A MANUAL

OF
MERCANTILE LAW
(lncludin°g Industrial Law, Trusts and Banking Law)

By
M.C. SHUKLA
B.A., B.Com. (Birmingham), Barrijter-at-Lav/
Retired Professor of Commerce, and Director of Correspondence
Courses, University of Delhi
Author of "Comjjany Low", "Conflict of Laws", "Commercial Law",
"Business Organisation and Management", "Administrative
Problems of Public Enterprises in India", and Joint Author
of "Cost Accounts", "Advanced Accounts"
and Statistics

MSU LIBRARY

I 17911

ELEVENTH REVISED EDITION

1974

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 To
the Memory
of My Wife
Blanche Sheila Shukla
 Preface to the Eleventh Edition
With a view to making the book more useful to the student
and the teacher, a number of improvements have been made in the
format of the book. The language has also been simplified.
Since the publication of the last edition, important changes
have taken place in some of the statutes, such as the Companies Act,
the Banking Regulation Act and the Insurance Act. All the changes
in these Acts have been incorporated in the re-written chapters.
The text material has been strengthened by the addition of
new decided cases and new legal principles to meet the combined
needs of B.Com. and M.Com. students and candidates for the I.A.S.
and C.A., as also of other professional examinations. Opportunity
has been taken to revise the book thoroughly for the present edition
and to rewrite substantial portions in simple and lucid language.
As usual, my wife, Blanche Sheila Shukla, has helped me in
seeing the book through the press. The dedication of this book is
but an inadequate expression of my indebtedness to her.

New Delhi, M. C. SHUKLA

July 1970.

Preface to the First Edition

The addition of yet another book to the large number of works
on Mercantile Law demands, if not apology, certainly "an excuse.
The excuse for the production of this volume is that it covers the
whole teeming ground in a manner differing from the usual text-
book, by giving in one volume, a thorough, lucid and easily under-
standable explanation of the various principles of that branch of law
which has to deal with mercantile transactions and mercantile com-
munity.
The book is intended primarly as a text-book for Pass and
Honours students preparing for the various University and Profes-
sional Examinations in Mercantile Law, but it cannot fail to be
^ ^ u l to businessmen who have from time to time to deal with
St\;eral branches of the subject. My aim is to explain the provisions
ofthe diffe^ent.enactments, and in doing so, I have dealt with the
law, subjeo^by subject, grouping together the sections of the respec-
tive Acts so as to make them simple and logical to the student,
convenient to the businessman and interesting to the casual reader
who may care to use it as a reference. Even lawyers and practitio-
ners will find the book of practical use inasmuch as it contains in a
handy volume the whole range of Mercantile Law, supported by cita-
tion of both English and Indian cases and references to the relevant
sections of the various Acts. Where controversial points occur, I
have based the exposition on the general consensus of standard
authoritative opinion of leading writers, and the considered judg-
ments of the Courts. At places I have allowed myself the freedom of
expressing my own opinion, with due deference, of course, .to the
authorities. To facilitate the work of recapitulation at the time of
examination, a summary is given at the end of each chapter. To
meet the needs of students preparing for the various examinations
held by several British Professional Societies, English law is explain-
ed fully under separate heads. In short, the present work presents
the subject fronl the composite view-point of the student, the busi-
nessman, the lawyer and the layman, A maximum range of illustra-
tions ivas been used to illuminate the subject-matter.'
I am under considerable obligation to various well-known and
monumental legal treatises and take this opportunity to acknowledge
the assistance I have derived from them in the preparation of the
book.
To thank my wife is but to inadequately express my indebted-
ness to her, for in the midst of day-to-day lecture work the comple-
tion of the book would have been impossible without her unflagging ,
assistance and advice 'at every stage of its production..

M. 0. SHUKLA
 Table of Contents

Chapter Pages
IntroductioQ ••• 1—4
Nature and Soureos of Mercantile Law.
I. GontractB ... 5—112
Introduction. Definition. N a t u r e and kinds of
Contracts. Kinds. Essentials. Agre'ement. Offnr
or Proposal. Acceptance, Consideration. Flaws in
Contracts. Flaw in Capacity. Flaw in consent.
Unlawful agreements. Void agreements. Restitution.
Quaai-contracts. Various Dieeharges of contract.
Doctrine of Frustration. Remedies for breach of con-
t r a c t . Summary. Cases for Recapitulation.
II. C o n t r a c t s of I n d e m n i t y a n d G u a r a n t e e ... 113—133
Contract of Indemnity, Contract of Guarantee.
Rights of Surety. Discharge of Surety. Summary.
Cases for Recapitulation. ^
III. B a i l m e n t a n d Fledge ... 134—149
Duties of Bailee. Duties of Bailor. Termination.
Finder of lost goods. Common carriers and inn-
keepers as Bailers. Pledge or Pawn. Pledge by
non-owners. Summary. Cases for Recapitulation.
IV P r i n c i p a l a n d Agent ... 150—177
Definition and general rbles. Creation of Agency.
Classes of Agents. Delegation of Authority. Duties
and rights of Agents. Scope and E r t e n t of Agent's
authority. Responsibilities of Principal to third ,
parties. Personal liability of Agent to t h i r d party.
Termination of Agency. Summary. Cases for Re-
capitulation.

V. L a w of P a r t n e r s h i p ... 178—220
Changes introduced by the n e w Act. Definition
a n d i i a t u r o . Formation. Classes of Partners. Test
of Partnership. Distinction from other Associations.
Duration. Pai tnership property. Rights and duties
of Partners. Relations with Third Parties. Implied
Authority. Dissolution. Winding up. Settlement
of accounts. Limited Partnership. Summary.
Cases for Recapitulation.
VI. Sale of G o o d s ,.. 221—271
Contract of Sale. Sale and Agreement to sell. Sale
and TransaotioiiB dntinguished. Formation of a
Contract of sale. Subject-matter of contract of sale.
The Price. Conditious and warranties. Implied
Conditions and warranties. Pas'^ing; of Property.
TrBnefor of Title by non-owners. Duties and rights
of Parties. Suits for broacli of contract. Auction
Sales. Summary. Casos for Recapitulation.
 {vi}
Chapter Tages
VII. Insuxance 272—283
N a t u r e . FundkiQentEl Principala. Pretnium. OajfS
of grace. Ketftrn of Premium. Policy, Subrogation
and Contribution, Distinction.
VIII. M a r i n e Insoffamce 284—30C
The Policy. Insurable interest. Double Insurance,
Warranties. The Voyage. Deviation and change of
voyage. Losses. Kinds of Losses. Salvage.
IX, Fire Insurance 307—312
Special Fire Policies. Claims,
X. Life I n s a r a a c c 313—331
DSEnition. Distinction. Policies, Assignment.
Nomination. Claims. Accident Insurance. Sum-
mary. Cases for Recapitulation.
XI, L a w of Negotiable l a s truioiests 332-402
Introduction. Meaning. Presumptions. Promis-
sory notes & Bills of exchange. Bank Drafts.
Cheques. Distinction, between Cheques and
Bills. Inland and Foreign Instruments. Negotiation.
Acceptance. Presentment. Dishonour. Discharge^
Compensation. International Law, Himdis, Sum-
mary, Cases for Keoapitulation. \
•>^

XII, L a w of Insolvency 403—443

Definition. Acts of Insolvency. Procedure. Petition,
Order of Adjudication, Effect of Insolvency, Annul-
m e n t , Insolvent's property. Reputed ownership.
Realisation of Property, Priority of debts. Official
Assignee and Receiver. Discharge of insolvent.
Small insolvencite. Penalties, Summary, Cases
for Recapitulation.
Xm, Arbitration 444—458
Definition, Arbitration without intervention of
court. Arbitrator. Powers and Duties of Arbitrators,
Award. Arbitration where no suit is pending. In
suits. Statutory arbitration. Appeals, Cases for
Recapitulation.
XIV. C a r r i e r s a n d C a r r i a g e of Goods 459—480
N a t u r e and classification. Railways as carriers.
Carriage of goods by sea. Implied warranties.
Charter P a r t y . Bill of Lading, Carriage by Air,
Cases for Recapitulation.
XV, Securities 481—49S
Pledge, Pawn or Mortgage. N a t u r e and Definition,
Kinds. Rights and Liabilities of Mortgagor; of
Mortgagee. Priority. Marshalling and Distribution-
Charge. Bills of Bale, Hypothecation. Lien.
XVI, C o m p a n y Lavr 497-619
N a t u r e a n d CI assificatioa. Legal persons. Corpo-
ration—Company, Private apd Public. Holding and
subsidiary companies. Foreign and Govt, Compa-
nies. Association not for profit. Illegal Associa-
tions. Formation of a company. Memorandum of
Association. Articles. Prospectus, Membership,
Shares. Allotment and Transfer of shares. Borrow-
 {mi)

Chapter PagM
ing powers. Eegistration of charges. Meetings a n d
Procedures, Beaolutiona. AccouhtP, Audit and
Investigation. Management of a company. Director.
Manager. Managing Director. Abolition of Mana-
ging Agents and Secretaries and Traaeurera. Com-
promise a n d arrangement. Prevention of Oppres-
BJon and Misraanagement. Winding u p . Liquids-
tors. Cases for Recapitulation.
XVII. BankJEg C o m p a u s e s 620—634
DeSmition. Wholetime Cbairman. Conwol over
m a s a g e m e n t . Acquisition of undertaking. Coopera-
tive Sooities.
XVIII. T h e iQCmrance Act. 1938 635—641
XIX. T&e IndJaia T m s t a Acs, 1882 642—659
Duties and Liabilities of Trustees. Rights, powers
and liabilities of t h e beneficiary. T h e Societies
Begistration Act, 1860. The Eleofrioity (Supply)
Act, 1S48. Po«?ers and Duties of State Electricity
Board.
XX. The F a c t o r i e s Act, 1948 660—696
XXI. Tibe Workimera's GwapemsatSon Aci, IS23 697—716
XSn. T h e I i i d m a T r a d o D a i o a a Act, I s a s 717—123
XXin. T h e P a y m e n t of Wages Act, 1936
XXIV, T h e iDdbStrtaa D i s p u t e s Act, 1947 728-1(750
XXV, T h e M i a i o a a m Wages Act, 1948 751 - 7 6 1
Appendix 1 762—809
T h e Indian Contract Act, 1872.
A p p e n d i x 11 810—825
The Indian Partnership Act, 1932.
Appendix lU 826-840
The Sale of Goods Act, 1930.
A p p e n d i x E¥
841—893
Test Questions.
Index
899—906
 Introduction

Nature and Sources of Mercantile Law

PART A

LAW AND SOCIETY

'' Some knowledge of law is necessary to a greater or lesser extent
'for all persons. The truth of this statement is obvious, because life of
eacii member of society must proceed to a large extent in conformity
with recognised rules and principles of social conduct. Indeed, an
individual is confronted almost daily with situations that demand legal
mformation for correct action. Just as a game of football or hockey
could not be played satisfactorily without rules to govern the^ players,
so life in general and the business world in particular could not con-
tinue without • law to regulate tlie conduct of people and to protect
their property and contract rights. Witliout rules tlie athletic contest
would soon become a brawl. Without law, life and business would
soon become a matter of the survival not only of the fittest but also
of the most ruthless. Without law, our rights would not be secure
because we would not know whether rights existing today would be
respected tomorrow.
What is Law ? Law in its legal sense, as distinguished from other
uses of the term, means those rules and principles that govern and
regulate social conduct and the observance of which can be enforced
in courts. It operates to regulate the actions of persons in respect
to one another and in respect to the entire social group or society.
There are several branches of law, suci\ as Constitutionai T.aw.
Administrative Law, Criminal Law, Civil Law and Mercantile or
Commercial Law. Our immediate concern , is with Commercial or
Mercantile Law and we shall confine our discussion mainly to thi.
branch of law. Mercantile Law may be defined as that branch of law
which deals with the rights and obligations of mercantile persons aris-
ing out of ' mercantile transactions in respect of mercantile property.
^An individual, a partnership or a company, carrying on business,- is a'
mercantile person. This law, in turn, is ^founded on the law of con-
tracts. For example, the laws of agency, suretyship, sale of goods, nego-,-
tiable instruments, partnership, etc., which constitute special branche
ot mercantile law, are only specialised fields of contracts The pie-
2 MERCANTILE LAW

sent IxMDk. deals with these and other branches o£ mercantile law, as well
as with industrial law.

SOURCES OF MERCANTILE LAW

Indian Mercantile Law is, in tlie main, an adaptation of the Eng-
lish Law. It is incorporated in a number of Acts, which follow to a
considerable extent the English Mercantile Law with some resen'a-
lions and modifications necessitated by the peculiar conditions obtain-
ing in India To ascertain the sources of Indian Mercantile Law we
have, therefoie, to trace the sources of the English Mercantile Law.
The sources of English Mercantile Law ai^e: (1) The Common Lgw,
('i) Equity; (3) The Law Mercliant, and (4) The Statute Lav,.
The Common Law.—The first source of the law is tlie customarv
conduct of community life. Group life creates customs, and when these
customs become stabilized to the extent that each member of the society
is justified in assuming that every other member of society will respect
them and vjill act in conformity with them, it can be said that rules of
conduct have been formulated. When these rules of conduct have re-
ceived the recognition of th^ community in general and have become for-
Dially expressed in judicial decisions, the 'Law' is made. The court, by
its decision, lays down a principle, based upon a custom or convenience,
and thus creates a precedent which will be controlling in similar future
controversies Thus the Common Law consists of principles based on im
memorial custom and enforced by the courts. It is traditionaiy, un-
written hiw, developed in English courts during the period beginning
with the thirteenth centurv and extending into the eighteenth century,
and brought to this country by tlie British rOlers of India. It is to be
found m some tliousands of volumes of reported cases and is common
to the whole realm.

EQUITY
In early times the administration of the law was not altogether
free from abuses of the grossest kind. The King's ofhcers were some-
times corrupt and partial In extreme cases the poor subjects had to
seek redress of their wrongs by petition to the King, who was the ulti-
mate fountain of justice. Originally the King heard these petitions,
but later he began to refer them to his Council. The foremost officer
of the King's Council wai> the Chancellor, who was in the early days
generally an ecclesiastic, and therefore, referred to as "Keeper of the
King's Conscience." It was therefore, a natural development that after
the middle of the Hth century, all "matters of grace" were addressed
directly to the Chancellor. One more cause led to the development
of equity A common-law action was begun by the issue of a writ
of suQimons out of the King's Chancellery or Chancery. The Chan-
cellor and his clerks issued an appropriate writ after hearing the plain-
tiff .and the subsequent proceedings in relation to the suit were deter
mined by the Common Law Judges In course of time the writs issued
from the Chancery became classified and rigid, as is the custom in
judical procedure. But while legal procedure was stiffening. civili?a-
NATURE AND SOURCES OF MERCANTILE LAW 3

don was progressing, society .was becoming more And more complex
n.nd new relationships between persons were growing up. Who . was
lo supply remedies for new grievances? T h e common law was too.
stereotyped to do this. So it came about tliat there was no writ suit-
able to meet the case presented to the Chancery by way of petition
or complaint, it was then open to the Chancellor, if he found that the
common law was deficient, to issue his awn subpoena—a direction to
attend under penalty in case of disobedience—and reserve the case for
hearing by the King-in-Council. It was out of this reservation that tire
jurisdiction of the Court of Chancery arose. From being an office for
he issue of common-law writs, it became a court for, the hearing of
pecial classes- of cases. The rules applied by the Chancery in the
.x.ercise of tliis jurisdiction became -known as "Equity." Equity i n ' a
amber of cases mitigated the rigour of the common law in order to
atry out the real i-ritentions of the parties.
Equity also developed new remedies. The common law courts
nly awarded damages, and were witliout the remedy of injunction to
revent the commission of a tort and had no machinery to compel the
specific performance of a contract. T h e power of the courts of equity
to compel personal obedience enabled them to invent these and other
much useful rerpedies. After a time tlie principles and procedure of
equity became virtually as fixed as thosf of common law. ' T h e dual-
ity of English law, and the conflicts between law and equity were bur-
densome, and were put an end to buy the Judicature Acts of 1873-75
which enacted that, where the rules of law and equity conflict, equity
shall prevail. At the same time one Supreme Court was constituted
with separate Divisions for common law work (King's Bench Divi-
sion) and equity or chancery work (Chancery Division). But either
division can give whatever remedy is most appropriate. In India
also, equity empowers Courts to deal with hai-sh cases where the ordi
"nary law fails to provide any remedv

' HE LAW MERCHANT

The Laiv Merchant was an independent body of customs and
sages governing commercial transactions of the merchants and traders
the Middle Ages, which have been ratified by die decisions of the
jurts of Law. The Common Law of England became fixed at a
me when little or no attention was paid to trading. Hence, among
aders there sprang up a number of customs and usages which were
scessary for the conduct of business. During this period the body
' commercial usages was practically uniform throughout Europe. In
• ^ earliest stages, therefore, the Law Merchant was a kind of private
ternational law administered by tribunals consisting principally of
'e merchants themselves.
^ Virtually it fell into two branches, the Law Merchant properly
;o-called, the Law of Fair and Market, and the Maritime or Sea Law,
ivhich early came under the dominion of Admiralty Courts staffed by
,j(vilians (lawyers trained to Roman Law) in all the countries of
curope. For many years the English Courts refused to recognise these
4 MERCANllLE LAW

customs and usages; but a change took place when the administration
o£ law fell into the hands of lawyers v h o were not irrevocably tied
down to ancient ideas. After the beginning of tlie 17tlt century the
King's Courts tigan to give effect to the rules of the Law Merchant,
the spe9ial meichjLi.ts tribunals dwindled into insignificance and gra-
dually died out. The fiist great judge to exercise his influence in the
recognition of these customs and usages was Lord Holt, but his work
was overshadowed by the labours of Lord Mansfield, who was Lord
Chief Justice from 1756 to 1787. To Lord Mansfield, Mercantile Law
owes more than to many generations of England's legislators. The
Law Merchant has, since his. time, been regarded as part of the Com-
mon Law and is consequently judicially noticed so that a custom once
established in Court requires a Statute to alter it. In Goodwin v.
Roberts (1875), L. R. 10 E.X. at page 346, Cockburn, C. J. observed:
'The Law Merchant is neither more nor less than the usages of mer-
chants and traders in the different departments of trade, ratified by the
decisions of Courts of Law, which upon such usages being proved
before them, have adopted them as settled law with a view to the
interests of trade and the public convenience, the Court proceeding
herein on the well-known principle of law that, with reference to
transactions in the different departments of trade. Courts of law, in
giving effect to the contracts and dealings of the parties, will asstmte
that the latter have dealing with one another on the footing of any
custom or usage prevailing generally in the particular department. By
this process what before was usage only, unsanctioned by legal deci-
sion, has become engrafted upon, or incorporated into, the CcMnmon
Law, and may thus be said to form part of it."
The Law Merchant, or lex mercatoria, is the origin of much of
the law relating to negotiable instruments, trade marks, partnerships,
contracts of affreightment and insurance. In India, the Law Mer-
cliant is codified, and the Courts are left only with the task of inter-'
preting the language of the .Acts. But where some principles of thei
Law Merchant (Indian trade customs and usages) are not covered byi
those Acts, the Indian Courts generally apply the English Law or
the stibject.
THE STATUTE LAW
The Statute Law means Acts of Parliament. These are the most
efficient and the most usual way of bringing about changes in tlie
law today. The authority of the Parliament is supreme, and subject
to natural limitations and those laid-down by the Constitution, it can
pass any law it pleases, and is not bound yby its previous Acts, It is
also within die power of Parliament to ^nhiiiiy the decisions of thq
Courts of Law. TJhe Statute Law, therefore, ranks _in priority to Com-
mon Law and Equity. But while Parliament is supreme in legisla-
tion, the Courts of Law are the interpreters of the mej^ning of the Acts,
of Parliament. Acts of tlue Indian Legislature based mainly on th^
English Metcantile Law form by fat the most important source of
Indian Mercantile Law. Where there are no Acts relating to certain
matters or where Acu are ambiguous, the Common Law of England ^
applied.
 Chapter J

Contracts

PART l-A
NATURE AND KINDS OF CONTRACTS
INTRODUCTION
The law of contracts lorms the oldest branch, of the law • elating
to business or to commercial transactions. In one form or another it
has existed from the beginning of organised society. Just as the safety
of person and of property depends upon the rules of criminal law,
so the security and stability of the business world are dependent upon
the law of contracts. Indeed the basis of trade and commerce today
is the enforceability of promises. It would be impossible to plan
ahead i f we did not have'the assurance that agreements 'once made
would be binding. .An essential part of enterprise in our economic
system is that the rights created by promises are protected and enforc-
ed. It is with the enforceability of these promises that the law of
contracts is concerned. Furthermore the law of contracts furnishes the
foundation for the other branches of commercial or mercantile law.
In fact the law of contracts affects every one of us; for every one of
us enters into contracts day after day. In eveiy purchase that one
makes, or a loan of book tl;at one makes to a friend of his, or a ride
that one takes in a bus, in all these and many other transactions of
daily life we enter into contracts. For these reasons the study of the
general principles of contruct law naturally precedes the specialised
fiekU of contracts.
In business transactions, where promises are very often made at
one time and the performance is to follow later, the parties have two
alternatives open to them. They may either rely upon dne another's
honour to ensure performance, or else tliere shculd be a legally en-
forceable obligation to perform the agreement. Reliance upon honour
alone is insufficient protection. Legal means of enforcing promises
has, therefore, been developed in civilised societies. Legally enforce-
able promises are termed contracts. Promises that do not meet the
requirements^ of a contract are not enforceable. Hence, the making
of a contract is the most common means of rendering a promise en-
forceable. The object and function of the law of contiact is to see
6 MERCANTILE LAW

that, as far as it is possible, expectations created by promises o£ the

pa»ties are fuIfiHed and obligations prescribed by the agreemeni^ of
the parties are enforced. The contract is, indeed, a cement that holds
our economic system together. For this reason the sanctity of con-
tract has always been made an objective of social control and indivi-
dual liberty.

DEFINITION OF CONTRACT
In the broadest sense, a contract is an exchange of promises' by
two or more persons, resulting in an obligation to do and refrain from
doing a particular act, which obligation is recognised and enforced by
law. In creating a legal obligation contract gives a right to one per-
son and casts a corresponding duty on another person. On account
of the presence of rights and obligations, the law gives a- remedy ,for the
breaeh of promise and recognises its due performance as a duty. Hence
a contract is sometimes defined as "an agreement creating an obliga-
tion," Which means a binding agreement. Our Contract Act [s. 2(h) ]
defines a contract as "an agreement enforceable by law." This defini-
tion*- naturally resolves itself into two distinct ^ parts. First, _ there must
be sin agreement. Secondly, such an agreement must be enforceable
by law. It will be so enforceable if it is- coupled with obligation.
Therefore, a contract is a combination of the two ideas of agreement
and obligation. An agreement is necessarily the outcome of consent-
ing minds, or there is consensus of mind. An obligation is the legal
duty to do or abstain from doing what one has promised to do or abs-
tain from -doing. A, contractual obligation arises from a bargain bet-
ween the parties to the agreement, who are called the Promisor and
the Promisee. In most commercial contracts each party is both a pro-
misor and promisee; that is to say, the contract is formed by mutual
promises. If A promises to deliver B a bag of wheat in a week's time
for Rs. lOO, payable in a fortnight, A is promisor as to delivery, and
B is promisor as to payment, while B is promisee of the delivery of
the bag of wheat and A is promisee as regards the mcmey to be paid.

All obligations, however, are not contractual in nature. For ins

tance the obligations resulting from the following are not contractual
namely :—
(1) Torts or civil wrongs;
(2) Quasi-contracts;

1. Our definition follows Pollock's definition which is,: "Every ag-

reement and promise enforceable at law is a contract." Salmond defines
a contract as "an agreement creating and defining obligations between
the parties." Anson says : "A contract is an agreement enforceable at law
ipade between two or more persons, by which rights are acquired by one
or more to acts or forbearances on the part of the other or others." Leak
observes: "An agreement as the source of a legal contract imports that
one party shall be bound to some performance which the other shall have
a legal right to enforce." Williston's definition i s : "A promise or set of
promises, for the breach of which the law gives a remedy, or the per-
fottnance of which the law in some other way recognizes as a duty."
CONTRACTS 7

(13) Judgements of courts—Contracts o£ Record;

(4) Relationship between husband and wite, trustee and bene-
ficiary—status obligations.
As the law- of contracts excludes trom its purview all such obli-
gations, and agreements of social nature and- hence not enforceable
by law, Salmond observes: "The Law of Contracts is not the whole
law of agreements, nor is it the whole law of obligations. It is the
law of those agreements which create obligations, and those obliga-
tions which have their source in agreements." Also, agreement is the
genus of which contract is the species; and, therefore, all contracts are
agreements, but all agreements are not contracts. Only those agree-
ments- which are enforceable by law are contracts. Thus, legally enfor-
ceable promises are termed contracts. Promises that do not meet the
requirements of a contract are not enforceable. Hence, the making of
a contract is the most common means of rendering a promise enforce-
able. But to be a valid contract it must fulfil certain requirements or
possess certain essential elements. We shall deal with these essentials
in the following pages, after naiTating the different kinds of contracts.

KINDS OF CONTRACTS
Contracts may be classified in terms of their form, or in terms of
their enforceability, or the way they are created.

FORMAL AND SIMPLE CONTRACTS

Contracts are classified in terms of their form as (1) contracts
under seal, (2) contracts of record, and (3) simple or parol contracts.
The first twd classes are known as formal contracts, their validity or
legal force being based upon form alone. When the terms of an obli-
gation are written or printed upon paper or parciiment and are signed,
sealed, and delivered, the obligation constitutes a contract under seal.
An instrument of this nature is- technically known as a deed or a com-
mon-law specialty.
An obligation imposed by the judgment of a court and entered unon
its records is often called a contract of record.
It cannot accurately be described as a contract, however, be-
cause it is really not based upon an agreement of the parties. One
form of contract of record is in fact a contract. ' This kind exists
when one acknowledges before a competent court that he is bound
or obligated to pay a certain sum unless specified thing is done or
not done. For example, a party who has been arrested may be re-
leased on his promise to appear in court and may bind himself to
pay a certain sum in the event that he fails to do so. An obligation
of this kind is known as a recognisance.
Ail contracts other than contracts of record and contracts under seal
are called simple or parol contracts, whether they-are in writing or mere-
ly oral. A parol or simple contract, whether oral or in writing, must
be supported by 'consideration.'
Formal contracts or contracts under seal, recognised under the
8 MERCANTILE LA\

English law, do not find any place in the Indian law. The simple or
parol contract supported by consideration is the type of contract
largely recognised under the Indian C9ntract Act. Form alone does
not allow to dispense with consideration under the Indian Act. But'"
•S. 25(1) of the Act makes provision for a kind of contract which to
some extent resembles' the formal contract or specialty of English law,
and is enforceable, if it satisfies four conditions, namely,—(1) the con-
tract must be in writing, (2) it must be registered according to the law
of registration of documents. (3) it must be between parties standing in
•near relation to each other and (4) it should proceed out of natural
love and affection between the parties.

EXPRESS AND IMPLIED CONTRACTS

Simple contracts may be classified in terms of t h e , way in which
they arc neated as (1) express contracts, and (2) imj^l-iWi contracts.
An Express Contract is one in which the parties ha\e made an
oral oii written declaration of their intentions and of the terms of the
transaction. In other words, an express contract is one, the terms of
which are stated in words, spoken or written.
An Implied Contract is one in which the evidence of the agree-
ment is not shown by words, written or spoken, but by acts' and con-
duct of the parties. Such a contract arises when one person, without
being requested to do so, renders services under circumstances indi-
cating that he expects to be paid for them, and ' the other person,
knowing stich circumstances, accepts the benefit of those services. An
implied contract cannot arise when there is an existing express contract
on the same subject. Thus, contracts in which the manifestation of
assent is purely acts rather than words are termed implied contracts.
Under certain conditions the law creates and enforces legal rights
and obligations when no real contract, express or implied, exists.
These obligations are known as qiiasi-contracts. A quasi or construc-
tive contract rests upon the ecpiitable principle that a person shall not
be allowed to enrich himself unjustly at the expense of another. In
truth, ho-wever, it is not a contract at all. Duty, and a promise or ag-
reement or intentiop of the person sought to be charged, defines it. We
.shall have more to say about it at a later .stage.
VALID, VOIDABLE AND VOID CONTRACTS
Contract'- may be classified also in tevnis of their enforceability or
validity as (1) valid contracts. (2) voidable contracts, and (3) void con-
tract? or void agreements.
A Valid Contract is an agreement which is Ijinding and enforceable.
It has all the essential elements to be stated and discussed later.
A Voidable Contracto's an agreement tliat is binding and enforce-
able 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.
If the party having tlie right to avoid his obligation doeS not exercise
the right witijn a reasonable time, the mgreement is biinling and en-
forceable.
CONTRACTS 9
A Void Contract is really not i contract at all I h e term means an
agreement which is without any legal effect Thus an agieement by a
minor is void undei the Indian law

EXECUTED AND EXECUTORY CONTRACTS

Contracts may be classified in terms of the extent to which they
Tiajc been performed oi ctrried out as (1) executed contracts, and (2^
executory contracts
An executed contiact is one that has been completely performed.
In othei words an executed contiact is one under the terms of which
nothing remains to be done by either party \ contiact may be execut
cd at once, (i e, at the time the coiiti ict is made), as in the case of
.1 cash sale, oi it may become executed in the future by it' terms bf
inq earned out m due time
An executoi7 contiact is composed of undei takings in which one
or both pal ties are undei an obligation to do or not to do certain
things In other words, undei the terms of the contract something re-
mains to be done For example, if an electric supply company agrees
to furnish electricity to another paity for a specified period of time at
a stipulated price, the contract is executor) If the entire price is paid
in advance, the contract is still deemed executory, although, strictly
speaking it is executed oivone side and executory on the other

BILATERAL AND UNILATERAL CONTRACTS

An agreement may oiiginate in one ot the se\eial ways First
there may be an offer of a piomise and a simple assent This is
possible only when the piomise is undci seal ot of recoul, in which
case It IS binding because of its form alone This wa) oi mode of
making contract is applicable in English h w and not in Indian liw
Second way in which theie may he an offer of an act for a promise,
IS when a public omnibus by running on its route makes an offer of
Its serMces for the promise of the one entering to pay his fare
Third, there may be an offei of a piomise for an act, as one promises
to pa) a specified sum for the performance of an act, such as the
returning of lost goods Fouuh, an agieement may originate m an
offei of .1 pioiriic foi a piomise, as when one person offers to pay
Rs 100 in return for the promise of aiiothei to paint Ins car The
first tliiee methods result in Unilaicial contracts, because in each nis
tance theie is ni obligation lo perfoim on the part of only one paity
The fourth or last method creates i Bilateral contract, in that there is
an obligation on the part of both to do or to refiain from doing a
paiticular thing In the case of a unilateral or onesided contiact,
one party to the contract has pcifoimed his pait e\en at the time of
Its formation and an oblig.ition is ^Jltistandmg onlv against ihc other
In the bilateral oi two-sided eoiiti let at the imie of its foimatioii
there aie two outstanding obligations one on cither party to the con
tract e g A piomucf to pnint a pictuie in one month in icturn for
which B promises to pay Rs 100 Heie ilieu au two piomises and
endi part) is a piomisot in lesjjcct of one pioiiiisr riiiri n jHomisef in
 10 MERCANTILE LAW

respect of the other, and as such each can hold the other liable for the
breach of his promise.
It follows from the above distinction between executed and exe-
cutory contracts and between unilateral and bilateral contracts tliat
a contract is a contract ^ r o m the time it is made and not from the
time its performance is due. Thus, the fact that in an executory con-
tract, both the parties have to perform their parts of the contract does
not affect^the validity of the contract. It was stated in Sahab Ram v.
Ram Niwas (1953) I All,' 494 (F.B.), that the fact that the agreement
has not been executed or performed does not mean that the agree-
ment was not entered inio. . Similarly, there may be cases in which
performance of a contract is postponed or deferred. Thus, where A
agrees to supply 1,000 maunds of wheat three months after the date
of contract, the performaijce will become due three months after the
date of the contract but fhe contract will be a contract on the date
when the offer is ..ccepied and other conditions of a valid contract are
complied with.

In the following sections of this chapter are discussed the foregoing

types or classes of contracts, starting with a valid contract and its
essentials.

ESSENTIALS OF A VALID CONTRACT

In order to be an enforceable contract, there must be (1) an agree-
ment, (2) based upon the genuine assent of the parties, (3) supported
by consideiation, (4) made for a lawful object, (5) between competent
parties. These requirements of valid contract may be analysed into the
following elements, all of which must be present:
1. Proposal or offer by one party and acceptance of die pro-
posal or offer by another party, resulting in an agreement-
Consensus ad-idem;
2. An intention to create legal relationship;
3. Genuine, (i.e., free and real) consent between the parties
(i.e., not marred by mistake, undue influence, coercion, fraud
or miirepresentation);
4. The parties to the contract are capable of contracting;
3. The object contracted for is legal and is not opposed to pub-
lic policy;
6. There are at leabt two persons to make the contract;
7. The agreement is supported by consideration, (or, under Eng-
lish law, propel form is used);
8. The agreement is capable of being performed,
Condacts arise under a wide variety of circumstances. They
may luho from face-to-face con\ersations or from conversations by
telephone from the exchan<ie of letters or telegrams, or by any other
means of coramunicaiion. When the contract is part of a common
CONTRACTS 11

business transaction, a printed form is often used. In sudi a case,

all that is usually necessar)' to complete the contract is to add the date,
the names of the parties, the price, the particular performance or
commodity which is the subject matter of the contract, and the signa-
tures of the parties. Familiar types of standard contract forms are
leases and the various forms used for the mstalment purchase of motor
vehicles, refrigerators, rad-.o sets, etc. Sometimes the contract must
comply witli certain standards. For example, the law may require a
particular contract to be in ivriting, such as an arbitration agreement.

PART 1-B

T H E AGREEMENT

A contract is a legally binding agreement This agreement results

when one person, the offeior or promisor, makes a proposal or
offer and the person to whom the offer is made, the offeree or pro-
misee, accepts it. For an agreement to arise, there must be two or
more parties to the transaction As it is imperative that there be a
concurrence of at least two minds, it is impossible for one person to
make an agreement with himself. T o illustrate, when a person \in his
official capacity, a Managing Director of a company, makes a promise
to himself, as an individual, no agreement is .formed by an acceptance
in the latter capacity. Plurality of persons is an essential character-
istic of an agreement. These persons must come to an understanding
with a view to creating a right in one party and a corresponding diuv
on the other. The Contract Act [S. 2(e) ] defines an agreement as
"every piomise and every set of promises, forming the consideration
for each other."

CONSENSUS AD m E M OR MEETING OF MINDS

To constitute an agreement or a contract there must be a meeting
of the minds of the parties and both must agree to the same thing in
the same ^ense. This means the wills of the parties must meet, or
there must be consensus art idem. For example. A, a painter, agrees
to paint the house of B and B agrees to pay A the sum of Rs. 2,000
upon the saLiafactory completion of the work. In this case, there is
a meetins; oT the minds of A and B on the subject of what is to be
done and at what price Generally speaking, 'it is true that the minds
of the parties must meet, but it is not literally .or universally true: for
in a few peculiar situations the law finds an agreement even though
the minds of the parties have not in fact met. For example, an auction-
eer may sav, "Who will pav Rs 10(1 for (his beautiful vase?" If a per-
son in the crowd present there raises his hand while looking at the
auctioneer, his action is regarded bv the law as an offer to pav Rs. 100:
and, if the auctioneer ther brings down his hammer nnd >;avs "Sold
for Rs. 100." there is an acceptance and a binding contract • The
man who raised his hand canrnt he .•'lioived to say that when he
T.iised it, he did not mean to niaLfi an fir,- h'jt vas merelv sfrerchin^
his nnii "^Vhat wa"; in hi', mn'd :>, iniiT'e i?l hi\-.<\,r it was -eisoii-
12 MERCANTILE LAW

able tor the auctioneer to assume that the man's motion was an ofter.
The real test, therefore, is not whether the minds of the parties met
but whether vinder the circumstances one party was reasonably entitled
to believe that there was an offer and the other to belieVe thax there
was an acceptance.
When we say that thers must be a meeting of the minds of the
parties, we are not thinking of the subjective thing known as meeting
of the minds, but the objective thing—manifestation of mutual assent.
Therefore, it is not the meeting of the minds, but the expression of
mutual and final assent that is necessary to complete a binding agree-
ment. The reason for this rule is that the inner intention of parties
to a conversation cannot be taken to bind the parties, but it is what
is said or done. Innermost tlioughts of a party are known only to
him, and the other party can depend upon what is said or done. Thus,
if A signs an agreement to purchase a certain gold watch for Rs. 1,000
from B, tlie agreement is binding, although A later testifies that he
never actually intended to buy it. By his conduct he led B, as a rea-
sonable man, to think that he would buy it. Such /'conduct is all that
the law lequires. To repeat, the phrase 'meeting of the minds' does
not mean that (lie paities must have arrived at a common mental state
toucliing tlie matter in hand. The standard by which their conduct is
judged and their rights are limited is not internal but external. In
tlie absence of fraud or incapacity, the question i s : What did the
parties say and do? In other words, there is an agreement when the
parties lead each other reasonably to believe that they are of the same
mind about a given transaction; they have come to the point of agree-
ment and the offer ;uid acceptable have coincided.

OFFER OR PROPOSAL
One of the early steps in the formation of a 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. In its general terms,
an offer or proposal is a statement by the offeror of what he will give
in return for some act or promise of the offeree. Section 2(a) of the
Contract Act defines an offer or proposal as follows: "When one
person signifies to another his willingness to do or to abstain from
doing anything, with a view lo obtaining the assent of that other to
such act or abstinence, he is said to make a proposal." In simple
words, an offer is a proposal by one person, whereby he expresses his
willingness to enter into a contractual obligation in return for a pro-
mLsc, or act, or forljcaiance. Note, the offer consists of two parts:
(1) a promise by the offeror, coupled ivith (2) a request addressed to
the offeree for something in return. 'I'he promise that the offeror
makes is not binding upon him until liie offeree unconditionally assents
to the' terms contained in the offer. For example, A offers Rs. 5 tc
B if he would mow his lawn. The pioniise to pay Rs. 5 is bhiding as'
soon as B promises to mow tlie lawn. Until then A is free to with
draw his offer,
CONTRACTS '^"^

REQUIREMENTS OF AN OFFER
A valid offer must meet Uie tesis of (1) contractual intention,
(2) definiteness, and (3) conmiunication to the offeree.
(1) Contractual I n t e n t i o n - T o constitute an offer, the offeror
must intend to create a legal obligation. When there is a lack, of such
intention on his part, it makes no difference whetlier the offeree takes'
any action concerning the offer. Parties are free to make their own
agreement, and if they agree that tlte breach of either party will not
give rise to legal rights, there is no contract, even though the offer and
acceptance have been reduced to writing. Hence, an offer must con-
template to give rise to legal consequences and be capable of creating
legal relations. The following are tlte examples of a lack of contrac-
tual intention on the part of the offeror.
(a) Social Invitations -Ordinary mvitations to social affaiis are
not offers in the eyes of the law, because the idea of bargain is absent
in such cases and there is no intention to create a leg^l relationship.
An agreement between two persons to go together to pictures, or for
a walk does not create a legal obligation on their' part to abide by it,
as it relates to social matters.
A invited B to dinner at his house on a specified date. On the stated
date, A forgot all about the dinner and his invitation to B. • When B
arrived as A's residence A was not there and no dinner was ready. This
agreement did not give rise to a legally binding agreement, and B could
not enforce it or claim compensation for expense and inconvenience.
Agreements between a husband and wife who are living in friendly
intercourse are not contracts but only domestic arrangements.
In Balfoui- v. Balfour (1919) 2 K. B. 571, the husband promised to
pay £30 to his wife every month. On his failure to pay, die wife sued
him for the recovery of the amount. Held, she could not recover as the
agreement did not create any legal relationship. Warrington, L. J. obser-
ved : " There is no contract here. These people never intended to
make a bargain which could be enforced in law. The husband ex-
pressed his intention to make this payment, and he promised to make it,
and was bound in honour to continue it so long as he was iii a position
• to do so. The wife, on the other hand, made no bargain at all."
(b) Offers made in Jest or Excitement.—A person may make a
proposal or statement in a jest without any thought or intention of
creating a binding obligation. A proposal made in jest, cannot be ex-
pected by the offeree as a reasonable man. to have been made with
the intention of making a contract. Also, a person, labouring under
the stress of great emotion or excitement, may make a statement that
cannot be treated as an offer on account of the fact that it would be
obvious to a reasonable man that a legal relation is not contemplating.
For example, where a man from whom some old harness of very small
\alue had been stolen, while denquncing die thief vehemently, stated
that he would give Rs. 500 for die apprehension of the culprit, it was
held tliat the offer was made under such circumstances that it could
not be turned into an agreement. Obviously, one would be bound by
14 MERCANTILE LAW

what he leads another reasonably -to believe that he is serious, even,

if he is in fact jesting or acting under stress of great emotion or excite-
ment.
(c) Invitation to Negotiate^The first statement made bygone of
the two persons is not necessarily an ofiEer. In many cases, there may
be preliminary discussion or an invitation by one party to. the other to
negotiate or talk business. If A asks B, "Do you want to buy this
car of mine?" ]?e is not making an offer but is inviting an offer from
B. If B then says, "I. will pay you Rs. 3,000 for the car," he is mak-
ing an offer that A can accept or reject. On the other hand, after
A's invitation, B ,may continue the preKminary negotiations by saying,
"What do you want for it?" If A then replies, "I -will sell it to you
for Rs. 8,000," A makes an offer.
Ordinarily, marked prices of goods displayed in a window, or
catalogues mentioning prices of goods, do not constitute an offer so as
to compel the tradesman to sell those goods at the marked prices.
Similarly, advertising is not held as offers. Advertisements are gene-
rally assumed to constitute • "invitations to trade" rather than offers.
The trader merely indicates • that he is willing to consider an offer
made by a buyer on tliese terms. In other words, he is inviting an
offer and not making one. Also, a circular inviting tenders for sale
or purchase does not amount to an offer, but only an invitation to
offer and unless an offer is accepted no contract is made. Again, an
announcement that a person will sell his property 'at public auction
to the highest bidder is a mere declaration of intention to hold an
auction at which bids will be received. A bid is an offer which is
accepted when the hammer falls, and until the acceptance of the bid
is signified in some manner neither part)' aisumes any legal obliga-
tion to the other. At any time before tire highest bid is accepted,
the bidder may withdraw his offer to purchase or the auctioneer his
offer to sell. The owner's offer to sell is made at the time through
the auctioneer, and not when he advertises the auction sale.^
A merchant advertises that on a certain day he will sell his goods
at bargain prices; but no one imagines that the prospective buyer, who
visits the store and is denied the right to buy, has an action for dama-
ges against the mercliant. He merely offers to buy, and if his offei is
refused, he has no remedy, although he may have lost a bargain, and
have incurred expenses and lost time in visiting the store, The ana-
logy between such a transaction and an auction is at least close. • In
view of the various points discussed above an offer must be distinguish-
ed from a mere quotation or an invitation to offer.
(2) Definite offer.-An offer must be definite and certain. If it
is indefinite, loose or vague or if an essential provision is lacking, it
cannot be accepted. The reason is that the courts cannot tell what
the parties are to do. Thus an offer to conduct a business for such
time as should be profitable is too vague to be considered a valid offer,

1. Champalal v. Jaigopal (1922) 45 Mad. 799.

CONTRACTS 15

as it does not consist o£ a definite promise to be lK>,und. Where A,

who has bought a horse from B, promises to buy another if the 'first
one proves lucky, and refuses to buy the second horse, 'B cannot enforce
the promise, ,it being loose and vague.
(3) Communication of the offer.—An offer must be commimicat-
ed'to the offeree. Until an offer is made known to the offeree, he does
not know what he has to accept. An offer becomes effective onlj
when it has been communicated to the offeree. The mere desire to
enter into an agreement, which remains hidden in the recesses of one's
mind, can never constitute an offer. Lord Lindlay says: "A state of
mind not communicated cannot be regarded in dealings between man
and man." The ^vriting of a letter embodying a definite proposition
will also prove futile unless the letter is posted and reaches the offeree.
Again, an offer must be communicated by the offeror or his duly autho-
rised agent. If the offeree learns of the offeror's intention from some
outside source, no offer results. An offer to the public may be made
• through the newspapers, but it is not effective so far as' a particular in-
dividual is concerned until he learns diat the offer has been made.
To the existence of a contract there must be mutual assent—offer and
consent to the offer. Without tliat there is no contract. How can there
ne consent or assent to that of^ which the party has never heard. Where
A, without knowing that a reward is offered for the arrest of a parti-
c-ular criminal, apprehends the criminal, he cannot recover the reward
jf he learns of the reward after apprehending the crim'inal. He had
no knowledge of- the offer and could not be taken to have accepted it.

In Lalman Shiikla v. Gauri Dutt l i , A.L.J. 489, G sent L, his ser-

vant, in search of his missing nephew. Subsequently, G announced a re-
ward for information relating to the boy. L, before seeing the announ-
cement, had traced the boy and informed G. Later, on reading the
notice of reward, L claimed it. His suit was dismissed on the ground
that he could not accept the offer unless he had knowledge of it.
Tickets.—Tickets purcliased for entrance into places of amusement
or as evidence of a contract for transportation often contain small print-
ed matter -which attempts to limit or define the rights of the holder.
T h e stipulations contained in the printed matter do not become part
of the offer and are not accepted by the holder if he is not aware of the
printed matter.
In Henderson v. Stevenson (1875) 2 H.L.S.C. 470, a passenger from
Dublin to Whitehaven who was travelling with luggage paid his fare and
took a ticket which bore on its face the words "From Dublin to White-
haven." He never looked at the back of the ticket, and no one told him
to do so, and the front of the ticket bore no reference to the back. If he
had looked at the back, he would have seen a special condition exonerat-
ing the shipping company from liability for the loss of luggage. Tlie
veisel was wrecked and the passenger lost his luggage. His claim for
• damages was upheld. It wa& held that- the only offer made to him was
• the carrier's offer to can7 him and his luggage safely for a stipulated fare,
and that there was no sufficient communication of the exceptional terms
contained on the back of the ticket.
 16 MERCANTILE LAW

Where a person knows that there are special terms and. does not
take the trouble to read them, he cannot set up his ignorance as a rea-
son for not being bound by tire terms.
In Parker v. S.E.R. Co. (1877) 2 C.P.D. 416, a handbag deposited in
the cloakroom o£. a railway company was lost, and the owner claimed
f24-10s. being its value. The railway company's defence was a condi-
tion exempting^ it from liability for articles exceeding £10 in the value
unless extra charge was paid. The words "see back" were printed on
the face of the ticket. The holder of the ticket admitted knowledge of
the printed matter on the ticket, but denied having read it. His suit
was dismissed. The railway company had given notice of the special
condition, and the holder of tlie ticket must suffer for his carelessness
in not reading it.
The same rule holds good even where the conditions are printed
in a language which the acceptor of the offer does not understand,
provided his attention is drawn to them by suitable words on the docu-
ment. It is his duty, before accepting, to ask for the translation, and
. if he does not do so, he will be presumed to know the conditions and
be bound by them.*

AN OFFER MAY BE GENERAL OR SPECIFIC

An offeror may make an offer to a particular person because he wants
only that person to do what he has in mind. When it is addressed
to a particular person the offer is called a Specific Offer, and it
can be accepted only by that person. The offeror may, on the other
hand, make the offer to tlie public at large because he does not care
by whom something is done so long as it is done. Such an offer is
called a general offer, but it cannot form die foundation of a contract
until it has been accepted by an ascertained person. Offers made by '
advertisement are the commonest form of general offers made to the
general public. For example, when a reward is offered to the public
for the return of lost property, the offeror does not care who jeturns
the property. Any one who, after having read about the reward, re-
turns the property is deemed to have accepted the offer by conduct
I and is entitled to get the reward. The leading case on the subject of
general offer is Carllil v. Carbolic Smoke Ball Co., (1893) 1 Q.B. 256.
In th|s case, the Company offered by advertisement a reward of £100
to anyone who contracted influenza after using their Smoke Ball for a
fortnight according to printed directions. Mrs. Carllil, on the faith of
the advertisement, bought a Smoke Ball and used it as directed, but was
attacked by influenza. She sued for the advertised reward. The court
decreed the suit on the ground that the advertisement was not a mere
statement of an intention to give reward but a definite promjse, and al-
though the offer was not made to any particular person but to the whole
world, it was capable of being accepted by one or more persons who ac-
cepted by conduct or performance of conditions.

2. Mackilligan v. Campagine de Messageries Maritines (1897') 6

Cal. 227. ^ ^
CONTRACTS i?
DURATION OF OFFER
An offer that has been communicated properly coniinucs as such
until it lapses, or until it is revoked, rejected, or accepted. The offeror
is considered t o ' be continually renewing the otter until one o£ ilve
above takes piace4
(1) Offer lapses after stipulated > or reasonable time.—An oiler
does not remain open indefinitely, althougti the offeror tails to witii-
draw it. 1£ tlie oiier stipulates tiie period during which u is to con-
tinue, it automatically lapses at the end of tlia't period. An attempt-
ed acceptance after that date could only amount to a new offer being
made by die offeree of the original offer. An offer which provides tor
no time limit remains open foi a reasonable time—a reasonable time
being such period as a reasonable person might conclude, was intended,
(i) I n Head v. Diggon, 3 M. and R. 97, a seller on Thursday offer-
ed wool to a buyer, and gave him three days. in which to accept. The
buyet accepted the offer on Monday • but the seller, after waiting for
three days, had sold the wool. It was held that the offer had lapsed
by Monday morning by its express terms, and the seller was not bound.
(ii) In Ramsgate Hotel Co. v. Montefiore (1866) 1 Ex. 109, M ap-
plied for shares in June,' but the allotment was not made till November.
Held, that the offer to take shares had la^Jsed, as the reasonable time had
passed since the making o£ the offer, and M ' was not , bound to take
the shares. '
(2) An offer lapses by the death or insanity of the offeror or the
offeree before accei>iance.—If tlie offeror dies before acceptance, there
is no offer to accept, and if the acceptance is made it becomes infruciu-
ous. "A dead man can no more continue to offer than he could begin
to offer." In the same manner, the offeree's death without accepting the
offer puts an end to the offer, and his heirs or executors cannot accept
for him. But if the acceptance is made in ignorance ol the death or
insanity of the offeree, Uiere would be a valid contract. In English law,
the death or insanity of the offeror or offeree causes an offer to lapse
even though the other party has no notice of the death.
S owned certain debentures of a company. K oifered to buy tnem.
S died without accepting the offer. His administrator accepted the offer
and sued K for damages when he refused to perform the contract. Held,
the death of S terminated the offer to-buy, and his administrator after
S,'s death could not accept.
(3) An offer lapses by subsequent illegality.—If the pertormance
of the contract becomes illegal after the offer is made, u lapses. Thus
if an" offer is made to sell alcoholic liquors but a law prohibitiiiiJ rhe
sale of liquors is enacted before the offiei is accepted, the offer is ter-
minated.
(4) An offer lapses by not being accepted in the mode pr'escribed,
or if no mode is prescribed, in some usual and reasonable manner.—
According to English law, once tire offer has lapsed on Uiis account,
tlxere cannot be a further acceptance, unless the offeror agi-ees thereto.
In Indian law, if the offer prescribes the manner in which it is, to be
accepted and the acceptance is not made in such a manner, die pro-
 18 iMERCANflLE LAW

posci oi oAcwi m-iy, witliiii a icasouabJe time after the acceptance is

Lommunicuted to hnn, imibt that his oiler shall be accepted iu the pre-
scribed niannei and not otlierwise. 11 he fails to do so, he accepts the
^ acceiJtaiice as made.
(5) An offer lapses by rejection oi offer by the offeree.—If the
oftexee rejects the otter by distinct refusal, he cannot ie\i\c the offer
by attempting to accept it^ unless the offeror renews the proposal.
(C) An otter lapses by counter-offer by the offeree, as it amounts
to lejection of ihe-ofter. IC A makes an otter to li to sell his car for
Rs. 5,000 and B, instead of accepting the offer, makes aji offer to buy it
for Rs. 4,000, the original otter by A is terminated, B in effect saying, "1
refuse your offer, 'but in its place, 1 make a different offer." Sucli an
oifer by the offeiee is known as a counter-offer. In substance, the coiui-
ter-offer presupposes a rejeaion of die original offer. It the original
offeror, who is now the offeree, accepts tlie counter-offer, a binding
contract results.
Where, h o w c e i , the otleiee iloes not make a counter-offei, but only
desires to know if the offeror's terms aie final or merely makes an
enquiiy, the offer does not lapse and may be accepted at any time be-
fore it is withdrawn. In Stevenson v. Mclean,' Lush J. says: "If there
is nothing specific by way of offer at rejection, but a jnere inquiry, it
should be answered and not treated as rejection of tlie offer." For ex-
ample, A offered to sell his house to B on an instalment payment ba-
sis, but axso asked B to make a cash offer. B made a cash offer wliich
A rejected. B then accepted tlie instalment payment basis. A refused
-to perform the contract and B sued him. A claimed there was no con-
tract. Held, B was entitled to the decree, as under the circumstances,
the making of the cash offer was not a coyunter offer^ so as to reject the
instalment payment basis. When B accepted tliat offer after his cash
proposal was rejected, a legal contract was created because'tlie offer was
still in existence and could be accepted (Quinn v. Feaheny, 252 Mich.
526).
(7) Revocation of the offer by the offeror.—Ordinardy, tlie offeror
can revoke his offer before it is accepted. If he does so, the offeree
cannot create a contract, by accepting the revoked offer. Thus, the bid-
der at an auction sale may withdraw (revoke) his bid (offer) before it is
accepted by the auctioneer by using any of the customary methods, e.g.,
fall of hammer. The auctioneer thereafter accepts tlie revoked offer
(withdrawn bid). An offer may be ^revoked by the offeror before its ac-
ceptance-, even though he had originally agreed to hold it open for a
definite period of time. So long as it is a mere offer, it can be with-
drawn whenever tlie offeror desires. The rule applies e\en though the
offer expressly stipulates that it may • not be withdrawn without die con-
sent of the odier party. Thus, if the offeror agrees to keep his offer
open for a specified time, he may nevertheless revoke it before tlie ex-
piration of that time, unless (i) tlie offer has in the meantime been ac-
cepted before notice of revocation "has reached the offeree, or (ii) there
is consideration for keeping the offer open, e.g., option contract.

3. (1880) 5 Q B . D , 346 at p. 350.

 CONTRACTS 1<J

/i) In Cooke v. Oxley (1790) 3 T.K. 653, A oirered to sell 26b hogs
heacr of tobacco at a certain price and promised to keep it open for ac-
ceptance by B till 4 p.m. of that day. Before tliat time A sold them to
C. B accepted before 4 p.m., but after tlie revocation by A. It was held
that the oifer was already revoked. /
(ii) In Dickinsoa v. Dodds (1876) 2 Ch. D. 463, A- agreed to sell
properly to B by a written docimient which stated: This
over until Friday 9 a.m." On tlie Thursday A made- a contract to sell
tlie property to C. B heard of this from X, and on Friday, at 7 a.m. he
delivered to A an acceptance of his offer. Held, B could not accept A's
offer after he knew it had been revoked by tlie sale of the property to C.
Communicatiou of Revocation.—A i evocation o/ an offer must be
communicated or made known to tlie person to whom the offer was
made. Until it is communicated to the offeree, he has reason to believe
iliat diere is still an offer which he may accept, and he may rely on this
belief and accept the offer. A letter or telegram revoking an offer made
' to a particular offeree is effective as a revocation against tlie person
who makes it when it is put into course of transmission, (i.e., wlicn the
telegram is handed in at llie telegraph otface or the letter is posted) and
as against the offeree wlien the revocation comes to his knowledge, (i.e.,
he receives the telegram or letter).
Revocation o£ a general offer can be made by giying the same
publicity as was givdn to tlie original offer itself. For (...ample, an offer
I of a reward that is made to tlie general public by advertisement in a
newspaper may lie revoked in the same manner. As a result, a member
of die public cannot recover the amount of the reward by thereafter
performing the act for which the reward was originally ollered, even
though he has not seen the revocation. Lei us assume tliat on April
15, A ollered a reward of Rs. 500 by means of au advertisement in all tiie
English language daily newspapers published in Delhi to be paid to any
i.one who may find and deliver him his lost dog. On April 25, A caused to
/ be published in the same new.spapers an advertiseniciit withdrawing his
i ofier of rewaiil. On .\piil 30, B, who Jiad read tlie notice of thoreward
but not the notice of the wiilidiawal of the offer, found tlie dog and de-
li\ered it to A. His claim of ilie reward will not be upheld, as the
offer had been withdrawn by A through the same channel in ji'hich it
was made before B had found ilie dog. The same notoriety was given
to the revocation that was given to the offer, and it did not matter that
he had not read the revocation in the papers. The offer of the reward
not ha\ ing been made to him directly, but by means of a published no-
tice, he should have known that it could be revoked in the manner in
whidi it was made. -

STANDING OFFERS
A standing offer or a tender is in tlie natuic of a coniinuino^ offer,
eidier to a specific person or to the general public. Thus, a tender for
{he supply of sucli )a[oo<ls as may be requiretl, no qu.niiity being speci-
fied, is a continuing or a standing offer. SucIi an 6ffer cannot be accept-
ed generally so as to form a binding contract; it is accepted from time
'to time whene\cv an order is given lor any of the goods specified in the
tender. An atcepiance of sucli a tender merely, amounts to an intima
20 MERCANTILE LAW

lion mat ilie oHer will be coiisideiud to leiniiin open during tne per-
iod specified, and that it will be accepted from time to time by order
ioi specified quantities, and does not bind either party unless and until
such ordeis arc given. For instance, a writing whereby A agrees to iup-
piy coal to B at certain prices and up to a stated quantity, or in any
quantity which may be required £or a period of 12 months, is not a con- '
tract unless B binds himself to take some certain quantity, but a mere
continuing ofter whicli may be accepted by B, from time to time by
oidering coal upon die terms of die offer. In such a case, each older
given by B is an acceptance of lire offer; and A can withdraw the offer
or revoke tire proposal, at any time before its acceptance by an ordei
fiom B.' Witli regard to tuither supply, the offer may be revoked b)
notice to fhe offeree.

ACCEPTANCE
Ml agreenieiu consists of aii otter by one paity and its acceptance
0) the person or persons to whom it is made. Acceptance is the ma-
nitestation by the offeree of his assent to the terms of die offer. Mathe-
matically stated. Offer and .'Vcceptance= Contract. The acceptance
must be aosolute and unconditional. It must accept just what is offered.
No paiticiilar form of words or mode of expression is required for an
acceptance. Any expression of an intention to agree is suflicient. An
acceptance may be indicated, for example, by saying "Yes", or by an in-
formal "O.K.", by a mere affirmative nod of the head, or, in the case of
an offer of a unilateral contract, by performing the act called for.
Who can accept.—An offer may be accepted only by tlie person to
whom It is made. If anyone else attejnpts to accept it, no contract v/ith
that person arises. Thus, if a person intends to contract with B, A can-
not give himself any right under the offer to B.
In Roulton v. Jones (1857) 157 E.R. 232, A sold his business to his
manager witliout disclosing the fact to his customers. On the afternoon
of die day on which the sale was carried thiough a customer (Jones),
who had a running account, sent an oider for some goods addressed to
the vendor of the business by name. The new owner of the business
executed the order witlioiit disclosing that the business had changed
hands. It was held that he could not recover die price, as diere was
no contract.'
If die oiler is directed not to a specified individual but to tlie pub-
lic at large, it may be accepted by any member of' the public at large
who Has knowledge of die existence of the offer. Carllii v. Smoke Bal
Co.° (supra) is die leading case on the point.
Modes of Acceptance.'—To make a concluded contract, die accejitan-
ce must be unequivocal, unconditional .and without any variance of any
sort between it and the proposal. A binding contract can only occur
ivhen the offer made is met by an acceptance which corresponds with
4. The Bengal Coal Co. v. Homi Wadia & Co., (1899) H Bom 97-
Jaravia Mall v. Jeogopal Das (1922) 43 M . L . J . 132; Secretary of State
V. Madho Ram (1923) 10 Lati. 493.
5. (1893) 1 Q : B . 256.
 CONTRACTS 21
- tne offer made in every particular. If, therefore, the acceptance does
not conform to tlie terms of the offer in all respects, or contains any new
terms or conditions, it becomes a counter-offer and thus rejects the ori-
ginal offer. For example, where an offer was to buy fully paid up shares
and partly paid shares were allotted, there was no acceptance and so no
binding agreement.
An absolute and unqualified assent by which acceptance is made
may be shown by the acceptor saying "Yes" to the person making the
offer, or by doing the act reauested in the offer, or by taking benefit or
service offered by the offeror.
Where the acceptance is not by conduct the assent must be actually
expressed. Like an offer, it must be communicated. The act of mak-
ing ur> one's mind is not sufficient, for a mere mental act of assent will
not be treated as a communication. A mental determination not indi-
cated by speech, or put in conrsr of indication by act to the other party,
is not an acceptance.
In Brogden v. Metropolitan Rly. Co. (1877) A.C. 666, a draft acrree-
ment relating to the supply of coal was sent to the manager of a raihvav
company for his acceptance. The manager wrote the word "approved"
and put the draft in a drawer intending to send it to the company's
solicitors for formal contract being drawn iip. By an oversight, the do-
cument remained in the drawer and was never completed. Held, thi":
mental act did not amount to acceptance and so did not complete the
contract.
While communication of an acceptance is essential, it is open to the
offeree to waive it. But in law, silence does not give consent; although
nodding one's head intimates acceptance. As the offeror cannot force
the offeree to speak, mere filence in most cases does not amount to ac-
ceptance. Ordinarily, the offeror cannot frame his offer in such a way
as to make the silence or inaction of the offeree operate as an acceot-
ance. For example, when a seller writes to another with whom he has
not had any prior dealing that "unless notified to the contrary" he will
send to that person certain auantity of goods to be paid for at specified
prices, there is no acceptance if the offeree ignores the offer and does
nothing. TTie silence of the person receiving the letter was not intend-
ed bv him as an acceptance, and the seller as a reasonable man shoukl
not have believed that it. was so intended. In the case of nrior dealings
between parties, the offeree mav have a duty to reiect an offer expresslv.
and his silence may be regarded as an acceptance. For instance, A
subscribed to the Daily News for one year. After the expiration of his
subscription, the newspaper company contiiiued to send him the pa'^ser
by mail for 5 years. A continued to use the paper, but he failed to
pay anv of the bills sent to him. He would be liable to pay on the
ground that his continued use of the newspaper was an accepianre of
the offer made by sending him the newspapers.
If the offeror makes an offer of a tinilalcral contract, communication
of acceptance is ordinarily not renu'Ved. Tn such a c.ise. the offeror ca/Js
for a completed or accomplished act. If that act h nerformed. the offer
if accepted without anv further action by way of notifying the offeror.
As a practical matter there will eveniuallv be some notice to the offeror
22 MERCANTILE LAW

because the offeree who has performed the act will ask. the offeror to
carry out his promise. It should be noted that the offer is accepted only
by ilie completion o£ the performance requested. Accordingly, if A
offers B Rs. 100 to paint A's house, and after B has finished nine-tenths
of tlie work, A says to B : "Stop, I withdraw my offer," there is no con-
tract, but B can recover from A the reasonable value of the services he
has rendered. Tlie basis of A's liability here is not contract, but quasi-
contract, to present an unjust enrichment at the expense of B.
There may be acceptance by taking benefit or enjoying the service
offered. A bus driver offers to carry passengers from New Delhi to Kasli-
mere Gate foi 25 P. A gets into the bus at the Pla/a stop and is tal^en
to Kashmere Gate. A lias taken tlie benefit or enjoyed the service offer-
ed and lias tlieieby agieed lo pay the conn act price for tlie ride.
An acceptance should alway. be accepted in the ni.mner required by
the offer. If the offeror specifies that tlie acceptance must be wri-tten,
an oral acceptance is ineffecine. If the acceptance is required to be
given by a specified date, a late acceptance has no effect. If the offer
says, "Please wire reply," and the reply is sent by post, that is no (om-
pHance with the offer unless tlie offeror chooses to accept it as such.
Remember, Sec. 7(2) of our Contract Act imposes the duty on the offeror
to intimate to the offeree that the; acceptance is not according to the
prescribed manner, and if he keeps quiet, lie is deemed to have accepted
the acceptance as made.
An acceptance must be made before tlie offer lapsps or is revoked.
We have already considered in connection with the lapse or revoca-
tion of an offer. In Englis.'i law, the moment a penson expresses his ac-
ceptance of an offei, tliat moment the contract is concluded, and such an
acceptance becomes ii revocable, whether it is made orally or through
the post. In Indian law, the posiiion is differem as regaids contiact
ihrougli post.
CONTRACTS THROUGH POST
In English law, the letter of acceptance is effective and the contiact
comes into being at the moment the letter is dropped into the mail
box, properly addressed and bearing sufficient postage, even if the let-
ter is not received by the offeror. T h e Indian Law on the point is
contained in Sections 4 and 5 of the Contract Act and is summarised as
follows: ' '
1. An offer or proposal is made when the leltei containing the
offer is deliveicd to the offeree.
2. As regards acceptance the Indian Law has two principles:
(a) Once tlie letter of acceptance properly addressed and
stamped is posted the acceptauce is made and binds the
offeror, as he is deemed to have received the acceptance
at the moment when it is despatched so as to be "out
of the powei of the acceptor" and it becomes a promise
on which the acc( ptor tan sue even if the letter novei
reaches the offtini, bur
 CONTRACTS 23
(b) an acceptance binds the acceptor only when it readies
the offeror. This is done to give an opportunity to the
acceptor to- revoke his acceptance, which .is not per-
mitted in English law. As a result of this rule, the ac-
ceptor gets the double advantage that, once he posts the
letter, he is freed from the responsibility and also gets an
opportunity to revoke the acceptance.
Regarding revocation the position is like this. An offer may be re-
voked by an express notice at any time before it is accepted. There-
fore, die ofEer must be re\okcd before the letter of acceptance is jested.
An acceptance, in English law, cannot be revoked, so that once the
letter of acceptance is properly posted the contract is concluded. I n
Indian law, tlie acceptor can re\oke his acceptance any time before the
letter of acceptance reaches tlie offeror.

CONTRACTS OVER T H E TELEPHONE

The law with regard lo contracts over the telephone is the same
both in Engljsii and India. The rule in England, as laid down in
Eniores Ltd. v. Miles Far Eastern Corporation (1955) 2 All. E. R. 493,
IS that in Telex" or telephonic communications the parties arc to all
intents and purposes in each other's presence and where a contract is
negotiated by sudi instantaneous communications, there is' no Ijindirig
contract until die notice ot the acceptance is received bv the offerer
Explaining the necessity of applying the rule that accentanc? is incom-
plete until received by the offerer in casts of contn'tcts concluded dur-
ing the course ot conversation over the telepfione, Dfenning, L.J', ob-
served :
"Now take a case witere two people mase a contract by telej^hone.
Suppose, for instance, that I make an offer to a man by telephone, and,
in the middle of his reply, the line goes "(lead" so that- 1 do not hear iiis
words of acce]Dtance. There is no contract at that moment. The other
man may not know the piecise moment when the line failed. But he
vnll know that the telephone •con\ersation was abruptly 'broken off be-
cause people usually say< somethijig to signify the end of the Lonversa-
tion. If he wishes to make a contiact he must therefore get througli
again so as to make sure that I heard Suppose next that the line does
not go dead, but it is nevertheless ao indis.tinct that I do not catch what
he says and I ask him to repeat it He 'then repeats it and I heajr his
acceptance. The contract is made, not on the first .time when I do
r o t hear, but only the second,time when I do hear If he ^des not re-
licat it, there is no contract. T h e contract is only complete when I Iiave
Iiis an.swer accepting the offer."
Jt- will be noticed that contracts l)y histantaneous communication
sucn as lelepnone or Telex-are not treated in tlie same way as contracts
l)V postal communication. The contracts over' the telephone are regard-
ed tlie same in principle as those negotiated bv the parties in the ac-
tual presence of each odiet

*). Telex is an equipment with the hel^J of which messages can be

despatched by ? teleprinter opei.ifed like a typewriter in one 'ountiv
and almost instantaneously received and typed in another,
24 MERCANTILE LAW
The same rule has been applied in India, because the Indian Con.
I)act Act, which is not esdiaustive, does not provide for contracts over
the telephone; and it is an established riile that when any matter rannot
be brought within particular provisions of the Contract Act, it would >
be peiTnissibie to apply English principles in dealing with the matter
(Kanhaivalal v. Dineshwarchandra, 1959 M.P. 234). In this case, Dixit,
J , in applying the principles of the English law, observed :
"Now. when Uie parties negotiate a contract-orally in the presence
of each other or over telephone and one of them makes an oral offer
to liie otlier, it is plain that an oral acceptance is expected, and the ac-
ceptor must ensure that his acceptance is audible, heard and understood
by the ofFere,- T h e acceptance in such a case must be by such words
whicli have the effect of communicating it. If the words of acceptance
are inaudible and have not been heard or understood by the offerer,
then the acceptance is incomplete and no contract would be formed until
the acceptor repeats his acceptance so that offeror can hear i t . . . . t h e
provisions of .S 4 of the Contract Act with regard to the completion of
the communication of acceptance, which are meant for contracts throug^h
the post, hav(^ no applicability where parties negotiate a contract in
ihe presence of each otiier or over telephone. T h e object of Sections
4 and 6 is to fix tlie point of time at which either party negotiating the
contract is precluded from changing his mind. When the parties neg-o-
tiate a contract f^ce to face or over telephone, no question of revoca-
tion '^n possibly arise for in such instantaneous comnumications a de-
finite ofFer_ is made and accepted at one and the same time."
It will be interesting to quote Sir William .Anson who sums up the
position \umorously as follows :' "Acceptance is to offer what a lighted
match is to a train of gunpowder. It produces something whicli cannot
be recalled or undone. But the powder" may have lain till it has be-
come damp, or the man who laid the train may remove it before the
match is applied So an offer may lapse for want of acceptance, or be
revoked before acceptance. Acceptance converts the offer fnto a p)-o-
mise, and then it is too late to remove." This means that as soon
as a lighted m;itcli is brought in contact with a train of efunpowder, rhe
gunpowder explodes, Gunpowder by itself is inert; it is the lighted
match wTiich causes the gunpowder to explode. Similarly, an offer from
the offeror doe? not by itself create any legal relationship between the
offeror and the offeree: offer bv itself is inert. But as soon as the offer
is accepted bv the offeree: a legal relationship is establislied between
the parties: the offer is converted into a promise which imposes an obli-
gation on the offerer. Offer is thus compared to gunpowder and ac-
ceptance to lighted match; .ind" an offer, when accepted, explodes mto a
contract and cannot be revoked.
Before concluding the discussion on agreement two more points may
be noted here. One is that no contract arises from cross offers. It
means that when two parties make identical offers to each other, %vith-
out knowledge of each other's offer, there is no comnleted airreement,
for there cannot be acceptance. For this reason it is well said that two
manifestations of willingness to make tlie same bargain do not consti-
tute a contract unless one is made with reference to the other. An

7. Law of Contract, p 40.

CONTRACTS |"|'C|ll ^^
offeree, therefore, cannot accept an offer unless its terms have been com-
municated to him by the offeror."
The second point is that an agreement to agree in the future is not
a contract, because unless all the material terms of the contract are ag-
reed there is no binding obligation. It was stated by Maugham L.J.. in
Foley V. Classique Ltd. (1934) 2 K.B. 2 at p. 13 : "It is indisputable that
unless all the material terms of the contract are agreed thcic is no bind-
ing obligation. An agreement to agree in the future is not a contract;
nor is there a contract if a material term is neither settled nor implied
by law and the document contains no machinery for ascertaining it."

PART 1-C
CONSIDERATION
The Need for Consideration.—Contracts result only when^one pro-
mise is made in exchange for something in return. The •something in
return is what we mean by consideration. T h e requirement of conside-
ration stems from the nolicv of extending the arm of the law to the en-
forcement of mutual promises of parties. We know fiom our study of
offer and acceptance that a mere prpmise is not enforceable. There
must be an offer, which is a promise conditional upon the making of a
certain promise by the other party, and the offer must be accepted by a
return promise. For example, a mere promise to make a gift, although
presumably creating a moral obligation, is not enforceable at law as
the person to whom the promise of a gift is given does not give any-
thing in return. To be enforceable a promise must be purchased, or
the consideration be bargained for a given in exchange for the pro-
mise
The reauirement of consideration limits the enforcement of promi-
ses to those in which each of the parties has bargained to give or sur-
render sometliing. The fact that each party has agreed to give or sur-
render something suggests that the parties have devoted some reflection
to the matter and that they seriously desire the promises to have legal
conseouences TIuis it is said that the justification for the doctrine of
consideration is that it provides at least some objecti\e guarantee of de-
liberation, a certain protection against hasty and ill-considered con-
tracts Consideration is an aid in determining that promises are
worthy of enforcement. Some degree of reciprocity and mufuah'tv of
undertaking is requisite before promises will be enforced: and the doc-
trine of consideration is the most important test of the enforceability of
executory promises.
In order that a contract may arise, three thing,s must concur- first,
the offer: second, the acceptance; and, tliird, the consideration. Miitual
assent, we have seen, takes place by offer and acceptance: but to liave
mutual assent, there must be something to be assented and aareed to on
each side. That something is consideration. Hence, consideration in
its essential nature is an aspect merely of the fundamental notion of
bargain, other aspects of which are offer and acceptance. ConsidcvntJon,
offer and acceptance are an indivisible Irinity, facefs of one idenfical no-
tion which is that of bargain.
'26 MERCANTILE LAW
Definition of Consideration.—In simplest terms, consideration is
what a promisor demands as the price for his promise. So, a simple or
parol contract, whetlier oral or in writing, to l)e valid and enforceable,
must he supported by consideration. A parol or simple contract is, in
fact, in the natme of a bargain, the party making the promise to do an
act or to abstain from doing it in return for something he gets. It is
a bargain struclc bv the exchange of promises, so that of the mutual pro-
mises, each one is equallv binding. In a bilateral contract each pro-
mise is consideration for the other. A unilateral contract has only one
promisor, and tlje perfoimance of the acl which is called for is the con-
sideration for his promise.
Pollock defines it a s : "An act or forbearance of one party, or the
promise thereof, is tlie price for which the promise of the otlier is
bought, and the piomise thus given for Aahie is enforceable." Conside-
ration must be an act or forbearance of some value in tlie eye of the
law; the promisee must suffer a legal detriment. The detriment need
not be real, it need not involve actual loss to ''the promisee. T h e word
means legal detriment as distinguished from detriment in fact. It is the
giving un bv the piomisce of a legal right: the refraining from doing
what he has the legal right to do, or the doing of what he has the legal
right not to do. .So. a benefit to the promisor or a detriment to the pro-
misee is a sufficient consideration for a contract.
Pollock's <lefiiiii'"on of consideration 'as the price l)v the promisee
for the promise of the promisor' iS preferred bv some English writers
to the one which emohasises the benefit and detriment theorv. But ac-
tually diere is hardly any difference. Both mean the .same thing. Con-
sideration is nothing more or less than the sign and .symbol of bargain.
Offers are ordinarily made in exchange for a 'consideration, either a
counter-promise or some other act which the promisor wishes to secure
In such cases thev propose bargains; they presuppose that each promise
or performance is an inducement to the oilier. In fact, consideration is
a teclmical term, used in the. sense of a quid pro quo (something in re-
turn), and must be either a benefit to the promisor or a detriment to the
promisee or botli. It follows that the doctrine of consideration is that
a promise will be enforced only when it has been paid for or purchased
either by a promise, an act. or a forbearance. Forbearance means re-
fraining from doing an act In other words, the promisor may desire
to buy the inaction of the other party or his promise not to act. For
ex'imnle, a director of a company may ask a creditor of the company to
refrain fiom suing it, and make a promise to the creditor that he will pay
the ilebi if the company fails to pay. If the creditor refrains from suing
the company, his forbearance is consideration for the- promise of the
director.

It should, however, he noted that promi.se and the consideration

must purport to be the motive each for the other, in whole or at leist
iu part. It is not enough that the piomise induces the detriment or the
detriment induces promise if the other half is wanting. If A promises
B to make him a gift of substantial wealth consideration is lacking
though B has renounced other opportunities for betterment in the
faith ih.nt the juoraisc will be kepi There is no mutuality, as each
CONTRACTS
party is not doing or agreeing to do something. Such situation'; usually
arise in cases relating to subscriptions for charity, where promises are
gratuitous.
In Abdul Aziz v. Mazum Ali (1914) 36 All. 268, a person had verb-
ally promised to the secretary 'of the Mosque Committee to subscribe
Rs. 500 for the rebuilding of a Mosque. On a suit by the secretary to
enforce this simple pjdmise it was held that the promise was not enforce-
able for there was no consideration in the sense of benefit to the pro-
misor or detriment to tlie promisee. It was said, "the person who made
the piomise gained nothing in return for the promise made, and the sec-
retar)' of tlie Committee to whom the promise was made suffered no
detriment in getting the promise from tlie' subscriber," and so the suit
was dismissed.
But a promise, tnough gratuitous, would be enforceable if on the
faith of the promise, the promisee suffers a detriment or undertakes a
liability. This is based upon what is called the doctrine of "promissory
estoppel", which h applied to avoid the harsh results of allowing the
promisor in such case to repudiate, when the promisee has acted in re-
liance upon the promise. Here the person makes a donative promise
witliout expecting an equivalent.
In Kedarnath v. Gori Mahomed (1886) 14 Cal. 64, the defendant
had agreed to subscribe Rs. 100 towards the construction of a Town
Hall at Howrah. The secretary, on the faith of the promise, called for
plans and entrusted the work to contractors and undertook liability to
ijay them. Held, though the promise was to subscribe to a charitable
institution and there was no benefit to the promisor, yet it was sup-
ported by consideration in that the secretary suffered a detriment in hav-
ing undertaken a liability to tiic contractors on the faith of ti\e promise
made by the defendant.
( I t should be noted that me promise can he enforced pro tanto to
the extent of the detriment or liability incurred. It should also be re-
membered that obligation in such circumstances is correlative and mu-
tual. For example, where a chair or a fellowship . in a University is
endowed with the aid of annual payments with the condit'on that it
should commemoiate the name of the founder or a member of his
family, the University must publicize the name of tlie benefrrtor.
The best definition of consideration in English law is found in the
case of Currie v. Misa (1875) 10 Ex. 153 : "A valuable consideration
in the sense of the law may consist either in some right, interest, pro-
fit or benefit acquiring to one party or some forbearance, tietiiment,
loss or responsibility given, suffered or imdcrtaken by the otiicr." Sec-
tion 2(d) of the Indian Contract Act defines consideration thus : "When
at the desire of the promisor, the promisee, or any othei person has
done or abstained from doing, or does or abstains fiom doiiiR or pio-
mises to do or abstains from doing something, .such act or abstinence
or promise is called a consideration for the piomise." The funda-
mental principle, that consideration is essential in every siniplc con-
tract, is laid down by both the definitions but there are some iin|jor-
tant points of diffeience in respect of the natinc and extent of (opsidr-
ration and the panics lo it iindrr ilio two s\s(cms of l.iw.
fiS IvrERCANTILE LAW

(a) Consideration at the desire of promisor.—Our definition starts

with the assertion that the consideration must move at the desire
or request of the promisor, and so, an act done at the desire of a third
party is not a consideration. Thus, a promise by the defendants to
pay to the plaintiff a commission on articles sold through their agency
in a market/ constructed by die plaintiff, not at the desire of tiie defen-
dants, but of the Collector of the place, is void, under Section 25 being
without consideration.^
(b) Consideration hy whom to be iurnished.—In Modern English
Law, it is well settled that consideration must move frotnahe promisee.
In other words, a stranger to die consideration cannot sue, and hence
a stranger to a contz-act cannot siie on the contract, though made for
his benefit." Thus, a contract between A and B that A shall pay off
B's debt to C gives no-right to C, for only a person who is a party "to
a contract can sue on it. Privity of contract is essential for a right of
action.'" Thus the wife and family of a tenant canrot sue the land-
lord for breach of liis obligations."
In INDIAN LAW consideration need not necessarily move from
the promisee. It may proceed from the promisee or any otlier person,
with the residt that a stranger to a consideration may maintain a suit.
A, by a deed of gift, made over certain property to her dau9;hter with
a direction that the daughter should pay an annuity to A's brother,
as had been done Iiy A. On the same day the daughter executed a
writing in favour of A's brother agreeing to pav the annuity. After-
wards she declined to fulfrl Iter promise saying tliat no consideration
had moved from her uncle (A's brother). The Court, however, held
that the consideration indirectly moved from A's brother to the daugh-
ter and he was entitled to maintain the suit." This is sometimes called
the doctrine of "constructive consideration" which is recognised by the
Indian law but' not by • the English law.
With regard to the second principle that a stranger to a contract
catinot sue, the Indian law is the same as the English law. .\, who is
indebted to B sells his property to G, and C, the purchaser of the
property, promises to pay off the debt to B. In case he fails lo fulfil
his promise, B has no right to sue C, for there is no privity of con-
tract between B and C. What B can do is to sue A and then attach
the amount due from C. It has also been held that wiiere a policy
of insurance is effected by the assuied on his own life, and the policy
is CNoressed to be for the benefit of his wife, not being a party to the
contract of assurance, she is not entitled to sue the insurance com-
pany on the policy, unless thr policy is assigned in writing or a trust has
been created by the assiired" .So, where a man insured his life express-
8. Durga Prasad v. Baldea (1880) 3 All. 221
0. Dunlop Pneumatic Tvre Co. v. Selfridge & Co. Ltd., (191.')
A.C 817, State of Bihar v. Charanjit Lai, 1960, Pat. 1.^9.
10. Dickson v. Reuters Telegram Co. (1887), 3 C . P . D . 1.
11. Cameron v. Young, (1908), A . C . 176
12. Chinnayya v. Ramayj'a, (1881), 4 Mad. 137.
13. Shankar v. Umbabhai (1913). 37 Bom. 471,
CONTRACTS 29^
ly for the benefit. o£ his widow, this gwes her no Ueii upon the poUcy
moneys m preference to his crediiois."
I h e r e aie, however, exceptions to tins rule recognised botli by tne
Enghsh law and the Indian law. In case of trust, die beneliciary
(cestui que trustj can sue in his own right to enforce the tiust"^ Tliis
principle of benehciary being able to sue in his own name has been
extended in India to the following types of cases In Khwaja Muha-
med V Husaini Begirni (191U) 32 All. 410, a Mohammedan lady H
sued het father in law K to lecovei Rs. 15,000 being the ariear. of
allowance called Khaichi-i-Pandan—betel box expenses, i e, "Pm-
money' payable to her by k undei an agreement made between K
and hei father puor to and m consideration of her marriage to K's
son D Both H and D weie minors at tlie time of the mairiage 'Ihe
Privy Council held tlie promise to be cnfoiceable by H and decreed
the suit rejecting tlie contention on behalf of K that H could not sue
as she was no party to the agreement Then Loidships observed that
It might occasion seiious injustice to apply the Common Law doctiine
of Privity of Contract to a country like India where maniages aie con-
tracted for minors by patents and guaidians Provision of marriage
expenses of female member of a Hindu family on a paitition between
male members entitles the female member to sue foi such evjjenses."
So, also where A has received money fiom B for pa) men t over to C
and admits to C receipt of tlie money, A is regaided as the agent of C
and C can recover from A ' Where a chaige in favour of a person
has Ijeen created on specihc immovable property, such charge is en-
foiceable at the instance of the person beneficially entitled, though he
ma) be a stiangei to die document cieating the charge The piopo-
sition may be summed up thus, (a) a stranger to a'consideiatioii can-
not sue in Lnghsh law, but he can under the Indian law, (b) a sti ang-
er to a contract both under English and Indian law, cannot, as a rule,
sue upon the contract But both systems lecogmse evceptions to this
rule.

KINDS OF CONSIDERATION
A consideration may be—
(a) Executory or futuie, waich means tliat i( takes the form of
a jjromise to be performed ui the future, oi
(b) Executed or piesent, in which it is an act oi foibearance
made or suffered for a piomise, or
l^c; Past, which means a past act oi foibeaianct-tli u is one

14 Paddie v Brown (1857) 29 L T C S 302, Royal Exchange Assur-

ance V Hope (1928) Ch 179: Alice v Accident Ins C o , (1933) A C 70
(1933) P C. 11.
15 Shuppu Animal v Subramanyan (1910) 33 Wad 238, Changa-
mal V Dominico of India, 157. Bom 27i5
16 Rakhmabai v Goviiid 1904), 6 B L R 421
17 Lily V Hays (1836) III E.R. 1272, Hamilton v Spottiswoode
(1849) 15 E R 1182.
 ^^ MtRCAK TILE LAW
wliicli took place and is complete (wholly executed) before
the promise i.s made.
According to English law, a consideration may be executory or ex-"
ecuted but never jjasl. The English law rule is that past considera-
tion is no consideration; because it is an act or forbearance made or
suffered at some time past by one party for the benefit of another
without die latter incurring any legal liability. If, afterwards, this per-
son cares to show his appreciation for what ilie other did, he can do
so; but his promise, to do this in\'olves no legal liability; it is a gratui-
tous promise. There are two exceptions, or what look, lil^e' exceptions,
to this rule of English law. viz., (a) when the past consideration con-
sists of services, rendered at tlie express request or on legally implied
request of the promis.or, it is a good consideration, B, while under
sentence of death for felony, requested L to obtain tiie King's pardon
for him. L having succeeded in obtaining pardon, B subsequently
promised to pay £100. L was held entitled to recover; (b) when a
debt, the payment of which is unenforceable (probal)ly barred" by
Statue of Limitation), is revi\'ed by a fresh, diougli gratuitous, promise
to pay, sucli promise forms a good consideration.
T h e Indian law, however, recognises aJJ tiie tJiree types of cojiside-
ration—executo'"y, execiued and past. The so-called exceptions to the
English fule have been incorporated in the Indian Contract Act in
Sections 2(d) and 25 (2 & 3). In Section 2(d) tlie words used are
"when at the desire of tlie jiromisor, tlie promisee or any other person
has done oi abstained from doing (past), or does or abstains from
doing (present or executed) or promises to do or abstains from doing
(future or executory)", and clearly show that consideration' may be past,
jiresent or future. Tlie first exception of the English rule is found in
this section as the words used aie "at the desire of the promisor", and
the other exceptions are expressed in Section 25 (2 &: 3) whicli read as
follows:

'Section 25. An agreement widioui consideration is ^•oid, unless

(I) "
"(2) it be a promise ;o compensate wholly or in part, a person
who has already -voluntarily done something for tlie promisor, or some-
thing which the promisor was legally compellable to do." A finds B's
purse and gives it to him. B promises to give A Rs. 50. This is a con-
tract. A supports B's infant son. B promises to pay A's expenses in
so doing. .This is a contract.
"(3) it is a propaise, made in writing and signed by die person to
be charged dierewith, or by his agent generally or specially authorised
in this behalf, to pay wholly or in part a debt of which the creditor
might have enforced payment but for the law for limitations of suits."
A owes B Rs. 1,000 but the debt is barred by the Limitation A c t / A
signs a written promise to pay Rs. 500 on account of the debt. This is
a contract.

ADEQUACY OF CONSIDERATION
A consideration need not be adequate, i.e., a full return for the
CON TRAGI'S ^^
promise, but it must be wmeiiviHg to whitli tlie law atyaches a \alne.
Where A agreed to sell a horse worth Rb. 1,000 for Rs. 500, and his
consent was freely given, tlie agreement became a valid contract in spite
of the fact that the consideration was so inadequate. The parties aie
presumed to be capable of appreciating their own interests and reach-
ing of their own equilibrium, and the Jaw, as a general rule, leaves
people to make their own bargains, and does not concern itself witli
tlie adequacy of the consideration. If a person chooses to make an ex-
travagant promise for an inadequate consideration, it is his own affair.
But if tlie consideration be grossly or shockingly inailequatc as if the
parties Iiave not been dealing at arm's length, and it one of the
parties alleges tliat his consent was obtained by mistake, fiaud, coer-
cion or undue influence, the inadequacy will be treated as an evidence
to sliow diat the consent %vas not a real consent and there would be no
contract. Because of this rule of inailenuacv of consideration being no
bar to a valid contract, it has been said that "in many cases, the doctrine
of consideiation is a mere tedinicality ineconciialile eitlier witli busi-
ness expediency or common sense."

CONSIDERATION MUST BE COMPETENT

Though tlie consideration need not be adetpiate to the piomise, yet
it must be competent, real and not illusory, illegal, impossible, uncer-
tain or ambiguous. Compiomising disputed claims, forbearing to sue or
giving up or forbearing to exercise an actually existing and enforceable
right, aie all good considerations." But where there is a pre-existing
legal obligation on the part of the promisee by which he is bound to
do something and he does (it that act cannot be a competent considera-
tion for a promise. In simple words, if the promisee did what he was
already bound to do there would be no consideration. Consideration
must he clearly stated."

NO CONSIDERATION NECESSARY
The general rule is that an agreement made without consideiation
is void. But Section 25 of the Act lays down three exceptions which
make a promise without consideration valid and binding. Thus, an ag-
reement without consideration is valid—
(1) if it is expressed in writing and registered if so required by
the law relating to registration of documents and is made crut of na-
tural love and affection between parties standing in a near relation
to eacli other; or
(2) if it is made to compensate a person who has already done
something voluntarily for the promisor, or done somediing which the
promisor was legally compellable to do; or ,
(3) if it is a promise m writing and signed by the person to
be charged therewith, or by his agent, to pay a debt barred by the law
of limitation.

18. Jagindra Nath v. Chandranath (1903) 31 Cal. 242.

19. Kanji v. Bhansali, 1950 Kutch 80.
?2 M E R C A N i l L t , LAW

I'liese exceptions are Daicd on principle!) ot equity. In the hist

and tiie tlurd instanceh the piomises having been evidenced by writing
it would amount to hardship i£ they were not lecognibea by the
Courts. Ihtis, a icgisieied agreement between a Wohammedan hus-
band and hib wile to pay his earnings to her is a valid contiact, as
It IS in writing, is registered, is between parties standing in near rela-
tion, and IS lor Jove and affection [Poonoo Bibi v. Fyaz Buksh (1874)
15 Bom L R. 57]. So is a legistered agieement wheieby an elder
brother, on account ol natural lo\e""aiKl ahection, pioinised to pay the
del)ts of his youngei brother [Venkataswamy v Rangaswamy (1903) 13
JVl L J. J2BJ Hut nearness ol relation does not necessarily import
natuial lo^c and adtction lliiis, where a Hindu husband by a regis-
tered document, alter leieiniig to quaiiels and disagreement between
himself and his wife, promised to pay his wile a sum of money for her
maintenance and sepaiatc lesidence, it was held that the piomise was
unenfoiceable [Rajhikhy Dohee v. Bhootnath (1900) 4 C W. N. 488].
Also the iiiie which insists on the pieseiicc ol consideration for every
agieement does not affect gifts Explanation 1 provides: "Nothing shall
affect the \aliduy, as between the donoi and donee, of any gift actually
made."

ACCORli AND SATISFACTION

Under Indian law, in the c.ise of leciprocal piomises, the piomise
of the oHei loinis ihe considciation foi die promise of the offeree;
and so it subsequent to ihc agieemcni both paiiies agiee that their
respective 2^iomises may not be cnfoiced, the subsequent agreement is
valid and suppoued by consideration I h e consideration in such
cases consists in the piomise of the offcice not to enforce tlie prolnise
in his favour, in consideration of die ofleiei making a similar promise.
According to Englisn lau, consideiaiioii is necessaiy not only for the
formation of contracts but also for then discharge Thus an agree-
ment to accept a small sum in satisfaction of a larger sum, is not
binding, foi iheic is no considciation, and tiie 'paity agreeing to accept
the smaller sum may sue lor the balance. It is, Jiowever, possible to
discharge ,in existing obligation by an Accoid and Satisfaction. An
Accord consists of an agieement bet^^een contracting parties whereby
one of theni is to do something different fioni th.it called for by the con-
tiact Tins accoid is satisfied when the leims of the new agreement
aie fully perfoimed Accord is the agreement by which the obliga-
tion is discharf^cd 'Ihe satisfacuon is the consideiation which makes
the agreement opeiame Both accord and satisfaction must take
place before the old obligation is discharged, the new agreement of
Itself does not teimmate the old "agieement To illusiiate. A pui-
chased a horse fiora B. and agieed to pay Rs 500 vithin GO days.
A failed to pay B at the end of the period, and a new agieement was
enteied ifito, wheie A was to deliver 30 maunds of wheat in full pay-
ment of the debt At any time before the wheat is delivered, B may
recover upon the on^ina! contract The delivery of the wheat cons-
titutes the satisfaction of the Accord, and tiius discharges the old
coninct Thus an \ccoul must be executed before it can opeiate as
satisfaction, and if it is only a promise and the Accord is executory, it
CONTRAC r s 3S
is of no avail, in oilier words, Accord execuicd is saiistacLion but
A.ccoid executon is merely substituting one cause ot action for an-
other. In this way, the Doctrine of Consideration has been extended
to the discharge ot contracti; but this is not recognised by the Indian
law. Section 63 of the Indian Contract Act provides:
"Every promisee nuy dispense with oi lemit, wholly oi in pait,
tlte pertorniance of the promise made to him or may extend the time
for such petfoimance, or may accept instead of it any satisfaction which
.he thinks fit." So, the Doctrine of Accord and Satisfaction Jias no
place in Indian law; executory Accords are perfectly valid ^ 'dia.
The rule in Pinnel's case that, a part payment of a debt an Ctisli can
never amount to a satisfaction of the whole debt, does not apply in
India.

PART 1-D
FLA^VS IN CONTRACTS
VOJD AND VOIDABLE CONTRACTS
We have already seen that a contiact iJ always based on agiee
ment. But an apparent agreement is not always a real agreement.
One party may have deceived the other party, or in some other way
there be no genuine consent. Tlte parties may be labouring under a
mistake, or one or both parties may be incapable ot making a con
tract. In all such cases there is no real agreement, and \\here there is
no real agi-eement the law has three remedies. First, the contract may
be treated as of no effect, and it will then be known as a void contract.
Secondly, die law may give the party aggrieved the option of getting
out of his baigain, and the contract is then known as voidable. Lastly,
the party at fault may be compelled to pay damages to ihe other.

A void contract is without legal effect. Such a contract is a nullity

and no right is acquired under or tlirough it, and is void ab initio.
Technically, tlie woids 'void contract' are a contiadiction in terms. A
loid contract is not a contract at all. It is a legal nullity, a legal
cipher. But despite semantic inconsistency in using the words 'void
contracts,' they provide a useful label for describing the situation that
arises when a contract is claimed but in fact does not exist. F6r ex-
ample, a contract with or by a minoi is void and also wheie it is made
by parties who are labouung under a mistake of fact material to the
contract.
A voidable contract lies in a middle zone between valid and void
contiacts. A contract is voidable when it is enforceable by law at the
option of one party but not at the option of the other. It is an agree-
ment that is binding and enforceable, but because of the lack of fiee
con.scnt of one of the paities, it may be rejected fay the aggrieved party
if he so desires. Thus, the party aggrieved a n d ^ o enjoying the option
may either elect to be bound by the contract o r ' t o repudiate it \Vhen
the contract is so repudiated it becomes void, but until it is so disown-
ed it continue!) to be valid. Hence, the difference between void and
voidable coiuidcts is significant. A voidable contract is valid if action
P^4 M E R C A i N l l L t LAW

is not taken to avoid it. A void contract is and remains a legal cipher;
It is non-existent.
FLAW IN CAPACHY lO CONTRACT
Broadly speaking, eveiy person is presumed by law to be compe-
tent to enter into contract, and if any one claims exemption from lia-
bility ou the ground ot incapacity to contract, he must strictly prove
such incapacity. Section 11 ot the Indian Contract Act piovides: "iLvery
person is competent to contract who is o£ the age ol majority accord-
ing to the law to which he is subject, and who is ot sound mind and
is not disqualified from contracting by any law to which he is sub-
ject." 'Ihis Section by stating the law in the positive enables us to
consider the incapacity to contiact._ Incapacity to contract may arise
out of (a) Mental dehciency, or (b) Status, infants or'minors, luiuiiics,
idiots' and drunken persons fall under (a) and Foreign Arnbassadois or
Sovereigns, etc., alien enemies, professional people, corporations and
married women fall under (b).

MINORS
In Indian law, the iVlajority Act, 1875, Section 3, declares uiat
every person domiciled in India shall be deemed to have attained his
r&ajority ivhen he shall have completed his age of 18 years, and not be-
lore. In case, however, a guardian has been appointed to die minor
under the Guardian and Wards . Act, or where the minor is under tiie
Guardiansliip of the Court of Wards, the age of majority is extended
to the date when he completes his age ot 21 years. Infancy is said
to be a disability, but in practice it is really protection granted by tlie
Law Courts. It has been ^ rightly observed: "The law protects their
(infants') persons; preserves their rights and estates, excuseth tlieir laches,
and assists them in their pleadings; tlie Judges are tlieir Counsellors,
the Jury are their sen'ants and Law is their guardian."

MINORS IM INDIAN LAW

Sections 10, U and 68 of the Indian Contract Act deal with the
matter of capacity of the contracting panics. Section II lays down die
rule : "Every person is competent to contract wlio is of the age of ma-
jority according to the law to which he is subject " If we con-
cert this into a negative proposition, it will read tluis: no person is
competent to contract who is not-ot tlie age of majority, etc This
cleaily shows that a minor is not competent to contract.
' I h e Privy Council's categoucal declaration in Mobori Bibi v.
Dharamodas Chose (1903) 3 0 ' C a l 539, makes it absolutely clear that
a miiioils contract under the Jnttian. law is absolutely void and there-
foie there is no possibility Or tjuestion of' ratifacation by the minor
on coming of age. In Mohon- Bibis: case, the minor had executed a
mortgage foi the sum ot Rs. 2Q;00(J out of whidi the lender had paid
the minor only about Rs. 8,000. T h e minor then filed a suit for set
ting aside the mortgage. It was contended that as tlie contract was
voidable and the minor was now repudiating it the amount of Rs.
8,000-actually paid to the minor must be refunded under Section G5~oJ
CONTRACTS , 35

the Indian Contract Act. The Privy Council pointed out that as the
minor's con ti act was absolutely void no question of lefunding money
could arise in these circumstancea.
The piesent position of tlie huv in India legaiding minor's capacity
to contract may be stated tlius:
1. A minor's contiact is altogether void hi law, and a muior
therefoie cannot bind himselt bv a contract. Tlieic is however, notli-
ing in the Coatidct Act wUich pievents a minor fiom becoming a pro-
misee. A minor is incapable o£ making an instrument but is not in-
capable of becoming a payee or endorsee."'" A duly executed transfer
by way of sale or mortgage-' in favour of a minor who has paid the
consideration money is not void, and it is enforceable by him or any
other person on his behalf The reason for this rule is that incapacity
means, incapacity to bind oneself by a contiact or be bound b) a con-
tract. All those contiacts to which a peison incompetent to contract
is a party are void, as> against him, but he can derive benefit under
them. Minority is a personal privilege and only the minor can take
advantage of it; the other partv is bound.
2. Since the contract js void an initio it cannot be ratified by the
minor on attaining the age of majority.
3. . If the minor tias obtained any benefit, such as money on a
mortgage, he cannot be asked to refund, nor can his moitgaged~ pro-
perty be made liable to pay.
4. A minor can always plead infancy and is not estopped to do
so even where he had procured a loan or entered into, ^ome otjier. con-
tract by falsely representing that he was of full age, when, in reality he
Was a minor." T h e ' r u l e of estoppel does not apply to a minor on the
ground that if it applied it would give a, handle to disiionest traders
to obtain false declaration^in"writing from the mhiov that he was a
major at the time of entering into the contract. But ii may be mncd
here that where the loan was obtained by fraudulent repiesonlatioii by
the minor or some propeity was sold by him and these ti.ansaetions ^are
set a.side the court may direct the minor to' restore the property to
the other party,'^ for "Minors can have no privilege to cheat men.". -If
a minor fraudulently overstates his age and takes deliveiy .o'f a motor
car after executing a promissory note in favour of the tradei foi its pnci;,
the minor is not estopped from pleading minority vncl can escape lia-
bility under the piomi'jsory note. But the Court oh; equitabl<; coiis'dera-

20 Gpekda Latcharao v Vishwanadham 13homayya, «U)5G Andhr.a

182; 33 All. 667; 24 M.L.J. 363..
21. Ragava v. Srinivas (1917) 40. Mad 308 (F.B.); Zafar Ahsan v.
Zabaida Khatun (1929) 27 A.L ] 1114.
22. Kanhaya Lai v Girdhari Lai (1912) 9 A.L J. I05; Gadigapp v
Balangowda (1931) 55 Bom. 741 1931- Bom. 561 (F.B.); Khaiigid v
Lakha Singh (1928) 9 Lah. 701 (1928) Lah 609 (F B.) Sadiq At.' Khan
V Jaikishore,- 1928 P C. 152,
^3. Mohd. Said v. Bishambhai Nath (1923) 45 All. 645) \'aikiiint
lama v. Anthi Moolan (1915) 33 Mad. 1071 See ilso Dvaviaii v Sin
\umma, 1959 Mys. 188; Batchu V^artah v Chepun Sarraju, i959 A.P. !00)
^6' MERCANIILE LAW
tions will order restitution, i.e., compel the minor to return to the trader
the car, if it is stili v;ith tlie minor or can be traced. But the tiader
cannot sue on tlie pro-note or for the price or damages, for, if allowed
he would be indirectly asking for the enforcement of tlie contract and
recover damages for breach, The English decisions graphically des-
cribe this position as "restitution stops where payment begins." S. 65
of the Contract Act cannoi be invoked as it pve-supposes ihc existence of
a contract toetween persons with legal competency, and a minor's' con-
tract is a nullity (Gockda I^atcharao v. Vishwanadham Bhoniayya, 1966
Andhra 182).
o. A minor is always liatile lor necessaries supplied to him or his
wile according to his status in life. So, a fi^dcsman v>ho supplies ne-
cessaries can always recover under Section 68 o! the Indian Contract Act
which provides tor liability in respect of necessaries supplied to u per-
son incapable of entering into a conlraci. It must be noted here that
tor necessaries supplied to a minor, it is only his property that is
liable, not the minor himself peisonally. In English law, an infant is
personally liable for necessaries supplied. I'hus in India if a, minor
has been supplied with necessaiies and he fails to pay and owns no pro-
perty, the tradesman will lose the price of necessaries. As in English law
necessaries must be according to the position and status in life of the
minor, and must be things which tlie minor actually needs. 1 herefore.
It is not enough to show that the articles supplied were of the kind
which a person of his position and_ station may reasonably require for
ordinary iise; tliey will not be .necessaries if he is already supplied with
things of that kind. The onus is on the supplier to make sure that
the minor actually needs the articles at the time of sale and delivery.
Objects of mere luxury are not necessaries nor objects which, though of
real use, are excessively costly. For example, buttons are normally used
in men's clothing, but pearl or diamond buttons are not necessaries-^*
The following have been held as "necessaries" in India. Costs incurred
in successfully defending a suit on behalf of a minor in which his pro-"
perty was in jeopardy."" Costs incurred in defending him in a prosecu-
tion.^ A loan to minor to save his property from sale in execution of a
decree.^ Money advanced to a Hindu minor to meet his marriage
lexpenses."^

Position of Mijior's Paieats.—A contract with a' minor doei not

give the creditor any rights against the minor's paients, whether the
contract is for necessaries or not. T h e moral oblig;ition of a father,
for instance, to provide lor his child does not impose on him any h'abi-
lity to pay the debts incurred by the child. The only case where a pa-

24. Johnstone v. Marks (1887) 19 Q.B. 609; Jogon Ram v. Maha-

deo P4 a909) 36 Gal. 768.
25... Ryder v. Womkwell (1868) R.L.- 4 Ex. 32.
26. Watkiaf V. Dhunnoo Baboo (1881) 7 Cal. 140- Palaram ^
Ayub Khan (1926) 49 AU. 52.
'27. Sham Charan Mai v. Chowdhry Lebya .Singh (1894) 2! Cal. 872
28. "Kidar Nath v. Ajadliia (1883) P.R. No. 185.
CONTRACTS Sl
rent may be liable is when the child is contracting as an agent for the
parent.

IDIOTS AND LUNATICS

Contracts other than those for necessaries by idiots and lunatics are
void. An insane person can make a valid contract during lucid inter-
vals.

DRUNKEN PERSONS
I Drunkenness is on tlie same footing as lunacy. A contract by a
drunken person is altogether void. It must be remembered that partial
or oidinary drunkenness is not sufficient to avoid a contract. It ifaust
be clearly shown that, at the time of contracting, the person, pleading
drunkenness, was so intoxicated as to be temporarily deprived of rea-
son and so could not give valid consent to the contract. Illustration
(b) to Section 12 of the Indian Contract Act reads: "A sane man who
is delirious from fever or who is so drunk that he cannot understand
the teims of a contract or form a rational judgment as to its effects on
his interest cannot contract while such delirium or drunkenness lasts."
This illustration clearly shows 'that " in India a contract by a drunken
peison is void and not voidable. Drunken persons are liable for neces-
saries supplied.

ALIEN ENEMIES
A person who is not an Indian is an alien. An alien may be
either an alien friend or an alien enemy. An alien friend or a foreign-
er ivhose Sovereign or State is at peace with the Union of India,
has usually the full contractual capacity of a natural-born Indian sub-
ject, except that he cannot acquire property in an Indian ship, nor
can he be employed as Master or any other Chief Officer of such a ship.
On the declaration of war between his country a n d ' the Union
of India he becomes an alien enemy, and the following rules will ap-
ply to iiim: (I) During the subsistence of the war, an alien enemy
cannot contract with an Indian citizen nor can he sue in an Indian
Couit, except by licence from the Central Government, in case he is
permitted to stay on Indian territory. (2) Contracts made before the
war between an alien enemy and an Indian citizen are either dissolved,
as being against public policy, particulaily if their performance would
involve intercourse v/ith or help to the enemy, or suspended for the
duration of the war and revived after the war is over, provided they
have not already become time barred. It may be noted that for the
purposes of civil rights "an Indian citizen or the subject of a neutral
State who is voluntarily resident or who is cariying on business in hos-
tile territory is to be treated as an alien enemy.

FOREIGN SOVEREIGNS AND AMBASSADORS

Ii!oreign Sovereigns and accredited representatives of a foreign
State or Ambassadors enjoy a special privilege in that they cannot be
sued in our Courts, but they can, if liiey choose, enter into contracts
and Aen enforce tliese contracts in our Courts. This immunity of a
^8 MERCANTILE LAW

Sovereign continues ev^n if he engages in trade. But an ex-king is not

entitled to the privilege and can thus be sued against in our Courts.
In India, under S. 8fi of tlic Civil Procedure Code, in order to <!ue rulers
of foreign States. Ambassai'ors and Erivovs, pievious sanrfiori ot the
Ccniial Government must be obtained.

PROtESSrONAL PERSONS
The only class of professional persons ivho suffpr a handicap in the
matter of capacity to contract is that ot Barristers practising in Eng-
land. They are not allowed to enter into any contract relating to their
protession or to sue for theii fees or to be sued. Their fees are deem-
ed to be debts of honour from die solicitors to them. In India, since
the passing of the Bar Councils Act of 1927, a Barrister who is in the
position of an Advocate with libeity both t j act and plead, has a
right to contract and to sue for his fees. A decision of tlie Full Bencli
of the Allahabad High Court has recognised tlie right of a Barrister
enrolled as an Advocate of an Indian High Court to sue his rljent for
his fees.'* '

CORPORATIONS
A corporation is an artificial person created by \s.\v It exists only
in contemplation of law and lias no physical existence It has a right
to sue, and can be sued, but only tlirough an agent, not being a "phy-
sical person. There are some contiacts into which a corporation can-
not enter without its Seal and others not at all, e.g., a contract to
marry. Further, the powers of the corporation to contract are limited
by its Charter oi ^ Memorandum of Association Any contract beyond
suf n powers ,is ultra vires.

MARRIED. WOMEN
A woman, jnarried or single, in Indian law is under no disability
as regards entering into c'o'ntracts Thus, a Hindu wife can enter into
Coritracts and bmo her property rTnder English law before 1883, a
married woman could not make a contract, but now the law is the
Same as in India

PART I-E

FLAW IN CONSENT
We have noted before that the basis of a contract i" <igreement,
that ii to say, mutual consent nr excliange of assents In other words,
the parlies should mean the same thing in the same sense and volun-
tarily agree When this consent is absent the contract may turn out
to be X'oid or voidable according to the nature of the flaw in coT""nt.
Where there is no consent or no real and certain object of consent there
can De no contract at all, as ir. the case of mutual mistake This is
described by Salmond as ericr in consensus, so that there wai not at

29. Nihal Chand v Dilawar Khan (1933^ 5? All. 570; 193S All.
3417 (E.B.)
CONTRACTS S9
the relevant time any real agreement or common intention between
the parties, or theii minds had not met. Error in consensus—a mis-
nndeistanding—pievcnts the existence of any consensus ad idem and
tiierefore of any con ti act. Where there i-; consent, but no fiee con-
sent, there is generally a contiact voidable at the option of the party
whose consent was not free, as in the case of misrepiesentation, undue
influence or coercion. This is known as error in causa. In this case
a true contract is constituted by the consent of tlie parties, but the
consent of 'One of die parties was induced or caused by the supposed
existence of a fact which actually did not exist If he had known the
truth he would not have enteied into the contract. Such error in
cause makes the contiact viodable at the option of the party ivhose
consent was not free In a mutual or bilateral mistake of fact the con-
sent is altogather absent or excluded, the minds of the contracting par-
ties fail to meet and the contract is void. Unilateral mistake, imdue
influence or coercion vitiates consent and the contract is voidable.

MISTAKE
Mistake is of two kinds, mistake of law and mistake of fact. If
there is a mistake of law of the land, the contract is binding because
cvervone is deemed to have knowledge of his own law, and ignorance
of law is no excuse. But if one of the parties makes a mistake of law
through the inducement of the other party, tlie contract raav be avoid-
ed. ^[istake of Foreign Law and Mistake of Private Rights are treated
as mistakes of fact and. therefore, would be excusable The contract
would be void.

MISTAKE OF FACT
"^Vheic botli the paities to an agreement are under a mistake as
to a matter of fact essential to agreement, the agreement is void" (Sec-
tion 20). It should be noted that to make a contract void on the
ground of mistake of fact the mistake must be on the part of both the
parties and it must be as to a matter of fact essential to the asjreement;
it must be a mutual mistake so as to negative consensus ad idem. A
meie enor or mistake of judgment though a material noint, will not
be sufhcieiit if it does not affect the substance of the whole considera-
tion.'" If A buys an article thinking that it is woith Rs. 100, when
it is onlv woith Rs. 50, the contract remains good and A has to bear
the loss of his own ignorance of the true value of the article. Fur-
tlier, the mistake merely in epxression is not sufficient to avoid a con-
tract, what leally is intended is that there is a bilateral mistake as
affecting the assenting minds; each party obviously understanding the
contract in a diffeient. way. Thus, X having two houses, A and B,
offers to sell house A, and Y, not- knowing that X has two houses,
thinks of house B and agrees to buy It Here, there is no real consent

,80. Kennedy v. Panama Mail Co (1867) L.R 2 Q B 580; 4dai-

kappa v. Thos. Cook & Son 1933 P.C 78. But see Kalvanpur Lime
Woiks Ltd., V. State of Bihar, 1954 SCT. 99; U.P, Govt. v. Nanhoo
Mai, 1960 All. 420.
40 MEUCANTILE L \ W

and the contiact is void. We have said above that the mista'ke miut
be on the part of both parties, and a unilateral mistake has no effect
on the contract Section 22 leads: "A contiact is not voidable mereiv
because it was caused by one of the parties to it being under a mistake
as to a matter of fact" Thus A intends to sell his house and B, in-
tendinsj to offer Rs. 300, by mistake offeis Rs 500 which A accepts
Afteiwards B cannot plead mistake and the principle of estoppel will
apply

MISTAKE AS T O NATURE OF CONTRACT

To the rule stated above there is an exception which under certain
circumstances enables a part) under mistake as to natuie of contiact
to a\oid the contract A contiact is void when one of the parties to it
does not intend to entei into it, but through the fault of another and
without any fault of his own, makes a mistake as ro the nature of the
tiansaction Thus, wheie a lady was induced to sign a deed of ex-
change and gift on the representation that it was a power of attornev, '
the document was held to he void, as hei mind did not ^o with her
signature"' Similarly, Vtheie a blind man signed what he thought was
a compromise petition, but was in fact a release, on the fiaudulent re-
piesentation of anothei the document was void'" This principle has
been applied to illiterate persons'''' and to those fai advanced in age
So, where the mind of the signer did not accoraj^an) the signatuie,
i e., he did not intend to sign, in contemplation of lau, never did sign,
the contract to which his name is appended In Foster, v. Mackinnon '^
(lU/)), L R 4 CJ* 704, M. an old man of feeble sight, endorsed a bill
of exchange foi £3,000 thinking.it was a guaraptee. Held, M ivas not
liable.

MISTAKE AS T O SUBJECT-MATTER O F CONTRACT

A contiact is void when the "parties to it assiun? that a ceitain
state of tJiirrgs exKts. ^ifhich does not ui actual fact exist, or in their
ignorance of sonje fact the cor^tract means one thing to one and an-
other to the other, and contract subject to that Assumption oi under
the igPoj-ancR Theie iS a common mistake, .i e, 1?b'h_ parties make <he
same mistake. Suclt a mistake ttiay relate to she existence of the siib-
ject-raatten il? identity, title of the 'parties to if, its- price, quantity or
quality
Mista'ke re ExijtencQ.—The contract was to buv n paigo desciibed
as shipped from poit A to poit j ^ and bejieved to be at sea which 4r
lact had got lost eailier unknown to the partie* ^nd-hence not m ex-
istence T h e contract was declared void due to the Parties' mistake "'
G agreed to -assiga to f^ a policy of assurance upon Hie life of L T had

•31 Sarat Chandra v. Kanai Lai, 1921 Cal 786

32. Hem ,S{ngh v Bhag^vat, 1925 Pat 140.
33 Chiman Ram v Diwan Chand, 1932 Bom, 15^; (1932'i 56 Bom
189r Gangaram v Sumangal, 19S3 Sind. 347.
34 Courturier v. Hastie (1856) 10 E R. 1005
CONTRACTS 4f
died before the contjact was made. Held, no contract.'" In both these
cases. tl;e agreement was nothing but a phantom since there was noth-
ing upon which it could fasten.
Mistake re. Identity of Subject-Matter .—"Where tne parties are not
agreed to the identity of the subject-matter, i e., one means one thing
and the od'er means another thing, the contract is void. Thus, where
there happened to be two ships sailing ^fiom Bombay for England under
the names "Fearless" and the buyer %vas buying the cargo of one ship
and the seller selling the cargo of the other, the contract was held
void.'"
Mistake re. Title to Subject-Maiter.—Where the parties believe that
the seller is the 'owner of tlie article which he purports to sell, but, in
fact, he has no title to it, the contract is vitiated bv the mistake and
is void. A agreed to take a lease of a fishery from B though contiary
to the belief of both parties at the time A was tenant of the fishery and
B never had any title to it. T h e contract -was void."
Mistake re. Price of Siibject-Matter.—There may sometimes be a
genuine mistake as to the price of an article for sale in which case the
contract will be void._ Wheie a seller intending to write the figure
£2.250 as price of the propei ty. wrote £1,250 and the buyer knowing the
mistake accepted the offer, the couit held the contract as void.'® Sirai-
larlv, where a contract of lease of a house was agreed to at a rent of
£230 but in the xvritten contract the figure £130 was inserted by mis-
take, the court did not enforce the contract.
Mistake as to Quantity of Subject-M^tter.^There may be a mistake as
to the quantity or extent of the subject matter, which wil! render the
contract void. Where a broker delivered a 'Bought Note' to the seller
and 'Sold Note' to othei buyer in relation to an identical contract, but
the two notes differed as to quantity sold and bought, the contract was
held unenfoiceable'" P wrote to H inquiring the price of rifles and
suggested that he might buy as many as 50. On receipt of a reply he
wired "send three rifles". Due to tlic mistake of the telegraph ofSce the
message transmitted to H was "send the rifles" He dispatched 50
rifles. P accepted three rifles and sent back the rest. Held, there was
no contract between the p.irties. The buyer xvas. however, liable to
pay only for three rifles on the basis of an implied contract."
Mistake as to Ouality of S«b]ect-Mat(er or Promise.—l\ristake as to
the quality raises difficult questions If the mistake is bilateral and be-
cause of the mistake the thing does not possess the quality bai gained
for the contract is obviously void But if the mistake is only uni-

35. Scoft. v Coulson (1903) 2 Ch. 249; See Tndi.in Trade & Gen.
Indian Co., Ltd.. v. Bhailal Maneklal Desai (1963) 55 Bom L R. 874
where it was held the Section did not apply.
36 Raffles v. Wichelhaus (1854) 159 E R. 375.
37. Cooper v. Phibbs (1867) 2 H.L. H9.
38. Webster v. Cecil (1861) 54 E.R 812
"9 Charlsworth v. Jannings (1864) 55 E R. 560,
40. Henkcl v. Pape (1870) 6 Ex. 7.
"•*2 MERCANTILE LAW

lateral difficulty arisej. Mere mistake as to tiie quality oE the subject-

matfer of a contract docs not invalidate it, but mistake of one party
to the promise of the other party as to the quality of subject, known
to that other party, does invalidate the contract. Such a question
generally arise? in cases oC sale of goods. The general principle com-
monly applicable is Caveat emptor—let the buyer beware. In othei'
words, the seller is not bound to disclose the defects of his wares to the
buyer, and the buyer must rely on his own judgment. But, if the
buyer specifics quality required or indicates the purpose for which, the
goods are required or -where the seller represents them to be of cer-
tain quality or to be suitable for the stated purpose, and they turn
out to be otherwise, the contract would be void. Vet. if the seller re-
mains passive and savs nothing to allnv the self deception of the buver,
the contract will not he avoided. A buys a picture from B: both A and
B believe it to be the work of an old master, and a high price is paid-
It turns out to be a modem copy. A has no remedy in the absence
of representation or warranty. But where a partv. knowing that the
other was labouring under a mistake "snatches a bargain" bv hurriedly
closing the transaction, this unilateral mistake will enable the party to
avoid the contract.

There is. however, a class of -contracts known as Uberrimae fidei—

contracts requiring utmost good faith. Contracts of insurance or con-
tracts for the allotment of shares are good examples of such contracts.
In these contracts from their verv nature, one of the parties must look
for his knowledoje of ihc tran-^action to the statements of the other party:
and it is onlv fair that an innocent mistake under these circumstances
should be a ground for allowing the person injured by such mistake
to avoid the contract. Since one partv must rely on the other for full,
frank and honest disclosure of all facts known to him, and material for
the putTJOse of securing the assent of the nartv. both mis-statement and
non-disclosure of material fact will vitiate the contract.

CONTRACTS UBERRIMAE FTDET

We may briefly consider here the various contracts reqin'ring utmost
good faith.
Insurance of all kinds.—The most important type of contracts
TJberrimae Fidei are contracts of insurance. In these cases the • insur-
ed is the fierson having knowledge of the facts likely to influence the
insurer in coming to a decision whether or not he should take the
risk. He is required to make a frank and true disclosure ot all ma-
terial facts known to him and essential for the purpose of enabling
the other party to give free' consent. A mis-statement or concealment
of a material fact will render the contract void." Contracts relatinsr
to «!ale of land" are sometimes classed as those reauirine utmost good
faith Full disclosures are also essential in all family settlements. TTt-
mosr good faith must be everdsed hv those who issue a prospectus In-
viting the public to subscribe to the shares of the company, and any

41. Tackson v. Lancashire k General Co. (1927) ^.C. 1,^9; Ratan

Lai V. Metropolitan Co., 1959 Pat. 413.
CONTJIACTS 43
wrong staLement in the prospeclus on the faijth of which a person ap-
plies for tlie shares will entitle the person to avoid the contract. Good
faith between partners after the formation of the partnership Is essen-
tial, and' partnerships are regarded as contracts requiring utmost good
faith. Although contracts of guarantee arc not positively to be classed
as requiring utmost good faith, yet certain circumstances make them as
such. Foi example, a creditor is bound to disclose to the surety all the
materia! facts known to him about the principal debtor.

MISTAKE AS T O T H E PERSON CONTRACTED W I T H

It is a rule of l:tw that if a person intcnd.s to contract with A, B
cannot give himself any rights under it. Hence, when a contract is
made in which the personalities of the contracting parties are or may
be of importance, no other person can interpose and adopt the con-
tratt. Thus, where M intends to contract only with A but enters into
contract with B. believing him to be A, the contract is vitiated by mis-
take, as there is no consensus ad idem." The following fowr cases are
important illustrations of the point.
Gundy v. Lindsay (1873) 3 A.C. 459. One Blenkarn by imitating
the signature of a reputable firm called BlenTciron, induced Lindsay to
supply him \vith goods on credit, which he aftenvards sold to Cundy, an
innocent purchaser. In a suit by Lindsay against Cundy for recovery
of goods, held that as Lindsay never intended to contract with Blen-
karn there was no contract between them and even an innocent buyer
of the goods from Blenkarn did not get a good title, and roust return
them or pay their price.
Lake v. Simmons (1927) A.C. 487. A woman, by fraudulently' re
]5resenting to a firm of jewellers that she was the wife of a certain Ba
ron, obtained two pearl necklaces on the pretext of showing theril to
her husband with a view to buying. It was held that there was no con-
tract between the jewellers and the woman and an innocent buyer
from her did not get good title and must return the necklaces to the
jewellers. Though the woman got possession physically, there was no
mental assent, as the jewellers intended to deal not with her but quite
a different person, viz., the wife of the Baron,
Phillips V. Brooks (1919) 2 K. B. 243. A man, Nortir, called in per-
son at a jeweller's shop and chose some articles oE jewellery. He tender-
ed in payment a cheque which he signed in the name of Sif G , B , ,
a person of credit. Thereupon the jeweller allowed him to take away A '
valuable ring which North pledged- to Brooks, who had no notice of tlie
fraud. In a suit by the jeweller for the return of the ring, it was held
that Brooks, the pawnbroker had good title to the ring, because the con-
tract between the jeweller and North was good until the jeweller dis-
affirmed it. Horridge, J. held tliat altliough the jeweller believed the
person to whom he was handing the ring was Sir G.B., he in fact con-
tracted to sell and deliver to the person who came into his shop. The
contract therefore was not void on the ground of mi.stake. but only void-
able on the ground of fraud. T h e Learned Judge cited with approval
an American case of Edmunds v. Merchant Despatch Co.. 135'Mass. 283
in which Morton, C. J. said: "The minds of the parties met and "ag-

42. Boulton v. Jones (1887) 2 H. ft N 564

44 MERCANTILE LAW

reed upon all the Lerms of (Jie sale, the thing sold, the price and terms T
of payment, die person selling and the person buying... .The plaintiff
could not have supposed that he was selling to another person; his in-
tention was to sell to the person present and identified by sight and
hearing; it does not affect the sale because the buyer assumed a false
name and practised any other deceit to induce the vendor to sell." But
if' in the present case, North had introduced himself as Sir G. B. on en-
tering the shop, the pioper conclusion would have been that the plain-
tiff (the jeweller) had intended to contract with Sir G. B. and widi no
one else, and in that case the contract would have been not merely void-
able, but void. In fact, however,' as Viscount Haldane pointed out in
Lake v. Simmons, the fiaudiileni representation by North was not made
until after the parties had agreed on the sale, i.e , alter the contract had
been made, and the property in the jewellei"y had passed to North. It
induced, therefore, not the making of the contract, but only the delivery
of goods, which by the Sale of Goods Act is independent of the passing
of tlie property. If, ho'ivever. North had spoken to the jeweller over
the telephone, and said that he was Sir G. B. the contract would have,,
been void on the ground of mistake in the identity of the contracting
parties.

MISREPRESENTATION
The term misicpresentation is ordinarily used to connote both Inno-
cent Misrepiesentation and Dishonest Mis-,statement. Misrepresenta-
tion may, thejeforc, be either (i) innocent, or (ii) wilful or deliberate
with intent to deceive. In law. for the former kind the word "Misrepre-
sentation" is u.sed and for the latior the term 'Traud." Misrepresenta-
tion may be defined as a mis si.Ttcmeni made innocently and with an
honest belief as to its truth. It is sometimes called an "Invalidating
Misrepresentation." T h e effect of innocent misrepresentation of ma-
terial fact is that the party misled by it can avoid the contract. But in
order to avoid a contract on (he ground of misrepresentation, it is ne-
cessary to avoid that (i) there was a representation or assertion, (ii)
such assertion induced the oarty aggrieved to enter into contract, (iii)
the assertion related to a matter of fact, and not mere opinion, which
has become tmtme. > Thus, innocent m.isrepresentation must be a posi-
tive assertion of a fact, and must not be mere opinion or hearsay or in
the nature of a commendatorv expression. In certain classes of con-
tracts, e.g., contracts Uberrimae Fidei, where the facts are specially with-
in one party's knowledge "A positive duly of disclosure is added, and
contract is made voidable, if there is passible failure to communicate a
material fact.

T\TLrUL MISREPRESENTATION OR FRAUD

Fratid is tlie representation either by woids or conduct that some-
thing is true whicli is not so, so as to deceive another person, either
intentionally or iviih' reckless (Jisiegard as to the truth or falsehood of -^
the words or conduct. It is immateiial whether the representation takes
effect by false statement or tvilfnl concealment. The party defraud-
ed can avoid the contract and also claim damages. The chief cha-
racteristics of fraud are r (a) there niust^hc a representation of assertion;
CONTRAClS 45
(b) the person making ii musi know it lo be false, or maWe it with
A reckless disregard oi its> iiudi oi falsit), (c'j the representation must
1 elate to a fact and must not be a mere expression ot opinion; (d) the
Teprescntation must be made with tlie object of inducing the jjaity de-
frauded to act upon it; (e) the rej^resentatioji must in fact have deceived
such party into acting; upon it; (f) tlie patty so acting must have suller-
ed some damage; (g) the represciiiaiion must be made by a party to the
coutiaci, i c cither the part> sought to he charged or by his duly au-
thorised agent.
There must be reiiresent:ition or asset tion, and it must be false.—
We have .ilreaiU considered this point under innocent misrepicsen-
lation. If there is an actual false statement, the case is siniple. If can-
ccalmcnt is alleged, it must be renienibeicd ihat mere nondisclosure of
material facts, however morally ccnsuiabic, docs not render a contract
soidable. Theic must be active m-is-stateuieut of fact, os at all events,
^such a partial and fragmentary statmitiu of l.ici, as that tlie witiiholding
of that which is not stated make^ tli.ii whidi is stared absolutely false.
In Peek \ . Gurney (1873) 6 ILL. 377. tlic piospcctiis issued did not lefer
to the existence of a document disclosincj liabilities, so tliat the impres-
sion t'eated was that the company was jn-osperous, whereas the docu-
ment if disclosed woidd ii,i\c cicaied a diffeicnt impression, it was held
that there was a suppression of truth and suggestion of falsehood
amounting to fraud. In ilie worcS of Biamwell B.. "To constitute fraud,
there must be an assertion of something false within the knowledge of
tlie p.irtv asserting it or the suppression of that which is true and
which it was his duiv to communicate.' Mere silence as to facts likely to
affect tile willingness of a person to enter mio .i conttact !•; not fi.\iid, un-
less silence is in itself equivalent to spcedi or where it is the duty of
person keeping silent lo sjieak; as whtie a fiduciary relation exists bet-
ween the contracting parlies or the conii.itt lequiics utmost good faith.
The rejjresentation must be of a (act.—As we have seen befoie, the
assertion must be of a fact and not :i mere expicssion of opinion
or hearsay, or pulTeiy oi nourishing desciiption. Thu-,. if ,'\, who is
about to sell a hoisc lo K. sa\s that the hoise is a Beauty and is worth
Rs. 1,000, that is A's opinion and B is at liberty to leject it.*' But if in
fact, he paid onh Rs 500 for it, then A lias mis-siaied a fact, and if R
has been induced l)v that statement to buy the hoise, he may rescind the
contract on the giound of fraud.
There must be knowledge of tlie falsehood of the lepresentation or
a leckless disregard as to its being true or false.—With regard to the
fust paia of the statement; ilitie seems to he no difficnli) for fraud
is proved when it is shown thai a f.dsc lepiesentation has been made
knowingly or without belief in its tiiiih lint where it is desired to
piove on the giound of iccklessness. snine difliculix is cvpcrienced.
_Jit first sight it m.iy appe.ir difncnll to sav that reckless misstatement
would amotint to fiaud. since the pcison does not definitelv know tJie

43. Horsfall v. Thomas (lRf.2) ir,8 F..R RKS Bimia B,ii v. Shanker-
lal, 1959 M.P. 8.
i^. See V. K. Sirinirds. SclK v P I . fe G J Co., )')'>? Mss. 53.
46 MERCAiN'llLE LAW

statement to be false. But when we piobc iiuo the matter a little fur-
ther we find that there is ically a wilful mispresentation. In a leckless
mis-statement tlie person is not sure as to the fact in his own mind;
he feels a doubt, yet he represents to the other party, as if he is cer-
tain about the truth of the fact represented by him. Such a misrepre-
sentation is a Iraud. Lord Herschell said in tlie leading case Deny v.
Peek (1S7I) 37 CIi. D. 514, "One who makes a statement under sucli
circumstances, (reckless, careless wliethei it be Hue or false), cannot have
real belief in the truth ol what he sa)s." .-Mso, a piomise made without
an intention of perfoiraing it is fraud. "When the bu)er bought with
the preconceived intenifon ol getting the goods witiiout paying for them
the seller could avoid the contract on tlie ground of Iraud.
The representation must be made with the object of inducing the
jiarty deceived to act upon It.—In this connection it may be noted that
the assertion must be made uith the intention of inducing o n e ' t o ac;t
on the assettion who does so act. This means that theie is an induce-
ment in fact and the assettion is one which, necess.irily influenced and
induced the party to set.
The representation must in fact deceive.—If the person on whom
the fraud was practised was not in reality deceivetl, then he is in just
the same position as if no false representation had been made to him,
and has no legal ground ol complaint. A Ijoiight a cannon of B. B
khew the cannon had a defect which made it woithless, and so put a
metal plug to conceal its vixakness. A accepted the cannon, without
e.Kamining it. Tlie cannon buist before it was paid for, and A lefused
to pay on the ground that B had been guilty of fraud. It was held
'hat A would have bought it e\en il no decepti\e plug had been in-
set ted, he was not in fact deceived b) it and was bound to cav."'"'
The plainiifl must be thereby damnified.—It is a common saving
that "there is no frawd without damages," for an action being one of de-
ceit, and unle'is the pLiintilf has sustained a damage or injury, no action
will lie. The damage may consist of actual and temporal injurv. th.-it
is, some loss of money or money's worth, or some tangible detviment.
capable of assessment

COERCION
Coercion is defined by .Section 15 of the Indian Contract Act ;is
"the committing Ol ihieatening to commit, any act forbidden by the
Indian Penal Code, or the unlawful ileiaining. or threatening to detain,
any properly to the prejudice of any person wliatevei, with the inten-
tion of causing any person to enter 'into an agreement." .Simply stated,
in Indian law, the doing of anything forbidden by ihe Indian Penal
Code is coercion, even tiiough sucli an act is done in a place where
the Penal Code is not in force. AVhere a young widow 13 years o t '
age ^vas lorccd to iulont a boy under tlie threat of preventing the body
of her husb.ind who had just died fiom being removed for cicmation,
It ivas held that her consent was not free but induced bv coercion, as

45. Horsiall v Thomas (18C2) 15S E.R. S13.

CONTRACtS - ^"^
any person who obstructed a dead body Irom being removed would be
guilty of an oflence under Section 297 ot die Indian Penal Code. The
adoption was set aside." A release deed was obtained by a person
from his wife and son under a threat ot committing suicide. The trans-
action was set aside on the gi-ound oi coercion, as suicide is forbidden
by the Indian Penal Code, although, for obvious reason, not punish-
able.'" A coercion may proceetl from any person and may be directed
against any person, even a stranger, and also against goods, e.g., by
unlawful detention of goods.

UNDUE INFLUENCE
Section IG of the Act defines Undue. Inlluence ttius: "(1) A'contract
is said to be induced by 'undue influence' wliere the^ relations subsist-
ing between the parties are such dial one of the parties is in a position
to domihate the will of the other and uses that position to obtain an
unfair advantage over the other.
(2) In particudar and wiiliout piejudice to the foregoing principle,
a person is deemed to be. in a position to dominate the will of smother
—(a) where he holds a real or apparent authority over the other or
(b) where 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.
(3) Where a person, who is in a posinoii,.to dominate die will of
another, enters into a contract with liim, and the transaction appears on
the face of it or on the evidence adduced to be unconscionable, the bur-
den of proving that such contract was not induced by imdue influence
shall be upon the person in a position to dominate the will of another."
The principle of undue influence applies to every case where the
influence is acquired or abused, where contidence is reposed and be-
trayed.** A consent to a contract obtained by undue influence makes
the fontuict voidable at the option of tlie party wliose consent has
been so obtained. A peison lii.ay avoid the contract if he can prove two
things ; (i) that one ol the parties was in a position to dominate the will
of the oilier,'" (ii) that the transaction was substantially unfair and
unconscioiiaiile. If ihew two things are proved, there arises a pre-
sumption of undue inllucMfc. The t)arty obtainin,ti the consent may,
however^ rebui this prcsmiijuion by proving that tlic other party had
independent legal advice and tliat no advantage liad Ijcen taken of
the relationship—fiduciary or otherwise. A plea of undue iiifliicace can
only be raised by a party to tlic contract and not by a third j^arty.'^"

46. Ranganayakamma v. Alwarseiti (1889) 13 Mad. 214.

47. Ammiraxu v. Seshamma (1917) 41 Mad. 33.
. 48, Smith v, Kay (1859) 7 H.L.C. 750; J. Amma v. P. A'air, 1954
T,C. 407.
49. Raghunath Prasad v. Sarju Prasad 1924 P.C. GO: 3 ' Pat. 279-
Gafar Mohd. v. Molul. Sharif 19'32 P.C. 202: Santhapp R:ii v. Shanth-
rija 1938 Mad. 426; Saleh Mohd. v. Klian Mull 1959 .Afys. 102.
50. Kotnmall v. Nur Mohd. 1931 Sind. 78.
48 MtRC/VN TILL Jj.A\V

iiie second part of Section J 6 deals Hith tlie ongm of ielation ot

dependants which makes undue influence possible Such a iclation may
arise from a special authout) or confidence committed to the donee or
from the feebleness lu bod\ oi mmd of tlie donor It is impoiiant to
remembei that persons in audioiity or holding confidential employment
such as that of spiritual, medical or legal adMsers, mw^i act with good
faith and moie so while accepting a benefit fiom those who a.e under
their authority oi guidance They should iii lact, insist upon the other
part) taking independent advice Lcfoie the nansaciioii We may with
achaniage, lake a feu examples to illustrate undue mlk'ence A, hav
ing advanced money to his son li during his minoiity, upon Bs coming
of age obtains by misuse oi paiental influence, a bond from B for a
gieater amount tlian the sum due in lespect of the adv'ance A employs
undue influence. A, a man enfeebled by disease or age, js induced by
B s influence ovei him as his medical attendant, to agree to pay B an
unreasonable sum foi his piofessional seivice B employs undue m
fiuenc-o"'^ A Hindu, well advanced in yeais, with tlie object ot secuiuig
benefits to his soul m the next \<,orhl gave away his whole property to
his G u m or spiritual ad\i5ei I h c i e was undue influence Similaily,
wheie a cestui que trust (beneficialy) had no independent advice it was
held a gift by him to ilie tiustee of certain shaies foimiiig part of the
trust fund was void A deed of gift by an old illiterate Mohammedan
lady in favoui of hei managing agent also falls under this head

Undue inllueu<.e makes the contract \oidable at the option of the

mjured party 'Undue influence is a kind of mental coeicion, which
destroys the fice agcnc\ ot one and constiains him to do that which
IS against his will, and which he would not ha\e done if left to his own
judgment and volition, so that his act becomes the act of tlie one ex-
citing the influence, r u b e r than his oun act—such act being to his own
injury or to the mjuiy of sume one upon whom he isould, if left to his
own fiee will, have bestowed a benefit"
Undue influence is otdmaiily piesumtd - m relationships such as
(a) patent and child, (b) (guardian uul waid (c) tuistee and bene
ficiary, (d) solicitor ami client, (e) doctot and patient (f) spiritual
adviser and disciple, (g) mahk and cultivator But the presumption
of undue influence does not apply to a gift by a mothci to her daugh-
tei The ])ioof of undue influence would be on diose 'who seek to
a\oid the giii'^ 1 lie ulation of niastci ind seivant ' cieditor and
debtor, husband and witc ' does not of itself raise a piesumption ot
undue influence It is po^^ible foi the piesumption ol undue inll'ientc
to arise in the relationship betnetn persons engn^^cd to maiiv'-
UNCONSCIOTsAULE TRANS VCTIONS
•\Vhcii a peisou viiliout being fiaiu'ukiit loices anothci to ciitei

51 Diala Ram ^ Sargha 1927 L.ili 536

J2 Ismail Mussaji v llafi? Boo (190G) S'-i Cal 773 "53 T A 26
53 Dauht \ Gulabiao (1025) Nag 360
51 Houcs \ Bishop (10U9) 2 K B 300
55 Re Lloyds Banks, Bombay v Bomze (1931) I Ch. 289.
 COISI'RACTS 49
Jinto an agreement by making an uac'onscientious use of his superior
power he is said to make an "unconscionable bargain." Such a bargain
is voidable. The test is that between two parties on unequal footing
one has sought to make an exorbitant profit of die other's distress.
Where a person is heavily indebted to another and for a fresh loan is
made to agree to pay extortionate rate of interest, it will be an un-
conscionable transaction. Similarly, where an heir to an estate borrowed'
Rs. 3,700 to enable him to prosecute his claim when he was- without
even the means of subsistence and gave the lender a bond for Rs. 25,000
to be paid after receiving possession of die property it was held that the
bargain was unconscionable, and the Court gave the lender a decree only
for Rs. 3,700 with xinterest at 20% per annum.^'. Also, where a spend-
thrift and a drunkard 18 )'ears of age, executed a bond in favour of his
creditor agreeing to pay compound interest at 2 per cent per annum
with mondily rests, it was heid the bargain was unscionable.^' In
i-^he following two cases die bargain was held unconscionable : where a
poor Hindu widow borrowed Rs. 1,500 from a money-lender at 100% per
annum for die purpose of enabling her to establish her, clairh for main-
tenance; and where an - illiterate agriculturist heavily indebted to a
money-lender sold his land wordi thrice the amount of the debt under
pressure of payment. It must be remembered diat in such cases 'the
money-lender must be "in a position to dominate die will"' of the -bor-
rower, and the bargain must be unconscionable within tJie meaning of
clause 3 of Section 16. The mere fact that the rate of iriterest is ex-
orbitant is no ground ' for relief under this section unless it be shown
that the creditor was 'in a position to dominate the will of the borrow-
er. Nowadays, however, drastic legislation in most of the States has
ptovided greater protection to debtors.

PURDA NISHIN WOMEN

The law throws around a Purda Nishin woman a special cloak
of protection, a n d . demands that person who deals with her must show
affirmatively and conclusively' that die deed was not only executed
by, but was explained to, and was really understood by the lady.'^
It must also be proved that no coercion or undue influence was exer-
cised on her, either by the party to the transaction or by a third party,
and that she had executed the document of her free will."' The reason
is that the ordinary presumption that a person understands the docu-
ment to which he has affixed his name does not apply in the case of a
Purda Nishin Woman:°° But a lady, whedier Hindu or Muslim, who is
claiming to be Purda Nishin must prove complete seclusion; and some
degree of seclusion is not sufficient to' entitle her to get special protection,

J'- 56. Chunni Kaur v. Rup Singh (1888) 11 All 57, confirmed on ap-
peal to P.C. (1893) 20 I.A. 127; 15 All. 342. f'
57. JCirpa,Ram v. Sami-ud-liln (1903)' 25 All. 284.
58. Bhikai7 v. S. H. Mohd., ]9Ss' Ori^;a 62.
59. Ranee Anna Purni v. Swaminatha (1910) 34 Afad. 7.
60. Asghar Ali v. Debroos Bapoo Begum (1877) S Cal. 324.
^'5" MERCANTILE LAW-

PART'1-F
UNLAWFUL AGREEMENTS
A contract, piuy have beeu made witli due observance of legal for-
malities, and may yet be unei^forceable, because it is unlawful. An ag-
reement is unlawful and tiierclore uneufoiceable, when the object for
whicli it is made is forbidden by law, or if permitted, would defeat the
provisions of law, or, is traudulent, or involves an injury to tlie property
^of another, or in the eyes M the court, is 'immoral or opposed to pub-
lic pelicy ^S. 23). In simple 'Words, an agreement may be unlawful be-
cause it is— ,
-(a) Illegal, i.e., contrary to positive law, being forbidden either
by Statute law or Common I'aw;
(b) Immoral, i.e., contrary to sound and positive morality as
recognised by law; and
(fcj Opposed to Public Policy, i.e., contrary to the welfare of
the State as tending to interfere with civil or judicial ad-
ministration, or with individual liberty of citizens. <
'Ihus, an agreement will not become a contract or will remain un-
enforceable, if it is made for an unlawful consideration and with an
unlawful object. If both parties contemplate an unlawful manner of
performance, tire case falls within the rule "that a contiact lawful in it-
self is illegal if it be entered into" with tlie object that the law should be
violated." Therefore, if both the parties know of the wrongful or im-
moral intention, tlie agreement is void; if the party wl^o is to furnish
property^ or money does not know of it, ,die contract is voidable at his
option, when he discovers the otlier party's intent. Further, an agree-
ment may be rendered unlawful by its connection witli a past as well
as with a future unlawful transaction. But a contract will be valid
if its object is not to defeat the provisi6ns of any law.'' This leads
us to make a distinction between Void and -Illegal Contracts.

VOID,AND ILLEGAL CON RACtS

A void contract is one which has no legal effect. An illegal
contract like the void .contract .has no legal effect as between the im-
mediate parties, .but has this furthei effect that transactions collateral
to such a contract become tainted witli 'illegality and are, therefore,
not enforceable. A borrowed Rs. 100 from B 'in order to bet with C
as to the resulri)f a horse race. A contract'u of betting in respect
of horse-racing is void undei Section 30 of the Act, and if A loses, C
cannot _ recover from A, But B can recover the sum of Rs. 100
from A. since his transaction witli A is only collateral to a void contract
and is. enforceable. On the other hand, if B had borrowed Rs. 100
from A to buj a revolver to shoot C, the question whether A can recover '«-
from B depends on whetlier A -was aware of the purpose for which *
the money was borrowed. If A knowing the illegal purpose, had lent
the money, he cannot recover, hiecairse his loan was an aid to an illegal

61. Balkishan v. Laxfflan -(1951) .Nag. 187.

CONIIUCIS Bi
object of B, and'illegal object taints; Uie collateral transaction alio.'- If,
on the other hand, A did not know tire purpose of the loan, even though
J3 had bought the revolver and shot C, A can recover. All illegal agree-
ments are void, but ail void agreements are not illegal. A minor's con-
tract is void but not illegal.
Parties to an "unlawful contract cannot get any help from a Court
of law, for "no i^olluted hand shall touch the pure fountain of justice."
So if money is 'promised to be paid under an illegal contract the money
cannot be recovered, even though the illegal object has been carried
out. Also, even though moneys have been paid, they cannot be got back
if tlic illegal object fails, ,'lhe effect of this principle is that the plaintiff
who founds his cause of action upon an illegal act, will not get any as-
sistance from the Court, and the defendant will, in consequence, bene-
fit.'" It may appear at fiist' sight that the Court in refusing to assist
the plaintiff is virtually helping the defendant as against the plaintiff.
But in actual fact, the Court refuses to help eithei^ party, i.e., the Court
is neutral and one of them gets the advantage oi the Court s neutrality.
The maxim is that in cases of equal guilt, the condition of ""the defen-;
dant is the better (in pari delicto jsotior est conditio detendentis)." This
.principle, however, has certain exceptions. Where the plaintiff need
not rely on the illegal transaction in obtaining the relief he seeks, the
principle will not come into operation. For example, where A has let a
house knowingly to a prostitute, he cannot recover the rent from her
but he can sue for ejectment and for possession. He will be given pos-
session of the l^ouse if he proves title and ownership, and there is no
need to bring in the point that the house was let for immoial purposes.
Further, it is presumed that both the parties to the contract ha\'e been
equally guilty. Tlierefore, in cases where the plaintiff is not as giiilty as
the defendant, and they occupy respectively the position ol oppressed
and oppressor, the plaintiff is not prevented from obtaining relief. Such
an inequality of situation may arise between a creditor and debtor, where
the debtor may be driven to comply with the terms which the creditor
chooses to enforce.

The next point to note in this connection is that ilie Court pre-
sumes' that a contract is legal, and where a contract is capable of two
constructions, the one making it valid and the other void, the first

62. Fisher v. Bridges (1854), 118 E.R. 1283.

63. Virayya v. Subha Rao, 1959 A.P. 647; Ramjanam Bharathi v
D. Kuer 1959 Pat. 506.
64. A party to an unlawful contract shall not receive the aid oi tlie
law to enforce that contract or to compensate him for the breach of it.
It is an undoubted principle of law, tliat it will not lend its aid to enforce
a contract to do an act that is illegal; or which is inconsistent with sound
morals or public policy; or which tends to corrupt or contaminate Lv im-
proper influences, the integrity of our social or political institution's.
The principle of public policy is this, ex 4olo mglo non oritur actio.
No court will lend its aid to a man who founds his caiise of action upon
an immoral or an illegal act. If the cause of action appears to arise
ex turpi causa, or from the transgression of positive law of the land, then
tlie conrt says, he has no right to be assisted.
52 MERCANTILE LAW

will be adopted. And, where a coiuraci is alleged to be illegal, it is

for the paiiy so alleging to prove conclusively its illegal character. If
tne Court is satisfied about its illegality, the contract will not be enforc-
ed. But this does not mean diat if illegality is not pleaded by die de-
fendant, tlie .Court will enforce it. Where the illegality is apparent or
patent, as in ,a contract for illicit cohabitation, the Court will not en-
tertain a suit based on such a contract. ' But where the illegality in a
contract on the face of it appears to be legal, the Court will refuse to
enforce it if it finds on tlie evidence that the contract is illegal even
though tlie defendant has not pleaded illegality.'" Furthermore, where
a contract consists of two parts, one part legal and the other illegal, and
the legal part is separable from the illegal one, then the Court will en-
force the legal one. If the legal and the illegal parts cannot be sepa-
rated the whole contract is imenforceable. Similarly, if part of the con-
sideration for a, contract be illegal, that would taint the whole contract.
(Sections 24, 57 and 58).

ILLEGAL AGREEMENTS FORBIDDEN BY LAW

I n . England, all offences are punishable by the common law. so, if
A and B agree to commit an indictable offence, the contract woidd
not be enforceable. In India, however, criminal law is codified; and
acts forbidden by law consist of acts punishable under Indian Penal Code
and of acts punishable iiy special legislation, or by regulations, or
ordinances under authority derived from the legislature. Now the
law may forbid an act for various reasons. It may not expressly pro-
hibit a contract but may impose penalties on the parties for the en-
tering into it.. If the object' of die penalty is merely' to protect revenue,
a contract in violation of the terms of the statute is not necessarily
illegal. But if the object is to protect the general public or a particu-
lar class of it, an agreement for which the penalty is imposed will be
legarded as forbidden by law and therefore illegal.'*
'Following the above principle, it has been held in India that where
the holder of a licence for collecting tolls, sub-leased it in violation of the
terms of the licence,"' and where the licence of a right to cut grass from a
forest, assigned it to another,"^ when the licence provided a penalty for
doing so, the transactions were not void though "they may expose the
wrong doer to the stipulated penalty. On the other hand, sub-lease of a
licence for manufacture and sale of country liquor (under tlie Abkari Act)""
of opium (under the Opium Act)™ or salt (under the Bombay Salt Act)"
was held to be void as die prohibition is for the protection of the pub-
lic as well as the revenue. A loan granted to the guardian of a minor
to enable h i m ' t o celebrate the^minor's marriage in contravention of
the Child Mairiage Restraint Act is illegal and cannot be recovered

65. Sita Ram v. Kunjilal (1963) All. 206.

66. Anderson v. Daniel (1924) K.B. 138.
67. Bhikanbhai v. Hiralal (1900) 24 Bofn. 622.
68. Naxarali v. Babamiya (1946) 40 Bom. 64.
69. Devi Prasad v. Rup Ram (1888) 10 All. 577.
70. Raghunath v. Nathu (1894) 19 Bom. 626.
71. Ismailji v. Raghunatli (1909) 33 Bom. 636.
CONTRACTS ^
back.'= A forward contract which offends against the provisions of the
Vegetable Oils and Oil Cakes (Forward Contracts Prohibition)'' Order
is illegal and void. An agreement to pay consideration to a tenant to
induce him to vacate premises governed by the Rent Restriction Act is
illegal and cannot be enforced."

WAGERING CONTRACTS
In England and Bombay Presidency, wagering contracts have been
declared unlawful by Statutes.'^ Therefore, in England and in Bombay
a wagering contract, being illegal, is void not only between the im-
mediate parties, but taints and renders void a contract collateraL-to it^
I n the rest of India, however wagering contracts are not illegal but.^inlY
void, with the result that a contract collateral to it or in respect of wag-
ering agreement is not void.'" There is an exception in favour of
subscriptions or contributions or agreements to subsaibe or contribute
for plate or sum of money or pri/.e of the value or ajnoimt of Rs. 500
or upwards for the benefit of the winner of any horse race. Games other
than horse races are not exempted, so that the same may be wagering
and thus void.
In England and Bombay Presidency, therefore, collateral contracts
to wagers are also void which is not the case elsewhere. A bets with B
and loses; applies to C for a loan, who pays B in settlement of A's losses
C cannot recover from A because this is money paid "under" or "in res-
pect of" a wagering transaction which is illegal in Bombay." But in the
rest of India such a transaction would be void and C could recover from
A.™ An agent bets on behalf of his principal and loses, and pays over,
the money to the winner. In Bombay, he catinot recover the monev
from the principal," but- elsewhere he can.'" If the agent wins, he mu.st
pay the winnings to^ the principal, as this monev was received on behalf
of the principal." ^

W H A T IS A TVAGER?
Or what 'contracts' are of the nature of Wagers, A wager is a
promise to pay money or-transfer property upon the, determination or

72. Srinivas v. Raja Ram Mohan (1951) 2 M.L.J. 264.

73. Portimurti v. TadepalH (1953) Mad. 845.
74. Mohanchana v. Mahindra, 1955 Cal. 442. See also Regezzane v.
Sethia (1956) I All. E.R. 229.
75. England: Gaming Acts of 1835, 1845 and 1892: Bom. Avoiding
Wagers (Amendment) Act, 18'61.
76. Gherulal v. Mahadeodas, 1959 S.C. 781; Soorajmal v. Doorif^'r-
mal, 1959 Raj. 27.
77. Tattam "v. Reeve (1893) 1 Q. B. 44 Macdonald v. Green (igfiO)
All. E.R. 1240. :
78. Ramimadhodas v. Kaushal Kishore (1900) % All. 452.
79. Tattam v. Reeve, supra.
80. Bankeylal v.. Bhagi'-aihmal (1949) All. 95.
81. Bridges v. Savage (1884) 15, Q.B.D. 363.
^^ MERCAiNTILE LAW

ascertainment of an uncertain event. Tiie event may be uncertain

either because it has not yet come to pass, or because it is not known
to the parties. Thus a bet may be made on the result of a wrestling
match which is to take place next week in Delhi or on the result of
Derby Race in England which has already taken place, but the result
of -which is not known to the persons betting. It wilf be noticed that
three points are essential to this definition. First, it must be a pro-'
mise to pay money or money's v.'orth. Secondly, the promise must be
conditional on an event happening. Thirdly, this event must be an
uncertain one, either because it has to happen in the future and no one
knows whether or not it will happen, or though it' has already happen-
ed the contracting parties do not know of the result. If on the other
hand, one of the parties has the event in his own hands, the transaction
is not a wager."- Further, it is essential foi a wagering contract tliat each
party .stands to win or lose according to (he uncertain event in reference
to which the chance or risk is taken.^'' There i.s. therefore, no wager
unless both parties run the risk of loss and both parties have a chance
of gain.^ In Thaker v., Hardy.'^ Cotton, L.J., said: "The essence of
gaming 'and wagering is that one party is to win and the other to lose
tipon a future event, which at the time of the contract is of an ijncer-
tain nature—that is to say. if the event turns out one way A will lose
but if ft turns out the other way he will xvin." It is not a wagering
contract if one party may win but cannot lose, or if he may lose but can-
not win, or if- he can neither win nor lose * Also, there are only two
parties or -groups of parties to a wagering contract.

It should be remembered, as has been pointed out by the Supreme

Court in Gherulal v. Mahadeo Das, 1959, S.C. 781, that the Common
Law of England and that of India never struck down contracts of Wager
on the ground of public poliq'. They have been declared void by S.
SO .of the Indian Contract Act but not illegal, and .so collateral con-
tracts in respect of wagers are held valid and binding. There is no
definite^ head or principle of public policy evolved by Courts or laid
down by precedents which would directly apply to wagering contracts.
Even if it is permissible for Courts ,to evolve a new head of public po-
h'cy under extraordinary circumstances giving rise to incontestable harm
to the .society, we cannot say that Wager is one of such instances of ex-
ceptional gravity, for it has been recognised for centuries and has been
tolerated by the public and the State alike.
Commercial Transactions and Wagers.—Wagering Contracts may
assume a variety of forms and it may sometimes be difficult to distin-
guish between genuine commercial transactions and mere Wagering con-
tracts If two persons A and B contract for the .sale and purchase of 100
bags of wheat at Rs. 80 per bag, to be delivered two months hence.

82. Tribhovandas v. Lachmi'chand (1885) 9 Bom. 358.

83. Sasson v. Thakersay (1904) 28 Bom. 616.
84. Babasahib v. Rajaram (1931) Bom. 264; Marikar v. Bartloct
(1932) P.C. 19.
85. (1878) 4 Q.B.D. 686.
oc Trn,„„o,o ,„ Wallurp HQZQ) 2 Ch. 1
 CONTRACTS 55

it may be difficult to say wliether it is a good commercial transaciion

w'hh tlie object of delivering tlie goods or whether the two merchams
are really speculating and wagering upon the prices two months hence,
iviih a view to paying the difference. Where delivery of goo<Is is in-
tended to be given and taken it is a valid contract', but where only tlic
differences are intended to be paid, it will be a wagering contract and
unenforceable. Therefore, in order to constitute a wagering contract,
neither party should intend to peiform the contract itself, but pay the
differences." It is not sufficient if the intention to gamble exists on the
part of only one of the contracting parties. A contract will be a wag-
ering contract only if both contracting parties at the time of entering
into contract had the intention not to take delivery of goods. There
must be common intention to wager.° .V suit will not be for the re-
covery of money deposited with a person on account of- Satta transaction
by way of security.
Teji Mandi Transactions or Option Dealings.-These transactions
are in the natuie of speculation pure and simple, and the Stock and
Commoditv Exchanges provide good facilities to Bulls and Bears to enter
into speculation freely. There was a time when it was believed that
such transactions were by way of wager and so void under Section 30.™
But at the present time the presumptiruj is that Teji Mandi is not a
wagering transaction, and is valid anu binding between the parties, nn-
ess it is positively proved that both paic'ies intended not to gi\e and
ake delivery. The English crpiivalent of the terms Teji Mandi is
'Option Dealing" and means a'^iight to buv or sell certain goods at a
price bv a certain date. In Bombay by virtue of Act XXV of 1930, op-
tions in cotton arc prohibited ^nd declared void. But cross transactions,
i.e.. forward contracts of sale and purchase which sometimes balance each
other when the settlement date comes, are valid because of the bona fide
intent to do business, even though no delivery may actually have taken
place. Option dealings in securities on stock exchanges are now prohi-
bited bv the Securities Contracts (Regulation) Act, 1956.
Agreements between Pakka Adatia and his Constituents.—.\ PaJcka
Adaiia is not merely the agent of his constituent, and thus a disinterest-
ed middle man bringing two principals together, but is a principal
Therefore, a transaction between a Pakka Adatia and his Constituent
may be by wav of wager like anv other transaction of the nature of a
.wager between two contracting parties'^ As between a Kaiclia Adati:

87. Peiosha v Manekji HSSS) 22 Bom. 699; Snkherdass v Go\n'nd-

dass (1128) P.C. 301: Chimanlal v. Nvamatrai lO.'ig Bom 44; Rama-
kishandas v. Mutsaddilal 1912 All. 170
88. Arian v. Walaiti, 108 I.C 58; Bankey v. Bhagirath, n940) AH.
95: Ghcru 1^1 v. Mahadeo Das. 1959 S.C. 781: Sooraimal v. Doongarmil
1950 Raj 27: Shantilal v. Madanlal, (1954) All. 789.
89. Ramrliandra .\. Gantrabison (1910) 12 B L. R. 590; Jessiram v.
Tulsidas (1913) 37 Bom. 264.
90. Shantilal v. Madanlal (1954^ All. 789: Dhruv C v I Brncri
1954 Sau. 99: Bhag^vandas v Buriorji (19/8) 42 Bom .173 ( P C I : Har-
cliarandas v Tai Rim (1940) All 182: Ramgopal v. l^ggnrsain, .(19-12') Sinil
115; RamVishendas v. Mutsaddilal (1942) AU. 130. '
56 MERCANTILE LAW

and his Constituent there cannot be dealings by way of wager, as the"

relation between them ' is diat of agent and principal and not that of
principal and principal as between Pakka Adatia and his Constiiaent,
x^otteries.—A wagering contract amounting to lottery is not only
void but illegal. A lottery is a game of chance. Therefore an agree-
ment to buy a ticket for lottery is a wagering agreement; and all trans-
actions in connection with a lottery remain illegal even if the Govern-
ment has authorised the holding of lottery.. The only effect of such
permission is that the persons conducting the lottery will not be punish-
ed."
, Crossword Competitions.—A Crossword competition is not, in so far
as it involves, for a successful solution, a good measure of skill, a wager.
But in an English case it has been held that a crossword puzzle in which
prizes depend 'upon correspondence of the competitor's solution with
a previously prepared solution kept with the editor of a newspaper, is a
lottery and, therefore, a wagering transaction.'" Prize competitions which
are games of skill, e.g., picture puzzles, athletic competitions, etc., are
not wagers, but those involving prizes of more than Rs. 1,000 have been
declared gambling and so void, by the Prize Competition Act, 1955.
Also, if the agreement does not involve loss to either party, it is not
a wager. Thus, an agreement to enter into a wrestling contest, in which
rhe winner was to be rewarded by the whole of the sale proceeds of tic-
kets and the party failing to turn up on that dav would have to forfeit
Rs. 500 was held not to be wagering contract."
Contracts of Insurance are not wagering' agreements even thougli
the payment of money bv the insurer may depend upon a future uncer-
tain event. Contracts of insurance differ from wagering agreements as
follows :
(a) It is only a person possessing msurable interest that' is al-
lowed to insure life or property, and not any person, as in the case of
wager. An insurance contract is, therefore, entered into to protect an
interest. In a wagering agreement there is no interest to protect.
(b) In the case' of fire and marine insurance only the actual loss
suffered by^the party is paid by the insurer, and not the full amount of
the policy. \
(c) Even in the case of lite insurance, the amount pavable on the
assured's death is fixed because of the difficulty in estimating the loss
cauaed by the death of the assured in terms ot money; but the under-
lying idea is that of indemnification; not so in a wagering agreement.
(d) Contracts of insurance are regarded as beneficial to the public
,ind are, therefore, encouraged. Wagering agreements do not serve any
'j.eful purpose and are considered to be against public policy.
91. Dorabji v. Lance (1918) 42 Bom. 676.
92. Coles V. Odham's Press 0936) 1 K.B. 416; see also ].N.. Gupta
V. State of West Bengal, 1959 Gal. H l - . ' R . M . B Chamarbaugwala v
Union of ^ndia, 1957 .S.C. 628; State of Bombay v. R.M.D. Chamarbaus-
wala, 1957 S.C. 699.
93. Babasaheb v. Rajaram (1931) 33 Bom. L.R. 260.
CONTRACTS 57

IMMORAL AGREEMENTS
Agreements whose objects are immoral or where the consideration
is immoral are illegal. A settlement in consideration of concubinage is
void," and a promise in consideration of illicit cohabitation is unen-
forceable."' Agreements between husband and wife for future separa-
tion are bad, those for inlmediate separation are enforceable. A man
who knowingly lets out his house for prostitution cannot recover the rent.

AGREEMENTS OPPOSED T O PUBLIC POLICY

An agreement which tends to prejudice the welfare of the com-
munity or tlie State is said' to be contrary to Public Policy and thus un-
enforceable. Public Policy is that principle of the law which holds that
no subject can unlawfully do that which has a tendency to be injurious
to the public or against the public good. It is difficult to give'a clear
cut classiftcation of agreerhents which are bad on the ground of public
policy, for "public policy" is a rather vague and elastic term, and it may
vary with different judges. Lord Halsbury observed in Jansou v. Drief-
teiri Consolidated Mines Ltd., (1902) A.C. 484, "that Categories of pub-
lic policy are closed, and that no court can invent a new head__of public
policy." This view is, however, too rigid; and S. 23 of the Indian Con-
tract Act seems to provide (Jiat ,it is open to the Couirt to hold that the
consideration or object of an agreement is. unlawful on the ground that
it is opposed to what the Court regards as public policy. In India, there-
fore, it cannot be affirmed as a matter of law that no Court can'invent
a new head of public policy but the dictum of Lord Davey in the same
case [(1902) A.C. 484] that "public is always an unsafe and treacherous
groimd for legal decision" may be accepted as a sound cautionary ma-
xim in considering the reasons assigned by a judge for his decision. Tlie
doctrine should only be invoked in clear cases in which the harm to the
public is substantially incontestable, and does not depend upon the
idiosyncratic inference of a few judicial minds. In popWar language,
the contract should be given the benefit of the doubt, and enforced.
In Ghenilal Parakh v. Mahadeodas, 1959 S.C. 781, the doctrine ot
public policy' lias been described in the following manner :—
'Public policy' is a vague and unsatisfactory term, and calculated to
lead to uncertainty and error when applied to the decision of legal rights:
it is capable of being understood in tlifferent senses. Therefore, it is an
illusive concept; it has been described—as "untrustworthy guide", of var-
iable quality," "uncertain one", "unruly horse", etc. Tlie primary duty of
a Court is to enforce a promise which the parties have made and to up-
hold the sanctity of contracts which form tlie basis of society, but in cer-
tain cases, the Court may relieve them of their duty on a rule founded
on what is called the public policy. T h e doctrine of public policy is
only a branch of common law and. just like any other branch of common,
law, it is governed by precedents; the principles have been crystallized
under different heads and> though it is permissible for the Court to ex-
pound and apply them to different situations, the doctrine should onlv
be invoked, in clear aitd incontestable cases of harm to the public.

9'1. Suhava Ycllapa v. Yamavappa Sabu (1933) Bom. 209,

95. Hussain Ali v. Dinabai (1923) Bom. 135.
 58 M F U r S N l I L F . TAW

Though the heads are not dosed and iliouqh theoietically it may be
permissible to evolve a new head under exceptional circumstances af
a changing world, it is advisable in the interest of stability of the so-
ciety not lo make any attempt to discover new heads in these days. As
is stated by Cheshire and Pifoot, "Tlie judges must expound, not ex-
pand, tliis paiiicuiar branch of the law" (i e., pul)]ic policy)"
Some of the commonly accepted RI omuls of public policy (includ
ing those contained in Sections 21) 28 of the Indian Contract Act) are
dealt with in the followin<T paiagraplis:
Trading with enemy.—It is a long settled law that an Indian Nation-
al cannot trade ivith an alien enemy without the Government's licence.
So all trade witli the I'^nion's enemies without licence is tmlawful. If
the peiformance of a contract made in lime of peace is rendered unlaw-
ful Ijy the outbreak of war (he obligation of the contract is suspended
or dissolved according as the intention of the parries can or cannot be
substantially carried out bv postponing the perfoimance till the end of
hostilities.
Agreement for stifling Prosecution.—Such agreements are a well-
known class of those which the Courts refuse to enfoice on this ground.
The law is "\ou cannot make a trade of your felony. You cannot
convert a crime into a source of profit." If a person has ically commit-
ted a crime, he should be ])iosccuted, and if found guilty, sentenced.
If he is not giiiltv, the contract is only a blackmail. "No court of law
can coimtenance or give effect to an agreement which attempts to take
the administration of law out of the hands of the judges and put it in
the hands of private individuals."" Where A, knowing that B has com-'
milted an offence, obtains a promise from B, in consideiation of not
exposing B. there is a case of stifling prosecution. The agreement is
void. But an agreement in willing between persons not to resort to a
Court of law, but to refer to arbitration is not opposed to public policy,
and is valid.
Agreements to vary the Periods of Limitations.—Agreements curtail-
ing or extending the period of limitation prescribed by the Law of Li-
mitation arc not enforceable, as the object of such agreement will be. to
defeat the provisions of the law. Agreements in fraud of insolvency law
are illegal and void. Thus, an aprreement by a cieditor to forbear op-
position to the discharge of the insolvent, or an agreement interfeiing
with an equal distribution of the assets will be void. Agreements to
the Indemnity Bail are void on the ground of public policy, as the -law
requites people to stand bail staking their own money on the conduct
of the accused! Where A, the acaised, pays money to R and requests
him to stand bail, A cannot reco\er back the monev, eveii if the bail
is over."* Again, if B forfeits his bail on account of A's absconding, B
cannot sue and recover the monev from A's property either on an ex-
press or an implied purpose."

f)6. Law of Contract, (Srd Edn), p. 280.

97. Sudhindra Kumar v. Ganeshchandra 1938 Cal. SAO; Eaneri.
Mercantile Bank v. Philip, I960 Ker. 191.
98. Fateh Singh v. Sai-wal Singh (1878) 1 All 751.
99. Bhupati v. Chowdry (1919) 24 C.W.N. S68,
CONTRACTS 59

Agreement tending to an abuse of legal process.—Maintenance and

Champerty—known to English law-are two important types of agree-
ments under (his head. Maintenance has been defined as the promotion
of litigation in which a person has no interest of his own. Chami^erty
has been defined as a bargain whereby one paity is to assist another in
recovering property and is to share the proceeds of the action. The
difTerence between Maintenance and Champerty is this: In Cham
perty the desire is to share in the proceeds of the litigation, in Main
tenance, the desire is to stir up litigation. Both of them are illegal
and unenforceable in English law. In Indian law, however, Champerty
and Maintenance are not illegal and the specific rules of English, law
against these have not beei adopted here. In Bhagwat Dayal Singh v.
Debi Dayal .Sahu (IQOS) 35 LA. 48: 35 Cal. -120. Their Lordships of the
Privy Council clearly laid it down that an agreement Champerlous ac-
cording to English law was not necessarily void in India; it must be
against public policy to render it void here. The principle is taken to
be part of the law of ."Justice eqin'ty, and good conscience." and if
any agreement tends to go against these, it would not be enforced. A
fair apfreemrnt to simply firnds to carry on a suit in consideration of
having a share of the property, if Tccovered is not per se opposed to pub-
lic polio.'. If. however, agreements of this kind gre made not with the
bona fide obiect of assisting a claim believed to be just and of obtain-
ing reasonable recompense therefor, but for improper objects as for the
purpose of gambling in litigation, or of injuring or oppressing others
bv. abetting and encouraging unrighteous suits .so as to be contrary to
public policy effect will not be given to them.'" Where, in considera-
tion of the plaintiff agreeing (n defrav the expenses of prosecuting the
defendant's sm't to recover a certain property, ^e defendant agreed to
transfer to plaintiff, in one case 55 P. share of tTie property,™ in another
12 P. share, and in a third 50 P. share, it was held that the agreement
^vas extortionate and ineqin'table, and the plaintiff was awarded (he ex-
penses legitimately inanred by him with interest. .Similarly, where
the claim ii-as of a simple nature and in fact no suit was necessary to
settle it. an agreement to pav Rs. 3(1.000 to the plaintiff for assisting
in recovering the claim w.is held to be extortionate and inequitable.'"
In re G, Senior .^dvocale of the Sujireme Court.'"" the Supreme Court
held that an agreement to render services for the ronducl of litigation
in consideration of pa^'mcnr of 50 per cent of the amoimt recovered
through Court would be legally enforceable and valid as the rigid En?-
lisli rules of champerty and mainicnaiice do not apply in India.
Tnierfe>cnce with cotirse of T"siice.—.^n agreement for the purpose
or 10 the effect of usinc inironer influence of nnv kind with judges or
ofTircrs of justice is void. Thus an agreement whereby one person ag-

100. Ram Kumar v. Chander Kant (1876) 2 Cal. 233 (P.C). see also
IP."!! P.C. 100.
ini. Kanwar Ram I.al v. Nil Kant fl80S) 20 T A. 112; Alopi Pra-
sad V. Court of Wards 1D38 Lah. 23.
102. Harilal v. Hhailal 1010 P,nm. H5
103. 1954 S.C. 554.
60 • MERCANTILE LAM

reed to assist another in carrying out litigation for the purpose of cW-
laying execution of a decree was held to be unenforceable."*

RESTRAINT OF PARENTAL RIGHT

- According to law the fAthei is the guardian of his minor child, and
in the absence of the father, the mother has the right of guardianship.
This right cannot be bartered awav by any ageement."" Thus, where a
father having two minor ?ons' agreed to transfer guardianship of those
boys in favour of Mrs. Annie Besant and also agreed not to revoke the
transfer, but subsequently changed liis mind and filed a suit for recovery
of the boys and a declaiation that he was the rightful guardian, the Court
held him to be th6 rightful and proper guardian and also held that h<
had the rijiht to revoke his authority and get back the children.™

AGREEMENT IN RESTRAINT OT MARRIAGE

The law regards marriage and the married status as the ordinary
right of every individual, and so according to Section 26 of the India^'
Contract Act every agreement in restraint of the marriage of any per-
son, other than a minor is void. Therefore in India, there is a prohi-
bition on resivAinis on mviitiage, whether partial or complete, so that.
a contract agreeing not to many a certain person or class of persons i'
void. But in Engli.sh law onlv an absolute restraint is void, e.g., ai
agreement to many no one but the promi.see is void. '

MARRIAGE BROKERAGE OR BROCAGE CONTRACTS

Agreements to procure marriage for reward are void, as being op-
posed to public policy. AViien a ptuohit was promised Rs. 20 in consi-
deration of procuring a se. ond wife for the defendant, the promise was
held invalid for where the agiecnient is by a person to pay money to a
Stranger hired to procure a wife for him, it is opposed to public policy
and void.^" An agreement'to pay money to parent or guardian in co,^
sideration of his giving his daughter in marriage is void as opposed tu
public policy. Tne validity of the marriage is not \affected, because^
Asura form of marriage is recognised by Hindu Law. So, money if ac-
tually paid, cannot be recovered back, and if not paid, a suit theiefoi
would not lie.'"' In India converse cases are more common, where
moneys are promised to be paid by the girl's parent or guardian to the
bridegroom or his parents in consideration or marriage. Stich con-
tracts are equally illegal. Thus, where a sum of money has been pro-
mised, and the mairiage takes place, the money cannot be recovered on
the pioniise, as-it is illegal. Where the moneys have been pai.d they.

104. Nandkishore v. Kunjbehari, 1903 All. 303.

105. Re Carol] (1931) I K.B. 307.
-106. ""Giddu Narayanish v. Mrs. Annie Besant (1915) 38 Mad. Mj
1914 P.C. 41. * r
107. Vaidyanathan v. Cangarazu (1R90) 17 Mad. 9.
108. Baldeodas v. Mahamaya (1911) 16 C.W.N. 447, ^ee also Atba.«
khan v. Nurkhan (1920) 1 Lah. .'574, Venkatkrishna v. 7e;nkatchalan
(1908) 32 Mad. 185;
CONTRACTS fcl

i, niKt be got Dack. Where, however, moneys have been paid but no mar-
riage haS taken place tliey could be recovered since the illegal purpose
has not been carried out. A promised to pay a sum of Rs. 1,100 to B,
the father o£ the bridegroom, and actually paid Rs. 400. The marriage
fell through. The Court held that Rs. 400 were recovered by A}'"
Traffic in Pensions.—S. !2 of tiie Pension Act prohibits traffic in pen-
sions. Therefore, traffic in pension is opposed ' to public policy and
void.""
Sale of Public Offices ;ind Titles.—Traffic by way of sale of public
offices and appointments obviously militates against public sei-vice. An
agreement to transfer office from one pe^-son to another or to secure an
office or honour or title for monetary consideration, is totally bad, be^
cause if sucli an agreement is enforced in law, it will impair die effi-
ciency, and corrupt tlie administration of the State. An agreement to
J>ay money to a Government servant to induce him to retire before the
due time, in order to make room for another, was held to be illegal as
amounting to sale of public office and moneys paid were held irrecov-
erable.™
Agieements tending to create monopolies are void as opposed to
public policy."^ Agreements not to bid at an auction sale may be un-
lawful if made widi the object of defrauding a third party."'

RESTRAINT OF TRADES
It has long been a principle of English Law diat it is for the good
of the community that everyone should be at liberty to use his skill,
where, when, and how he likes. Contracts by whiclr a man fetters his
liberty in this direction are presumptively to the detriment of the gene-
ral good, and the Courts aie prepared to treat them as void. Thus, if a
Jather were to bind his son not to enter various specified trades, the
'contract would be void even if undei seal and sujjported by conside-
ration paid by the father to the son. It was, howeve'r, found that in
result, this strict rule defeated its own purpose and was, therefore, re-
laxed. Thus, in English Law, though general and total restraints will
be bad, reasonable restraint will be entoiceable. In other words, if the
restraint is limited to such a space, and is only for such a time, as will
be reasonably sufficient to carry out the intentions and objects of the,
parties, it will be enforceable. The character of particular trade may
justify a very wide restraint.

109. Dharani v. Kanhji, 1949 Pat. 250; Rajindra v, Roshan, 1950

All. 592.
110. Baldeo Jha v. Ganga Prasad, 1959, Pat. 17.
111. Saminatha v. Miithuswamv (1907) 30 Mad. 530; Karuppin v
-^annuochanii 1933 Mad. 768.
112. Somu Filial v. The Municipal Council Mayavaram (1905) 28
Mad. 520. Maharajadhiraja Sir . Kameshwer Singh v. Yasin Khan 1938
Pat 473w District Board of Jhelum, v. Harichand 1934 Lah. 474.
113. Ramlal Misra.v. Rajendranath, 1938 Ondh 124; But see (1950)
2 MT^J. 634, ^
02 MiiRCAlS'ilLK LAW

In Indian Law a contract in resuaint of trade is void. Section i.!

ol Indian Contract Act reads: "Every agieement by which any one is
restrained Irom exercising a lawful profession, trade or business of "an\
kind, is to that extent void" Accoidingly, in India, all agreements in
restraint of trade, whether general or partial, qualified or unqualified,
are void, and the fact that the restraint is limited in pomt of time o)
place is immateiial. It is, therefore, not open to the Courts in India tc
enter into any question of reasonableness or otlterwise of the restraint."'
In Shaikh Kalu v. Ramsaran Bhagat (1909) 13 C.W.N. 388, 29 out of 30
makers of combs in die citv of Patna agreed witli 1^ to supply him with
combs and not to sell comb^ to any one else leaving R fiee to reject the
goods if he found tliere Was no market for them m Patna, Calcutta
or elsewhere, the agreenien' was held i oid. As between an employer
and an employee there can be no agieement whatever in restraint of
trade after the term of employment is over. In Oakes & Co. v. Jackson
(1876) 1 Mad. 134, J who was an employee of Oakes & Co., agreed not
to employ himself in' any similar concern within a distance of 800 miles
from Madras after leaving the company's service. This restraint was
held void."" A restraint imposed upon a servant is not valid, and is not
reasonable even in English law. But an agreement of service by ivhich
a person binds himself during the term of the agreement not to take
service with any one else or diiectly or indirectly take part in or promote
or aid any business in direct competition with that of his employer is
not in restraint of a lawlul profession, tra<le .or business and is valid."*
A agreed to become assistant lor 3 yeais to B who was a doctor practis-
ing at Zanzibar. It was agreed that during the term of the agreement
A was not to practise on his own account in Zanzibar. At.the end of
one year, A ceased to act as li's assistant and began to practise on his
own account. It was held that the agreement was valid and A could be
restrained by an injunction from doing so."' But if a servant is ivrong-
fully dismissed by the employer he may treat tlie dismissal as the repu-
diation of the contract and is free fiom the restrictive covenant."*

Trade, Combinations.—Ic should be lemembered in this connection

that, while agreements opeiating as a bar to the exercise of a lawful
business are void, agreements merely to restrain freedom of action in de-
tail in the actual exercise of a lawful business are valid. Section 27 is
not intended to take away ihe rights of a tiader to regulate his business
according -to his own discretion and choice. Thus, an agi-eeinent bet-
ween manufacturers or tradeis not to sell their goods below a certain
price, to pool profits and to divide business and profits in certain pro-
portion does not amount to a restraint of trade and is perfectly valid.
An agi-eement in the nature of a trade combination for the purpose of

114. Khemchand v. Dayaldas, 1942 Sind. 114.

115. See also Bralimputra Tea Co. v. Seartli (1885) II Cal 545-
Cohen v. Wilkie (1912) 16 Cal. W.N.' 534; Kores v. Kolok (1957) 3 All
E.R. 158, • . y > •
116. Charles v. Macdonald (1899) 23 Bom. 103.
117. Ibid.
118. Deshpande v. Arvind Mills (1946) 48 B.L.R. 90.
C O N l RAC'l is' <Ji
avoiaing competition is not necebsaiily unlawful, pven if it damages
otliers.™ If'the agreement v,as not cleaily lor the mutual beneht of the
parties but was an attempt to create a monopoly, it would be void as
against pubhc policy. It was observed in Vancouver Breweiy Co., v.
V. Breweries (1934) P.C 101, that, "Libeity of trade is not an asset which
the law will permit a person to bartei away except m special ciicums
tances."

WHEN A CONTRACT IN RESTRAINT OF TRADE IS VALID

We have noted above that eveiy lestraint is bad in law, but cer-
tain exceptions to the general rule aie recognised and, if a paitial and
leasonable lestiaint falls under any of these exceptions the contract will
be enforceable The exceptions aie as follows :—
(a) Sale of goodwill.—Exception 1 to Section 27 of the Contract
9 Act jjiovides that a seller of goodwill of a business may
agree with the buyer to letraiu from carrying on a similar
business, within specified limits 'as to' territory and time so
long as tlie buyer oi his representative in title caiiies on a
like business, and the lestiamt appeals to the Court reason-
able. Thus, a restraint clause in tlie sale ot a right to ply
ferries was held to be enforceable as it was a reasonable cove-
nant in a sale of goodwill.""
(b) Paitners' agreements.—Section 11 (2) of the Indian I'artner-
ship Act permits contracts between partners to provide that
a paitner shall not carry on any business other than that of
tlie firm while he is a paitner.
(c) Section 36 (2) of the same Act piovides tliat a paitner may
make an agreement ivith his partners that on ceasing to be
' a partner he will not carry on any business similar to that of
the firm within a specified period or within specified local -
limits; and the agieeuient shall be valid if the lestrictions are
reasonable.
(d) Section 54 of the same Act provides tliat partners may, upon
or in anticipation of tlie dissolution of tlie firm, make an ag-
reement that some oi all oi them will not carry on a business
simdar to that of tlie firm within a specified period or within
specified local limits; and such agreement sliall be valid if
the lestrictions imposed are reasonable.
(e) Section 55 (3) of the Act provides that a partner may, upon
the sale of the goodwill of a -firm, make an agreement that
such partner will not carry on any business similar to tliat
of the firm within a specified period or within specified local
limits; and such agreement shall be valid if the restiiciions
imposed are reasonable.

119. Daulat Ram v. Dharara Chand, 1934 Lah. 110.

120. Chandra v. Mulli^k (1921) 48 Cal. 1030, 1922 P.C. 167.
fJ4 MliRCANTlLE LAW

RESTRAINT OF PERSONAL FREEDOM

The law generally allows all persons freedom to enter into any con-
tract they please, but at the same time, if the Court finds that the con-
tract unduly restrains individual liberty and virtually amounts to sla-
very, it will refuse to enforce it. Where a borrower in an agieement
with the money-lender, undertook not to change his address nor his em-
ployment, not to consent to reduction of salary, not to part with any
property, not to incur any obligations on ciedit, not to incur any obli-
gations legal or moral, without first obtaining in each case the money-
lender's express permission in writing, it was held that the agreement
was void as against public policy.""' Again, where a borrower executed
a bond to do work in lieu of interest, and the work^'was paid for at ver)
low rate the Court held that an agreement was not enforceable, as it
virtually amountsd to slavery."^

' VOID AGREEMENTS

All the agreements which are or are declared by the Contract Act
to be void are summed up here for the convenience of the reader.
1. Contracts by a minoi or a person of unsound m^nd (S. 11).
2. Contract made under a mistake of fact material f the ag-
reement on the part of both the parties (S. 20).
3. An agreement of which the consideration or object is imlaw-
ful (S. 23).
4. If any part of a single consideration for one_ or more ob-
jects, or any one or any part of any one of several consi-
derations for a single object, is unlawful," the agreement is
void (S. 24).
5. An agreement made without consideration (Subject to 3 ex-
ceptions already noted) (S. 25).
6. An agreement in restraint of marriage (S. 2G).
7. An agreement in restraint of tiade (S. 27).
8. .^n agreement in restraint of legal proceedings (S. 28).
9. Agreements, the meaning of which is not certain, or capable
of being made certain (S. 29).
10. Agreements by way of wager (S. 30).
11. An agreement to enter into an agreement in the future.
12. An agreement to do an act impossible in itself [S. 56 (1) ].

WHEN CONTRACT BECOMES VOID

An agreement not enforceable by law (as in the above 12 cases) is
void ah initio'[2(g)].

121. Harwood v. Miller's T & T Co., (1917) K.B. 305.

122. Rama Sastier v. Ambela Koren 1929 Mad. 167.
CONTRACTS 65
But a contidLL which ceases to be enforceable by law becomes void
vvhen it ceases to oe enforceable |2(j)].
I contract becomes void \vhen, by reason of some event which the
promisor could not prevent, the performance of the contract becomes im-
possible. The impossibility must happen after die formation of the con-
tract. A and B contract to marry each other. Before the time fixed for
the marriage, A goes mad. T h e contract becomes void.
A contract also becomes void by reason of subsequent illegalit'. A
in England agrees to supply goods to B in Gennany After the forma-
tion of the contract war breaks out between England and Germany, and
the s.iipply of goods to Gennany is prohibited by legislation. The con-
tract becomes void.
A contingent contract to do or ~ aot~ to do anything if an uncertain
tuture event happens becomes void if Kjie event becomes impossible.
•yVliere a contract is voidable at the option of the promisee the con-
tract becomes void when tlie promisee, exerdses his option by avoiding,
the contract.

RESTITUTION
When the contract becomes void, it need, not h e ' performed by either
party; but where any party has received any benefit under such a con-
tract fiom the other party he must restore it or make compensation for
it to the other party.' A agrees to sell to B after 6 months a certain quan-
tity of gold and receives' Rs. 500 as advance. Soon after the agreement,
private sales of gold are prohibited by an Act of the legislature. T h e
contract becomes void, but A must return the sum of Rs. 500 to B.
Restitution is also j)rovided for by Sec. 65 where an agreement is dis-
covered to be void. A pays B Rs. 500 in consideration of B's promising
to marry C, A's daughter. C is dead at the time of promise. The agree-
ment is discovered to be void, but B must pay back Rs. 500.
To sum up, Sec. 64 provides that the party rescinding voidable con-
tract sliall, if he has received any benefit thereunder from another party
to sucli contract, restoie such faeriefit, so far as may be, to the person from
whom it was leceived.
Section 65 gives a right of restitution (i) when an agreement is dis-
covered to be void, and (ii) when a contract becomes void. It should be
iioted that in the first case the agreement pever amounted to a conirsct
because it was void ab initio, the fact of its being void being discovered
at a later stage. The second part deals ivith a contract which was en-
forceable at its inception but becomes void at a IktPr stagt.
The section, however, does not apply to a case where the parties are
wholly incompetent to contract, e.g., where one of the parties is a minor.
The minor cannot be asked to restore tlie benefit; although where he had
misFepresented his age, the court may, on equitable grounds, order foi
the restoration of the benefit received.^
123. V. Pillai V. A. Chettiar, 1914, Mad. 641; B. Verraiah v. Sarraju,
1959 A.P. 100; but see Dyaviah v. Shivamma, 1959 Mvs. 188.
66 MERCANTILE LAW

Where benefit cannot be restored, the party may be asked to make

compensation for it.

PART 1-G
QUASI-CONTRACTS
OR
CERTAIN RELATIONS RESEMBLING THOSE OF CONTRACTS
A contract, to be enforceable must have certain essential elements,
namely, pffer and acceptance, genuine consent, lawful consideration, law-
ful object and rapacity to contract. "But under cettain conditions the
law creates and enforces legal rights and obligations when no real con-
tract exists. These obligations are known as quasi-contracts. Our Con-
tract Act describes tliem as certain relations resembling those of contiacts.
A quasi or constructive contract rests upon the equitable principle
that a person shall not be allowed to enrich lumself unjustly at the ex-
pense of another. ^In truth, it is not a contract at all. It is an obliga-
tion which the law creates, in the absence of any agreement, when and
because the acts of tiie parties or others have placed in the possession
of one person money, or its equivalent, under such circumstances that in
equity and good Conscience he ought not to retain it, and which ex
aequo bono (in justice and fairness) belongs to another. Duty, and not
a promise or agreement or intention of the person sought to be charged,
defines it. It is fictitiously deemed contractual, in order to fit the cause
of the action to the contractual remedy" (Miller v. Schloss, 218 N. Y.
400, 113 N E . 337-An American case).
T h e following types of quasi-contracts have been dealt with in the
Contract Act, Sections 68-72 :—
1. Necessaries supplied to a person incapable of contracting or
on his behalf (Section 68).
2. Suits for money had and received^ (Sections 69 &: 72).
3. Quantum Meruit.
4. Obligations of a finder of goods (Section 71),
5. Obligations of a person enjoying benefit of a non-gratuitous
act (Section 70).
Necessaries supplied to a person Incapable of contracting.—We have
alreadv seen that contracts by minors, idiots, lunatics, etc, are void, but
Section 68 provides that their estates are liable to reimburse the trader
who supplies them with necessaries of life. This is- on the basis of quasi-
contract.
Suit for money had and received.—The light to file a suit for the re-
cover)' of money under this head may arise—
(a) where the plaintiff paid money to the defendant (i) under a mis-
take, (ii) in pursuance of a contract the consideration for xvhich has
failed, (iii) under coercion, oppression,' extortion or other sucli means.
CONTRACTS 67

A debtor may recover from a creditor the anjount of an overpayment

made to him if it was made by mistake.
Tliis mistake may be mistake of fact or that of law. The term
'mistake' used in Section 72 of the Contract ^ct has been used "wiinout
any qualification or limitation whatever and comprises within its scope a
mistake of law as well as a mistake of fact. There is no conflict bet-
ween the provisions of Section 72 on the one hand ajid Sections 21 and
22 on the other. The true principle is that if one party under a mistake,
whether of fact or law, pays to another party money which is not due
by contract or otherwise, that money must be repaid. The mistake lies
in thinking tliat the money paid was due when in fact it was not due,
that mistake, if established, entitles the party paying the money, (even
if it is a tax paid), to recover back from the party receiving it (Sales Tax
Officer v. Kan'haya Lai, 1959 S.C. 135. '
In this case, K was levied a sales tax on his forward transactions in
Bullion which he paid. The levy of this tax was declared ultra vires.
K demanded lefund of the amount of the sales tax on the .ground that
payment was made under a mistake of laV. Held, that he was entitled to
the refund. It was observed that no distinction can be made in respect
of a tax liability and any other liability on a plain reading of Section
72 of the Act.
It was I eld in Shiba v. Sri.sh, 1949 P.C. 297 that money paid under
a contract caused by mistake oE law cannot be said to have been paid
under mistake of law. Thus, although the contract will stand yet the
money paid under mistake of law which is not due under the contract
or otherwise, can be recovered Moneys to be recovered in respect of
consideration which has failed are only recoverable if the whole consi-
deration has failed and not a part of the consideration. If only a part
of the consideration has failed, the case must be such, that the considera-
tion is a separable part. If an apprentice paid premium to a master and
before the relationship had commenced the master died, the money
would be recoverable, but not if the relationship had commenced. Where
money has been obtained by coercion, oppression, fraud, or extortion the
plaintiff can recover it as the money is paid involuntarily. Cases gene-
rally arise when money is paid under protest in discharge of an illegal
demand, e.g., where a pledgee refused to deliver goods unless extra
amount was paid. This extra amount could be recovered. If a per-
son pays money to save his property which has been wrongly attached in
execution, he is entitled to recover it. Afoney paid to'- avoid prosecution
can be recovered. T was caught travelling without ticket on a tram-
car and paid on demand by the Traffic Supervisor Rs. 5 as penalty to
avoid prosecution. Held, he could recover."' But money paid under
compulsion cannot be recovered. Thus, where the Official Assignee in
Insolvency paid a creditor under directions of. the Court, he cannot re-
cover it on the ground tliat it was paid by mistake."^ Excess payment

124. Trikamdas Udeshi v. Bombay Municipal Corporation. 1954

Bom. 427.
125. Official Assignee v. Dayabhoy, 1937 Rang. 234.
68 MERCANTILE LAW

made under the belief that price paid was controlled price can be re-
covered '^
(b) Payment to third party of money which another is bound to
pay.—Cases under this head usually arise ivhere the properties oE a per-
son get into the hands of tliird paities -who will not release them unless
some amount due from anotliei is paid. It must be remembered that, in
Older to be able to recover, the plamtiff must have been compelled by
law to pay, or the' plaintiff himself has interest in payment. Where A's
goods are wrongfully attaclied in order to realise arrears of Government
Revenue due by B; and A pays the amount to save the goods fiom being
sold, he is entitled to recover the amount from B. The payment, how-
ever, must have been made on behalf of the person ivho •(vas bound by
law to pay it, whether in contract or in tort or by statute.'"
(c) Money obtained by the iefendant from third parties.-This
usually happens where the defendant being the agent of the plaintiff
obtains a secret commission or fraudulent payment from a third paity. In
such cases, the principal has a right to obtain the payment from his own
ggent as money paid to the use of the plaintiff.

QnaiitTmi Meruit
The expression "Quantum Meruit" literally means "as much as earn-
ed." It is used where a person claims reasonable remuneration for die
services rendered by him when there was no express promise to pay the
definite remuneration.'^ The general rule is that where a party to a
contiact has not fully performed what the contract demands as a condi-
tion of payment, he can bring no action for payment for that which he
lias done. In Cutter v. Powell (1795) 101 E.R. 573, a mate was engaged
on the terms that he would be paid a lump sum for a complete voyage.
He died before the voyage v/as completed. It was held his representives
could not recover the lump sura, neither could they sue for payment for
the services rendered by the deceased. The first claim failed because
tlie deceased had not completed his part, the second could not be made
because the existing contract was the only basis for action and it vras in-
divisible and so made full performance a condition precedent to the
ship owner's liability. Moreover, the shipowner did not prevent the com
pletion of the work.
But where one party who has performed part of his contract is pre-
vented by the act of the other from completing his side o"f the contract,
he may sue on a quantum meruit, for the value of what he has done.
This is not a claim on the contract but is a claim on the quasi-contratual
obligation which tlie law implies in these circumstances.
In WiUiam Lacey (Hounslow) Ltd. v. Davis (1957) All E.R. 712, W.
Co. was asked by D for tender in connection with a reconstruction
scheme, W. Co. was given to understand that it would receive the con-
tract and thereafter did on behalf of D a considerable amount of work

126. Lakshmanprasad v. Kamal Bai, I960 Mad. 335.

127. Govind v. Gondal State, 1950 P.C. 99.
128. B.N. Rly. v. Ratanji, 62 Cal. 175.
CONTRACTS 71
could not_ have called upon him to pay as the shares did not stsnd in
his name in the coiup<iny's register. As the company had been wound
up and the value of the shares was nil the son did not enjoy the benefit;
Section 70 does not apply where an act is done by one person at- the
express request of another.' So also a suit against a' minor to recover
property or get compensatibn under this Section cannot be filed, as he
cannot be sued on an express contract, neither can he be sued on an
implied one. i

P A R T l-H
VARIOUS DISCHAROES OF C O N T R A C T
Modes of discharge ot termination of contracts Contracts may be
discharged or terminated by any one of the following modes :—
1. By performance.
2. By consent or agreement.
3. By impossibility.
4. By lapse ot time.
5. By operation of law.
6. By breach.
BY PERFORMANCE
The obvious mode of discharge of a contract is by performance,
for that is what the contracting parties had contemplated at the time of
entering into it. Every person who is bound by an obligation must be
ready to perform it at the time when he had promised to perform it
(Section 37). No difficulties arise where the contract is fully performed,
nor are there any serious difficulties when the contract consists of an
absolute promise by A made to B for a consideration already received.
In this latter case, if A does not ful.'ll his promise, B can sue him for
damages for breach of contract But between these simple cases lie seve-
ral more complicated cases arising out of the fact that in several differ-
ent ways a promise may be conditional and not absolute. From this
point of view contracts are of two kinds. Contracts Absolute and Con-
tracts Contingent or Conditional. -

C O N T I N G E N T CONTRACTS
An absolute contiact is one in which the promise has to be perform-
ed independently of any contingency or condition. A Contingent con-
tract is a contract to do or not to do something, if some event, collateral
to such contract, does or does not happen (S. 31). A contracts to pay B
Rs. 10,000 if B's house is burnt. This is a contingent contract—a con-
tract of fire insurance. Quite a good part of commercial busi-
ness transactions consists of contingent contracts; all contracts of insur-
ance, indemnity and guarantee are contingent contracts. A wager is a
contingent agreement, but Section 30 prevents it from being a contiact.
Such contracts are also called "conditional contracts"; but a contract in
which performance by one party is conditional upon the performance, or
readiness and willingnew to perform, by tlie other, is conditional, but
72 MERCANTILE LAW

not contingent. Jf A agrees to deliver 100 bags of wheat and B agrees

to pay the price only alterwards, the obligation of B to pay is condition-
all upon A's delivering the wheat, but this is not a contingent contract,
because the event on which B's liability depends is a part of the promise
itself {a condition precedent) and not a collateral event. Also, if A offers
a reward for the recovery of his lost dog, there is not a contingent con-
tract; there is no contract at all unless and until someone, acting 'on, the
offer, finds the dog and brings it to A. A contract to pay a man for a
piece of work on the terms that he is to have no pay till the work is all
done, is not contingent, because the completion of the work is the very
thing contracted for, and is not collateral to the contract. Also, a
piomise amounts to no promise if its operation depends upon the mere
will 'or pleasure of the promisor. If A promises to pay B Rs. 500 if he
so cijcoses, or says he will pay for R's services whatever he himself tliinks
reasonable, it is not a contingent contract.

RULES KJEGARDING CONTINGENT CONTRACTS

T h e rules as deducted from Sections 32-36 are given below :
1. Coritracts contingent upon the happening of a future uncertain
event, cannot be enforced by law unless and until that event has hap-
pened. If the event becomes impossible, such contracts become void
(Section 32).

Illustrations-:
(a) A makes a contract to buy B's horse if A survives C. This con-
tract cannot be enforced by law unless and until C dies in A's lifetime.
(b) A contracts to pay B a sum of money when B marries C. C dies
witliout being married to B. The contract becomes void.
2. Contracts contingent upon the non-happening of an uncertain
future event, can be enforced when the happening of that event becomes
impossible, and not before (S. 33).
A agree 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 un-
specified 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 contin-
gencies (S. 34).
A agrees to pay B Rs. 1,000 if B marries C. C marries D. The-
marriage of B to C must now be considered impossible although 't is pos-
silile that D may die and that C may afterwards marry B.
4. Contracts contingent on the happening of an event within a fix-
ed time 'become void if, at the expiration of the time, such event has-
not happened, or if, before fhe time fi.xed, such event becomes impossible
(S. 35).
A promises to pay B a sum of money if a certain ship returns withiii
a year. T h e contract may be enforced if the ship returns within the
year, and becomes void if the ship is burnt widiin the year.
CONTRACTS 75
5. Contracts contingent- upon the non-happening of an event with-
ia a fixed time may be enforced by law when the time fixed has expired
and such event has not happened, or before the time fixed has expired,
if it becomes certain tliat such event will not happen (S. 35).
A promises to pay B a sum of money it a certain ship does not return
within a year. The contract may be enforced if the ship does not return
within the year, or is burnt within the year.
6. Contingent agreements to do or not to do anything if an im-
possible event happens, are void, whether the impossibility of the event
is known or not to the parties to the agreement at the time when it is
made (S. 36).
(a) A agrees to pay B. Rs. 1,000, if two straight lines should enclose
a space. The agreement is void.
(b) A agrees to pay B Rs. 1,000 if B will marry A's daughter C. C
was dead at the time of agreement. T h e agreement is void
ORDER OF PERFORMANCE OF RECIPROCAL PROMISES
A contract consists of reciprocal promises when one-party makes a;
promise (to do or not to do something in the future) in consideration o t
a similar promise (to do or not to do something in the future), made
by the other party. Reciprocal promises are of three classes : (1) Mutual
and Independent; (2) Mutual and Dependent; (3) Mutual and Con-
current.
1. Where each party must perlorm his promise without waiting foi
the performance or the readiness to perform of the other, the promise is
Mutual and Independent. Sectioni 52 of the Contract Act deals witli
tliis kind and provides : Where tlie order in which reciprocal promises
are to be performed is expressly fixed by the contract, they shall be per-
formed in that order; and, where the order is not expressly fixed by the
contract, they shall be performed in that order which the nature of the
transaction requires. ,
(a) A and B contract chat A shall build a house for B at a fixed
price. A's promise to build the house must be performed before B's pro-
mise to pay.
(b) If B promises to deliver his goods on 15th May and A promises-
to pay the price on 10th May, A's paying the price is independent of
B's delivering the goods. Even if A does not pay the price on the 10th
May, B must deliver the goods on the 15th May. B can, of course, sue
A for damages' and the payment of price.
2. Where the performance of one party depends on the prior per-
formance of the other party the promise is Mutual and Dependent. Sec-
tion 54 provides for this :
When a contract consists of reciprocal promises, such that one of
them cannot be performed, or that its perfoimance cannot' be cUimed
till the other lias been performed and the promisor of the promise
last mentioned fails to perform it, such promisor cannot claim tlie per
tormance of the reciprocal promise, and must make compensation to the
other party to the contract for any loss which such other party may sus-
tain by the non-perfonnance of the contract.
74 MERCANTILE LAW
(a) A contracts with B to construct a building for a fixed price, B
.^applying the necessary timber. B fails to supply the timber and the
•work cannot be executed, A need not execute the work and B is bound
to compensate A for the loss caused to A.
(b) • A promises B to sell him 100 bales of cotton, to be delivered
•next day, and B promises A to pay for them within a month. A does not
deliver according to his promise. B's promise to pay need not be per
formed, and A must make compensation.
3. Where each promise has to be performed at tlie same time, it
ds a Mutual and Concurrent promise. Jj.ection 51 provides: When a
•contract consists of reciprocal promises to be simultaneously performed,
no promisor need perform his promise-unless the promisee is ready and
"willing to perform his reciprocal promise.
A and B contract that A shall deliver goods to B to be paid for by
B on delivery. Here the promise of each should be performed at tlie
•same time, and so A need not deliver the goods unless B is ready and
•willing to pay for the goods on delivery; and B need not pay for the
goods unless A is ready and. willing to deliver tliem on payment.
4. When a contract contains reciprocal promises, and one party to
tl^e contract prevents the other from performing his promise, the con-
tract becomes voidable at the option of the party so prevented; and he
is entitled to compensation from the other party for any loss which he
may sustain in consequence of the non-performance of the contract (S. 53).
A and B contract that B shall execute certain work for A for Rs.
1,000. B is ready and lyilling to do the work, but A prevents him from
doing so. The contract is voidable at the option of B; and, if he elects
10 rescind it, he is entitled to recover from A compensation for any loss
lie has incurred by its non-performance.
Mode of performance.—Broadly speaking, a person who is bound to
peiiorm a contract must be ready to perform ir at the time when he has
undertaken to do so. But, under the Indian law, the promisee has to
demand performance, unless the promisor has absolutely bound himself
l o perfoim even without a request or demand (Section 48). Where the
time and place are prescribed by the promisee, the performance must be
a t the specified time and place. If no time and place are mentioned,
then the agreement must be performed within a reasona-ble time (Sec-
tion 50), and with' regard to the place the promisor must ask the promi-
see where he would like the contract to be performed (Section 49). Fur-
ther, it is essential for the discharge of a contract that the performance
must be in strict accordance with the terras of tlie contract. The pro-
misor has no. right to substitute for what he has promised something
else which is equally or even more •'dvantaRcous to the promisee.

APPROPRIATION OF PAYMENTS
It may happen that a debtor owes several debts to the same creditor,
and makes payment, the (iiiesfion will ari.sc, as to which of these debts
the payment is to be applied- Sections 59, 60 and 61 contain the answer
to this question. Where the debtor has stated that the payment made by
him should hr appropriated to a particular debt, the creditor must do so
(Wasudeo v. Namdco, 1951 Nag. 155). But where he does not express
CONTRACTS 75

his intention, the law will gather his intention from the circumstances
attending the payment. For example, if the amount paid by the deb-
tor is the exact amount of one of the debts, it must be used to discharge
that one. If the creditor asks for the payment of a specific debt, the pay~
ment made in response to this demand must be applied to that debt.
Where the creditor demands discharge of several debts and the debtor
sends a lump sum, the same will have to be applied proportionately to
the several debts. But if there is no indication and it cannot be reason-
ably ascertained from, the circumstances in respect of which tlie payment
has to be appropriated then it is open to the creditor to apply the pay-
ment to any debt lawfully due from the debtor, irrespective of the question
of limitation. But the creditor cannot apply the payment to a disputed
•debt o r . an unlawful debt. The creditor is not bound to appropriate
the payment immediately; he may wait to the last moment. He may ap-
propriate even during the pendency of the suit concerning the payment
"(Uthup V. Kathanar, 1960, Ker. 90)7 And where neither the debtor nor
the creditor has made any appropriation, then according to law, it has
to be applied in discharge- of the earlier debt in the order of time. En-
dorsement of payment not stating whether it is towards interest or prin-
cipal; payment must first be applied towards interest and balance to
principal (1950 Fed. C. 38).^'"
Who can demand performance? Tlie person to demand perform-
nnce is the party to whom the promise is made, even tliough the promise
is not made for the benefit of the promisee, but for the benefit of some
third person. A promises B to give C Rs. 100. The person who can
demand performance is B, and not C. A draws a cheque for Rs. 100 in
favoui of C. The banker makes a mistake as to A's balance and refuses
payment. The person to whom the Banker is I'able is A and not C. In
case of the death of the promisee his legal lepresentatives can demand
performance.
Who may perform ? In cases involving personal skill, tabte, or cre-
dit, the promisor must himself perform the contract. The courts will
enforce the intention of the parties. In all other cases the promisor or
his representative may employ a competent person to perform it. A
promises to paint a picture for B. A must paint it personally. But
where A promises to pay B a sum of money, A may pay the money per-
sonally or cause it to be paid to B by another.
When a promisee accepts performance of the promise from a third
person, he cannot afterwards enforce it against the promisor (S. 41).

DEVOLUTION OF JOIN r RIGHTS AND LIABILITIES

Two or more persons may enter into a joint agreement with one or
more persons. For example. A, B and C jointly borrow from P a sum
of Rs. '3,000 and jointly promise to repay the said amount. In such cases
question arises who is liable to pay. Tlie rules on the subject are staled
in Sections 42-'15.
1. When two or more persons make o- joint promise, the promisee

133. See also Srinivasulu v. Kondappa, J9G0, A.P. 174.

76 MERCANTILE LAW
may, in die absence of express agreement lo the contrary, compel any
one or more of such joint promisors to perform the whole of the promise.
In the above example, in case of default, P may realise the entire amount
from A, or B, or C, or from all or any fwo of them. A promisor cannot
claim tlie right of being sued only along with his co-promisors.'"' T h e
liability in India is joint and several. If, however, the promisee sues
only one or some of the several joint promisors, and obtains a deciee
against him or tliem, his claim merges in the c|ecree, and he is precluded
from suing the others if he fails to realise the whole of the decretal
amount.
The English law is different. Under that law the liability is joint
so that all joint promisors must be sued jointly.
2. The joint promisors during their lives must jointly fulfil the
promise. After the death of any one of th'em his legal representative
jointly widi the survivor or survivors, must fulfil the promise. After the
death of the last survivor, the legal representatives of all the original
promisors must jointly fulfil the promise. The above rule regarding the
devolution of joint liability shall not apply when a contrary intention
appears from the contract. It should be noted that though the joiiU
promisors or the legal representatives are required to perform the pro-
mise jointly the promisee may compel any one of the joint promisors to
perform the promise. That is, as against the promisee, their liability is
joint and several.
3. If one of the joint promisors is made to perform the whole con-
tract, he can ask for equal contribution from the others. In our ex-
ample, if A is compelled to pay the entire amount of Rs. ,3,000, A can
realise from B & C Rs. 1,000 each. This rule is also subject to any con-
trary intention of liie parties. If any one of the joint promisors makes
default in making contribution the remaining joint promisors must bear
the loss arising from such default in equal shares. If C, in our exam-
ple, is compelled to pay the whole amount, and B is insolvent, but his
assets are sufficient to pay one half of his debts, C is entitled to receive
Rs! 500 fiom B's estaie, and Rs. 1,250 from A. But for B's default in
paying Rs. 500 out of his contribution, C could not have received morr-
than Rs. 1,000 from A.
4. In case ot a joint promise, if one of the joint promisors is re-
leasAid from his promise, his liability to the promisee ceases but his liabi-
lity to the other promisor's to contribute does not cease.
In Engli-sh law, as the liability is joint, the question of contribution
between joint promi.sors does not arise, for the promisee must- sue all die
promisors. Also, release of one promisor under English law releases all
the promisors.
T h e rule of contribution does not, eveh; in India, apply as between
the principal debtor and his surety, even tliough as against the creditor
they are joint promisors. So a surety can recover from the principal
debtor die entire amount paid by him on behalf of the principal deb-
134. Jainarain Ram v. Surajmall Sagarmall (194.9) F.C.R. 379; Todh
Singh V. Kesar Singh, 1950 J. & K. 96,
CONTRACTS '7
tor, who in Jiis turn cannot ask for any contribution from the survey i£
the entire amount is recovered from him by the creditor, because by pay-
ing hiJ debt he is disrharging his own liability.
5. W'lien one person has made a promise to several persons jointly,
the right to claim performance rests on all the promisees jointly so long
as all of ihem are alive. When one of tlie promisees tjies the right to
claim performance rests with his legal representative jointly with -the sur-
viving promisees. When all the promisees are dead, the right to claim
performance rests .with tlieir legal representatives jointly.

ASSIGNMENTS ON CONTRACTS
The Indian Contract Act has no section dealing generally with as-
signrnent of contracts. But the following rules have been accepted by
courts in India in respect of assignment of contract. Broadly speaking,
an obligation under or burden or liability of a contract cannot be as-
signed; for instance, if A owes B Rs. 1,000, and A transfets his liability
to C, i.e., asks C to pay the sum to B, this would not bind B and B may
not consent to this arrangement, as he may know nothing of C's solvency.
But if B consents to accept performance from C, there is a substitution
of new contract and the old contract disappears and all rights and liabi-
lities under it are e.Ktinguished. This is technically called 'Novation'
(Sections 41, 62). It is, however, open to a party to have the contract
performed vicariously by another person provided the contract does not
expressly or impliedly contemplate performance only by the promisor.
But in such cases, the promisor will continue to be liable under
the contract. For if a person employs an agent to do something for him,
the agent's act will be taken to be that of the principal. It \i'ill
be noted that even here it is really not the assignment of burden
but the obligation is discharged by a delegated performance. It must
be remembered that where die performance of the contract depends on
the personal skill or solvency of the contracting party, it cannot be as-
signed; e.g., where A promises to paint a picture for B, A cannot get it
done by another, but must paint it himself (Section 40).
Though the liability under a contract cannot generally be assigned
without the consent of the promisee, tlie rights and benefits under a
contract may be assigned- and the assignee can demand performance
against the other contracting party (the promisor). But this can be
done only subject to all the equities if any, existing as between the origi-
nal contracting parties. Thus, if A owes B Rs. 1,000 and if B, the cre-
ditor, transfers his right to C, C can demand payment from A. But if
A can prove that he has already paid, say Rs. 500, to B, C will be bound
by that payment, and can get only Rs^ 500, the balance due. And, if A
has already discharged the total debt, C will get nothing. Therefore, in
order to protect, the rights of innocent third parties, the law reauires
that the party who gets the transfer, must give notice to the party liable
under the contiact giving intimation of tlie transfer and calling upon him
for payment. After such notice has been given, any payment to the ori-
ginal party will not bind die assignee." In other words, the debtor can
assert no equity against the assignee arising out of the transaction with
the assignor after notice of assignment but he may set off a debt ex-
78 MERCANTILE LAW
isLing at ihe time of notice. Any payments obtained by the assignor
after assignment and before notice, should be accounted for to the as-
signee. A contract for the future delivery of goods cannot be assigned
under the Indiati Law, because the burden of an executory contract can-
not be assigned. Where A agrees to sell goods to B deliverable
at a future date, neither the seller nor the buyer can assign the contract
before the date fixed for delivery to a third person without the consent
of the other so as to entitle tfie assignee to sue in Jiis own name. Tliere
is, however, no objection to a suit being brought by the-assignor and as-
signee as co-plaintiffs, for when the suit is by tliem both there is no ques-
tion as to which of them is to recover.""
An actionable claim (chose in action of the English law) can always
be assigned; but the assignment to be complete and effectual must be
effected by an instrument in writing, and upon the execution of sucfi
instrument all tlie rights and remedies of the assignor vest in the assig-
nee, ivho may thereupon sue in his own name without making the assig-
nor a party to tlie suit. It has been held in Jaflau Mehar Ali v. Budge
Budge'juie Mills Co., (1906) 33 Cal. 702 afhrnied on appeal in 3-1 Cal.
289; and in Hansraj Morarji v. Nashoo Gangaram (1907) 9 Bom. L.R.
838 that ihe interest of a buyer of goods in a contract for forward deli-
very is an actionaljle claim and may be assigned as such so as to enable
the. assignee to sue in his own name. Theie is no definite decision with
regard to the seller's riglit to call for payment of price.on deliverv' of
goods but the dicta in Jaffar Mehar Ali v. Budge Budge Jute Mills Co.,
are wide enough to cover the seller's interests, and it is probable that a
seller can also assign his interest. But a claim for damages for breach
of contract, after breach, is not an actionable claim and cannot,
tlierefore, be assigned.™ An option to repurchase property sold is
prima facie assignable, unless it is meant to be personal to the grantee."'
What is an actionable claim or chose in action ? An actionable claim is
defined in Section 3 of the Transfer of Property Act, 1882 as "a claim
to any debt (except secured debt), or to any beneficial interest not in
movable property in die possession, eidier actual or constructive, of the
claimant, whether such debt or beneficial interest be existent, accruincf,
conditional or contingent." With regard to chose in action, Channel, J.,
in Trokintan v. Magce (1902) 2 K.B. 427 (430), says: "A chose in action,
is a known legal expression used to describe all peisonal rights of pro-
perty which can only be claimed or enforced by action, and not by tak-
ing physical possession." It means a thing reducible to possession only
by an action at law.

DISCHARGE BY TENDER
We have seen that a contract is discharged by performance. But it
may sometimes happen that a person who is bound to perform a promise

135. Tod v. Lakshmidas (1892) 16 Bom. -141; Jiwdn v. Haji Oosmaii

(1903) 6 Bom. L.R. 373.
136. Mahomed v. Chunder (1909) 36 Cal. 315; Varahaswami v.
Ramchandra (1915) 38 Mad 138, 140: 18 L.C. 520.
137. Vishweshwar Narsabhatta v. Durguppa (1940) Bom 674-
A.I.R. 1940 Bom. 339: 191 I.C. 139.
CONTRACTS '/9
has been ready and willing to perform and has offered to perform his
promise at the proper time and place, but the other party will not ac-
cept performance. In such a case, the contract is discharged because of
the wrongful refusal to accept performance. Tender is called attempt-
ed performance, and to discharge, the party tendering it must fulfil all
the features of a proper performance. If the promise is to deliver goods
at the premises of the buyer the seller must take the goods of the iden-
tical description to the place of the other party during office hours and
offer to deliver, there and then,' the whole lot of goods which he is
bound to deliver under the contract. If it is a promise to pay money
then the promisor must go to the creditor, and offer the whole amount
to him in such a way that the creditor might take the whole amount
due to him. (Bank of Mysore v. Naidu, 1954 Mys. 168). An offer of
money in a locked box would not be a proper tender. Similarly, pay-
ment .by cheque will not be a proper tender, unless the other party
agrees' or has asked for payment by cheque.
Section 38 deals with performance by tender and lays down the es-
sential conditions of a valid tender as follows :—
"Where a promisor has made an offer of performance to the pto-
misee, and the offer has not been accepted, the promisor is not respon-
sible for non-performance, nor does he thereby lose his rights under the
contract." The section then goes on to state the essential conditions of
a valid tender as given below :

ESSENTIALS OF A VALID TENDER

Every tender must fulfil the following conditions :—
(1) It must be unconditional.
(2) It must be made at a propei time and place
(3) It must be made under circumstances enabling the other
party to ascertain that the party by whom it is made is able
and willing then and there to do the whole of what he is
bound-by his promise to do. ^
(4) If the tender relates to delivery of goods, the promisee m u s t '
have a reasonable opportunity of seeing that the thing offer-
ed is the thing which the promisor is bound by his promise to
deliver.
(5) Tender made to one of several joint promisees has the same
effect as a tender to all of them.

DISCHARGE BY MUTUAL AGREEMENT OR CONSENT

By agreement of all parties to the contract, or by waiver or release
by the party entitled to performance, a contract may be discharged. T h e
discharge by consent may be expressed or implied; and an expressed con-
sent may be given at the time of the formation of the contract or sub-
sequently. For example, it may be agreed at the time of, making the
contract that on the happening of an event one or both parties will be
absolved from performance. A buyer may be given the option to return
80 TSIERCANTILE LAW

the goods Sold within a specified period of time, ii^ certain conditions are
not fulfilled.
In Head v. Tattersall (1871) 7 Ex. 1, tlie contract was for the pur-
chase of a horse on the understanding that the buyer could return the
same within two days,, if the horse had not been hunted with the Bicester
hounds. T h e horse was returned within two days as it had not been
hunted with the Bicester bounds. The Court held the return valid.
Express consent subsequently to the formation of the contract may
be given by waiver, release, abandonment, novation, remission, altera-
tion, rescision, and in English law, by accord and satisfaction. Each one
of tliese methods is dealt with here. Sections 62 and 63 expressly pio-
•vide for these methods and aie reproduced here :—
S. 62.—If the parties to a contract agree • to substitute a new contract
for it, or to rescind or altei it, the original contract need not be per-
formed."
"S. 63.—Every promise may dispense with or remit, wholly or in pkrt,
the performance of the promise made ,to him, or may extend the fime
for such performance, or may accept instead of it any satisfaction which
lie thinks fit."

T^OVATION
Novation occurs when a new contract is substituted for an existing
contract, either between the same parties or between different parties,
the consideration mutually being the discharge of the old contract.
*
(a) A owes money to B under a contract. It is agreed between A,
B, and C that B shall thenceforth accept C as his debtor, instead of A.
There is novation. The old debt of A to B is at an end, a new debt
from C to B has been contracted.
(b) M insured his life with the X Co. T u e X Co. became amal-
gamated with the Y Co., and a memorandum was endorsed on M's po
licy that' the Y Co. would be liable for the policy money. Held, there
was a complete novation and M could recover from the Y Cp. [In r e :
European Ass. Society (1876) 3 Q v D 391].

ALTERATION
Alteration of a contract takes place when one or more of the terms
of tlie contract are dianged. Alteration is valid when it is made with
the consent of all the parties to the contract. Where, however, an alte-
ration of written contract is a-,ade by one party to the contract with
the consent of the otlier party and of a material fact, so that the legal
effect of the mstrtiment is clranged, the contract is discliarged and the
other party is -also dischatged fro'm his duties.

RECISION
A contract may he Tcscinded by agreement between the parties at any
time before it is discharged by performance or in some other way. For
example, a contract for the sale of gooas can be discharged by mutual
agreement between the buyer and the seller at any time before delivery
of the goods or payment of the price.
 CONTRACTS 81

Recission may also take place in the following manner: where a party
to a contract fails to perform his obligations, the other party can rescind
the contract without prejudice to Iiis rights to receive compensation for
breach of contract. In a vcydable contract, one of the parties has the op-
tion of rescinding the contract.
(i) A promises to deliver certain goods to B on a certain date. Be-
fore the date of performance. A and B mutually agree that the contract
will not be performed. The parties have rescinded the contiact.
(ii) A was induced to enter into an agreement by coercion. He can
rescind the contract.

ivemission is the acceptance of a lesser sum than what was contracted

for or a lesser fulfilment of the promise made. Section 63 specifically
provides for remission of performance or promise. Thus, the law in
India is different from that in England. In the latter country, remission
must be supported by a fresh consideration. In India, under Section ^63,
a promisee may remit or give up a part of his claim and a promise to do
so i'' binding even though there is no consideration for doing so,
(i) A owes B Rs. 5,000. A pays to B and B accepts in full satisfac-
tion Rs. 2,000. The whole debt is discharged.
(ii) A owes B Rs. 5,000. C pays to B Rs. 1,000 and B accepts them
in satisfaction 'of his claim on A. This payment is a discharge of the
whole claim.

ACCORD AND SATISFACTION

As we have already seen, these two terms are used in English law
and find no place in Indian law. According to English law, a promise
to accept less than %vhat is due under an existing contract, is not enforce-
able, because it is not supported by consideration. But an exception is
made where the lesser ^um is actually paid or lesser obligation actually
performed and accepted by the promisee. In sudi a case the old con-
tract is discharged by accord and satisfaction. Accord means the promise
to accept less than what' is due under the old contract. Satisfaction
means the payment or the fulfilment of the lesser obligation. An accord
is unenforceable; but an accord followed by satisfaction discharges the
pre-existing obligation. Accord witliout satisfaction is not discharge.
(i) A owes B Rs. 5,000. B agrees to accept Rs. 2,000 in full satisfac-
tion of his claim. This promise is unenforceable in English law. But
when Rs. 2,000 is actually paid and accepted, there is accord and satisfac-
tion and the original debt is dischaiged.
(ii) If A owes B Rs. 1,000 and B agrees to take a cheque for Rs.
500 in full settlement, there is an accord. This agreement is unenforce-
able. As soon as B accepts the cheque there is both an accord and satis-
i-. faction. If B will not accept the cheque ivhen it is offered, the agree-
ment can be enforced by counterclaim when B sues for Rs. 1,000.

WAIVER
Waiver means die intentional relinquishment of a right whicli a per-
8a MERCANTILE LA^V

son is eniitled to. A pau\ may \vAi\e liis rights under tlie contract,
whereupon the other party ii leleased from his obligations. In the case
of u execiuoiy contract, (e.g.. an agreement to sell and buy), each party
may excuse the other fiom paying for or from buying the goods. In
the case of a unilateral pioniise, the parly entitled to performance may
waive. performance of it. In P^nglish law. wai\er is possible only by le-
lease under a deed.

MERGER
When a superior light and an inferior right coincide and meet in
one and the same person, the inferior right vanishes into the superior
right. Til is is known as merger. Thus, merger is where a party to a
contract takes a better security than the one he has already. To effect a
merger, three conditions must be fulfilled, namely,—(1) the two securities
must be different in their legal operation, one higher than the other; (2)
the subject-matter must be the same; (3) the parties must be the same.
Therefore, there can be no merger wiien the securities aie of equal deg-
ree, so that an oral agreement is not merged in a written contract to the
same effect.
A man holding property under a lease, buys die property. His rights
as a lessee vanish. They are merged into the rights of ownership which
he has now acquired.

DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE

The law relating to discharge by impossibility of performance of a
contract is laid down in Section 56 of the Contract Act. Section 56 says :
• "An agreement to do an act impossible in itself is void. A contract
to do an act which, after the contract is made becomes impossible, or,
by reason of some event which the promisor could not prevent, unlawful,
becomes void when the act becomes impossible or unlawful.
Where one person has promised to do something which he knew, or,
with reasonable diligence, might have known, and which the promisee did
not-know to be impossible or unlawful, Such promisor must make compen-
sation to such promisee for any loss whi^h such promisee sustains through
the ijon-performance of the promise."
This, section covers a wide range of cases and lays down certain clear
rules. It is clear from the different parts of the section that impossibility
is of various kinds. The impossibility may be absolute, i.e., inherent in
the nature of the matter promised; or it n<iy exist only relatively to the
ability and circumstances of the promisor. The former is objective, (viz.,
inherent in the nature of the thing to be done) and discliarges the con-
tract. T i e latter is subjective impossibility, i.e., it is due to the inability
of the individual promisor to perform his pi<j..iise, and does not discharge
a contractual duty.
The performance may be impo-ssible as a m_atter of fact; or it m^y be
impossible by the rules of law. The impossibilitv may exist at the time
of contracting eidier with or without the knowledge of the parties or it
may arise subsequently to the making of the contract, and in the latter
case, it may be caused by events beyond the control of the parties or it
CONTRACTS 83

may be caused by some act of the promisor or promisee. The impossi-

bility may affect the promise or consideration for the promise. These
variations in the nature and incidence of the impossibility produce cor-
responding modifications in its effects.''^ Thus, a contract may be impos-
sible of performance at the time it is made, or it may become impossible
or unlawful after it was made. In the first case the contract is void
ab initio. In the second case it becomes void. This is known as die
doctrine of supervening impossibility or supervening illegality.

IMPOSSIBILITY AT T H E TIME OF CONTRACT

A contract to perform something that is obviously impossible, e.g.,
a promise to ride a horse to the moon, is void because there is no con-
sideration for the contract. Here both parties are aware of the iiUpos-
sibility. It may be that at the time of the agreement both parties are ig-
norant of the impobsihility. In sucli a case also the contract is void on
the ground of mistake. In either case the contract is void ab initio. In
such a case, there is no contract to terminate and the parties are excus-
ed from performance (Section 5G, Para 1). If, however, the promisor
alone knows of the impossibility then existing, he is bound to compensate
the promisee for any loss lie may suffer through non-performance of the
promise (Section 56, Para 3)
SUBSEQUENT OR SUPERVENING IMPOSSIBILITY
Paragraph 2 of Section 56 provides that subsequent or supervening
impossibilitv or illegality will make the contract void in certain circums-
tances and the contract will be discharged. Supervening impossibility
may occur in many ways, some of ivhich are explained below.

DISCHARGE BY SUPERVENING IMPOSSIBILITY

A contract will be discharged by subsequent or supervening impos-
sibility in any of the following ways :—
(i) Destruction of Subject-matter.—When there is a contract in res-
pect to a particular subject-matter that is later destroyed without the
fault of the parties, the contract is discharged.
(i) In Taylor v. Caldwell (1863) 122 E.R. 299, the leading case on
this point, a music hall was agreed to be let out for a series of concerts
on certain days. The hall was burnt down before the date of the first
concert. The contract was held to have become void and the owner .of
the hall was absolved from liability to let the hall as promised. Black-
burn J. observed in diis case as follows: "In contracts in which the per-
formance depends on the continued existence of a given person or thing,
a condition is implied that the impossibility of performance arising from
the perishing of the person or thing shall excuse tlie performance."
(ii)' In HoweU v. Coupland (1876) 1 Q.B.D. 258, a person contract-
ed to deliver a part of a specific crop of potatoes. The potatoes were
destroyed by blight tlirough no fault of the party. The contract Vvas held
to be discharged.
(iii) In V. L. Narasu v P.S.V. Iyer, I.L.R. (1953) Mad. 831, a con-

138. See Leake on Contracts, p. 513.

84 MERCANTILE LAW

tract was entered into between a producer and a theatre owner to ex-
hibit a picture at the latter's theatre for a particular period and share I he
profits. The exhibition of the picture had to be stopped, because the
building was demolished under the orders o£ the authorities on account
of its being defective and unsafe. The owner had no knowledge ol the
'defective and unsafe nature of the building. Held, that the continued
existence of the theatre was a fundamental basis of the contiact and LIK"
demblition discharged tl^.e contract.
T h e desiiMtliow of U\e swbiecv-Yaaivet y\e.td nol be toia\, <\s \o\ig vi
it is sufficient to prevent the contract from being carried out.
In Nickoli & Knight v. Ashton, Eldridge & Co. (1901) 2 K.B. 126, A
sold to N a cargo of cotton seed to be shipped by a specified ship in a
iiamed month. Before die time for shipping arrived, the ship %vas so in-
jured by stranding as to be unable to load by the agreed time. Held,
ijhe contract was discharged.
If A in the above case, had not named the ship on which the cargo
vas to be loaded in his contract, he would not have Ijeen excused fioifl
!
serformance by the destruction of the shipN on which he had intended,
ijn his own mind, to load the cargo.
(2) Non-existence of a state of things necessary foi peiformanfe.w
XVlien a contract is entered into on the basis of the continued existence'
bi a certain state of things, the contract is discharged i£ the state of
Lhings changes or ceases to exist. In this case'tli,ere is no destruction of
^iny property affected by the contract, but die use of that property con-
templated by the contract has become impossible.
(i) In Krell v. Henry (1903) 2 K.B. 740, H hired a room from K for
two' days. The room was taken for the purpose, as both parties well
knew, of using the room to view the coronation procession of King Ed-
ward VII, although the contract contained no reference to the ;orona-
tion. Owing to^ the King's illness the procession was abandoneii. Held,
that H was excused from paying rent for the room, as the existence of the
procession was the basis oi the contract, and its cancellation discharged
the contract.
(ii) A & B contract to marry each other. Before the time fixed fc.
the marriage, A^'fgoes mad. The contract becomes void [Illustration (b)
of Section 56].
(3) Death or pfci„„„ui incapacity.—Where the personal qualification
of a parly is the basis of the contract, tlie contract is discharged by the
death or physical disablement of tliat party. In other words the death
or illness of a particular person whose action is necessary for the promised
performance discliarges the duty to render that perfonnance.
(i) In Robinson v. Davison (1871) L.R. 6 Ex. 269, R contracted
with D that D should play the piano at a concert given on a specific day.
D was ill on the day in question and. unable to perform. The contract
was discharged and D's illness excused! him from performance.
(li) A contracts to act at a theatre for six months in consideration
61 a sum paid in advance by B. On several occasions A is too ill to act.
The contract to act on these occasions becomes void [Illustration (e) of
Section 561
CONTRACTS ^'°

DISCHARGE BY SUPERVENING ILLEGALITY

A contrart which is contrary to law at the time of its formation K
\oicl. But if, after the making of the contract, owing to an alteration
of the law or tne act of some person armed with statutory authority the
performance of the contract becomes impossible, the contract is dis-
charged This is so because tlic performance of the promise is prevented
01 piohibited by a subsequent change in the law.
(i) In Baily v. De Crespignay (1869) L.R. 4 Q.B. 180, D leased some
land to B and covenanted that he would not erect any but ornamental
buildings upon the adjoining land. A railway company, under statutoiy
powers, took this adjoining land and built a railway station on it. Held,
D was exclused from performance of his covenant, because the railway
company's statutory powers had rendered it impossible.
(ii) In r e : Shipton, Anderso.i & Co. (1915) 3 K.B. 676, A sold to B
a specific parcel of wheat in a warehouse in Liverpool. Before delivery,
the wheat was requisitioned by the Government under statutory power.
Held, the delivery being now legally impossible, the contract was dis-
charge)^
(iii) In Noorbux v. Kalyan, 1945 Nag. 192, A had agreed to trans-
port goods belonging to B from one point to another. Subsequent to
the contract, A's trucks were requisitioned by the Government under a
statutory power. Held, the contract was discharged.
On the othei: hand, if at the time of the making of the contract,
compulsory powers are in existence, the exercise of which may affect the
contract, a party kittjwing of those powers cannot rely on the fact that
they are subsequently exercised as a defence to his breacli of contract.
The exercise of the compulsory powers was an event which might have
been anticipated and guarded against in the contract."" Also, a continu-
ing contiact is not discharged by a prohibitive regulation which may be
determined or varied and leaves a substantial -part of the contract cap-
able of execution. So, where a notification regulating retail prices was
issued whiclr did not make the performance of the contract impossible
or unlawful, the parties were not discharged.^'" But if a contract to be
performed in a foreign country becomes illegal owing to a change in the
law of that country, the contract is discharged.^"

DECLARATION OF WAR
A contract entered into during war with an alien enemy is void
ab initio. A contrart entered into, before the war commenced, bet-
ween citizens of countries subsequently at war, remains suspended during
the pendency of the war, provided it does not involve intercourse with
the alien enemy or is not helpful to him or his country. Such a contract
will be revived and may be enforced at the end of tlie %var. If a contract
entered into before the outbreak of the war amounts to aiding the
enemy in the pursuit of war, it ivould be abrogated or discharged and

139. Walton Harvey, Ltd., v. Walker and Homfrays, Ltd. (1931) 1

Ch. 274.
140. Sarada Prasad v. Bhutnath (1941) 2 Cal. 78; 19-. Cal 231.
141. Ralli V. Compania Naviera (1920) 2 K.B. 287.
86 MERCANTILE LAW

not merely suspended."'" It will also be disdiarged if it cannot remain

suspended, e.g., the coniiact in-\ol\es the continuous performance of mu-
tual duties. •

CASES WHICH ARE NOT COVERED BY THE DOCTRINE OF

SUPERVENING IMPOSSIBILITY
Apart from the cases mentioned above, impossibility does not dis-
charge contracts. Therefore, impossibility of performance is, as a rule,
not an excuse from performance.'" He that agrees to do an act should
do it, unless absolutely impossible which may happen in any one of tlie
ways discussed above. It may be stated, as a general rule, that impos-
sibility to perform arising subsequently to tlie agreement will not, as a
rule, discharge the promisor, because when there is a positive contract
to do a thing which is not unlawful, the promisor must perform it or pay
damages for not doing it, although the performance becomes unexpect-
edly burdensome or even impossible on account of unforeseen events.
Some of the circumstances in irfiich a contract is not discharged on the
ground of supervening impos.sibility are stated here.
(1) Difficulty of performance.—The mere fact diat performance is
more difficult or expensive or less profitable than the parties anticipated
does not discharge the duty of perfonnance. Increased or unexpected
difficidty and expense do not, as a .rule, excuse from performance.
(i) A sold to B a certain quantity of Finland timber to be delivered
between July and September, 1914. No deliveries were made before
August when war broke out and transport > was disorganised so that A
could not bring any timber from Finland. Held, B was not concerned
with the way, in which A was going to get timber from Finland and there-
fore the impossibility of getting timber from Finland did not excuse per-
formance [Blackburn Bobbin Co. v. Allen & Sons (1918) 2 K.B. 467].
(ii). A promised to send certain goods from Bombay to Antwerp in
September. In August war broke out,"and the shipping space was not
available except at very high rates. Held, the increase freight rates did
not exQuse perfoimance (40 Bom. 301).
(2) Commercial impossibility to perform a contract will not dis-
charge the contiact. A contract cannot be said lo be impossible of per-
formajice Ijecausc expectation of higher piofits is not realised (Sachindra
\. Gopal, 1919 C^al. 240). A promisor's contractual duly to lay gas mains
is not discliaiged hctausc the oiiiureak of war makes it expensive to pro-
cure the necessary materials.^"
(3) The piinciple of supcneniiig impossibility does not extend to
the case of a thiid petsoii on whose work the piomisor leiicd.
(i) In Ganga Saran v. Firm Ram Charan, 1952 S.C. 9, a contiact bet-
ween the parties provided that -"61 bales as noted below arc to be given
to yoti by us; vve shall go on supplying goods to you of the Victoria Mills
as' soon as they are supplied lo us by the^said mill." In a suit for dam-

112. Esposito V. Bowdcn, ? £ . & ; » 763.

11,8. Ka Ron Lanong v. State of Assam, 1959 Assam 75.
144. Sec M/s Alopi Pras.id v. Union of India, 1960 S.C 56
CONTRACIS 87

ages for non-delivery of goods die defendants pleaded impossibility and

frustration on the ground that the goods were not supplied to them by
the mill. Held, V that the law is contained in Section 56 of the Act, and
the words "as soon as they are supplied to us by the mill" simply indicat-
ed the process of delivery and did not convey the meaning that delivery
was contingent on their being supplied by the mills. The case did not
fall within the provisions of Section 56, as the default was due to the
fault of the defendant.
(ii) In. Toolsidas v. Venkata, 25 C.W.N. 26 P.C, a contract regarding
the sale of dyes contained a stipulation about the adjustment of prices
according to rates published by a syndicate but the war destroyed the
syndicate. The contract was not discharged as it was not dependent upon
the continuance of the syndicate.
(4) Partial impossibility rarely discharges a promisor beyond the
extent of th^ impossibility. Thus, if the state of things in question is
not the sole basis of the contract, so that there will still remain a sub-
stantial portion, though not all, of what was contracted for, the contract
will not be discharged. In other words, where there are several purposes
for which a contract is made, failure of one of the objects does not ter-
minate tlie contract.
In H. B. Steamboat Co. v. Hutton (1903) 2 K.B. 683, the Company
agreed to let a boat to H to view the naval review at the coronation and
to cruise round the fleet. Owing to die King's illness the naval review
•ivas cancelled, but the fleet was assembled, and the boat might have been
used for the intended cruise. Held, the Co. were not discliarged from
performance as the naval review was not the sole basis of the contract.
(5) Strikes, lockouts and civil disturbances like riots do not termi-
nate contracts unless there is a clause in the contract providing that in
such cases the contract is not to he peifonncd or that the time of perfor-
mance is to be extended.
(i) The lessee of certain salt pans failed to repair them according to
the terms or his contract, on the ground of a strike of the workmen. Held,
a strike of workmen is not sufficient leason to excuse performance' of a
term of the contract (52 Bom. 142).
(ii) In Jacobs v. Credit Lyonnais (1884) 12 Q.B.D. 589, a contract
was entered into between two London merchants iot the sale of certain
Algerian goods. Owing to riots and civil disturbances in that country,
the goods could not be brought. Held, thcie was no excuse for non-per-
formance of the contract.

T H E DOCTRINE OF FRUSTRATION
The Common law of England started with die harsh doctrine that
unless the parties expressly stipulated to the contrary, impossibility was no
defence to an action for breach of a contract. In course of time, how-
ever, exceptions were introduced to modify the severity of the Doctrine.
In English cases, it has been now held that when the common object of
a contract can no longer be carried out, the court may declare the con-
tract to be at an end. This is known as the Doctrine of Frustration The
doctrine developed in England under the guise of reading implied terms
in contracts. The idea was diat they could not have intended to stick
to a contract the purpose of which has disappeared. Thus, when the
88 MERCANTILE LAW
performance depends on the continued existence o[ a given person or
thing, a condition is implied that impossi'sility of performance arising
from the perishing of the person or thing shall excuse performance. If
the act became impossible subsequently by leason of some event which
the promiser could not prevent, the conn act is discharged. This is based
on the maxim Les non cogit ad impossibilia—the law does not compel
the impossible. This dischaige of a coittiart rendered impossible of per-
formance by external causes beyond the contemplation of the parties is
known as frustration. Frustration, as said above, is a device by ivhich
the rules as to absolute contracts ate leconciled with a special exception
which justice demands. It has become a gloss on the older theory of
- impossibility which it has greatly, developed under the guise of reading
, "implied terms" into contracts,""' In Taylor v. Coldwell,"" it was stated
that the rule that where there is a contract to do a thing, not in itself
I unlawful, the promisor must perform it or pay damages for not doing
it, is only applicable when the contract is jDOsitive and absolute, and not >
subject to any condition either expiess or implied; and where, from
the nature of the contract, it appears that the parties m.ust from the be-
ginning have known that it could not be fulfdled unless when the time
for the fulfilment of the contract arrived .some particular specified thing
continued to exist, so that, .when entering into the contract, they must
have contemplated such' continuing existence as the foundation of what
was to be done; there, in the absence: of any express or implied warranty
that the thing shall exist, the contract is' not to be construed as a posi-
tive contract, but as subject to an implied condition that the panics shall
be excused in case, before breach, perforhiance becomes impossible from
the perishing of the thing ii'ifhout default of the contract Therefore
in contracts in which performance depends on the continued existence of
a given person or thing, a condition is implied that the impossibility of
performance arising from the perishing of the person or thing sliall ex-
cuse the perfoiTiiance.
The implied leim theoiy has fuIfdlcd its historical purpose and
should no longer l)c legaided as an adcau;itc explanation off the doc-
trine of fmstration. The doctiiiie is iec|uiied because the parties have
failed to provide for an unfoie.secu contingency. If, therefore, t.ie judge
has to fill this gap b) inferring what the paities would have prov'.idcd if
they had thought of the contingeiicv. he is expected lo perform an im-
possible feat of speculation. He is required to inlcr tlie intention ot
the parties not fioni nhat they have said, but from what th(?y have
left unsaid, a task which has been described as "preposfcrous." Kiir-
ther, there is something of a logical difTicuUv in seeing how the parties
could e\en impliedly have provided for something which ex hypoihesi
they neither Expected nor foresaw."" If they had exiiected or foreseen
it, they would have provided for it by inlioducing reseivaiious or (|ua-

M5. Darwood v. Q. Ins Co., 1919 Cal. 390.

H6. (1863) 122 E.R. 299.
147. Per Lord Radcliffe in Davis Contractors, Ltd. v. Farehara
(1956) A.C. 696.
CONTRACTS 89
lifications or compensations, Xs to what tliey would have provided, the
Court cannot guess."^
Again, the Court, in deciding whether there is frustration or not,
attempts to do wliat is reasonable in view of subsequent circumstances
that could not possibly have been contemplated by the parties, and
not "from the nature of the contract ^nd surrounding circumstances"
when it was made. The application of this theory which is based upon
a vague and uncertain term requiring further definition by the parties
conflicts with the rule of law that an ouer must be certain and not
vague and so must be its acceptance. Thereforer "as observed by Lord
Radcliile, "frustration occurs •ivhenever the law recognises that without
default of either party a contractual obligation has become incapable
of being performed because circunistaticei! in which performance is
called for would render it a thing radically different from that which
was undertaken by the contract. Non haec in foedera veni. It was
not this that I promised to do.""°
1'urthermore, undei tlie doctrine of frustiation the fundamental as-
sumption underlying the contract becomes impossible. The perfor-
mance of the contract may not be actually inipoisiblc, but if tlie con-
tract cannot be performed as originally conteraplatecl by the parties,
there is frustration. In such a case, there is a frustration of the object
of the contract. -Where, for instance, goods were sei7ed as prize and
then released and transhipped so that they arrived two years late, the
arrival was not such as was contemplated by liie parties."" The dis-
charge of a contract by reason of frustration follows automatically when
the relevant event happens and does not depend on the volition or elec-
tion of either party."' The doctrine applies if the disturbing cause goes
to the extent of substantially preventing the perfoimance of the whole
contract. Thus, a contract may become frustrated or impossible of perfor-
mance by an Act of Legislature, or by operation of law; it may be discharg-
ed by a subsequent declaration o[ war, or by emergency regulations. The
frustration of venture may arise through an Act of God or vis majeur or
by restraints of princes subsequent to the promise. An Act of God or vis
majeur is "an accident due to natuial causes, diiectly and exclusively,
without lumian intervention and which could not have veen avoided by
any amount of foresight or Care." In a recent case of British Movietone
News Limited v. London and District Cinemas, Limited (1943) A.C. 2
the House of Lords based the doctrine of frustration on the principle
of "Construction." It was said ihat where the court gathers as a mat-
ter of construction tiiat the contract itself contained impliedly or ex-
pressly a term, according to which it would stand discharged on thf

148. Lord Wright in Denny, Mott & Dickson, Ltd., v. Frascr & Co.
Ltd. (1944) A.C. 265. See Bank Line, Ltd. v. Capel & Co. (1919) A.C.
435.
149. Davis Contractors. Ltd. v. Fareham (195G) A.C, 696.
150. Gourishanker v. Moitra (1921) 26 C.W.N. 573.
151. D.M. and D. Ltd. v James B.D.F. & Co., Ltd. (1944) A.C.
265.
90 MERCANTILE LAW

liajjpeniiig of ciicumstaiice!), ilie dibioluLion of liic coniract Avould tnke

plncc under the teims of the (oiuracc iLself.
The doctrine of frusiiation has no application to a demise of land
[Matthey v. Curling (1922) A C 130]. to a lease of a furnished house, or
to a building lease foi QO years [Lighton's Investment Trust v. Grickle-
wood Properly Co. (1913) 2 K.B. 493]. It does not extend to the case
of a third person on whose •ivoik the promisor relied. Commercial im-
possibility also does not frustrate a contract. The doctrine does not
apply wheie the event uhich is s.u'd to have frustrated the oijject of the
contract nrhcs from an jnieniional .id or election of a party [Maritime
National Fish, Ltd. v. Ocean Trawlers. Ltd. (1935) .\.C. 524 (P.C.)].

INDIAN LA^V REGARDING FRUSTRATION

In India, the law is codified and Section 56 which deals with this
subject provides for discharge of coniract by impossibility of perform-
ance or frustiation. Para 1 and 2 of Section 50 as follows'
"An agreement to do an act impossible in itself is void.
"A contract to do an act which after the contract is made, becomes
impossible; or by reason of'some event which the promisor could not pre-
\cnt, unlawful^ becomes \oid when the act becomes impossible or un-
lawful. . . . "
It is clear from the language of tlie section tJiat it departs from
the English law to a large extent and la)s down positive rules of law
whicli accoiding to English decisions .ire only matters of construction
depending on the intention of parties. There is no a|uestion of read-
ing implied teims in (ontraris. In India fuistration of contract is equi-
valent to supervening impossibilitv or illeg.ility. The point of frustia-
tion laiscs some difhciiliies but a recent pronouncement of the Siip-
icnie Court has clarified the position.
Ill .Saiyabial Ghose \ Miigiiccram Bangur S; Co., M. S: Co.. v\ho
were the owners of a large tract of land started a scheme for its deve-
lopment for residential puiposes and accordingly di\ided it into a
large numbei of plots for the sale of uhich they invited offers fiom in-
tending buyers. The company's plan was lo accept a small portion of
the price by way of earnest money from the Ijuycrs at the time of agree-
ment, construct tlie loads and drains itself .ind within one month after
(heir compietion calf upon the biiyeis to complete the conveyance fay
paying one-third of the price at the time of the legistration and the ba-
lance within 6 years bearing interest at (i pei cent per annum, time be-
ing deemed the essence of tha contract.
B entered into a conirct on those terms with iM S. Co., on 5-8-1940
and later on assigned the contract to S. Shoitly prior to that assignment
a poiiion of the land coAered by the scheme was requisitioned for mili-
tary purposes by the Government under the Defence of India TRules. and
later the rest of tlie land was <:lso requisitioned. M Sc Co. thereupon in-
lormed 13 that the land pertaining to the scheme was taken possession of
by the Government and there was no knowing how long the Govern-
ment would retain possession and tiiat the company could not, there-
fore lake up the construction of loads and diains dining the continu-
ance of the ivai aiul possibh foi ni.ui\ )ears after ils leriniiiation. The
rompaiu .ilso wrote to B to treat the contract as cancelled and take
CONTRACTS ^^

back the earnest money, or if B liked to complete the conveyance with-

in one month of the receipt of die letter by paying the balance of price
and take the land in the condition in which it existed at that time,
the company undertaking to construct the roads and drains as circums-
tances might permit after the termination of the war; and tliat in de-
fault of accepting either of the alternatives the contract would be deem-
ed to be cancelled, and the earnest money forfeited. This letter was
handed over by B to his assignee S, who refused to accept either alter-
native and asserted that the company was bound by the contract and
could not resile. S filed a suit for declaration tliat the contract dated
5-8-1940 was subsisting and that S, as the assignee of B, was entitled to
get the conveyance executed and registered by the company on pay-
ment of consideration mentioned in the agreement and in the manner
and under the conditions specified therein. The company contended
that the contract of sale became discharged by frustration as it became
impossible of performance by reason of supervening events. Tlie Sub-
Judge and the District Judge on appeal rejected the defendant com-
pany's plea and decreed the suit but the Calcutta High Court in Second
Appeal upheld the contention and dismissed the suit. On appeal the
Supreme Court held that having regard to tlie terms of ihe contract,
the actual existence of war conditions at the time when it was entered
into, the extent of the work involved in the development scheme, and
last, though not the least, the total absence of any definite period of
time agreed to by the parties %vithin which the xvork was to be com-
pleted, it could not be said that the requisition order vitally affected
the contract or made its performance impossible and accordingly the
appeal was allowed and the suit was decreed.
The law relating to frustration in India as laid down by the Sup-
reme Court in Satyabvat Ghose's case may be summed up as follows :—
"The Courts in India should look primarily to tiie law as embo-
died in Sections $2 anil 50 of the Indian- Contract Act. Indeed, tlie
above sections of tlie Contract Act embrace the whole of the Indian law
on the subject. Section 32 applies in cases of contingent contracts and
Section 56 covers the rest. Under cither, liowever, impossibility is the
central or dominating idea and the determining factor, impossibility in
cases of contingent contracts in tlie happening of the event or events on
which same depend, and, in otiicr cases, impossiljility of tlie act to be
performed under the contract, illegality or unlawftdness of tlie act,
given in Section 50 as a separate ground for frustration of contract, be-
ing comprehended within the: nbo\c conception of impossibility for
that purpose...
"The essential idea upon wliicli ilie doctrine of fni.stration is based
is that of impossil)ility of performance of the contract. In fact, impos-
sibility and frustration are often used as intercliangeable expressions.
T h e changed circumstances make performance of the contract impossi-
ble and the parties arc absolved from the further performance of it as
they (lid not promise to perform an impossibility.''- The doctrine of
fruslration is in reality an ;isnect or part of the law of discharge of

152. Satyabrat Chose v. Mugneeram Bangur k Co., 1054 S.C. 44;

M/sV.^l'opi Prasad v. Union of India, 1900 S.C. 5S8; Hari Suigh v, I)e-
wani Vidya\<rati, 1960 J. 8: K. 91
92 MERCANTILE LAW

contract by leason of supervening impossibility or illegality of the act

agreed to be done and hence comes within the purview of Section 55.^"
To the extent that the Contract Act deals with a paiticulai subject, it is
exhaustive upon the same and it is not peiraissible to import the prin-
ciples of English law 'de hors' those statutory provisions. The decisions
of the English Courts possess only a persuasive value and may be help-
ful in showing how the Courts in England have decided cases under
circumstances similar to those whicli have come befoie Indian Couits.
In deciding cases in India the only doctiine that we have to go by is
that of supervening impossibility as laid down in Section 56, taking
word impossible in its practical and not literal sense.
Section 56 lays clown a rule o£ positive law and does not leave the
matter to be determined according to the intention of the parties.
Therefore, in India, the doctrine of flustration is applied not on the
gioimd that parties themselves agreed to an implied teim which opeiat-
ed to release them from the pertoimance of the contract. The relief is
given by the Court on the ground of subsequent impossibility when it
finds that the whole purpose or the basis of a contract was frustrated
by the intrusion or occurrence of an une.xpected event or change of
circumstances which was beyond what was contemplated by the parties
.^t the time when they entered into the agreement. ^Vhen such an event
or change of circumstances occuis which is so fundamental as to be
regarded by law as striking at the root of the contract as a whole, it is
the Court ivhich can pronounce the contract to be frustrated and at
an end. The Court undoubtedly has to examine the contract and the
circumstances under which it was made, but it is 'the Court which has
to form its conclusion whether the changed circumstances destroyed al-
together the basis of the adventure and its underlying object, the belief,
knowledge and intention of parties being evidence, but evidence only
on which the Court will form its own conclusion whether the changed
ciicurastances destroyed altogether the basis of the adventure and its
underlying object. This is really a rule of positive law and comes with-
in t h e p u n i e w of Section 56 of the Contract Act.
In applying this rule the Court has to examine the nature and terms
of the contiact before it and the circumstances under which it was made
and to deteimine whether or not the disturbing element which is al-
leged to have happened in the paiticular case has substantially prevent-
ed the performance of the contract as a whole. If the answer be in the
affirmative, the contract will stand dissolved or discharged by'> virtue of
Section 56, as it is well settled that, if and when there is frustration the
dissolution of the contract occurs automatically. It does not depend,
as does recision of a contract on the ground of repudiation or breach,
or on the choice or election of either party. It depends on the effect of
what has actually happened on the possibility of performing the contract.
What happens generally in such cases is that one party claims that the
contract has been frustrated while the other party denies it. The issue
has got to be decided by Court ex post facto, on the actual circumstan-
ces of the case.

153. See also,Ka Ron Lanong v. State of Assam, 1959; Assam 76,
M. Bangur v. G. Singh, 1959 Cal. 576.
CONTRACTS ' 93

In ascertaining the meaning of the contract and its application to

the actual occurrences, the Court has to decide, not what the parties ac-
tually intended, but what as leasonable men they should have intended.
The Court personifies for diis purpose the reasonable man."* In cons-
truing the word 'impossible' in Section 56, it should be noted that the
word has not been used in the sense of physical or literal impossibility.
The performance of an act may not be literally impossible but it may
be impracticable and useless from the point of view of the object and
purpose which the parties had in view and if an untoward event or
change of circumstances totally upsets the very foundation upon whicli
tl\e parties rested dieir bargain, it can very well be said diat the promi-'
sor finds it impossible to do the act which he promised to do.
In State of Rajasthan v. Madanswarup, 1960 Raj. 138, M, i */d-
vocate of Bikaner High Court, was appointed by the Bi^'aner Sti^te- fo
look after its criminal work in the High Court. After merger of Bika-
ner, its High Court was abolished and a ne^v High Court for the Unit-
ed State of Rajasthan was established at Jodhpur by an Act of Legisla-
ture. Thereafter ^ services of M were terminated by the successor
State. M sued the State of Rajasthan for damages for breach of con-
tract. Held that in view of the change of circumstances the contract
became virtually impossible and all that could be said was that it was
discharged or piit an end to and not broken. The doctrine of frus-
tiation was, therefore, applicable so that M could not found an action
for damages on that account.

EFFECT OF SUPERVENING IMPOSSIBILITY OR FRUSTRATION

Section^ 56 and 65 of the Indian Contract Act expressly provide
for the consequences of impossibility of performance as follows :—
1. When the peiformance ol a contract becomes subsequently im-
possible or illegal, the contract becomes void—Section 56, Para 2.
2. When a contract becomes void, asiy person who has receiveu
-111 advantage under it must restore it, or make compensation for it to
the person fiom whom he received it.
The English law on this point is laid down in Fibrosa, etc., v. Fair-
bairn, etc., (19'13) A.C. 3 in these words: All sums paid to any party in
pursuance of the contract before it is dischaiged are recoverable. Sums
payable cl^ase to be payable.
In this case, English sellers agieed to sell machinery to Polish buy-
ers, part 6f the price to be paid in advance. The buyersr-paid £1,000.
Performance became impossible, as before delivery was due Germany oc-
cupied Poland. Held, the contract was discharged by fiusiVation. and
the buyers could recover £1,000 paid and were not liable to pay the
balance.
3. 'Where one person has iiromised to do something iWiich he

154. Joseph C. S. Line Ltd. v. Imperial S. Corp. Ltd. (19'12) A.C.

154. See also Mugneeram Bangur & Co. v. Gurcharan, 1959 Cal. 576,
which has followed the law as laid down by the Supreme Court in Satya-
brat Ghose case, and held that there was no fiustiation on similar facts
as in the Supreme Court case.
94 MERCANTILE LAW

knew, or with reasonable diligence, might have known, and which the
promisee did not know to be impossible or unla%vful, such promisor
must make compensation to such promisee for any loss which such pro-
misee sustains through the non-performance of the promise—Section 56,
Para 3.
A contracts to marry B being already married to C, and being foi-
bidden by the law to which he is subject to practise polygamy. A must
make compensation to B for any loss caused to her by the non-perCor-
mance of his promise.
DISCHARGE BY LAPSE OF TIME
The Limitation Act. m some ciicumstances, aifoids a good defence
to suits for breach of contract, and in fact teiminates the contract by
depriving tlie party of his remedy at law. For example, where a deb-
tor has failed to repay the loan on the stipulated date the creditor must
file the suit against him within three years of the default. If the three
years expire and he takes no action, he will be barred from his remedy,
and the other party is disdiarged of his liability to perform. The per-
iod of limitation for simple contracts is three yeais in India and six
years in England, and in the case of special contracts it is twelve years.

DISCHARGE BY OPERATION OF LAW

Discharge under tliis head may take place as follows :
By merger.—Where the parties embody the inierior con ti act m a
superior contract. When between the same parties, a new contract is
entered into, and a security of a higher degree, or a higher kind is
taken, the previous contract merges in the higher security. Where secu-
rities of the same kind o£ degree are taken there is no merger.
By the unauthoiised alteration of tcnns of a written document.—
Where a party to a contract in writing makes any material alteration
without the knowledge and consent of the other, the contract can be
avoided by the otlier party. An alteration even by a stranger will en-
title the other party to avoid the contract, but where the alteration is
due to mere accident or is riot material contract cannot be avoided.
By insolvency—The Insolvency Acts provide for discharge of con-
tracts under particular circumstances. So, where the Insolvency Court
passes an order discharging the insolvent, this order exonerates or dis-
charges hiiii from liabilities on all debts incurred previous to his adju-
dication.
DISCHARGE BY BREACH OF CONTRACT
We have have seen that a contract must be strictly performed accord-
ing to its terms. But where the promisor has neither performed his
contract nor tendered perfoimance and where tlie performance is not
executed by consent, express or implied, or ivhere the performance is
defective, tliere is a breach of the contract by him. which entitles the
other paity to file a suit. I£ the contract is unilateral the only remedy
for the other party is to claim relief for breacli. In the case of a bila-
teral contract, the party not in breach can claim relief for breach and
CONIRACIS 95
also in certain cncumstaiices is exoneiated fioin liability to perform his
pait of the contract l l i c breach of A contract may be (i) actual, oi (ii)
constiucti\e oi anticipatoiy. The actual bieadi may take place (a) at
tlie time when perloimance is due, oi (b) when actually pertorming the
contract The constiuctive or anticipatoiy bieach of contract, i e., a
bleach before the time foi peifoimance has arrned, ma\ also take place
in two ways, namely, (a) by the pioniisoi doing an act which makes the
peiforraance of his promise impossible or (b) by the piomisoi m some
other way showing his intention not to peiform his piomise.
Actual Breach of Contiact at the time when Performance is due.—
^\here a person fails to perform a contiact, when peifoimance is due
the othei pauy can hold him liable foi breach. But, if a party who
lias failed to perfomi the contract at the appointed time, subsequently
expresses willingness to peiform, tlie question whether he can do so oi
not would depend upon whether time was of the essence of the contract
or not. In all mercantile contiacts time is of the essence of the contract
and a breach of contract results on failuie to perform within the limited
time This is specially so in shipping contracts. In a sale of
goods subject to rapid fluctuations of market price, the time of delivery
IS of the essence. There aie other tiansactions, e.g., contracts relat-
ing to sale of land m which time is not deemed to be of tlie essence
unless parties specially stipulate to that effect. But the terms of the
contract, or the nature of the piopeity sold, will determine whether
time was of the essence In die case of sale of a house to be imme-
diately occupied or sale of a business as a going concern, time will be of
the essence In Indian law, wheie in a contract time is not of the es-
sence and the party e.\pi esses willingness to perform it after the ap-
pointed time, die law permits him to do so subject to payment of com-
pensation for failure of due performance. The party accepting perfor-
mance after the due date is required to give notice while accepting that
he intends to claim compensation, otherwise he is deemed to have waiv-
ed the light to compensation (Section 55).
Breach during the Performance of the Contract.—Where a party ap-
parently performs the promise but the othei party says that it is not a
proper performance according to the contract, the question arises whe-
ther there is a breach of the contract exonerating the other party from
performance of" his part of the bargain. If breach is of a condi
tion vital to the contract, the contract is dischaiged and the o.ther party
need not perform his part of the baigain. In the case of sale of goods
(5y description, unless the goods Answering to the description are offer-
ed, the buyer is not bound to take delivery or to pay for them. But if
the breach is only of a collateral teim (non-essential condition) this will
not exonerate the party from perfoimance of his part of the bargain, but
only entitle him to claim damages Where the buyer has obtained pos-
session of goods and his right of enjoyment is disturbed in any way, he
can claim damages caused by the breach of the implied warranty of quiet
possession Where the promisor had made more than one promise, or a
divisible piomise, his lepudiation must either be of the whole contract,
or of a part of it which is a condition precedent to the promisee's
liability', else tlie piomisee will not be entitled to treat such rejrudiation
as equivalent to the breach of the whole contract.
95 MERCANTILE LAW

CONSTRUCTIVE OR ANTICIP VTORV BREACH OF CONTRACT

It may sometimes happen tliat e\en befoie ihe lime oE perfoimance
arrues, tiie promisor may do some act wiDch makes the perfoimance
impossible or may definitely lenounce the contract or sliow his inten-
tion not to perfoim it Thus, ivheie A piomised to assign to B witlun
7 years from the date of promise all his iiiieiest in 4 houses for £140,
and befoie tlie end of tlie 7 years assigned all his interest to another per-
son, it was held tliat without waiting for the 7 years to elapse B could
sue A for breach of his piomise.'"- In another case a couiier was engag-
ed in April to accompany his employer oi\ a toUr of three months to com-
mence on June 1 On May 11 the employer wrote to the courier that
he had changed his mind and decliiiefl h(p services but refused to
mar.e him any compensation. On May 2i: the couriei brought his ac-
tion for breach of contract and the defeace was that there could be
no breach befoie June 1 It was held tliat the courier was entitled to
treat the lettei of Ma> 11, equivalent lo brtach of contract It is to
be noted that a constructive or anticipitoiy bieacli of contract does not
give rise lo a liglii of action, unless the pioi.n^ee elects to neat it as
equivalent to actual breach Thus, instead of bringing an immediate
aciioTi, as m i\\e examples g'wen above. il\e pvomisee ma^ irea^ vht con-
duct, act or notice of tlie promisor as inoperntne, and wait for the time
when the contract is to be performed, and then hold tlie promisor res-
ponsible for all the consecitiences of nonperformance. But in tliat case
tlie promisee keeps the contract alive for the benefit of the promisor as
well as his own, he remains liable undei it, and enables the promisor
not only to complete the contract in spite of previous repudiation, but
also to avail himself of any excuse for non perfoimance which may have
come into existence before die lime fi\ed for performance Thus, in
our second example, if the courier Iiad waited till June 1, the employer
could withdraw his letter 6f May II, and ask the courier to accompany
him on tour, or if the perfoimance had become impossible due to some
cause, such as the declaration of war, ilic courier would have lost his
remedy and the employer would ha\e been excused from peiformance.
A party putting an end lo the contract must restore any advantage he
may have received'"

LIABILITY OF PARTY PREVENTING PERFORMANCE

When a contract contains reciprocal promises, and one party lo the
contract prevents the othei fiom performing his promise, the party so
prevented can avoid the contract and claim compensation for any loss
he may sustain (Section 53). Wliere A and B contract that B shall ex-
ecute a certain woik for A for Rs. 1,000, and B is willing and ready to
do the work, but \ prevents him from doing so, the contract is \oid-
able at the option of B If he elects to rescind it, he can recover fiom
A compensaiion for am loss which he has incurred by non performance
of the contract. This is based on the principle that one of the con-
tiacting parties is exoneiated from the performa.ice of a contract when

155 Lovelock v. Franklyn (18')9) 8 Q B 317.

150 Muiali v. I Film Co, 1943 P C 34
CONTRACTS 97
it is prevented by the wrongful act of the other party. No person can
•take advantage of the non-fulfilment of condition the performance of
which has been hindered by himself. Money paid or ornaments given
for the benefit of the bride or bridegroom or of both, can be recovered
by suit, if the marriage con'ract is broken (Dholidas v. Fulchand, - 26
Bom. 638). A betrothal is a contract; when it is broken or otlierwise
becomes void, parties are entitled to the return of the gifts made by
them. (Ilajendra' v. Keshan, 1950 All. 592).

PART I-I
REMEDIES FOR BREACH OF CONTRACT
^Vhen a contract is broken, die injured party becomes entitled to
any one or more of the following reliefs: (1) Rescision of the contract
with the result that the injured party is fi-eed from all his obligations
under the contract; (2) Suit for damages; (3) Suit upon a Quantum
Meruit (already discussed); (4) Suit for sjjccific performance of the con-
tract; (5) Suit for an injunction.

DAMAGES
Where a party suffers by a breach of contract, he has under Section
73 a right to claim damages thereof. The section is based on the lead-
ing case of Hadley v. Baxendale (1854) 9 Ex. 34 the facts of. which were
as follows :
The plaintiff, an owner of a mill, delivered a broken ''shaft to the
defendant, a common carrier to take to a manufacturer, to copy it and
make a new one. The carrier -delayed delivery of the shaft beyond a
reasonable time, as a result of which the mill was idle for a longer period
than should have been necessary. The plaintiff did not make known to
the defendant carrier that delay would result in a loss of profits. Held,
the carrier was not liable for loss of profits during the period of delay.
Alderson. B. observed: "When two parties have made a contract, which
one of them lias broken, the damages which the other party ought to
receive in respect of such breach should be either such as may fairly
be considered as arising naturally, i.e., according to tiie usual course of
things, from such breach of contract itself, or such as may reasonably be
supposed to have been in tlie contemplation of both the parties at the
time the contract was entered into as a piobable result of the breach."
T h e principle enunciated in Section 73 is tliat a, party wtio suffers
by the breach of contract is entitled to—
(a) such damages as naturally arose in the usual course of
things as a result of the breach;
(b) and if he claims special damages if any loss sustained .(which
would not ordinarily flow from the brearh) he must prove
that the other party knew at the time of making the con-
ti-act that the special loss was likely to result from the
breach of the contract;
(c) such compensation is not to be given for any remote and
indirect loss or damage sustained by reason of the breacli;
(d) compensation tor quasi contract as damages- is the same as
for a contract.
98 MERCANTILE^LAW

The damages that may be claimed are of four kinds: 1. Ordinary

or General; 2. Special; 3. Exemplary or Vindictive; and 4. Nominal.

ORDINARY DAMAGES
General or ordinary- damages are restricted to the proximate conse-
quences of the breach of contract and the remote consequences are not
generally regarded. T h e measure of damages is the estimated loss di-
rectly and ngturally resulting in the ordinary course of events, fiom
the breach of contract."' The reason for this rule is that these are the
damages which a reasonable man would contemplate as the likely re-
sult of the breach if he had directed his mind to it. The measure is,
in general, the value of the performance to tlie plaintiff, not the cost of
performance to the defendant. Thus, in a breach of contract to enclose
plaintiff's land by a wall, the damages will ,not be the cost of building a
wall, but losb of value of land. In the case of sale and purchase, the ^
^ damagec payable would be the difference between the contract price and
the price at whidi the goods are available on the date of breach. T h e
damages are calculated as on the date of breach and any subsequent
change of circumstances tending to an increase or reduction of damage
cannot be taken note of. In a contract of sale of shares the buyer broke
the contract, and the seller sued for ^damages on the basis of the dif-
ference between the contiact rate and the market rate on the date of
breach. The buyer proved that the price of the shares subsequently rose
and that the seller did not really suffer any damage. But the Court
held that the damages should be ascertained as on the date of breach and
any risk of profit or loss arising from a subsequent increase or decrease
is entirelv the vendor's and has nothing to do with the other party.-'*
Damages may also be claimed for a breach of warranty and such da-
mages will include all damages flowing from the breach. A cow ' was
sold with warranty that it was free from disease, and damages were
claimed on the ground tliat the, cow was suffering at the time of sale-^
from foot and mouth disease, with tlie result that not only that cow
died of it but infected the other cows of the plaintiff also. It was held
that damages could be claimed for the entire loss."^ Similarly, where
the wife of the plaintiff had died from tin poisoning caused by the tin-
ned salmon bought from the defendant, the Court held that the plaintiff
was entitled to damages incurred by employing extra servants by reason
of the loss of his wife's services, during illness, medical expenses, and
pecuniary loss occasioned by the death of his wife.™ Damages are also
awarded for the personal inconvenience suffered by a party. Where a
passenger was set doxvn by a railway company at the place wheie he
could get neither conveyance nor hotel and he had to walk several miles
to reach his destination, he was held entitled to damages for the in-

157. Union of India v. Vasudeo Agarwal, 1960 Pat. 87.

158. Jamal v. Moalla Dawood & Co. (1916) 43 Cal. 493 (P.C);
Union of India v. Baijnath', 1951 Pat. 219; See also Trojan v. Nagappa,
1963 S.C. 135. , J b f1
159. Smith v. Green (1876) 1 C.P.D. 92.
160. Jackson v. Watson & Sons (1909) 2 K.B. 193.
CONTRACTS 99
convenience suffered for having had to walk.'" But the loss of business
consequent iipon his failure to keep an appointment was held to be
too remote. A party to a contract is bound to use all reasonable means
of mitigating the damages consequent upon the breach of the other
party. He cannot recover any part of the damage, traceable to his
neglect to mitigate.

SPECIAL DAMAGES
Special d^r.-^gts are those resulting from a breach' of contract Under
some peculifcr Circumstances If at the time of entering into a contract
a person has notice of special circumstances which makes special loss the
likelv result of the breaclt in the oidinary course of things, tiien upon
his breaking his contract and the special loss following this breach he
will be required to make good'ithe special loss. Here again, the da-
mages are what a reasonal)le man would contemplate as the likely re
suit of tlie breach if he had directed his t jnd to it. Wheie a manu-
facturer of cattle food delivered goods to the laihvay company for car-
riage to a particular place where a cattle show was being held at the
time and informed the company that he was sending the goods to the
•b'fio^w and that delay would cause him special loss and the goods reach-
e d the destination after the show was over, he would be entitled to re-
cover j i o t only damages for the delay but also for the loss of profit
causecl by the breach.

TFlfriVt?LARY OR VINDICTIVE BAMAGES

Damages for Ijieach of contraci aie intended to. compensate the
plaintiff, not to pun.sh the defendant. But in three cases a sum be-
yond the pecuniaiy loss sustained by the plaintiff may be awarded by
the court, as exemplary damages. In an action lor breach of promise
to many an additional sum caJed solatium or .solace may be awarded
to tlie jilted woman as solace lor her injured feelings. Similarly, exemp-
larly damage^ may be awarded where a banker wrongfully dishonours a
trader customer's cheque; and the smaller the cheque dishonoured the.
greater the damage is the rule. Exemplary damages may also be a'ward-
ed foi inlringemeni of copyright (Williams v. Settle (1960) 2 All E. R.
806). ,
NOMINAL DAMAGES
Nominal damages consist of a sum of money which is very small in
quantity, e.g., a rupee, a shilling. Nominal damages are awarded where
the plaintiff has proved a breach of contract but has not suffered any
real damage. These damages are awarded to establish the right to dec-
ree for breach of contract.
RULES REGARDING AMOUNX OF DAMAGES
The-rules applicable to the awarding of damages may be summaris-
ed as follows :—
1. Where a party sustains a loss by reason of a breach of contract,
he is, as far as money can do it, to be placed in the same situation %vith
respect to damages, as if the contract had been performed.

161. Hamlin v. V.G.N. Rly. Co. (1856) 156 E.R. 1261: 108 R. R
649.
100 MERCANTILE LAW

2. Ordinarily, the injured party can recover by way of compensa-

tion only tlie actual loss suffered by him.
3. In calculating actual loss, the court will take into account only
suclr loss as may be fairly and reasonably considered as arising naturally
and in usual course of things from the breach.
4. Remote damages, i.e., damages for remote consequences, or .
those not naturally arising out of the breach are usually not allowed.
The Court may allow remote damages, i.e., damages not arising na-
turally from the breach, if such damages may reasonably be supposed
to have been in the contemplation of both the parties at the time they
made the contract.
5. In order to recover special damages the special circumstances
must be communicated to the other party at the time of the contract.
6. The fact that damages are difficult to assess does not prevent the
•injured party from recovering them.
7. If the parties agree about damages for breach of contract, no
more than the agreed amount can be recovered.
8. Vindictive damages cannot be awarded for breach of contract,
except for breach of promise to marry or against a ban.Ler for wrongful
dishonour of a cheque.
9. It is the duty of the injured party to minimise the damages.

LIQUIDATED DAMAGES AND PENALTY

Sometimes it may happen that the parties fix at the time of the con-
rract the damages that would be payable in case of breach. In such a
case the question has often arisen, in English law, whether the provi-
sion amounts to "liquidated damages" or a "penalty." Courts in Eng-
land usually give effect to liquidated damages, but they always relieve
against penalty. The test of the two is that where the amount fixed is
a genuine pre-estimate of the loss in case of breach, it is liquidated da-
mages and will be allowed; and if the amount fixed is without any re-
gard to probable loss, but in terrorem as it were, to prevent a party
from committing breach of contract, it is a penalty and will not be al-
Iowed."° In Indian la^v, there is no sucli difference between penalty
and liquidated damages, as Section 74 specifically provides payment of
only "reasonable compensation." • Section 74 reads:
"When a contract has been broken, if'-a -sum is named in the con-
tract as the amount to be paid in case of such breach or if the contract
contains any other stipulation by way of penalty the party complaining
of the breach is entitled, whether or not actual damage or loss is prov- 4
ed to have been caused thereby, to receive from the party who has bro-
ken the contract a reasonable compensation not exceeding the amount
so named or, as the case may be, the penalty stipulated for.

162. Union of India v. Vasudeo Agarwal, 1960 Pat. 87

 CONTRACTS i^i
Explanation.—A stipulation for increased interest from the date of
i default may he a stipulation by way of penalty.../"^
Tlie party suffering from breach is entitled to get the actual da-
mages he has suffered. 'With regard to tlie amount named in the con-
tract, the compensation payable is the reasonable amount up to the sti-
pulated amount whether it is by way of liqviidated damages or penalty.
A contiacts with B to pay a Rs. l.uwO if he lails to repay B K.s. &0u on a
giv?n day. A tails to repaj B Ks. 500 on that dxy. B is entillea to re-
cover from A such compensation, not exceeding Rs. 3,000 as the Court
considers reasonable. But where a contract provides for paymejit in a
number of instalments but on the failure to pay any instalment the
whole amount is to be paid forthwith, such a stipulation is not a pe-
nalty and the contract can be enforced according to its terms.^"'
Payment of Interest With regard to the payment of inteiest the
following rifles have been laid down :—
1. .Where a contract provides that the amount should be paid by
a particular date and in default, it will be payable with interest, the
Court will give effect to the stipulation if the interest is reasonable.
Where the interest is exorbitant, the Court will give relief.
2. Where the bond provides that in default of the payment of the
principal by a stated date, enhanced interest should be payable, if the
enhanced interest is made payable from tlie date of default and is rea-
sonable, it is regarded reasonable compensation and is allowed. But if
the enhanced inteiest is exorbitant, e.g., increase from 12 per cent to 75
per cent, it will be penalty and relief will be granted against it.
3. T h e Courts do not lean towards compound interest, they do not
award in the absence of stipulation, but ivhere there is a stipulation for
its payment it is, in the absence of disentitling circumstances, allowed,
i.e., it will be allowed only if it is not an enhanced rate.

SPECIFIC PERFORMANCE
Instead of, or in addition to, awarding damages to the injured party,
a decree for specific performance may be granted. Specific performance
means the actual carrying out by the parties of their contract, and in
proper cases the Court will insist on the parties carrying out their ag-
reement. This remedy, however, is discretionary, and will not be grant-
ed in the following cases :—
1. Where monetary compensation is an adequate remedy.
2. Where the Court cannot supervise the executinn of the contract,
e.g., a building contract.
3. Where the contract is for personal services.
4. Where one of the parties is a minor.

163. See Nageswaraswami v. Viswa-iundararao (1953) S. C. R. 894,

where the Supreme Court did not allow compound interest in place of
simple interest as originally fixed, in case of breach.
164. Tayya v. Gangayya (1927) M.W.N. 597; S3 M.L.J. 562.
iu^ MERCANTILE LAW
Specific peiformance is usually granted in contiacts connected with
land, e.g., purchase of a particular plot or house, or to take debentures
in a company. In ilie case of sale of goods, it will only be granted in
the case of specific goods and is not ordered as a rule unless the goods
aie unitjiie and cannot easily bo purchased in the market, or are oC spe-
cial value to the party suing by reason of personal oi family associa
tions. y
Another remedy granted is injunction, which is a mode of securing
the specific performance of the negative terms of the contract. If A pro-
mises (i) to sing for B for ten nights in a month, and (ii) to sing for no
one else during that month the Cdurt will not decree specific perfor-
mance of A's promise to sing, since it cannot effectively supervise the
performance, but it will issue- an injunction restraining A from sing
ing eUewhere.

OPERATION OF CONTRACT
A contract cannot impose liabilities upon one who is not a party to
the contract. In McGruther v. Pitcher (1904) Ch. 306, A sold to B
some rubber heels nacked in a box, in the lid of which was a notice tlja't
the Jieels were sold on the express agreement that they were not to be
re-sold below certain prices. Z bought the heels from B witli notice of
the agreement, but re-sold them below the prices. Held, as there was no
contract between A and Z, A could not enforce the agreement.
A contract imposes a duty on third party not to induce others to
commit a breach of contract In Limiley v. Gye (1853) 2 E and B 216,
L engaged W, an opera singer, to sing in his theatre for a season, and
G, knowing of his contract, induced W to break it and to sing for him.
Held L could recover damages from G.

SUMMARY
A contract is an agreement enforceable by law. A contract will be
enforceable at law where there is an intention to create legal obligation.
Essentials of a Valid Contract
1. Proposal or offer and acceptance of that proposal or offer.
2. An intention to create legal relationship.
3. Free and real consent between the parties.
4. Each party apable of contracting.
5. Contract is for legal object..
C. There are two parties to i!:
7. The agreemeftt is supported by consideratiop.
Offer and Acceptance
Every contract is the result of the acceptance of an offer or proposal.
An offer or proposal is made wlicn' and not until, it is communicued
to the other party.
T h e terms of an offer m u s t be certain and not loose and vai'ue.
An offer must be distinguished fiom a meie Cjuoiation or an inviia- ""
tion to offer.
An offer may be specific or geneial, but no contract can result until
it has been accepted by an asceitained person.
CONTRACTS '03
An offer may lapse or be revoked before acceptance.
An offer lapses by rejection or by counter-proposal.
An offer lapses by the deatli of the offeror or the offeree.
Acceptance of an offer can be made by the person to whoin the offer
is made by giving absolute and unqualified assent in the mode prescribed
iby the terms of the offer.
An acceptance must be made before the offer lapses or is terminated.
,ik.e an offer, an acceptance must be communicated,
m acceptance can be revoked before its communication.
Acceptance by post is communicated when the letter of acceptance
reached the offeror.

•Consideration.
A contract must be supported by a consideration, unless it is in writ-
ing and registered under the Registration Act, and made for natural \ove
a n d affection between parties standing in near relation to each other,
•or is a promise to compensate for something done, or is a promise to pay
a debt barred by limitation law. Consideration is a technical term
used in tlie sense of quid pro quo and must be either a benefit to the
promisor or a detriment to the promise or both.
Consideration must move at the desire or request of the promisee,
so that an act done at the desire of a third party is not a consideration.
In English law, consideration must move irom the promisee. In
Indian law, it may proceed from the promisee or any other person, with
tlie result tliat in India a stranger to a consideration may maintain a
•suit.
A consideration ma*r be
Executory or future, which means that it takes diq form of a pro-
raise to be performed in the future, or
Executed or present, in which it is an act or forbearance made or
suffered for promise, or
Past, •Which means a past act or forbearance, i.e., one which is com-
plete before the promise is made. In English law, as a rule,
past consideration is no consideration; but in Indian law, past
consideration is valid.
A consideration need not be adequate but it must be competent,
"Teal and not illusory, illegal, impossible, "nuertain or ambiguous.

Flaws in Contracts
A'contract destitute of legal effect is void.
A void contract is a nullity and no right is acquired under or
through it. It is bad ab initio.
A contract is voidable when it is enforceable at the • option of one
party and not at the option of the other. The party aggrie\ed may
elect to be bound by the contract or repudiate it. When the injured
party repudiates the contract it becomes void.
A contract is unlawful where the subject-matter is one foi bidden by
law.
Capacity of Parties
I n general, every person is presumed by law to be competent to con-
104 MERCANTILE LAW

tract, and any one claiming exemption from liability on the ground of
incapacity to contract must strictly prove it. Incapacity to contract may
arise out o£ (a) mental deficiency or (b) status. Minors, lunatics, idiots
and drunken persons fall under (a) and Foreign Sovereigns, Ambassadors,
alien enemies, convicts, professional people, corporations and married
women under (b).
A minor's contract is absolutely void. He is not bound by it, nor
can he ratify it on attaining the age of majority. It is void even wheie-
the minor misrepresented his age. The property of the minor is, how-
ever, liable for necessaries supplied to hirti according to his station in
life provided he was in need of them at the time of sale and deli\ery. A.
contract for minor's benefit is valid.
Contracts by idiots and lunatics are void except for necessaries. A
lunatic can make a valid contract during lucid intervals. Similarly, a
contract by a drunken' person does not bind him. but he can make a valicf
contract when he is sober.
An alien can make binding contracts in India, but or} the declara-
tion of war between his country and the Union of India he becomes an
alien enemy, and cannot enter into a contract. Contracts made before
the war are dissolved if tliey involve contract with the enemy or they
are likely to help the enemy, of they are suspended during the war.
Foreign Sovereigns and Ambassadors cannot be sued in our Courts but if
they submit themselves to the jurisdiction of our Courts they %vill b e
treated as commoners.
A contract by the directors of a company made beyond the powers
of the company as stated in die Memorandum of Association is ultra-
vires the company and thus not binding on it, nor can it be ratified at
a geneial meeting of the shareholders.
A married woman can contract in respect of her private propen.)-.
Flaw in Consent
Mistake of material fact on the part of both the parties renders the-
contract void. Mistake of law, however, is not excused.
Mistake of fact may be as to the nature of the transaction, identity
of party and the subject-matter. Mistake as to subject-matter may re-
late to its existence, identity, title of the party, price, quantity or quality.
Misrepresentation is a mis-statement made innocently and with an
honest belief as to its truth, and renders the contract voidable at the-
option of party misled by it.
Fraud or wilful misrepresentation is the representation either by
words or conduct that something is true which is not so, so as to deceive
another person, either intentionally or with reckless disregard as to the
truth or falsehood of the words or conduct. The party defrauded either
by mis-statement or wilful concealment can avoid the contract antf
claim damages.
Coercion is doing of anything foruidden by the Indian Penal Code,
and a contract made under coercion is voidable.
Undue influence.—A contract is said to be induced by undue in-
fluence where the relations subsisting between the parties are such that
one of the parties is in a position to dominate the will of the othet a n d
uses that pbsition to obtain an unfair advantage over the other. A con-
tract made under undue influence is voidable at the option of the party
so influenced.
CONTRACTS 105

As a rule, undue influence will be presumed between parent and

child, guardian and ward, trustee and beneficiary, solicitor and client,
doctor and patient, Guru and disciple, Malik and cultivator.
Unlawful Agreements.—An agreement may be unlawful because it is
[ti) Illegal, i.e., opposed to positive law, being forbidden either
by statute law or common law.
(b) Immoral, i.e., contrary to positive morality' as recognised by
law.
(c) Opposed to Public Policy, i.e., contrary to the •welfare of tlie
State as tending to interfere with civil or judicial administra-
tion, or with individual liberty of citizens.
An agreement will riot becc-:ne a contract or will remain unenforce-
able if it is made for unlawful consideration a r d with unlawful objects.
Void and Illegal Contracts Distinguishea
A void contract is one which has'no legal effect. An illegal contract,
like the void contract, has no legal effect as between the immediate par-
ties, but has this further effect that transactions collateral to such a con-
tract become tainted .witli illegality and therefore become unenforceable.
Wagering Contracts.—In England and -in Bombay Presidency, wager-
ing- contracts are unlawful by Statute, and taint collateral • transactions
rendering them void. In the rest of India wagering cotitracts are only
void, and thus collateral contracts are not affected.
What is a Wager.—A wager is a promise to pay money or transfer
property upon the happening of an uncertain event. Betting on the
results of a horse race, a wrestling match, are examples..'
. Commercial transactions may amount to wagering contracts if both
parties at the time of entering into contract have the intention not to
give and take delivfiry of goods, but only to settle differences. Teji Mandi
transactions or option dealings are good contracts. Agreements in res-
pect of immoral purposes are not only void but illegal.' A transaction
collateral to an immoral contract knowingly entered into is equally un-
enforceable.
Agreements Opposed to Public Policy :—
(a) trade with Indian Union's enemies without the Union's li-
cence is unlawful;
(b) agreements for stifling prosecution and for ousting jurisdic-
tion of courts are unlawfiil;
(c) agreements curtailing or extending the period of limitation
prescribed by law are not enforceable;
(d) agreements in fraud of insolvency law are illegal;
(e) agreements for using improper influence of any kind with'
judges or officers of justice are void;
(f) agreement in restraint of the marriage of any person other
than a minor is void;
(g) agreements to procure marriages for reward are void;
(h) agreements to pay money to parent or guardian in conside-
ration of giving his daughter in marriage is void. Similarly,
a promise by the bride's, parent to pay money to the bride-
groom or his parent is illegal;
(i) trafRc by way of sale in public offices and appointments o r
titles for monetary consideration is illegal;
106 MERCANTILE LAW

(j) agreements tending to create monopolies are void;

(k) agieements in restraint of trade are void. Partial restraint
is allowed in sale of goodwill;
(1) contracts unduly restraining individual liberty are unenforce-
able.
Implied or Quasi Contracts.—In die Indian Contract Act such can-
tracts are described as "certain relations, resembling those created by con-
tracts." In certain circumstances the law implies from the conduct of
the patties a promise imposing an. obligation on one party- and confer-
ring a right in favour of the other, although there, is no offer or ac-
ceptance, no consent, and, in fact, no agreement or promise. The Con-
tract A c deals with the following types of Quasi or implied contracts:-^
1. A person incapable of contracting is liable for necessaries sup-
plied to him or on his behalf.
2. Suits for money had and received. A right to sue for reco-
very of money may arise—
(a) where plaintiff paid money to the defendant;
(j) by mistake of fact,
(ii) in pursuance of a contract the consideration for
which has failed, and
(iii) under coercion, undue influence, fraud, etc.;
(b) when plaintiff paid to third party money which another
is to pay;
(c) where defendant obtained money fr^im tliird parties,
-e.g., agent making secret profits.
3. Quantum Meruit.—No claim can be made on an entire and
indivisible contract until die entire work is done. Payment
can be claimed under quantum meruit for part perfonnance
if the contract is divisible into parts so that payment for each
part can be made.
4. A finder of goods lost by another must try to find the owner
and must not appropriate the property to his own use. He
can recover from the owner expenses incurred in protecting
and preserving the property. Finding is not keeping, unless
it is reasonably certain that die real owner cannot be found.
5. A person enjoying benefit of non-gratuitous act is under an
obligation to compensate tlie oiher party.
/
Discharge of Contract.—A contract terminates b y ^
Performance'.-Performance means the actual carrying out of all the
terms of the contract. Performance must be in accordance with the obli-
gations under the contract. In a conditional contract, with condition
precedent, performance becomes due only on the happening of the event,
certain or uncertain; and with condition subsequent, performance ceases
to be due on the happening of some event. Where one party has per-
formed his obligation the other must perform his bargain. Where both
promises are outstanding, the order of performance may be—
Mutual and Independent.—WJiere each party must perform his pro-
jnise independently and neither can say that he did not perform because
.the other failed to perform his promise.
Dependent.—Performance of the one promise depends upon the prior
CONTRACTS 107
performance of the other. Performance of one is condition precedent to
peilormance of the other.
Mutual and Concurrent.—Here the two acts are done at the same
time. Promisee alone can demand performance, or if he has died before
perfotmance, his legal representative can demand it. Promisor must per-
form the promise and in case of his death, his legal representatives.
Assignment of Contracts—As a rule, an obligation under contract can-
not be assigned. It can never be assigned when peifoimance depends
on the personal skill of the promisor. An actionable claim can alwa)s
be assigned in writing.
Discharge by Tender.—Where one paity is ready and willing to per-
form his promise and has oflered to do so at tlie right time and place,
but the other party does not accept performance, the contract is dis-
chaigcd by render or "attempted performance."
Dischaige by Covenant or Agreement
'iVaiver of performance by the promisee or rescision by both will
•discharge the contract.
Release.—Wliere one party agrees to excuse {serformance by the other
after breach by the latter.
Novation.—By agreement between parties that the performance may
be carried out by diffeient parties. A ficsh contract is substituted in
jDlace of the original one.
Discharge by Implied Consent or Impossibility of Performance.—
TJie law does not compel a man to do tlie impossible thing. Contract is
discharged when jierfoimance becomes impossible—
(i) due to destruction of the subject-matter;
(ii) due to deatii or incapacity of tiie piomisor in a contract for
personal services;
(iii) due to subsequent change of legislation;
- (iv) due to non-existence or cessation of a state of affairs, the ex-
istence or continuance of which formed the basis of the con-
tract;
(v) due to such an alteration of circumstances as to bring about
complete frusiiation of commercial object.'
Discharge by Lapse oE Time.—Contract is discharged if tlie suit is
not brought by the injured party within the time permitted by the Limi-
tation Act, for breach of promise. For example, if, on the debtor fail«
ing to pay a loan on the stipulated date, the creditor does not file a suit
witiiin 3 years of the default, tlie contract is dischaiged and the creditor
is barred, from his remedy.
Dischai-ge by Operation of Law may take p l a c e -
By Merger, where the parties embody tlie inferior contiact in a supe-
rior contract. The lower security merges in the higher security.
By the unauthorised alteration of teims of a written document.—
Where a material alteration is made by one party tke other can avoid
the contract.
By insolvencj'.—Wliere an insolvent is discharged by the Court he is
exonerated or dischaiged fiom li.ibility on ail debts incuned bcfoie ad-
judication
Dischaige by breach.—Bieach of contiact may be .•\ctual or Constiuc-
ti\e or Anticipatory.
108 MERCANTILE LAW

Actual breach may take place—

(a) At the time when performance is due, in which case the other
party can sue tlie defaulter £or breadi of contract. If party,
failing to perform at the appointed time, subsequently expres-
ses willingness to perform, he can do so if time is not of the
essence after paying compensation. In mercantile contract
time is of the essence.
(b) During performance of the Contract.^Where a party appar-
ently performs the promise, but the other party says it is not
a proper performance, then the otlier party is exonerated from
performance of his part of the bargain, if the breadi n oi a
condition vital to contract.
Constructive or Anticipatory Breach, i.e., breach before performance
is due, may take place—
(a) by the promisor doing an act which makes the performance
impossible,
(b) by the promisor in some other way showing his intention
not to perform his promise.
The promisee may, if he likes, elect the breach as equivalent to
actual breach and sue the defaulter, or he may wait till the time of
actual performance, in the second' case the promisee keeps the contract
alive for die benefit of promisor and his own. He remains liable imder
it, and enables the promisor to perform in spite of previous repudiation
and also to avail himself of any excuse for non-performance which may
come into existence before time for performance.
Remedies for Breach of Contract.—
Damages.—Breach of contract entitles the injured party to file a suit
for damages. Damages, are die money awarded to a person v.-lio has a
right to sue for breach of contract.
General or Ordinary Damages will oe awarded if actual loss has
been suffered from the proximate consequences of the breach. T h e
amount awarded will be compensation to the plaintiff for loss sustained
and not punishment of the defendant.
Special Damages are those wJiich result from a breacii of contract
under some special circumstances. If special loss is likely to be sustain-
ed as a result of the breach, this should be communicated to the other
party; otherwise special damages will not be awarded.
Exemplary Damages are the exceptions to the rule that damages are
not to be in the nature of punishment, but only compensation for the
loss sustained.
Exemplary damages will be awarded—
(a) In suit for breadi of promise of marriage, and the amount
will depend upon the extent of injury to the lady's feeling;
(b) In"- suit against bank for wrongfully dishonouring customer's
dieque.
T h e customer, though he has sustained no pecuniary damage, may
recover substantial damages for injury to his credit.
Nominal I>amages consist of a very small amount of money, e.g., a
rupee. Nominal damages are awarded where the plaintiff has proved a
breach of contract but has suffered no real damage. Nominal damages
are awarded to establish right to decree or to vindicate plaintiff's honour.
Specific Performance.-Where for die breach of a contract .damages
CONTRACTS ^0^
are inadequate remedy, the party at fault may, at the discretion of the
Court, be ordered to perform the contract in specie. But specific per-
formance will not be granted—
(a) to enforce a contract for personal service;
(b) in cases where Court cannot supervise performance of con-
tract;
(c) where damages are adequate remedy;
(d) contract contains ambiguous terms;
(e) contract by its nature is revocable;
(f) contract by or on behalf of public company in excess of its
power; ,
(g) contract which can be performed in more than tliree years;
(h) where subject-matter or major part of such subject-matter of
contract has, unknown to both parties, ceased to exist before
contract is made.
Injunction.—This is anotlier discretionary remedy granted to secure
specific performance of negative tenns of the contract. Injunction res-
traints a person from doing or continuing to do something wliich amounted
to breach of contract.

CASES FOR RECAPITULATIONS

1. An auctioneer advertised in the newspapers that a sale of office

furniture would be held at Connaught Circus, New Delhi. A broker
with a commission to buy office furniture came down from Bombay to
attend the sale, but all die furniture was witlidrawn. The broker there-
upon sued tlie auctioneer for his loss of time and expenses. It was
held that a declaration of the intention to hold auction did not create a
Jjinding contract with those who acted upon it; it was only an invita-
tion to offer and so the broker could not recover [Harris v. Nickerson
(1873) L.R. 8 Q.B. 286].
2. An actress was engaged for a provincial tour. The agreement
also provided that if tlie piece came to Delhi she would be engaged at
a salary "to be mutually arranged between us." Held, no contract. The
parties had not agreed on tire terms of the contract but had made an
agreement to agree in the future [Loftus v., Roberts (1902) 18 L. T . R.
532].'
3. B ordered some machinery from J. &: C. Before tlie company
had taken any action on the order, it received a letter from B cancelling
the order. T h e company refused to recognise the cancellation and sued
B for the purchase price. Held, B is not Jiable. An order js merely an
offer" which must be accepted ^^y the seller before there is a binding con-
tract. Before acceptance the offeror mpy remnvp his order (Owens Co v
Bemis, 22 N.D. 159).
4. On June 1, 1968, A advertised in a .newspaper that he would pay
Rs. 100 to any one-who ATOUM find his lost dog before July I, 1968. On
June 10, A advertised m the same newspaper that he had cancelled his
offer of June 1. On 15th June, B, who had read the first advertisement,
but not the second one, found the lost dog and claimed Rs. 100 from A"
Held, B could not recover, as the offer nad been revoked before it was
accepted. T h e revocation was given the same publicity as was tlie offer
of tlie reward and it did not matter tha,t B l^ad not read the second no-
tice cancelling the offer (Shuey v. U.S. Govt. 92 U.S. 73).
110 MERCANTILE LAW

5. T h e defendants advertised in their paper that their city editor

would be glad to advise the readers of the paper with reference to in-
vestments. T h e plaintiff wrote for advice and asked for the name of a
good stock-broker. The editor recommended a broker who was an undis-
charged bankrupt, tliough this fact was not known to tlie editor. Rely-
ing on~">^}re recommendation, the plaintiff sent sums of money to the bro-
ker for investment and the broker misappropriated them. Held, tlie
plaintiff is entitled to recover from the detendants. The price paid by
him for tlie paper he bought was good consideration and hence there
was a contract between liim and the defendants [Dc la. Bere v. Pearson
(1908) 1 K. B. 280].
6. A wife deseried her husband. He entered Jnto an agreement
by which he promised to pav her 30 shillings a week if she woukl -main-
tain herself and nnder>take not, to pledge his credit. /He fell in an car
with the payments, and the wife sued him. He pleaded in delenre ^\:int
of consideration. Held, there was good consideration and the liusbaiid
was liable to pay [Williams v. Williams (1957) 1 W.L.R. )48].
7. M lobt a sum of Rs. 8,500' to L. & Co. on bets on horse races
and on his failure to pay was ^reported to the Royal Calcutta. Turf Clul).
M subsequently executed in favour of L. &: Co. a hundi for Rs. 8,500 in
consideration of their .withdrawing his name from the Club and thereby
preventing his being posted .as a defaulter. When L. & Co. demanded
payment M pleaded that the consideration was imlawful. Held, M •is as
liable to pay as the consideration in the shape of L. & Co.'s promise lo
withdraw M's name from tiie club in order to prevent M being posted
as a defaulter was legal. A wagering contract is only void and so does
not alfect the collateral transaction (Leicester & Co., v. S. P. Mullick,
1923 Cal. 445).
8. During a strike by the workers in a coal mine, the • police au-
thorities thought it enough to provide a mobile force for tlie protection
of the mine. Tiie colliery manager wanted a stationary guard. It was
ultimately agreed to provide the latter at a rate of payment by the com-
pany owning the colliery, which involved a sum of £2,200. Subsequently,,
the company refused liability to pay, pleading absence of consideration.
Held, that the promise to pay the amount was not without consideration
and the company was liable to pay. It was said that the police, n o
doubt, were bound to accord protection, but they had a discretion as to
tlie form it should take. The undertaking to provide more protection
than what they deemed to be necessary was a consideration for the pro-
mise to pay the amount [Glass-brook Bros. v. Glamorgan Country Coun-
cil (1925) A.C. 270].
9. A minor falsely representing himself to be of age, enters into
an agreement to sell his property t o - R and receives from him as price
a sum of Rs. 10,000 in advance. Out of this sum the minor purchases
a car for Rf. 6,000 and spends the rest on a- pleasure trip. After the
minor has attained majority, R sues him for the conveyance of the
propetry or in the alternative, for the refund of Rs. 10.000 and damages.
Held, R cannot succeed in his suit for conveyance of propei'tv or refund-
of the amount. A minor's contract is void and he is not liable under
it. Since he falsely misrepresented himself to be of full age the court
may, in its discretion, order him to hand over the car to R [R. Leslie Ltd.
V. Shell (1914) 3 K.B. 607].
10. E, who was on the staff of a foreign embassy, was a tenant of
M's house. M sued him for arrears of rent. Held, whether E owed
CONTRACIS 111
the rent or not, no action could be brought against him, as he was pro-
tected by diplomatic privilege [Engeike v. Musman (1928) A C . 433].
11. The defendants had commenced a periodical publication, call-
ed the Juvenile Library, and had engaged the plaintiff to write a volume
on ancient armour for it. For tins he was to receive tiie sum of £100
on completion. -When he had completed part of his volume, tlie de-
fendants abandoned die publication. The plaintiff sued tlie defendants
for reco\ery of the amount contracted alternati\ely by way of (i) dama-
ges or (li) a quantum meruit. Held, that the plaint'ff is entitled to get
damages for breach of contract and payment quantum meuiit [Planche
V. Coldburn (1831) 8 Bing 14].
12 A, a Madras doctor, employed anotliei doctor B, as an assis
tant for a period of three yeais on a salary of Rs 1,000 per mensem^
The agieement between A and B provided that aftei the teinunaiion
of his employment B should not practise as a doctoi in Madias wiilim
a radius of one mile of his dispensary for a peiiod of one \eai, and if
B did so, B should pay Rs 10,000 to V as 'liquidated damages' Im-
mediately after the termination of his employment ri begins to piac-
tise as a doctor next door to A's dispensary. A sued B foi ilic reco^erv
of Rs 10,000 Held, A could not reco\ei, as the contiact was alto-
gether void being in restraint of trade In Indian Law, a restraint,
whether general or partial, qualified or unqiialihed, is \oid if it is in
the natuie of a restraint of trade [Oakes 8. Co. v. Jackson (1872) 1 Afatl.
131]
13. A and B weie joint proprietors of a hotel Water connection
to the hotel had been taken from tlie Municipal Board in ihe name of
A Subsequently B made an application to the Board foi recoiding his
name as tenant jointly with A in respect of water rates payable by the
hotel The Board refused to do so, as B would not give an undertaking
to fuISl certain conditions proposed by the Boaid. llater on the Board
filed a suit for recovery of arrears of water rates against A as the pio-
misor and B as the beneficiary under the contract. Held, B is not liable
to pay as a beneficiary under the contract, as the Board had refused to
recognise B as a tenant The acceptance and enjoyment of the thing
delivered or done, which is the basis for the claim under Section 70 of
the Contract Act, must be voluntary. In this case the services were ren-
dered against the will of B for whose use they were supposed to have
been rendered and hence the Board could not recover under Section 70.
Also, there was no privity of contract between B and the Board [Jay-
gopal v J.W.W. Committee (1964) Orissa 69].
14. In May, 1936,' a building lease was made to the lessees for a
term of 99 years Before any buildings had been erected the war of
1939 broke out and restrictions weie imposed by the Government on the
supply of building materials. As a result, the lessees were urfable to cairj-
out any building on the land covenanted in the lease. In an action
against them for the recovery of the rent the lessees pleaded that the lease
was fiustrated. Held by the House of Lords that the doctrine of frustra-
tion, even if it were capable of application to a lease, did not apply in
the instant circumstances. The compulsory suspension of building did
not strike at the root of tlie transaction, for when it was imposed the lease
still had more than 99 years to run, and therefore, the interruption in
the performance was likely to last only for a small fraction of the term
[Cricklewood Property &: Investment Trust Ltd. v. Leighton's Investment
Trust Ltd. (1945) A.C. 221j
112 MERCANTILE LAW

15. S i n t e r e d into a contract with K in July, 1952 for the sale of

200 tons of scrap iron at tlie controlled price oh Rs. 70 per ton pliib inci-
dental charges. Subsequently, in Januaiy, 195.", when the controlled price
was ihe same as in July, 1952, K agreed to supply the scrap iron to E for
export, b, who iiad no Knowleagt oi tnis suosequeiii contract, lailed to
supply the scrap and, as a result, K could not comply witli his contract
with E, who purchased tlie necessary scrap iron from the open market
and obtained from K Rs. 20,700 being the difference between the con-
tract price and tlie market price. K bucs S for the recovery of Rs. 20,700
as damages for breacli of contract. Held by the Supreme Court that
K was not entitled to claim damages from S at an amount equal to dif-
ference between the price paid by his vendee, E and the price he would
have paid to S for 200 tons of scrap iron, as he had not entered into the
contract with S after informing S that he was buying for further sale.
In fact, he was not entitled to claim any damages, as the price was the
same at all times, and if the third party had bought from the uncon-
trolled sources and paid more, it was not his responsibility (Karsan Das
V. Saran Engineering Co. 1965 S.C. 1981).
16. L had entered into an agreement with two of his employees
whereby he promised to pay, and did in fact pay, considerable sums to
them in compensation for the premature termination of their contracts
of service. This payment, however, was strictly unnecessary, for during
their employment the two men had been guilty of certain breaclies of
duty which would have entitled L to dismiss them immediately. When
L discovered this fact, he claimed to avoid the contract and recover the
money paid on tire ground, inter alia, that the employees were bound to
disclose to him those breaches of duty. The House of Lords held that
L could not avoid the contract and recover back the money paid to the
two employees, as they were not bound to disclose to him tfie breaches
of duty. Lord Atkin observed : "It is a contract of service which does
not fall within tire category of contracts uberrimae fidci which require
disclosure" [Bell v. Levers Bros. Ltd. (19£2) A.C. 161].
17. X offered to Duy a car from Y and to pay by cheque. Y re-
fused the offer and the clieque, as she did not know him. X ilien con-
vinced her that he was a well-known person, and being convinced she
accepted his clicque and let him take the car. He sold the car to L
and (he cheque proved worthless. Y filed a suit to recover the car from
L. HeJd, Y could recover the car from L. The contract between X and
Y was void for misj^ake, since the mistake occurred during the negotia-
tion, and Y would not have accepted X's- offer if she had not been con-
vinced of his identity. X had never had right to the car and could not
lawfully sell it to L, ana, so pass on any little to him although L bought
it for value and in good faith [Ingram v. Little (1961) 1 Q.B. 31].
18. B signed a document guaranteeing R'S account with the bank
thinking that he was only signing a proposal for insurance. The <ourt
found an evidence that he was negligent in s'gning. Held, B is not
I'abk on the guarantee, in spite of his negligence, as he never had an
intention to contract [Carlisle and Cumberland Banking Co. v. Erase
(1911) 1 K.B. 4891
 Chapter II

Contracts of Indemnity and Guarantee

PART 2-A

CONTRACT OF INDEMNITY

The Indian Contract Act (Section-]24) defines a contract of Indem-

nity as "a contract by which one party promises to save the other from
]oss caused to him by tlie conduct of the promisor himself, or by the
conduct of any otlier person". The person wlio promises or under-
takes to indemnify or make good the loss is called indemnifier and the
promisee or whose loss is made good is called the indemnified. Where A
contracts to indemnify B against the consequences of any proceedings
which C may take against B in respect of a certain sum of Rs. 200, there
is a contract of indemnity. If B is ordered to pay to C Rs. 200 and
costs of suit, A shall be required to pay B the total amount.
Now, according to the above definition the loss to b e ' made good
must be caused either by the conduct of the promisor himself or by the
conduct of any other person, and. so .if loss is caused by accident or
by tlie conduct of the promisee, it would not apparently amount to a
contract of indemnity. If this strict view were accepted the contracts
of insurance might have to be.excluded. It may be submitted that such
a strict application of the definition so as to have excluded contracts
of insurance and certain other relations was not intended by the Legis-
lature. The Indian Courts have, tiierefore, applied the English equitable
principles to indemnity for as has been stated in a recent Bombay case'
by Chagla, J. " ' . . . . I have already held that Sections 124, 125, Contract
Act, are not exhaustive of the law of indemnity and that the Courts here
would apply the same equitable principles that the Courts in England
do "
In English law, a contract of indemnity has been defined as "a pro-
mise to save another harmless from loss caused as a result of a trans-
action entered into at the instance of the promisor." It includes the loss
caused by events or accidents which may not or do not depend tipon
the contract of any person, or by liability arising from something done
by the promijee at the request of the promisor. T h e English definition

I. Gajnan Moreshwar v. Moreshwar, Madan, 1942 Bom. 302.

114 MERCANTILE LAW

is more happily worded and the English law in respect of indemnity has
been followed by Indian Courts.
A contract of indemnity may either be express or implied, and the
latter may be inferred from the circumstances of a particular case, e.g.,
acts done by A at the request of B, or money paid by A under compul-
sion of law in respect of liability imposed on B, or may be based on tha
obligation caused by the relationship of the parties, e.g., (the obligatiorj
of a' beneficiary to indemnify his trustee, the relation between auction-
eer and client, principal and agent). The promisee (indemnified) in a
contract of indemnity, can recover from the promisor (indemnifier) ali
the damages that he may sustain, and if there has been any suit against
the promisee, any cost therein, and any amounts bona fide paid in res-
pect of any compromise, provided the promisee had acted as a prudent
man and tliere has been no express direction by the promisor not to
compiomise (Section 125).
Since the Contract Act has not stated the time of the commence-
ment of the indemnifier's liability to indemnify and the word "loss" has
been used in Section 124, doubt has arisen as to the commencement ol
tiie promisor's liability. The High Courts of Lahore," Nagpur" and Bom-
" bay* have held that the indemnifier does not become liable until the in-
demnified has incurred an actual loss. But the High Courts of Cal-
cutta,^ Madras," Allahabad,' and Bombay (not following the earlier der
cision)^ have decided diat the , promisee (indemnified) may compel i the
indemnifier to place him in a position to meet liability that may be cast
upon him, without waiting until the promisee (indemnity-holder) has
actually discharged it.
It is submitted that tlie latter view is more correct. We may quote
with profit the observation of Chagla, J. in the Bombay case. The learn-
ed Judge says:" "It is true that under the English Common Law no ac-
tion could be maintained until actual loss has been incurred. It was
very soon realized that an indemnity might be worth very littl6 indeed
if th6 indemnified could not enforce his indemnity till he had actually
paid the loss. If a suit was filed against him, he had actually to wait
till a judgment was pronounced and it was only after he had satisfied
the judgment that he could sue on his indemnity. It is clear that this
might under certain' circumstances throw an intolerable burden upon
the indemnity-holder. He might be in a position to satisfy th^ judg-
ment and yet he could avail himself of his indemnity till he had done
so. Therefore, the Court of Equity stepped in and mitigated the rigour

2. Shanfr Sunder v. Chandra Lai 1985 Lali. 974..

' 8. Ranganath v. Padiusoo 1935 N&g. 147.
4. Sanker Nirabaqi v. Laxman Napu 1940 Bom. 161.
5. Kamnannath Bhattacharjee v. Nohokumar-(1899) 26 Cal." 241.
6. ' Ramadigathudayar v. Munamdai Achi (1915) 38 Mad, 791; 25
I.e. figs.
7. Shiamlal v. Abdul Salal 1931 All. 754; Abdul Maiid v. Abdul
B-ashid 1986, All. 598.
- 8. - Gajnan Mureshwar v. Mureshwar Madan 1942 Bom. 302.
CONTRACTS OF INDEMNITY AND GUARANTEE 115
of tiie Common Law. The Court of Equity held that if his liability had
become absolute then he was entitled either to get the indemnifier to
pay off the claim or to pay into Court sufficient money which would
constitute a fund for paying off the claim whenever it was made. Sec-
tions 124 and 125, Contract Act, are not exhaustive of the law of indem-
nity and the Courts here would apply the same equitftble principles that
the Courts in England do. Therefore, if the indemnified had incurred
a liability and that liability is absolute, he is entitled to call upon the
indemnifier to save him from that liability and pay it off." In Osman
Jamal & Sons v. Gopal," the plaintiff company before having actually
made any pa)ment to the \'endor in respect of its liability to him was
held entitled to recover from the indemnifier under contract of indem-
nity. "Indemnity is not necessarily given by repayment after payment.
Indemnity reouires that the party to be indemnified shall never be call-
ed upon to pay."
A contract of indemnity, being a species of contract, is subject te
all the lules of contract, such as, genuine consent, legality of object,
etc., and an indemnity procured by fraud will not be enforced, or where
A asks B to beat C, promising to indemnity B against the consequen-
ces and B beats C and is fined Rs. 500, B cannot recover the amount
from A.

PART 2-B
CONTRACT OF GUARANTEE
A person who seeks to borrow money or to undertake some othet
obligation may be required to pledge some property with the creditot
as security. But the creditor may be willing to lend money to a person
if he can get some otlier person to assume personal liability as security
for tlie payment of Ihe loan or for the perfoimance of the promised
acts. In this case the creditor gives a Joan to tire debtor on the com-
bined financial standing of the debtor and some third person, called
the surety.
Section 126 of the Contract Act defines a contract of guarantee a s :
"A contract to perforin the promise, or discharge the liability of a
third person in case of his default. The person who gives the guaran-
tee is called the surety^ tlie person for whom the guarantee is given is
called the 'Principal Debtor', and the person to whom the guarantee
is given is called the 'Creditor.'" In India a guarantee may be either
oral or written, although in English law it must be in writing.
Suretyship is the lending of credit to aid a principal debtor,who has
not sufficient credit of his own. It follows that in a contract of gua-
rantee there must be three parties, viz., the creditor, the principal deb-
tor and the surety, the debtor being primarily liable to discliarge hii
debt or perform his promise and the surety being secondarily liable.
When A requests B to lend Rs. 5,000 to C and guarantees that G
will repay tlje amount within a stated time, and on C's failing to pay
he will himself pay to B, there is a contract of guarantee.

9. (1919) 56 Cal. 262; Profulla v. Gopee 1946 Cal. 159.

116 . MERCANTILE LAW
I t will be noticed tliat in a contract oE guarantee there are three
separate contracts giving rise to a triangular relationship. These are : (i)
between the creditor and tlie debtor, creating the debt; (ii) between
the surety and the creditor, creating a liability of surety in case of deb-
tor's default, and (iii) an implied contiaci between the surety and the
debtor tliat the debtor will indemnify the surety after tlie latter has
paid the creditor on tlie debtor's default. A guarantee may be given
not only in case of a debt, but also where a party wants to buy goods
on credit, and for the good conduct of another person. T h e English
definition brings out this more clearly, which says : "A guarantee is a
promise made by one person to another to be collaterally answerable
for the debt, default or miscarriage of a thiid person." To constitute
a guarantee, however, it is not necessary that the surety must undertake
to be personally liable for the default of the principal debtor; 'it would
be sufficient if a person deposits documents of his property by way of
security with the creditor."
Fiduciary Relationship.—The contract of guarantee is not, as is the
contract of insurance, a contract uberrimae fidei in the sense that there
is an obligation on the part of the creditor to disclose to the surety every
circumstance tvitliin his knowledge material to the surety to know. StiU
the surety is entitled to loiow so much as will tell him -what is the
transaction for which he is making himself answerable. He will be
discharged, if there is either active misrepresentation of the matter by
the creditor, or silence amounting to misrepresentation. A situation of
this kind exists where an employer continues to employ the principal
debtor, but fails to tell the surety that the employee, whose conduct has
been guaranteed by the surety is a defaulter, thus representing him to
be honest. Thus, a contract of guarantee may not be a contract of
utmost good faith, but the suretyship relation is one of trust and con-
fidence, and the validity of the contract depends upon good faith on
the part of the creditor. A^ creditor must disclose those facts which
under the circumstances the surety would expect not to exist, for omis-
sion to state tliat such facts do not exist is an implied representation
that they do exist. A creditor in possession of unsual and important
facts must impart tliose facts to the surety at the time the agreement is
made. The courts deem it unfair to permit a creditor to take advant-
age of a suretyship contract when lie knows that the surety is unwit-
tingly assuming an unusual risk. Likewise, a surety will be released from
his liability if the creditor is aware that the surety is relying upon mis-
information and he fails to warn the surety of his error.
It is, however, not every disclosure that a surety can require. For
example, where a customer'^ credit with the bankers is guaranteed, the
fact that the new credit is to be applied to paying off an existing debt
of tlie customer to the bank is not such as need be disclosed. For
this is nothing out of the ordinary course of business, but rather to he
expected." So, there is-no duty on the part of a banker taking a gua-

10 Tagjivandas v. King Kamiton S: Co. (1931) 55 Bomb. 677: 1931

Bom. 337.
11. Hamilton v. Watson (1815) 69 R.R. 58.
CONTR.A.CTS OF INDEMNITY AND GUARANTEE 117

rantee in respect of advances made to a debtor' to disclose the past in-

debtedness of the principal debtor but that is the duty of the surety
to inform himself." T h e rule is that the creditor need not offer infor-
mation if the surety has equal opportunity to discover such facts.

DISTINCTION BETWEEN INDEMNITY AND GUARANTEE

1. In indemnity a promisor is primarily and independently
liable to the promisee, and, therefore, there are only two
parties. In a guarantee, the liability of the surety is colla-
teral or secondary, the primary liability being that of the
principal debtor; and, hence, here the concurrence of three
persons is essential.
2. In the case of a contract of indemnity it is not necessary for
the indemnifier to act at the request of the debtor, whereas
in the case of a contract of guarantee it is necessai7 that
the surety should give the guarantee at the request of the
deb tor .'^
3. In the case of guarantee there is an existing debt or duty,
the performance of which is guaranteed by the surety, while
in the case of indemnity, the possibility or rjsk of any loss
happening is the onlv contingency against which the indem-
nifier undertakes to indemnify."
4. In a contract of guarantee, where the surety discharges tlie
debt payable by the principal debtor to the creditor, the
surety, on such payment, is entitled in law to proceed against
the principal debtor in his own right, while in the case of
indemnity, the indemnifier cannot sue third parties in his
own name, unless tiiere be assignment. He. must bring the
suit in the name of the indemnified.^
5. In English law, a contract of guarantee to be actionable,
must be evidenced by a memorandum or note as requijred
by Section 4 of the Statute of Frauds while a contract of in-
demnity need not be in writing and an oral promise will be
enforceable. But this distinction does not prevail in India,
as. both the contracts of indemnity as well as guarantee are
valid whether they are written or oral.
^ Like a contract of indemnity, a guarantee mnst also satisfy all the
essential elements of a general contract. There is, however, a special
feature to be noted with reference to consideration /in a contract
of guarantee; the consideration received bv the principal debtor is suffi-
cient for the surety. T h e detriment suffered by A lending money to
or dealing with B at C's re'quest is a sufficient consideration for C's

12. Imperial Bank v. Avanasi Chettiar (1930) 59 M.L.J. 513.

13. Brahmayya v. Srinivasan, 1959 Mad. 122.
14. Guild V." Cinrad (1894) 2 Q.B. 885.
15. Periamramna Marakkayar v. Banians & Co. (1926) 49 M^d. 156;
1926 Mad, 445; Yyavan Chettiar v. Official Assignee (1932) 55 Mad 949-
139 I.e. 562.
 113 MERCANTILE LAW

proraise to stand surety (Section 127). One more point with regard to
contractual capacity may be noted here. It is obvious that the credi-
tor and the surety must be jjcrsons competent to contract and' also tlie
principal debtor must be a ' person capable o£ bin'ding himself by the
contract; otherwise he will not be liable. It may liappen, that the
surety is competent to contract, but the principal debtor is not, (e.g., he
is a minor), then the surety will be bound by his contract and liable lo
p4y to the creditor on default by the principal debtor. So where A
lends Rs. 5,000 to B, a minor, and C, a surety, promises to pay the
amount on default of B the contract between A and C will be enforcea-
able, although the contract between A and B is not enfoiccable. T h e
reason for 'this rule is that in such a case the contract between A, the
creditor and C, the so-called surety, is not treated collateral but indepen-
dent and principal and is not necessarily vitiated by the contract bet-
ween A arid B being invalid, and so the surety is in the position of a
principal debtor. So A is entitled to sue C, even though lie may not
be able to sue B." Also a discharge oE the principal debtor by opera-
tion of law does not discharge the surety."

NATURE OF SURETY'S LIABILITY

T h e liability of a surety is variously described as secondary, ac-
cessory or contingent, in the sense that the surety is liable only on de-
fault of the principal debtor. So, unless the principal debtor lias made
a default, the surety cannot be called upon to pay, and where the surely
becomes insolvent before default by the principal debtor, the creditor
cannot prove against surety's assignee in insolvency. But the moment
the principal debtor • defaults in the pavment or where the guarantee
was for the conduct of a party and, there is some breach of dutv by the
party causing damage to the liolder of tlie guarantee, then, immediately,
the surety becomes liable, as if lie were the principal debtor. It is ob-
vious that the surety has no right to ask tlie creditor to e.xhaust his
;'emedy against tlie principal debtor, nor can he "demand a notice from
the creditor, that the principal debtor has defaulted, for according to law
it is the surety's duty to see that the principal debtor pays or performs
his obligation. Therefore, as soon as the time for pavment has come and
the principal debtor does not or is imable to pay the surelv becomes
liable to pay. Thus, the creditor may file a suit against the surety v.'iib-
out suing the principal debtor." A suit may also be maintained against
the surety for the full amount of the debt where the principal debtor
has been adjudged insolvent or has gone into liquidation." Again,
where a creditor holds securities from the principal debtor for his debt,
the creditor need not first resort to tliese securities before siiinpf the sure-
ty. Of course, a contract may specially provide that the creditor must

16. Kashiba v. Shrinat (1804) 9 Bom. 1697; Sohan Lai v. Puran

Singh 1916 Punj. Rec. No. 54, P. 165; Tikki Lai v. Kamal Chand (19-10^
Nag. 1632. 1940 Nag. 327
17. Subramaniam \ Patchu Rowthar (I9H) Mad. 45.
18. Sankana v. Virunokahapa (1883^ 7 Rom. MG; Ina\ninllah v
Rani 1886 All. W.N. 306: Dcpnt Datt Chaudhri v ScTcietnrv of State
1929 Lah 393.
19. Jngannath v. Shivanarayn (1940) Bom. 387; 1910 Bom. 217.
CONTRACTS OF INDEMNITY AND GUARANTEE 119
exhaust his remedies against the principal debtor,. or give notice of de-
fault or-^proceed against the securities. And, since the surety is liable
only for the guaranteed debt, i£ the sum or part of the sum has been
paid by the principal debtor, the surety cannot be liable for more than
•the amount remaining unpaid.
Similarly, the surety will not be liable for the cost of fruitless action
against die debtor, unless' the creditor has given previous notice of
Siis intention to sue. But apart from agreement, the surety will be
liable for interest, he is liable for all that the principal debtor would be
liable for. Hence, once the liability of the surety arises, it is co-exten-
sive with tliat of the principal debtor. It will be neither more nor less,
•although by a special contract it may be made less than the principal
debtor's but never greater (Section 128). The law does not treat the
principal debtor and surety as one person; therefore, any admission by
the principal debtor or a judgment obtained against the principal deb-
tor will not be enforceable against the surety, without a special agree-
ment to tliat effect.™ Similarly any acknowledgment or part payment
made by the principal debtor with a view to saying limitation will not be
binding upon tlie surety. Further, it is not open to the creditor to call
upon tlie surety to pay under the contract of guarantee unless tlie credi-
tor has performed his part of the contract."^ For. this reason tlie surety is
•sometimes called a "Favoured debtor." "A surety is undoubtedly and not
unjustly, an object of some favour both at law and at equity" (Lord
Selborne).

KINDS OF GUARANTEE
A contract of guarantee may be for an existing debt, called "Retros-
pective" guarantee, or for a future debt termed as "Prospective" guaran-
tee. It may, again, be a "Specific" guarantee, when it is'given for a sin-
•gle debt, and comes to an end when the debt guaranteed has been paid,
or a "Continuing" guarantee, when it extends to a series of distinct and
•separable transactions. It is a continuing guarantee where A, in con-
•sideration of B's discounting, at A's request, bills of exchange of
C, guarantees to B, for'12 months, tlie due payment of all such bills to the
extent of Rs. 10,000, or A becomes answerable to C for B's purchases
from C for 6 months to the extent of Rs. 1,000. A continuing guaran-
tee can be revoked by the surety as to future transactions, by notice to
the creditor; but the surety remains liable for all transactions, pre-
vious to the notice of revocation. So, if during the three months B has
discounted bills for C to the extent of Rs. 2,000, and A revokes the gua-
rantee, then A will be discliarged of all liability to B for any subsequent
discount. But A is liable to B for Rs. 2,000 on default of C. When
a guaiantee is continuing it is not exhausted by the first advance or cre-
dit up td the pecuniary ,limit. A guarantees B's overdraft up to

20. Exparte Young (1181) 17 Ch. D. 688: Shree Meenakaihi Mills

V. Ratilal Tribnavindas (1941) Bom. 273: 1941 Bom. 108. See also I960
Mad. 79, and 1951 Mad, 48 (F.B.).
21. Probodh Kumar v. Gillanders & Co. 1934 Cal. 699; Pratap.sin^
V. Kesha\'lal 1935 P.C. 12: Necresalinghum v. Subhoraduda 1939 Mad.
932 and also 1939 Mad. 152.
120 MERCANTILE LAW
Rs. 1,000. It B overdiaws up lo Rs. 1,000 and ihen reduces his o\ci(lra[ts
to Rb. 500 and subsequently increases it to Rs. 1,000 agai". A is still hnble
if Jiis guarantee is a continuing one. A guarantee given for an entire
consideration, is not continuing and cannot be revoked during the con-
tinuation of the consideration, unless a material change occuis in the
situation, such as miscarriage oE the person whose fidelity is guaranteed.
So, a guarantee of the fidelity of a person appointed to a place of trust,
e.g., in a bank, is not a continuing guarantee.^ Nor is a guarantee for
the payment by instalments of a certain sum within a definite time.^
Again, the guarantee may be for an ascertained debt, e.g., for a loan
of Rs. 5,000, or in respect of a floating balance, e.g., a trade debt with a
running balance of account not exceeding Rs. 5,000. Further, the gua-
rantee may be for the whole amount or for a limited amount. Dilhculf
questions, however, arise in the case of a guarantee for a limited amount,
for an important distinction exists as to guarantee limited in nmoimt.
A surety may guarantee only a part of the whole debt or he may gua-
rantee tiie whole debt subject to a limit. For instance, where B owes-
A Rs. 5,000 and C has stood surety for Rs. 3,000, tiie question may arise-
whetiier C has guaranteed Rs. 3,000 out of Rs. 5,000 or whether C has
guaranteed the full amount of Rs. 5,000 subject to a limit of Rs. 3,000.
This matter becomes important when B is adjudged insolvent and A
wants to nro\e in B's insolvency and also enforce the liability against
C If C has stood surety only for a part of the debt and if B's estate-
can gay only 25 Paise dividerid in the rupee, then A can get Rs. 3.000,
the fidl guaranteed amount from C and Rs. 500 from B's estate being^
one-fourth of the balance of Rs. 2,000, which was not guaranteed. .Since
after paying Rs. 3,000 to A, C can step into his shoes and claim from-
B's estate, C will get from B's estate Rs. 750. being one-fourth of Rjs.
3,000 pai^I. by C to A."' If. on the contrary, C has stood surety for the
whole debt of Rs. 5.000 subject to a limit of Rs. 3000, then, A ran re-
cover from C Rs. 3,000 and from B's estate 25_Paise dividend on the
entire amount of Rs. 5,000 i.e., Rs. 1,250, and C will not be entitled
to get any dividend, imless A )ias been fidly paid and this can happen
only if B's estate declares higher dividend, say 50 Paise in the rupee.
For, in that case, B's estate will pay Rs. 2,500 and then C can get lialf
of this amount. '

•\Vhere there is a floating or running linlnnce of account and the

guarantee is only of a portion thereof such a contract applies prima facie
to a part of the debt only." Thus, C guarantees A against trade debts-
to B contiacted by B as a running balance of account to anv amoimt
not exceeding Rs. 3.000, and B becomes indebted to A for Rs. 5.000,
and then becomes insolvent. If a dividend of 50 Paise in the nince is
declared, A will get Rs. 2,500 from B's estate and only Rs. 500 fronr
C and not the balance of Rs. 2,500 as the gii.irantce bv C was only for

22. Sen v. Bank of Bengal (1929) 47 I.A. 1G4; 58 I.C.I.

23. Bhagwandas v. Secretary of State 1924 Bom. 465: 9R I.C. 248.
24. Gray v. Seckhan (1872) Ch. Ap. 690; Philips v. Mitchell (lOSOV
57 Cal. 764; 1930 Cal. 17.
25. Ellis V. Emmanual (1876) Ev. Div. 157.
CONTRACTS OF INDEMNITY AND GUARANTEE 12I'
Rs. 3,000 and that amount A has recovered.^" If the liability is not for
a floating balance, but in resijcct of a debt already ascertained, then'
prima facie the contract would be construed as security for the whole
debt. In such cases, it is a ciuestion of construction as to tvliether the
intention was to guarantee the whole debt with a limitation on the-
liability of the surety or to guarantee part only of the debt. It is, how-
ever, open to parties to contract, even in case of a floating balance, that
a limited guarantee shall be applicable to the whole debt. In such a case,
the creditor can in the event of principal debtor's insolvency, prove for
the whole debt without any deduction and the surety cannot stand in
the creditor's shoes until creditor has been paid 100 paise in the rupee..

RIGHTS OF T H E SURETY
The surety has certain rights against the creditor, the principal deb-
tor and his co-sureties, and such rights include those of exoneration, sub-
rogation, indemnity, and contribution.
RIGHTS AGAINST THE CREDITOR
Exoneration.—In the case of hdelity guarantee, the surety can call
upon the creditor or the employer to dismiss the employee whose honesty
he has guaranteed, in the event of proved dishonesty of the servant.
Also, the surety may call upon the principal debtor to pay the 'debt,", or
file a suit for declaration that the principal debtor is the person to pay
the amount. In that event the surety is exonerated.
At the time of payment, a surety can a.sk. the creditor to marshal
his securities. Thus, where the creditor has got two or more securities-
from the debtor in respect of the same debt, the surety can compel the
creditor to resort to those securities first which are exclusively the credi-
tors," and to that extent he is exonerated.
If the surety learns that the debtor is about to remove his property
from the jurisdiction to avoid his creditors, the surely may call upon tiie
creditor to take steps against the principal debtor to enforce his right.
If at that time the creditor could proceed against the debtor and fails
to do so, the surety is released from liability to the extent that he can
show that he has been harmed.

RIGHTS AGAINST THE PRINCIPAL DEBTOR

Subrogation.—When a surety pays a debt that he is obliged to pay,
he is deemed subrogated to the claim and right of the aeditor. Section
140 lays down to the same effect and says: where a surety has paid the-
guaranteed debt on its Ijccoming due, or has performed the guaranteed
duty, on the default of the principal debtor, he is invested with all the
rights which the creditor Iiad against the debtor. This rule is made to
keep alive for the surety's benefit any right of tlic creditor, under secu-
rity or otherwise, which otherwise would have been extinguished at law by

26. Bardwell v. Lydall (1831) Bing. 489.

27. Praed v. Gardiner (1788) 30 E.R. 40; Heyman v. Dubhois (]878>
18 E.Q. 158.
122 MERCANTILE LAW
'the pavment of ihe debt or performance of cUuy. In other words, the sure-
ly steps into the shoes of tJie creditor and will be able to exercise as
ajfainst the principal debtor all those rights and remedies which could
be exercised by the creditor, that is to say, the surety is subrogated to all
•the rights which the creditor had against the principal debtor. " . . . . A
•surety i s . . . .entitled to every remedy which the creditor has against the
principal debtor, to enforce every security and all means of payment;
to stand in ihe place of the creditor, not only through the medium of
•contract, but even by means of securities entered into without the know-
ledge of the surety, having a right to have tliose securities transferred to
liim, even if there was no stipulation for that, and to avail himself of all
those securities against the debtor. This right of surety also stands not
upon contract, but upon a principle of natural justice.™ Thus, where
the creditor has a right of lien or of stoppage in transit with respect to
•the goods sold to the principal debtor, or ;i'here the creditor has a right
to receive dividends from the assignee in insolvency of the debtor the
surety can exeicise all those rights.^
Since the surely, on payment, is entitled to all the securities which
the creditor has against the principal debtor, whether the surety is
aware of the existence of such securities or not, if the creditor loses, or,
witiiout the consent of the surety, parts with the securities, then die
surely is discharged to the extent of the value of such securities. Fur-
ther, the creditor must hand over to the surety the securities in the
same condition as they formerly stood in his hands. The creditor, how-
ever, is not bound to use extraordinary, or it would seem any dili-
gence about preserving or retaining a security which is in fact worth-
less, e.g., a policy on the debtor's life which had lapsed by non-pay-
ment ot premimns." And where a surety without the concurrence of
the principal debtor enters into a contract of guarantee, even though
he pays principal debt, he would not be subrogated."^ But, none-
theless, it would amount to a contract of indemnity and the surety
who has paid can claim to be indemnified. In other words-, though he
would not be able to sue in his own name he may either get an assign-
ment from the creditor or sue in the name of the creditor." "When a
surety is only a surety for a part of tlie debt, and has naid that part of
tiic debt, he is entitled to receive the dividend which the principal deb-
tor pays in re.spcct of that sum which the surety has discharged. Here the
right of the suieiy arises merely by payment of tlie part because that
part, as between him and the principal creditor, is the whole.'™ But a

28. Craythorne v. Swniborne (1890) 14 Ves. 160: f) R.R. 26-1. Sir

Samuel Romiliy's observations quoted by Court; Rajagopala Iyer v. Ram-
chandra Iyer I0-12 Mad. 628.
29. Imperial Bank v. London & St. Kathereine Coaks Co. (1877) 5
Ch. D. 195.
30. Rainbow v. Suggins (1880) 5 Q.E.D. 422.
31. Mutliuram v. Vallyan (1916) 39 Mad. 965.
?2. Pcriamianna Marakkayar v. Banians 8: Co. (1926) 49 Mad. 156;
J26 Mad. 544.
33. Per Mcllish L.J. in Gray v. Seckhan (1872) L.R. 7, Ch. 680 at
p . G33.
CONTRACTS OF INDEMNITY AND GUARANTEE 123

person who has become surety, though ivith limited liability in respect
of the entire debt has no right by way of subrogation or in preference
to the creditor until the creditor is fully paid:"' He becomes the credi-
tor of the principal debtor for what he has paid.'^ "The creditor's right
•to hold his security until his whole debt is paid is paramount to the sure-
ty's claim upon such securities which only aiises when the creditor's
•claim against such securities has been satisfied.™ So where A owes B a
total debt of Rs. 5,000 Iialf of ivhicli is secured by a mortgage and the
•other half guaranteed by C. C on payment of his half, i.e., Rs. 2,500
cannot have any rights against the security, until B has been fully paid
•off. But that does not mean that the suifty cannot claim to be re-
imbursed by the principal debtor for the amount paid by him to the cre-
ditor until the creditor has been paid fully. The surety has, under
•Section 145, a right to be indemnified by the debtor for the amount he
has rightfully paid under the guarantee. It must, however, be noted
that the surety's right against the principal debtor is to indemnity only,
•and, therefore, if the surety discharges the debt by settlement witli the
creditor at less than its full amount, he can get from the principal deb-
tor only tiie amount actually paid and not the amount guaranteed. Not
•only that, but before the surety can ask the principal debtor to pay, he
must have actually paid the money."

Indemnity.—A surety who has made paym.ent is entitled to indemnity

•from the principal debtor, i.e., he is entitled to demand from the prin-
cipal debtor re-imbursement of the amoimt which he has paid T h e
right arises and is implied from the surety.principal-debtor relationship.
T h e right of indemnity e.\ists only as to claims that the surety mtist pay
because of his position as surety. If he pays a claim for which the prin-
•cipal debtor is not liable, lie cannot demand indemnification from the
principal debtor.

RIGHTS AGAINST CO-SURETIES

Contribution.—Sometimes it may happen that one and the same debt
has Iseen guaranteed by two or more-'sureties either jointly or severally.
Section 146 provides for a right of contribution between co-sureties.
'UHien a surciv has paid more than his share of the debt to the creditor
or a decree has been passed against him at the suit of the creditor, for
more than his share, he has a right of contribution from the cu-sure-
ties, who are eciually bound to pay v;ith him.
.'\, B and C are sureties to D for the sum of Rs. 3,000 lent to E. E
makes default in payment. A, B and C are liable, as between tliem-
selves. to pav Rs. 1.000 each, and if any one of tlierii lias to pay more
than Rs. 1,000, he can claim contribution from the other two to reduce
his payment to only Rs. 1,000.

34. Re Sass (l896) 2 Q.B. 12.

?,5. Darbarilal v. Af.ihbiib AH (1927) 49 All. 610: 1927 A. 538.
36. Govardhandas v. Bank of Bengal (1890) 15 Bom. 48, per Far-
ran, J.
37. Bardford v. Gammon (1925) ! Ch. D. 52.
124 MERCANTILE LAW
If one of the sureties becomes insolvent, the co-sureties shall have
to contribute the whole amount equally. Although a surety can file a
suit for a declaration against the other co-sureties before he is actually
compelled to pay, yet he cannot ask for contribution, unless he has ac-
tually paid more than his share. Also all the sureties are entitled t o
share in the benefit of any security or indemnity which anyone of them
has obtained from the principal debtor, and this whether ^they knew of
it or not.°°
It should be noted that the right of contribution is available only
when all the sureties guarantee one and the same debt. It cannot b e
exercised where more persons than one become sureties by distinct and se-
parate obligations for different portions of a debt'." Where the co-sure-
lies have agreed to guarantee different sums they are bound under Sec-
tion 147 to cor pay ate equally up to the maximum of tlie obligation of
each one.
A, B and C as sureties for D. enter into three several bonds, eacli in a
different penalty, viz., A in the penalty of Rs. 10,000, B in that of Rs.
20,000, C in that of Rs. 40,000 conditiorid for D's duly accounting to E,.
D makes default to the extent of Rs. 30,000. A, B and C are each liable
to pay Rs. 10,000. But if D makes default to the extent of Rs. 40,000,
then A is liable to pay Rs. 10,000 (his maximum obligation) and B and
C will pay equal shares of the balance, i.e., they will pay Rs. 15,000 each.
Again, if D makes default to the extent of Rs. 70,000, then A, B and C
will each pay the full penalty of his bond.
The lule in these cases is that subject to the limit fixed by his gua-
rantee, each surely is to coti pay ite equally and not proportionately to
the liability undertaken.

DISCHARGE OF SURETY
A surety may be discharged by (i) the revocation of the contract of
guarantee, (ii) by the conduct of tlie creditor, or (iii) by the contract of
suretyship being invalid. Each of these main giounds-of discharge of
surety has further classes. The classification is given in the following chart
(page 125).
By Revocation of Contract of Guarantee.—We have seen that a con-
tract of guarantee may be either specific or continuing. A specific gua-
rantee, i.e., guarantee relating to one transaction, cannot be revoked if
the liability is incurred. Thus, if A lends B a certain sum on the gua-
rantee of C, then C cannot revoke the contract of guarantee. But it can
be revoked by notice if the liability has aot been incurred. So, where
A has not yet given the sum to B, even though the guarantee has been
executed by C, C may revoke the contract by giving notice to tlie cre-
ditor; and*if A gives the money to B after this notice then C will not
be liable to pay on B's default. Where the guarantee is a continuing
one and extends to a series of transactions, it may be revoked by the
surety as to future transaction by giving notice to the creditor. The Act

38. Steel v. Dixon (I88I) 17 Ch. D. 325.

39. Ceppe v. Tyyan (1823) T u r n &: Roth 420 : 24 R.R. 89,
 CONTRACTS OF INDEMNITY AND GUARANTEE 125

"1 1. Revocation by Surety

(Section 130).
1. By Revocation 2. Death of Surety (Section
131).
3. Novation.
1. Variations of terms with-
out consent of Surety
(Section 133).
2. Release or Discliarge of
By conduct Principal Debtor with-
of out Surety's consent (Sec-
Creditor tion 134).
Discharge 3. Compounding by Credi-
of tor with Principal
Surety Debtor without Surety's
consent (Section 135).
1. Creditor's act or omis-
sion impairing Surety's
eventual remedy (Sec.
139).
3. By Invalida- 2. Guarantee obtained by
tion of Fi-aud or Misrepresenta
Contract tion (Section 142) or by
Concealment (Sec. 143).
3. By failure of Considera-
tion.
contemplates series of distinct and separate transactions to constitute a
continuing guarantee which can be revoked by notice. T h e test adopted
by Courts in order to find out whether revocation of guarantee is possi-
ble or not, is to find out whether the consideration for the guarantee
is entire, supplied at one time; or whether it is fragmentary, supplied
* from time to time. A guarantee by C of payment of montlily rent by
B in respect of a lease for five years is not revocable, as tlie guarantee
is for five years and the consideration is a lease for 5 years. But, if
A, in consideration of B's discounting biUs of exchange for C, gua-
rantees, for six months, the due payment of all such bills to the extent
of Rs. 50,000, and B discounts bills to tlie extent of Rs.- 20,000, and after
this A revokes his guarantee, this revocation discharges A from all liabi-
lity to B for any subsequent discount. But A will remain liable for Rs.
20,000 in case of default by C. The guarantee by A is nothing more tlian
an offer by him and does not become binding unless accepted by B by
discounting C's bills. Each discount being a separate transaction, tlie
standing offer can be revoked with regard to future acceptance.
Revocation by Death.—As a continuing guarantee can be revoked
"with respect to future transactions, so does the death of the surety
act as revocation and the surety's estate will not be liable for any trans-
actions after his death. For the death of the surety to act as revocation
it is not necessary that the aeditor must tiave known of the surety's
deatli. So, if tlie creditor enters into fresh transactions after- the
•surety's death without any knowledge of sucli death, tlien the deceas-
126 MERCANTILE LAW.
cd surety's estgte -will not be liable for svich transactions. In English
law, however, notice of surety's death is essential'before the rule will
come into operation.
Revocation by Novation—A contract of suretyship 'may be dis-
charged by novation, i.e., fresh contract being entered into either bet-
ween the same parties or between other parties, as a consequence of
which the original contract of suretyship becomes discharged.
Discliarge by Conduct ot Creditor.—A surety is dischaiged by the
conduct of the creditor. As a surety is liable only for what he has-
positively undertaken in the guarantee, any alteration made witliout
the surety's consent in the terms of tlie contract between the principal
debtor and the creditor, will discliarge the surety as to transactions sub-"
sequent to the variation," Lord Lyndhurst, L. C. says in Bonsev v.
Cox (1814) 13 L.J. Ch. 260: 55 R.R. 120: "The party who is a siirety
for another for the performance of an engagement can only be called
upon to guarantee the performance of the engagement when the engage-
ment is carried into complete, literal, and strict effect. He enters into
a particular and specific contract, and that contract alone he is bound
to perform." A surety is bound to the letter of his engagement, and
it is incumbent on the creditor to show that the teims of guarantee-
have been strictly complied with.' An alteration without the surety's
consent even for his benefit will discharge him, as Lord Westbury said
in Blest V. Brown (1862) 45 E.R. 1225: 135 R.R. 181: " you bind
him [surety] to the letter of his engagement... .If that engagement be
altered [without the surety's consent] in a single line, no matter whe-
ther it be altered for his benefit, no matter whether the alteration be
iiinocently made, he has a right to say: 'The contract is no longer"
that for which I engaged to be surety; you have put an end to the
contract that I guaranteed and my obligation therefore is at an end'".
There is^ however, one qualification to this general rule that, wheie al
guarantee is for the performance of several distinct debts, duties or
obligations, a variation in the nature of one of them will not discharge
the surety as to the rest," A contract of repurchase of goods by the
seller from the buyer (whose purchases were guaranteed) does not dis-
charge the original contract but the two contracts stand together and,
therefore, the surety under^the original contract is not discharged."
Similarly, a contract of resale to the vendor does not discharge a sutei
ty from his original contract." Again, an attempted variation which
h inoperative, as being against law applicable as, between the creditor
and the principal debtor "will net discharge the surety. A surety will
not be dincharged by a variation to wliich he has assented, but the
onus is on the creditor to show that the surety assented to the alteration;

40. Narayan v, Markandya, 1959 Bom. 51G. See also C. Nambiar

V. Raman Nair, I9S9 Kcr. 176.
41. Croyden Gas Co. v. Dickenson (1876) 2 C.P.D. 56; Skillet v.
Fletcher •(1866-67) L.R.I.C.P. 217:2 C.P. 469.
42. Uttamchand Saligi-am v. Jewa Mamooji (1919) 46 CaL 554.
.4S. Uderam v, Shivibhajah (1920) 22 B.L.R. 711; 58 I.C. 272.
CONTRACTS OF INDEMNITY AND GUARANTEE 12X
By Release or Discharge o£ Principal Debtor.—A surety will be dis-
charged if the creditor makes a contract with tlie principal debtor by
which the principal debtor is released, or acts or makes an omission-
which results in the discharge of the principal debtor (Section 134). A-
supplies goods to B on the guarantee of C. Afterwards B becomes em-
barrassed and contracts with A to assign his property to him in con-
sideration of his releasing him from his demands on the goods supplied.'
Here B is released from his debt, and C is, in correequence, discharged
from his suretyship. Or, again, where A contracts with B for a fixed
price to biiild a hoyse for B within a stated time, B, supplying the ne-
cessary timber. C guarantees A's performance of the contract. B omits-
to supply the timber. C is discharged from his suretyship. But if the
principal debtor is discharged of his-debt by the operation of law, e.g.,
is discharged in insolvency, this will not operate as a discharge of the
surety". And, if the creditor expressly reserves his remedies against t h e
surety, the- surety will not be discharged. Also, where there are co-
sureties, a release by the creditor of one of them does not- discharge
the others : neither docs it free the surety so released bora his respon-
sibility to other silreties (Section 138). But in English law, if the co-
sureties are jointly liable, die rele;ise of one vfill discharge the others,
although, if the liability is several, other sureties will not be discharged'
on tlie release of one surety. Thus, in English law "the release of a
surety discharges a joint-surety, but not a co-surety severally bound'V
The Indian law does not recognise tliis distinction.

CREDITOR'S OMISSION T O SUE W I T H I N LIMITATION

P E R I O D - W H E T H E R DISCHARGES SURETY
Where the creditor failed to sue the principal debtor within t h e
period of limitation, thereby, in effect, discharging the principal debtor,
opposite views have been taken by the Indian Courts. But tlie Privy-
Council ruling*' confirming the majority view has set at rest the con-
flict, and the law may be taken as settled now. Accordingly, omissiou
of the creditor to sue within the period of limitation jdoes not discharge
a surety. Of course, even Section 137 provides that mere forbearance
on the part of the creditor to sue the 'principal debtor or enforce any
other remedy against him does not discharge the surety. B owes to 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 suretyship. A surety cannot compel tlie creditor to enforce his.
rights against the principal debtor.
Compounding by Creditor with Principal Debtor.-Where the cre-
ditor, without the consent of the surety, makes an arrangement with
the principal debtor, for composition, or promises to giVe him time o r
not to sue hira, the surety will be discharged (Section ]35). This sec-
tion will apply only where there is a binding contract, though it need
not necessarily be expressed' as even a tacit or implied coriifact inferred

44. Marice v. Simla Bank Cprporation (1878) P. R. No. 9 : Jagan-

nath V. Shiv Narayan 1940 Bom. 247.
" 45. Maha:nt Singh v. U Bayi (1939) 66 LA, 198: 41. B L R 742-
•I9S9 P.O. 119.
J28 MERCANTILE LAW
from tlic .TCis of the parties, is cc[iin)ly binding as an express one. And,
ioibcaiancc to sue, cxcicised in pursuance of an agreement wiiliout con-
•sidcration, would not disclinige llie suiciy, as it is nothing more than "for-
bcaiauce" wiiliiu SeLtion 137. J'lie aLcei)tance of iiitcrcit in advance by
a creditor wiilioui the consent of tlie surety, operates as an agreement: to
gi\e time and will discliaigc the siueiy, lor the creditor cannot stie liic
principal deljior iiiitii the lime covcied by the payment in advance
has cxpiied." A consent dccice. made ivilliout the smell's consent,
for pa\mcnt by instalments of the sum due fiom principal • debtor dis-
charges the siuety as p.i\mcul by iusi.dnients gave time to the debtor."
T h e mere f.ict of striking .i balance iieiween the creditor and principal
debtor so as to decide what is due does not dischaige the surety for it
cotdd not extend the time." And, if the surety has paid part of the debt
tieioie the composition, he is as to that part not a surety, but a principal
creditor and cannot recpser it under section 135.™ It is laid down in
Section 136 that where the contract to gi\e time to the princip.il deljioi'
is matle by the creditor with a third person, and not with the jirincipal
debtor, the surety is not discharged. C, the holder of an o\erdue bill of
exchange drawn by A as silrety for B and accepted by B, contracts witli "M
to give time to B, in consideration of an undertaking by M to see the
Taill paid. A is not discharged.
By Creditor's Act or Omission Impairing Surety's Eventual Remedy.—
If the creditor does any act which is against the rights o[ the surety, or
omits to do any act which his duty to surety requires him to do, and t h e '
eventual remedy of tlie surety himself agairvst the principal debtor is
thereby impaired, the surety is discharged (Section 139). B, a ship-build-
er, contracts to build a ship for C for a given sum, to be paid by instal-
•menis as the work reaches certain stages, (the last instalment not to be
paid before the completion of the ship). A becomes surety to C for B's
due pciformance of the contract. C, without the knowledge of A, pays
the last instalment to B. A is discharged by this payment. Again, A
puts M as apprentice to B, and gives a guarantee to B for M's fidelity. B
promises on liis 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. But mere passive acquiescence by the
creditor in irregularities on the part of the principal debtor such as
laxity in the time Tind manner of rendering accounts by a collector of
public moneys whose fidelity is guaranteed will not itself discbarge Llie
•surety. Neither is the surety discharged from' liability for the jirincipal
debtor's default by saying that default would not have occurred, if the
creditor had exercised all powers of superintending the performance of
the debtor's duty. For, the employer of a servant whose due perform-
ance of work is guaranteed does not contract with the surety that he ivill
use the utmost diligence in checking the servant's work. Likewise, the

46. Kalir Prasanna v. Ambica Charan (1872) 9 B.L.R. 261 : Pro-

tab Chundra v. Tour Chunder (1878) 4 Cal. 132.
47. National Coal Co. v. Kashitish Bose & Co. 1926 Cal. 818.
48. Dcvidas v. Sant Mohan Singh 1931 Lah. 627.
49. Bombay Co. Ltd. v. Official Assignee (1921) 44 Mad. 381.
 CONTRACTS OF INDEMNITY AND GUARANTEE 129
mere passive .inactivity of the creditor to whom a guarantee is given or
liis neglect to call the principal debtor to-account in reasonable time and
to enlorce payment against him does .lot discharge the surety. Tliere
must be'some positive act done to the prejudice o£ the surety, or such
degree of negligence as to imply connivance and amount of fraud.^ But
where the surety bond in lespecL nt a decree payable in instalments pro-
vided that die decree-holder shduia gxecute the decree if default was
made, and the decree-holder allowed the decree to become time-barred,
tlie surety was discharged.^^ Also, where a person stood surety to a bank
for payment of a customer's current account, the act of the bank in al-
lo^ving such customer to open a sepaYafe account in his own name, was
held to discharge the surety." Similarly, where one stands surety for se-
veral defendants and the decree-holder^ proceeds against one of them
only, tlie surety wdl be discharged by virtue of the exoneration of ^he
otlier defendants. Section 139 is similar to Section 40 of the Negotiable
Instruments Act, 1881, which disdiarges the indorser from liability in
cases wliere the holder destroys or impairs indorser's remedy against a
prior party.
By Invalidation of Contract.—A contract of guarantee, like 3ny other
contract, may be avoided, because it is eitlier void or voidable. If the
debt itself is void for illegality, it cannot be recovered from the gua-
rantor. So, guarantees liave been held void given for a secret preference
by a bankrupt for compounding a debt. Also, where guarantee is ob-
tained by coercion or undue influence, it would be void. Therefore, a
contract of suretyship will be unenforceable and a surety is not liable,
if it is void, or voidable, at the option of the surety, as in, the case of
mistake or fraud. Sections 142 and 143 read;
"142. Any guarantee which has been obtained by means of mis-
representation "made by the creditor, or with his knowledge and assent,
concerning a material part of the transaction, is invalid."
"143. Any guarantee which the creditor has obtained by means of
keeping silence as to material circumstance is invalid."
Failure of consideration.—A surety will be discharged on the failure
of consideration. But there must be substantial failure of consideration
in order to operate as discharge. Where it was intended that two or
more co-sureties should join,^ but it was discovered that they did not
join," then the surety who actually signed under the impression that others
were going to join is discharged from his suretyship. This is provided in
Section 144.

SUMMARY
Indemnity.—Where a person promises to indemnify the other or
make good his loss caused to him by the conduct of the promisor or any

^- 50. Black v. Ottoman Bank (1862) 15 E.R. 573; R.R. 101.

51. Hazari v. Chuni Lai (1886) 8 All. 259.
52. Ghuzanvi v. National Bank of India (1916) 20 C.W.N. 562.
53. ^ Sitaramasivamy Sasfri'v. Basavayya (1921) 60 I.-C. 114; 12'L.-W.
536..
130 MERCANTILE LAW

otlier person or by accident, tliere is a contract of indemnity. A contract

of insurance is a contract of indemnity.
There are two parties to a contract of indemnity—the indemnifier
wlio promises tcr make good tlie loss, and tlie indemnified, wliose loss is
made good.
Indian Contract Act is silent on the point of time for indemnifier's
liability to indemnify.' There is a conflict of opinion of various High
Courts. Better view appears to be that where the indemnified has in-
cuned an absolute liability, though not actual loss, he is entitled to call
upon the indemnifier to save him from that liability and ppy it off.
Guarantee.—A contract to perform the promise, or discliarge the lia-
bility of a third person in case of his default, is called a contract oE gua-
rantee or suretyship.
The person who gives the guarantee is called surety; the person for
whom the guarantee is given is called die Principal Debtor, and the per-
son to whom guarantee is given is called the Creditor.
In Indian Law, a guarantee may be oral or in writing. In English
Law it must be evidenced by a memorandum.

Indemnity and. Guarantee Distinguished

' Indemnity Guarantee
1. Promisor primarily indepen- 1. Liability of surety is collateral
dently liable to tlte promisee. or secondaiy, the primary lia-
bility being that of the prin-
cipal debtor.
2. Only two parties are required 2. Three parties are essential to
to contract. ^ this contract.
3. Indemnity depends upon the 3. In guarantee there is "an ex-
possibility or" risk ot some isting debt or duty perform-
loss. ance of which is guaranteed
by the surety.
4. Indemnifier cannot sue third 4. Surety on payment of debt to
parties in his own name, un- the creditor can pioceei'l in
less there is assignment. He his own n.imc against the
must sue in the name of the principal debtTDr.
indemnified.
Consideration received by the princiJDal debtor is sufficient conside-
ration for a contract of guarantee.
It is obvious that- ci-editor and surety must be competent to contract
and so also the principal debtor.
Surety will, however, be liable to pay tlie creditor on default ^by
principal debtor, even where principal debtor is incompetent to con-
tract,
Discliarge of principal debtor by operation of law does not discliarge \
tlie surety.
Nature of Surety's Liability.-Surety's liability is second.iry H r is
liable only on default of the principal debtor. As soon as tlie time for
payment has come and principal debtor does not or is unable to pay
the surety becomes liable to pay. But surety is liable only for the
CONTRACTS OF INDEMNITY AND GUARANTEE 131
guaranteed debt and only the part remaining unpaid. Surety's lia-
bility, once it has arisen, is co-extensive with -the principal debtor: it
may be made less by special agreement, but never greater than that of
the principal debtor.

Kinds of Guarantee
Retrospective Guarantee is for an existing debt.
Pros])ective Guarantee is for a future debt. It is specific, when it
is given for single debt, and continuing, when it extends to a series of
distinct and comparable transactions.
Rights of Surety: against creditor in fidelity^ guarantee. Surety can
call upon the creditor or the employer to dismiss the employee, in the
event of proved dishonesty of seri'ant. In a loan guarantee he may,
before paying, get declaration by Court that the principal debtor is
bound to pay.
At the time /of payment surety can ask the creditor to marshal his
securities.
Surety's Rights; against principal debtor. After paying the debt or
performing the duty, the surety stands^in the shoes of the creditor an&
can sue principal debtor for payment. He is subrogated to all tlie
rights which the creditor had against the principal debtor.
Surety's Rights: against co-sureties. When a surety has paid more
than his share of the guaianteed debt to the creditor he has a right of
contribution from the co-sureties.
Discharge of Surety.—A surety may be discharged—
(a) By revocation b r the surety, which can be done only in the
case of a contintiing guarantee in respect of future liability;
(b) by tlie death of the surety;
(c) by Novation;
(d) fay variation of terms of contract without his consent;
(e) on {he ptincipal debtor being released or dischaiged by the
creditor without surety's consent;
(t) compounding by creditor with principal debtor without
surety's Consent;
(g) where creditor'^ ace or omission impaired surety's eventual
remedy;
(h) where giiarantee was obtained by fraud; misrepresentation or
concealment of some fact;
(i) on failure of consideration.

CASES FOR RECAPITULATION

1. H and A guarantee Cs debt witii D, who had as security three
policies on C's life. H latei on paid off tiie debt and t'ook an assign-
ment of the policies, i n an action for contribution against A, it was
held that h was entitled to contribution from A, on bringing into ac-
count the value of the policies- fin re Arcedeckne (1883) 2^ Ch. D.
709] The law on the point is that, before recoverfng contribution, the
132 viERCANTILE LAW

guarantor who ]ias paid the debt must bring into account all securities
he has received from tlie creditor in respect of the debt.
2. C and D go into a shop. C says to the shopkeeper-
(i) "Let him (D) have the goods, I %vill see you are paid." The con-
tract is one of indemnity;
(ii) "Let D have the goods, and if he does not pay you, I ivill."
This is a contract of guarantee [Bii-kmyr v. Darnell (1701) 1
Salk, 27].
3. T bought from M a motor car under a hire-purchase agreement
by which he was to pay Rs. 1.500 per month. N guaranteed these pay-
ments. T fell into arrear witli liis instalments, and it was agreed bet-
ween T and M that T should give a cheque for Rs. 2,500 and pay the
rest of the arrijiars at the end of the month. Held, N wdb discharged
from tire whole contract, because M had agreed to give time to T, and
the J contract was one contract and not a series of monthly contracts
[Midland Motor Showiooms v. Newman (1929) 2 K.B. 256].
4. A gives a guarantee to C for goods to be supplied by C to B
C supplies the goods to B in due course. Afterwards B becomes finan
cially embarrassed and contracts xvitb all his creditors to assign to then"
all his property in consideration of their releasing him from their de-
mands. The sale proceeds of the property are just sufficient to pay
80 paise in the rupee. Here B is released from Iijs debt by the con-
tract with C and as a result of this release A is discharged from his
suretyship [Illustration (a) to Section 134].
5. A agreed to stand surety for an overdraft allowed by tlie T. Bank
to S. The Bank required a guarantee in the form whicli was handed
over to S. S got it filled by A for a sum of Rs. 25,000. The T. Bank
declined to accept this letter ot guarantee. S took back the letter and
after some time brought it bacK. with the figures so changed as to read
Rs. 20,000. The Bank accepted the letter and kept it. Jn respect of
this transaction there was no prior agreement between A and the Bank;
and the letter of guarantee was given by A after the loan of Rs. 20,000
had aheady been made. On the failure of S to repay the loan, the
Bank sued A upon the letter of guarantee. A pleaded discharge from
liability on the ground of a material alteration of the instrument. It
was held by the Supreme Couif that A was not discharged from his
liability, as there was no material alteration bv the creditor. The altera-
tion was made by S who was at that time acting as the agent of A and
who brought the document to the Bank on both occasions. A must be
deemed to have held S out as liis agent for tliis purpose and this creat-
ed an estoppel against A, because the Bank believed that S hnd the
authority. The offer thus remained in its amended form an offer by A
to the BanK. and the Bank by accepting it turned it into a contract of
guarantee which was backed by the past consideration on which the
offer of A was originally based. (Anirudham v. Thomco's Bank, 1963
S.C. 746).
6. S guaianteed the honesty of a sen'ant in the employ of C. T h e
servant was guilty of dishonesty in the course of his service, but C con-
tinued to employ him and did not inform- the defendant of what had
occurred. Subsequentlv the servant committed further acts of dishonestv.
C seeks to recover his loss from S. Held, S is discTiarged and C cannot
recover his loss from him (Coop Commission Shop v. Udham Sin^h
1944 Lah. 424).
CONTRACTS OF INDEMNITY AND GUARANTEE 13S
7. G made an ofier to P that if he would discount bills for D he
would guarantee the payment of such bills to tlie extent of Rs. 6,000
during the period of'12 months. Some bills were discounted by P and
duly paid, but befoie the 12 montlis had expired, G revoked his offer and
notified that he would guarantee no more bills. P continued to dis-
count the bills, some of which were not paid by G. P sued G on the
guarantee. G was discharged after revocation from all liability to P for
any subsequent discount, and is not liable t6 pay to P. [Illustration (a)
to Section 130]. *
8. A guarantees C against the misconduct of B in an office to which
he is appointed by C and of which the duties are defined by an Act
of Parliament. By a subsequent Act, the nature of the office is material-
ly altered. Afterwards B misconducts himself. A is discharged by the
change from future liability under his guarantee, tlpugh the misconduct
of B is in respect Af a duty not. affected by the later Act [Illustration (h)
to Section 133].
9. A held partly paid shares in a, company and D guaranteed the
payment of his unpaid calls to the company. The company called upon
A to pay the calls and, on default being made, forfeited the shares -un-
der a power given in the articles. Held, the company by forfeiting the
shares had deprived D of his lien on the shares to which he would have
been entitled had he been compelled to pay tlie calls, and he wdjs, there-
fore, discharged from his liability as surety under the guarantee [In re
Danven & Pearce (1927) 1 Ch. 176].
10. B appointed A as his agent to collect his rents, and required
him to execute a fidelity bond in which C was surety. C died. In a
suit by B against C's legal representatives, it was held that C could not
revoke his liability under the bond, during his lifetime, and consequent-
ly his death did not release hfs estate from liability [Baljour v. Grace
(1902) 1 Ch. 733].
11. K was appointed the manager of the T.C. Bank and C execut-
ed an indemnity bond rendering himself liable in the sum of Rs. 4,500
as guarantee for the fidelity of K in the performance of his duties as
manager. Two years thereafter K committed suicide. It was discovered
that K had misappropriated about Rs. 1,72,350 by falsifymg accounts.
No scrutiny into cash balance was ever made by directors as required
by the provisions of the bye-laws; in fact, the directors had shut their
eyes to the fraudulent career of the manager. In a suit by the bank for
the recovery o*^ Rs. 4,500, the guaranteed amount, from C, it was held
that by the conduct of the directors, the guarantor (indemnitor^ stood
discharged from his obligations under the indemnity bond. It was
stated that no employer who secures a fidelity guarantee can tell his gua-
rantor that the guarantor is liable evert if an act of infidelity was assisted
by the employer himself. A person in Whose favour a guarantee is given
is bound to a faithful observance of the rights of the surety and to the
performance of every duty necessary for the protection of those rights
(Chandraseldiara Pai v. Town Co-op. Bank Ltd., 1965, Mysore 209)
 Chapter III

Bailment and Pledge

.PART 3-A

A Contract of Bailment is the next class of Special Contracts that

we have to consider now The word "bailment" is derjved from tlie
French word "bailer" which means "to deliver", but in law it is usedi^
in its ^ technical sense, involving voluntary change of possession from
one person to another. A bailment has been defined as a "voluntary
transfer of the possession of goods by the owner to another person, who
is not his servant, upon a trust or imder a contract that such other
person shall do something with or to the goods, or merely hold them
and return them to the owner, or deliver them to his order when the
purpose for which they were transferred has been accomplislied." The
owner who transfers or deposits the goods is called the Bailor, and the
transferee or depositee is called the Bailee. Bailments may be divided
into three main classes—
1. Those for the exclusive benefit of the bailor.
2. Those for tlie exclusive benefit of the bailee.
3. Those for the mutual benefit of boUi parties.
The third class is the most usual and important
The Indian Contract Act does not deal especially with these types
of bailment, but only deals generally with contracts of hire, contracts of
work to be done, contracts of loari and contracts of pledge. It also
makes special mention of the duties of a finder of goods. The contracts
of carriage have not been dealt with, as they are sijeciaily provided in
the Carriers Act, Railways Act, and other enactments. Section 148 of
the Indian Contract Act reads: A "bailment" is the delivery of goods
by some person 'to another for some purpose, upon a contract that they
shall, when the purpose is, accomplished, be returned or otherwise dis-
posed of according to the directions of the person delivering them. The
person delivering the goods is called the "bailor.'' The peison to whom
they are delivered is called the "bailee."
Explanation.—If a, person already in possession of the goods ot an-
other contracts to hold them as a bailee, he thereby becomes the
bailee and the owner becomes the bailor, of such goods although they
may not have been delivered by way of bailment.
BAILMENT AND PLEDGE 135
The above definition contains a number of elements which roust be
present in a contract of bailment. Accordingly, to constitute a bail-
ment it is essential that—
(1) there must be a deliveiy actual or constructive, (2) of goods,
(3) by the owner called the bailor, (4) to another person called the
bailee, (5) for a speciiic purpose, (6) on condition tliat tlie goods shall be
returned in specie either in their original or in an altered form or
shall be disposed of according to the directions of the bailor.
Since the essence of bailment is the delivery of goods for a seated
purpose and their return in specie, it is only the possession that passes
from the owner to the other and not the ownership. So, where goods
are transferred by the owner to another in consideration of money
price, it is a sale, or where the goods are not to be delivered back ,in
specie but their price is paid it is not a bailment. Again, where money
is deposited by a customer with a bank in a current, savings banlc, or
fixed deposit account, and, therefore, there is no obligation to return
the identical money but an equivalent of it there is no bailment, but a
relationship of creditor and debtor is created. But if valuables or even
coins or notes in a box are deposited for safe custody threre is a con-
tract of bailment, for these are to be returned as they are, and not their
money value. The point is important for the purposes of limitation,
for if t!ie transaction amounts to a loan, the cause of action for recovery
commences from the date of the loan, and if it is a bailment from the
dale of demand for the return. Goods given on hire, or handed over
to be turned into something, e.g.i gold to be made into ornaments, or
left with a warehouseman for safe keeping, or given to a factor for sale,
or entrusted to a carrier for conveyance from one place to another, or
something left with a friend for use or to be looked after, are all ex-
amples of bailment, as also where the Master of the ship leaves the
goods in the custody of the Port Trust.*

DUTIES OF BAHJEfi ;
1. T o take care of goods bailed The first and most important
duty of a bailee is to take care of the goods entrusted to him. T h e
question of the degree of care required in different cases of bailment
was at one time of great importance in English Law, as it was supposed
that tlie degree of care required varied according as the bailment Tvas
gratuitous, or for reward. But by modern English Law the gratuitous
bailee is bound to make the same care of the .property entrusted to
him as the Jsailee-for reward." Therefore, now the law on this point
may be said to be the same both in England and India. T h e Indian
Contract Act also does not recognise any distinction between a gra-
tuitous bailment and bailment for reward, and lays down uniform stand-
ard of care for all types of bailments. Sections 151 and 152 read:
"151. In all cases c^f bailment the bailee is bound to take as much
• j
1. G.E. Shipping Co. v. S.M.S: Saheb & Co., 1919 Mad. 367.
2. Gibbon v. McMullen (1869) ]L.B. 2 P. 317, Scarle v. Loveric
(1878) L.R. 9 Q.B. 122; B.C Co-op. Bank v.. State, 1959 M.P. 77-
136 MERCANTILE LAW

care of-the goods bailed to him as a man of ordinary prudence would, -

under similar circumstances, take of his own goods of the same bulk, i
quality and value as the goods bailed."
"152. The bailee, in the absence of any special contract, is not
•nesponsible for fhe loss, destruction or deterioration of the thing bailed
if he has taken the amount of care of it described in Section 151."
The degree-of care that is expected of a bailee is tliat of the aver-
age prudent m a n ' l h bis own affairs under similar circumstances, and
if, in spite of that much care any damage is caused to the goods, the
bailee will not be liable. But if he does not take as much care of the
goods as a man of ordinary prudence would do cf his own goods, in
like circumstances, he will be liable for negligence and will be required
to make good tlie loss. Section 152 contemplates enlargement of legal
liability by special agreement.
Thus, a bailee may agree to keep the property safe from all perils
and answer for accidents or thefts. But, even such a bailee will not
be liable in case of loss happening by an Act Of God, such as fire or
tempest, or by public enemies.
Section 151 expressly provides for the standard of care expected of
a bailee; and tlie liability cannot be reduced by contract below the limit
prescribed by this section. Also, where the master is the bailee, and
the servant is either dishonest or negligent in dealing with the goods
bailed, the master is liable if the goods are lost due to the pegligence
of the servant (B. C. Co-op. Bank v. State, 1959 M.P. 77)
Not to make any unauthorised use of Goods.—The bailee is under
a duty not to use the goods in a manner "inconsistent with the terms
of the bailment. If he does so, the bailor can terminate the bailment;
and if any loss or damage results from the use df goods for a purpose
other than the one agreed upon, or in a manner opposed to the one
stated, the bailee becomes responsible for such a loss, unless such a use
is necessary for its preservation. There is a breach of good faith. A
lets to B his horse for his own riding. B cannot drive the horse in his
carriage, or lend it to another person for any purpose. If B drives the
horse in Jiis carriage or lends it to someone else, A can terminate the
contract; and -it the horse is injured, A can also claim damages for tlie
injury. \
Not tn mix Bailor's Goods with his own Goods The next duty of
the bailee is to keep the goods of the bailor separate from his own. Sec
tions 155, 156 and 157, however, lay down certain circumstances in
whicli intermingling is permitted. The intermixture of goods of the
bailor and bailee may take place with the consent of the bailor, or ,it
may be the resvilt of accident, mistake or inadvertence, or it may be
wilful or intentional. If the intermixture be 'with the consent of the
bailor, then the bailor and the bailee become joint owners and possess
common interest in the goods in proportion to their respective shaies;
•\Vfiere the intermixture is made witliout the consent of the bailor and
the goods so mixed are separable or divisible, such as articles of furni-
ture, the parties remain die owners of their respective shares, and so
each party can claim propprtionate share; but the cost of separation.
BAILMENT AND PLEDGE 137
or any damage as a result of mixture, shall be borne Dy the bailee.
Where the mixture without the consent of tlie bailor is inseparable or
indistinguishable so that the bailor's goods cannot be returned, the
bailee is bound to compensate the bailor for the whole of the goods.
If X deposits a tin of A grade ghee with Y and Y mixes it with his
ghee of grade B, Y must pay the price of A grade tin. Where, how-
ever, a bailee, by accident or inadvertence, mixes the goods left by
bailor with his own goods, or where the mixture is the result of an
Act of God or of an unauthorised third party, and thei mixture consists
of goods of similar kinds and quality, such a mixture belongs to both
parties in proportion to their shares, but the cost of separation will be
borne by the bailee.
Not to set up Adverse Title.—Generally, the bailee has no right to
deny the bailor's title or set up agaipst the bailor his own title or the
right of a third party. He will however, refuse to deliver goods to the
bailor if there is an effective pressure of an adverse claim amounting to
an actual eviction by a paramount title. This is Common Law rule and
is laid down in Section 117 of the Evidence Act, 1872.
To return the Goods.—It is the duty of the bailee to return or deli-
ver the goods, witliout demand, on the expiry of the time fixed or when
the jiurpose is accomplished. If he does not return or' deliver as directed
by the bailor, or tender the goods at the proper time, he becomes liable
for any loss, destruction or deterioration of the goods even without
negligence during the period it is detained. Where goods are deliver-
ed to the Post Office for transmission by V.P.P. to a buyer, they must be
delivered to the buyer on payment by him of the price. Delivery of the
goods by the Post Office without receiving the price will render it liable
as a bailee for delivering goods against directions (Income-tax Commer.
v. V.P.M. Rathod & Co., 1959 S. C. 1394). If the bailee sells the goods,
the bailor can in equity follow the goods or their proceeds, wherever
they may be. If the bailor does not take delivery ivheh it is offered
at the proper time, the bailee can claim compensation for necessary ex-
penses of and incidental to the safe custody. Where, however, the ar-
ticle bailed or hired does not serve the purpose, the bailee may leave the
article where it is and give notice to the bailor that it is unfit for the
purpose. Wheie the goods are lost before the proper time witliout ne-
gligence on the part of the bailee he will not be liable for tlie loss.
And a bailee, who jreturns the goods in good faith to the bailor who
really had no title to tlie goods, is not responsible to the true owner of
the goods. The bailee even in such a case is bound to deliver the goods
to the bailor, if the bailor has, by his own act, as by mortgaging the
thing bailed, made it impossible for the bailee to redeliver to him %vith-
out being exposed to in action at the suit of a third person (Sections
53 and 67).
As regards the return of goods bailed by two or more joint owners,
the bailee may return the goods to any one without the consent of the
bailors, provided that there is no contract that deliveiy must be given
to all. It is to be noted that the word used in Section 105 is "mav" and
not "must" with the effect that no one bailor can compel the bailee to
return him the goods, but the bailee may, if he likes, do so. But even
138 MERCANTILE LAW

where there is a contract asking the bailee to redeliver only to all joint
owners, and he returns them to ope ol the joint owners, no suit can
be filed by the others against the bailee joining the one who got the
goods and he cannot be a party to a suit, for the breach is occasioned
by his act.
In the absence of any contract to the contrary, the bailee must re-
turn to the bailor any increase or profits which have accrued from the
goods bailed. This usually happens in the case of animals. So, where
A leaves a cow in the custody of B to be taken care of, and the cow
gets a calf, B is bound to deliver the cow as well as the calf to A. Simi-
larly, new shares allotted in respect of shares that have been pledged
are an increase %vliich the pledger is entitled to get.° And xvhere a bailee
entrusted with some goods for some purpose finds something else hid-
den in them, such other goods belong to the owner and not to the bailee.

DUTIES OF BAILOR
To disclose Known Facts.—TJie first and foremost duty of the bailor
is to disclose the faults in the goods bailed in so far as they are known
to him; and if he fails to do that he will be liable to pay such damages
to the bailee as may have resulted directly from the faults. A lends a
horse, which he knoivs to be vicious, to B, without disclosing this fact.
B, in ignorance of tire horse's vicious nature, rides the horse and h
thrown ofl and injured. A is responsible to B for damages sustained.
Or, A delivers to B, a carrier, some explosives in a case, but does not
warn B. The case is handled without extraordinary care necessary for
such articles and explodes. A porter is injured and some other goods
are damaged. A is liable for all the resulting dpmage. In the case of
bailment of hire a still greater responsibility is placed on the bailoi-.
He will be liable for all damages as above even if he did not know of
the defects. A hires a carriage of E. T h e carriage is unsafe, though
B does not know this. A is injured. B is responsible to A for the in-
jury. It follows from this that a gratuitous lender is not liable for de-
fects in the things lent of which he is not aware. Thus, if the car-
riage were lent gratuitously, B would not be liable i;nder the circums-
tances.
T o bear Extraordinary Expenses.—The bailee is no doubt, requir-
ed to pay the ordinary and reasonable expenses of the bailnient, but for
any extraordinary expenses the bailor would be responsible. If a horse
is lent for a journey, the expenses of feeding the horse would, of course,
be borne by the bailee. But, if the horse becomes sick and expenses have
been incurred, the bailor shall have to pay these expenses. The parties
can, however, enter into any contract as regards expenses. In the case
of bailment without remuneration to the bailee Section 158 provides
that all the necessary expenses incurred by the bailee in connection with
the bailment must be paid by the bailor.
To indemnify Bailee.—The bailor is bound to indemnify the bailee
for any cost or loss which the bailee may incur because of the defective
title of the bailor to the goods bailed (Section 164). This right to in-

3. Lucknov; Municipal Board v. Abdul Razzaq 1931 Oudh 15.

BAILMENT AND PLEDGE 139
demnity extends also to a suit by third parties, even after the goods
are returned to the bailor or delivered to someone else according to his
directions.
Bailee's Lien Where the goods are bailed for a particular purpose,
and the bailee, in due performance of bailment, expends his skill he has
a lien on tlie goods, i.e., the' bailee can detain the goods until his char-
ges in respect of labour and skill used are paid by the bailor. Btit, if
the bailee does not coinp]ete ihe work within the agreed time, or a rea-
sonable time, he is not entitled to a lien to the goods, A gives a piece
of cloth to B, a tailor, for making it into a suit. B promises to have
the suit ready for delivery within a fortnight. B has the suit ready for
delivery. He has a right to retain the suit until he is paid his dues.
But, if B takes a month to complete the suit, he has no lien. Further,'
the right of lien arises only where "labour and skill" have been us^d
So as to confer an additional value on the article. So, a person who
takes an animal for feeding has no lien, but a veterinary surgeon has.
And also the bailee keeping the article to enforce his lien cannot charge
for keeping it.
Liens are of tv;o kinds: Particular Lien and General Lien. A
particular. lien is one which is available only against that property -in
respect of which the skill and labour are used. A general Hen, on the
other hand, is a right to detain any property belonging to the other
and in the possession of the person trying to exercise the lien in respect
of any payment lawfully due to him. A general lien is the right to re-
tain the property of another for a general balance of accounts; but a
particular lien is a right to retain it only for a charge on account of
labour employed or expenses bestowed upon the identical property de-
tained.' We have so far dealt with the particular lien, and that is the
lien to which a bailee is ordinarily entitled. The right of general lien
is specifically given by Section 171 only to the Bankers, Factors, Whar-
fingers, Attorneys of a High Court, and Policy-brokers. These persons
are authorised, in the absence of a contract to the contrary, to retain
the goods bailed them as security, for any debt due to them, A banker
has a general lien on cash, cheques, bills of exchange and securities de-
posited v/ith him in liis character of a banker for any money due to him
as a banker. But, where valuables and securities are deposited for a
specific purpose, e.g., for safe custody, the banker has no general lien
on them. A factor "is an agent entrusted with the possession of goods
for the purpose of sale." If any money is due to him by his principal,
he can retain the principal's goods, in exercise of his right of general
lien until his dues are paid. This lien, however, applies only to debts
due to the factor in that chai'acter; it does not extend to debts which
prose prior to the commencement of his relation as a factor to his prin-
cipal. It extends to all his lawful claims against the principal a-, -i
factor, whether for advances, or remuneration, or for losses, or liabilities
in the course of his employment as a factor. A ^vharfingcr can, as a
rule, exercise general lien on goods as regards claims against tlie owner

4. Kent. Comm. ii 634 quoted as foot-note. Pollock & MuUa.

Indian Contract Act.
 140 MERCANTILE LA.W

o£ the goods. Tlieie£ore, Jie has no lien as against a buyer for charge*
becoming due from the seller after the wharfinger had notice of the
sale.
An attorney (i.e., a solicitor) of Hign Court has a lien -on all papers
and documents belonging to his client which are in his possession in his
professional capacity for his professional fees, but not tor ordinary loans-
and advanrps. A solicitor who is discharged by his client holds the pa-
pers entrusted to him subject to his lien for cost, but if he discharges
himself he is not entitled to a lien.

RIGHTS OF BAILOR AND BAILEE AGAINST THIRD PARTIES

As the bailee is, the person entitled to the possession of the goods
bailed the law (Section 180) vests in him a right to such remedies as
the owner would have had, if no bailment had been made., Thus, if a
tjiird person wrongfully deprives the bailee of the use or possession of
the goods bailed, or causes them any injury, the bailee may file a suit
for trespass or conversion or for damages. He can recover from the
wrong-doer in this manner even when he is not himself responsible to
the bailor for loss and damage to the goods. The section further gives
an option to the bailor also to stie for the injury or deprivation caused
by the thiid party. As between the bailor and bailee it is provided that
whatever is recovered from the third party by way of relief or compen-
sation, is to be apportioned according to their respective interests. If,
for instance, the bailee recovers more than his interest he must account
for it to the bailor. It/ does not matter which of them recovers first or
whether one sues or both; a recovery by one will oust the otlrer of his
recovery from the third party, for there cannot be a double satisfaction.
And the defendant cannot be liable in all for more than the value of
the goods, and special damages, if any.

TERMINATION OF BAILMENT
Where the bailee does anv act with regard to goods bailed inconsis-
tent with the condition of bailment, e.g., wrongfully uses or disposes of
them, the bailor may determine the bailment
As soon as the period of bailment expires or the object of the bail-
ment has been achieved, the bailment comes to an end, the bailee must
return the goods "without demand" by bailor.
A gratuitous bailment can be terminated by bailor at any time,
even before the stated time, subject to the limitation that where such a
termination of bailment before the stipulated period causes loss in excess
of benefit, the bailor must compensate tlie bailee.
A gratuitous bailment terminates by the death of either the bailor
or the bailee.

FINDER OF LOST GOODS (Sections 168 and 169)

We have seen under Section 71 that the position of a finder of goods
is exactly that of a bailee. It is true that a person who comes by an
article is not obliged to take charge of it; but if he does pick it up, he be-
comes a bailee. The rights of a firider are that he can file a suit against the
BAILMENT AND PLEDGE 141
own,er for any reward that might ha^e been oEEered, and may retain the
goods until he receives it. But where the owner has offered no rcwaid,
the finder has only a particular lien and can detain the goods until he
receives compensation for die trouble and expenses incuiied in preserv-
ing the propeuy or for finding out the true owner; but he cannot 'ale
a suit for the recovery of such compensation. In English law, however,
the finder has, in the absence of an offer of reward, no right to aliy
remuneration or lien, as the service is rendered without request.
As against everyone save the true owner, the property in the goods
found in a public or quasi public place vests in the finder on his taking
possession of it. Thus, a person who picks up a purse or a ring, acci-
dentally diopped by a stranger, can keep it as his own as against the
wliole %vorld, except the true owner. The finder keeps the aiticle in
trust for the real owner, and according to common law cannot sell it
even if the true owner his not turned up. But, in Indian Law, the
finder is given a right to sell the property (1) where the owner can-
not with reasonable diligence be found, or (2) when found, he refuses
to pay the lawful charge of tlie finder and (a) if the thing is in danger
of perishing or losing greater part of its value,^or (b) when the lawful
charges of the finder for tlie presen'ation of goods and the finding out
of the owner amount to two-thirds of the value of this thing.

COMMON CARRIERS AND INN-KEEPERS AS BAILEES

^Ve have seen above that Sections 151 and 152 place equal amount
of responsibility on all kinds of bailees, and in fact embody the com-
mon law iiile as to the liability of bailees other than common carriers
and inn-keepers. The Contract Act has omitted to deal with the earners
because there are Carriers Acts dealing witli them. But to complete the
subject of bailment, we may considei these here.
Common Carriers.—In Irraivaddy Flotilla Co. v. Bhug^vandas (1891)
18 J.A. 121 : 18 Cal. 620, the Privy Council held that the duties and
liabilities of a common earlier in India are governed by die principles /
of the English Common Law in conjunction with the pro\isions of the
(iarriers .Act, 1865, and that, notwithstanding some gcncial expressions
in the chapter an Bailments, the responsibility of a common canicr is
not witliin tlic Contract Act. A common canier is one wlio imdei fakes
to carry fiom place to place the goods of all persons who think fit to.
employ him for hire. There are two impoitant elements in this defini-
tion. A common carrier is bound to cany for all who are ^I'iliinp' to
pay his usual or reasonable rates—that is tlie force of the teim "Com-
mon", and secondly, to cany safely, with the exceptions gi\en below.
Thus, under common law he must make gooa all loss or damage, whe-
ther caused bv his negligence or not, unless the loss or damage is caused
by the Act of God, or public enemies. Tlie Carriers Act, now, enables
a common carrier to limit his common law liability of insuiing the
goods by special contract in the case of ceitain goods, such as \aluablcs,
]-)erishable goods, or explosives, but not so as to gel fid of liabilitv for
negligence."

5. Orient S.S. Co. v . K.S.S. Co. 1951 Trav. Coch. 1.

142 MERCANTILE LAW
Carriers by Sea for Hire are not common carriers within the mean-
ing of the Cairierb Act; dieiefore earners by sea limit their liability even
against negligence ot their servants. So, where a shipping. company was
sued for damages to goods discharged in the rain by their servants it
ivas held that though the act amounted to negligence on the company's
part, yet they were exempted from liability by a clause in the bill oE
lading which provided that the company should not be liable for the
negligence o£ its servants." But carriers by inland navigation or by
river steamers are common carriers.'
Carriers by Raihvay.—In England railways, as far as goods traffic is
concerned, have always been common carriers, with powers to limit their
liability by special contract subject to the rules laid down under sta-
tute. In India, imtil the Railways Act, 1890,- was amended in 1961,
railways were regarded as bailees and their liability was that as laid down
in Sections .151 and 152 of the Indian Contract Act. But now, after
the 1961 Amendment Act, tire responsibility of Indian railways as car-
rieis of animals and goods has been dianged, to that of common carriers.
Now, therefoie. railways in India are common carriers, with responsibi-
lities higher than those of a bailee, with powers to limit their liabi-
lity by special contract subject to the provisions of Sections 72 to 78B
Df the Indian Railways Act. 1890, as amended up to date. Every con-
signor of animals or goods must execute a Forwarding Note in the form
prescribed by the railway administration and approved by either at or-
dinary rate called the railway risk rate or at a reduced rate called the
owner's risk rate. A railway administration is liable for loss or damage
in both cases, but with this difference that in the former case the onus
is on the railway to show that the consignment was carried without neg-
ligence, while in the latter case the consignor has to show that the loss
or damage to the consignment was caused by the negligence or miscon-
duct on the part of the railway administration or any of its servants.
Inn-keepers—There is a conflict of opinion ivith regard to the lia-
bility of an inn-keepei or a hotel-keeper in respect of the guest's pro-
perty. The Bombay High Court has held that the liability of a
hotel-keeper in respect of goods belonging to a guest is governed by the
Common Law of England according to which a hotelkeeper is liable for
loss or damage of goods belonging to the guest, unless the loss or da-
mage arises from the guest's negligence, tire Act of God or public ene-
mies.° The Allahabad High Court has held that in India the liabilitv
of a hotel-keeper is governed by the provisions of Sections 151 and 152
of the Contract Act and is that of an ordinary bailee." The Allahabad
view is evidently the correct view, for the case of an inn-keeper or hotel-

y
6. Haji Ismail Sait v. T h e Company of the Massageries Maritiraes
of France (1905) 28 Mad. 400; see also (1913) 38 Mad. 941 and (1917) 34
M.L.J. 253: 48 I.G. 485.
7. Indian General Steam Navigation Co. v. Bhagwan Chandrapal
(1913) 40 Cal. 716, Dekhricca Co. v. Assam Bengal Rly. Co. (1929) 47
Cal. 6 and 47 Cal. 1027.
a. Whateley v. Polanii (1886) 3 B.H.C.O.C. 137.
9. Jain &: Son v. Cameron (1922) 44 All. 735.
BAILMENT AND PLEDGE 145
keepei is difteient from a common carrier The Common Law rule as
to the hotel keepers liability does not appeal to have been accepted
anywhere, nor is theie any enactment like the Canieis Act, witli which
the provisions of Sections 151 and 152, if appfied to innkeepers, conflict

PART 3 B
PLEDGE OR PAWN
A pledge or pawn is a special foiin of mutual benefit bailment by
which one peison transfers possession of some article to another to secure
the payment of debt or the performance of a piomise. A pledge is thus
a secuiity device based upon a bailment. The iDailor is called the "pawn-
oi" and the bailee the "pawnee" Note deposit of goods as security foi
a loan is necessaiy, and if there is no transfer of possession of goods,
no pledge is cieated. Since pledge is a branch of bailment, the pawnee
is bound to take reasonable care of the goods pledged with him. He
must not use the goods pledged, and if he does so, he would be respon-
sible foi damages and any loss occasioned by such uses.
A pledge is distinguished fiom other types of bailments by the na
tute of the lien possessed bv the pledge The pledge lien gives the
pledgee the right to sell the goods in the event of the non-payment o£
the debt or non-performance of the obligation secured

PLEDGE, LIEN AND MORTGAGE DISTINGUISHED

A pledge is something between a simple lien and mortgage In the
case of a lien there is no transfer of any interest, the peison exercising
a lien has only a right to retain the subject-matter of the lien until he
is paid In the case of a mortgage the property passes to the mort-
gagee he has an absolute interest in the property subject to a right of
redemption by the mortgagor. But, in the case of a pledge, though the
deposit of goods is made security for payment of a debt or perfoimance
of a inomise, the pledgee has only a special property in the pledge, while
the geneial property therein remains in tlie pledgor and whollv reverts
to him on the discharge of the debt or the peiformance of the pro-
mise On the contrary, the pledgee can sell the goods after rtotice if the
pledgoi fails to discharge the deist on tlie stipulated date (J. & K. Bank
V. Tekchand, 1959 T- & K- 67; Narsayyamma v. Andhra Bank, 1960 A.P
273)

RIGHTS OF T H E PAWNEE
No pioperty or ownership in the goods pawned passes to the pauhee
but he (pawnee) gets a "special propeity to retain possession even
against the tiue owner until the payment of the debt, interest on the
debt, and any other expenses, inairred in respect of the possession or
for preseivation ot the goods" (Section 173). The pawnee must, there-
fore, deliver the goods to the paivnor on the tender of all that is due
and if he persists in retaining the goods thereafter, he will make himself
a 'wiongdoer\ and his 'special property is determined and the pawnor
can reco\ er the goods. As the pledgee does not transfer ownership, the
meie right to retain confers no title to alienate except upon default of
144 MERCANTILE LAW
payment in accordance with the terms o£ the contract. Hence, the
pawnor cannot, apart from the above circumstance, confer a good title
upon a bona ficle purchaser for value, further, tlie articles pledged are
security only tor the particular debt, unless the parties contract that
they shall be security also for any other subsequent debt (Section 174).
We have said above tliat for necessary expenses incurred in the preser-
vation of the pawned goods the pawnee has a right of lien, but if there
be any extraordinary expenses ("the cost o£ curing a pawned horse which
meets with an injury by accident"), he has only a right to sue the pawnee
for recoveij of such extraordinary expenses, and cannot retain the goods
for such expenses (Section 175).
Should the pawnor make a default in payment of the debt, or per-
formance of the promise, at the stipulated time, the pawnee may either
(i) file a suit for die lecovery of the amount due to him while retain-
ing the goods pledged as collateral security, or (ii) may sue for the sale
of the goods and the realisation of the money due to him, or (iii) may
himself sell the goods pawned, .after giving reasonable notice to the
pawnor, sue for the deficiency, if any, after the sale (Section 176). If the
sale of the goods is made in execution of his decree, the pawnee may
buy the thing at the sale. But he cannot sell it to himself, and if he
were to do so, then it would be treated as wrongful sale and the pawnor
will have the right to recover tlie article on payment of the pawnee's
dues according to the terms of the contract. While exercising either
of his first rights of suit the pawnee need not give any notice to the
pawnor, but-if the pawnee wants to sell the goods, he must give rea-
lonable notice of his intention notivithstanding any contract to the con-
trary." And, should he sell the goods in default of payment, and find
the proceeds insufficient to meet his full dues, he may recover the ba-
lance from the pawnor, but if there is a surplus, he must pay it over to
the pawnor. In this respect, the right of a pledge or pawnee differs
from the right of an unpaid seller, because if there is a surplus, the
unpaid seller can retain the surplus. Furthermore, the pawnor can
redeem at any time before sale, though the time for payment has
expired, for die rights c£ the pawnee depend solely upon possession
and he does not own the subject-matter. Hence the rule that tender
of the amount due or even the pledge coming to the hands of the
pawnor otherwise than for a limited purpose will extinguish all the
pawnee's rights in respect of the pledge. Thus, an agreement that the
pledge should become irredeemable, if it is not redeemed after a certain
time, would be invalid

R I G H T S OF PLEDGOR
We have seen above tliat in case of default by tlie pledgor to repay
on the stipulated date, the pledgee may sell the goods after giving the
pledgor a reasonable notice. This notice is compulsory in all cases of
pledge, even when the instrument of pledge contains an xmconditional
power of sale. Therefore, if the pledgee makes an unauthorised sale

10. Narsavyamma v. Andhra Bank, 1960 A.P. 273

BAILMENT AND PLEDGE 145
(i.e.. without giving the notice as required under Section 176), the
pledgor has the following courses open to h i m : _
(1) to file a suit for redemption of goods by depositing the
money, treating tlie sale as if it had never taken place; or
(2) to ask for damages on the ground of conversion.
A pledgor who impugnes the sale by the pledgee cannot sue for a
declaration that the sale is contrary to law and does not aftect the rights
of the pledgor [Narsayyamma v. Andhra Bank, 19G0 A.P. 273; Neckram
Dobay v. Bank of Bengal (1892) 19 Cal. 322].

PLEDGE BY NON-OWNERS
(i) Mercantile Agents,—Hitherto we have assumed that the person
creating the pledge is tlie owner of tlie goods. But tlie Jaw permits
under certain circumstances a pledge by a person who is not the owner
but is in possession of the goods. In the first case, a mercantile agent
who is, with the consent of the owner, in possession of goods or docu-
ments of title of goods may, in die ordinary course of his business as
a mercantile agent, pledge the goods, and such a pledge will bind \ the
owner. It ,will also be a valid pledge even when made by the mer-
cantile agent without the authority of the owner, provided that the
pawnee has acted in good faith and did not have at the time of the
pledge notice that the pawnor had no authority to pledge the goods.
A mercantile agent has been defined by Section 2(9) of the Indian Sale
of Goods Act as "a mercantile 'agent having in the customary course oi
business as such agent authority either tc sell goods, or to raise money
on the security of goods." Thus a commission agent, or a broker may
make a valid pledge of the goods, but a person in bare possession can-
not do so." Similarly, a person entrusted with goods for a specific pur-
pose cannot pledge the goods. It must be noted .that a mercantile
agent like an owiier can create a pleage by the delivery eiiher ol goods
ar 'lie document of title to goods (Morvi Mercantile Bank v. Union of
India, 1965 S.C. 1954).
(ii) Seller or buyer in possession after sale.—A seller left in posses*
sion of goods sold, is no more owner of the goods, but a pledge created
by him will be valid, provided the pawnee acted in good taith and had
no notice of the sale of goods to the buyer. Where B buys goods from
A, pays for them, but leaves them in the possession of A, and A then
pledges the goods with C who does not know of the sale to B, the pledge
is valid. Similarly, where a buyer or a person who has agreed to buy,
obtains possession of goods with the seller's consent, before the pay-
ment of price, pledges these goods to a pawnee who takes them in good
faith and without notice of the seller's right of lien or any other right
of the seller, the pledge is valid.
(iii) Pledgor having Limited Interest.—When the pawnor is not
the owner of the goods, but has a limited interest in the goods which
he pawns, e.g., where he is mortgagee or he has a lien with respect to

11. Visalakshi v. Janopakara, 1942 Mad. 208.

146 MERCANTILE LAW
these goods, the pledge will be valid to the extent of such interest. A
found a watch on the road and had it repaired, paying Rs. 10 as re-
pairing charges, and then pledged it for Rs. 50. I'he real owner can
recover the watch only on paying Rs. 10 to the pledgee. *
(iv) Pledge by Co-owners.—One of the joint owners in sole possession
of goods, \vith the consent of the others, can make a valid pledge.
(v) Pledge .by person" in possession under voidable contract.—A per-
son may obtain possession under a contract which is voidable at the
option of the lawful owner on the ground of fraud, misrepresentation,
coercion or undue influence. Possession so obtained is not by free con-
sent, but it is nevertheless possession by consent, ^ n d the person in
possession may make a valid pledge of the goods, provided the con-
tract has not been rescinded at the time of the pledge. But in a case
where there is no leal consent as where goods have been obtained by
means of the_ft, no pledge can be made. A thief has no title and cats
give none.

SUMMARY
A "Bailment" is (i) the actual or constructive delivery, (it) of goods,
(iii) by the owner called bailor, {iv) to another person called bailee, (v)
for a specific purpose, (vi) on condition that goods shall be returned in
specie either in their original or in an altered term, or shall be dispos-
ed of according to directions of bailor.
In a bailment, only possession of goods passes to the .bailee and own-
ership remains widh the bailor.
Bailment may be—
(a) for the exclusive benefit of the bailor;
(b) for the exclusive benefit of the bailee;
(c) for the mutual benefit of both.
Duties of Bailee—
1. To take as much care of goods bailed as a man of ordinary
prudence would, in similar circumstances, taTce of his own
goods of similar nature.
2. Not to make any unauthorised use of goods.
3. Not to mix his own goods with bailor's goods.
4. Not to set u p adverse title.
5. To return the goods in specie.
Duties cf Bailor—
1. To disclose known facts relating to the goods bailed.
2. To bear extraordinai^ expenses incurred by the bailee in
connection with bailment.
3. To indemnify tht^ bailee for cost or loss incurred because
of the defective title of bailor.
4. Bailee has a lien on the goods, ^i.e., he can retain the goods
until his charges in respect of labour and skill used by him
with respect to the goods are paid.
Termination of Bailment—
L The bailor may rietermi'^p the bailme'^f where the bailee does
 BAILMENT AND PLEDGE 147
any act with regard to goods inconsistent with conditions of
bailment.
2. A bailment comes to an end as soon as the period of bail-
ment expires or the object is achieved. Goods must be re-
turned without any demand by bailor.
3. A gratuitous bailment can be terminated by bailor at - any
time, provided tliat the termination before tlie stipulated
period does not cause to the bailee a loss greater than the
benefit.
4. A gratuitous bailment terminates by tlie death either of the
bailor or the bailee.
Finder of Lost Goods.—A finder of goods is a bailee, with all liis
rights and liabilities, as against the real owner, and an owner as against
the rest of the world.
A finder can sell the property found—
1. where the owner cannot with reasonable diligence be found,
or
2. when found, he refuses to pay the lawful charges of the
finder, and
3. if the thing is in danger of perishing or losing greater part
of its value, or when lawful aiarges of finder for preservation
of goods and finding out the owner amount to two-thirds of
the value of the diing.
Carrier as Bailee.—A common carrier undertakes to carry goods of
all persons who are willing to pay his usual or reasonable rates. He fur-
ther undertakes to carry them safely, and make good all losses, unless
they are caused by Act of God or public enemies. Caniers by land, in-
cluding railways, and carrieis by inland navigation, are common carriers.
Carriers by sea for hire are not common carriers and 'they can limit their
liability. Railways in India are now common carriers.
Inn-keepers.—In India the liability of inn-keepers or hotel-keepers in
respect of, goods belonging to guests appears to b e that of a bailee.
Pledges.—A pledge or a pawn is a contract whereby an article is
deposited with a lender or promisee as security for the repayment of a
loan or performance of a promisee. T h e bailor or depositor is called a
Pledgor or Pawnor and the bailee or depositee the Pledgee or Pawnee.
Pawnee must take reasonable care of the goods pledged with him.
He must not use the goods pledged, and if he does so, he may be liable
for any loss caused by user.
Rights of Pawnee.—A pawnee gets special property in gaods, pawn-
ed, and he can retain them until payment of the principal, interest and
any other expenses. If the debtor fails to pay on the stipulated date,
the pawnee may, after giving due notice, sell the goods pawned, and if
there is any deficiency, sue for the balance. Any surplus must be paid
over to the debtor.
^ Pledge by Non-Cv/ner.—A mercantile agent in possession of goods
with owner's consent can pledge the goods. A seller in possession of
goods may pledge to a pawnee who acts in good faith and has no no-
tice of the sale to buyer. Buyer In possession with seller's consent may
pledge befoie paying the price. A person widi limited interest in the
goods, e.g., mortgagor, a person in possession under voidable contract.
i43 MERCANTILE LAW
may pledge the goods. A mie£ cannot create / a valid pledge o£ stolen
goods, as he has no title and can give none.

CASES FOR RECAPITULATION

1. A finds a lostly ring and, after making reasonable efforts to dicov-
er the owner, soils it to B, wh.o buys without knowledge tliat A was mere-
ly d finder. The true owner sues B to recover the ring. Held, the
owner can recover the ring. The mere Tact of an innocent and bona fide
purchase from a person with no title is no answer to the claim of tlie
true owner [Faiquharson Bros. v. King and Co. (1902) A.C. ^25].
2. B hired from G a van and driver for three hours for the pur-
pose of delivering goods tb his customers expeditiously. During the
journeys, the vaii driver left tlie van unattended for an hour in order
to have a meal, and the goods were stolen while he was away. An ex-
emption clause in the contract of hire stated 'G does not hold himself
responsible for loss or damage to goods in the van.' B sued G for the,
value of the goods and, alternatively, for damages for breach of contract.
Helfi, G is liable to pay damages to B. The Court of Appeal declared
that, even though G had effectively excluded his liability in tort, he could
not exclude his fundamental duty under the contract to deliver the
goods forthwitli to their destination. G had failed to perform the con-
tract into which he had entered, and was bound to pay damages for this
fundamental breach [Bontex Knitting Works Ltd.- v. St. John's Garage
(1944) 1 All. E.R. 381].
3. A, a I jeweller, was entrusted with a diamond by P with tlie ins-
f-uctions tliat A should obtain offers for it, and if any such offer was
approved by P, A should sell it to the offeror. Acting contrary to P's
'instructions, A sold the diamond to S who bought it in good faith.
Thereafter A. absconded. with die price money. In a suit by P against
S to recover the diamond, it was held tliat P could not recover tlie dia-
mond from S, as the sale was made by A, as a mercantile agent in the
ordinary course of his business, tliough contrary to P's instructions,
(1929) 3 Bom. L.R.
4. A guest, arriving late for- dinner at a hotel, saw a number of
ladies' coats left in an ante-room which was previously used as a super-
vised cloak-room. At tliat time, however, there was no attendant in the
room. Nevertheless, she left her mink coat with the other coats. Whilst
she was dining, the coat was stolen. It was held that the hotel-owners
were liable to pay for tlie loss.
5. Some cattle belohging to A were agisted with B. Without any
negligence on B's part the cattle were stolen. B did not inform the
owner or the police immediately, or make uny. efforts to recover them
because he thought that it would be useless to do so. Held, B was
liable for tlie loss, unless he could .prove that, even if he had reported
the loss, the cattle still could not have beon recovered [Goldman v. Hill
(1919) 1 K.B. ,443].
6. A gives an electric kettle to B, an electric repairer, on condi-
tion that the kettle must be returned completely repaired within :. fixed
period. A part only of the work is done witliin the period. When A
asks for tiie return of the kettle, B- claims to retain it untU lie is paid
due remuneration for the work done by him. Held. B cannot refuse to
deliver the kettle until payments for part of the work done by him is
made. Ke has lost his right of lien as he has failed to complete the
BAILMENT AND PLEDGE , 149
work within tlie agreed period and A can take it back ivithout payment
[Judah V. Emperor (1925) 53 Cal. 174].
7. H, the owner of a motoi car, agreed with d\e C M C o , that
the company •would maintain and garage her car tor three years, on be-
ing paid an annual sum by H. H was entitled to take the car out of the
company's garage as and when she liked The annual payment being
m arrear, tlie company detained the car \ n the garage and claimed^ a lien.
Held, as H was entitled to take the car away as and when she pleased,
the company had no lien [Hatton v. Car Maintenance Co., Ltd. (1915)
1 Ch. 621]
8 Six boxes containing mendiol crystals weie consigned by H to
'self and entrusted to the railway lor carriage from Bombay to Delhi
under a railway leceipt. H borro^ved JR.s. 20,000 from M Bank, execut
ed a promissory note tor the amount and endorsed the R / R pertaining
to the six boxes in favour of die Bank as security for the loan T h e
consignment did not leach Delhi and the railway failed to deliver the
boxes to the Bank. The Bank, claiming to be the pledgee of the goods,
sued the Union of India for the recovery of Rs 35,000, being the value
of the goods, as damages The Supreme Court held that the Bank is
entitled to recover the full amount of Rs. 35,000. The owner of
goods can make a valid pledge of them, by transferring the railway receipf
represent ng the said goods. I h e Bank is a pledgee and as such can sue
for -the value of the goods Section 180 gives the bailee the same re-
medies against third parties as are available to the owner of the goods.
The three transactions, viz, the advancing of loan, the execution of the
promissory note and the endorsement of the R/R, together form one
transaction Their combined effect is that the Bank would be in con-
trol of the goods till the debt was discharged Such a transaction is
a pledge (Morv'i Mercantile Bank v. Union of India, 1965 S C 1954).
9 A lady employed a goldsmith for die puipose of melting old
jeivelleiy and making new jewels. Every evening she used to receive the
half made jc'svcls from the goldsmith and put them into a box which
was left m a loom in the goldsmith's house of which she retained the
key. One night the box ivas stolen. In a suit by the lady against the
goldsmith. Section 151 of tlie Contract Act would apply I h e r e is
nothing in the case to suggest that the box was stolen through the negli-
gence of the goldsmith or that the goldsmith did not take care of the
box as 1 man ol ordinary prudence would under similar circumstances
take of his own goods. Therefore, the goldsmith cannot be held liable
for the loss of the box
iO G luul loiUiccI his car lO his brother, R, who obtained peirol
ant! oil oil ciedit ^lom X X took possession of the car from R and re-
fused !o rciurii ii uniil he was paid G is entitled to sue X for con\er-
sion .ipd rlaim damages for injury to his reversionary interest as the
owner ol th" car G is entitled under S 180 of the Contract Act to sue
X for unl.iwlully taking the car from the possession of R, the bailee
[Geoige Post \ Lloyd 13 N I M Sc 241, 177\ 560]
 Chapter IV

Principal and Agent

PART 4-A

DEFINITION AND GENERAL RULES

So far we have been considering our legal persons as acting entirely
by themselves, and as being self-sufficient for their necessary legal actions.
In leal life v/e do not always act ourselves. This is particularly impor-
tant in business world. Our economic structure of today rests upon the
doctrine that one person may act for and in tlie place of another. In
lav, a person wiio acts in place of anotlier is called an Agent, and the
person for whom or on whose behalf he acts is called the Principal.
It is true that the law might have insisted that each man must act for
himself and that no one could act through another. This would have
greatly liandicapped the development of the modern economic world, for
it would have limited each man to what he himself could do. Today,
by virtue of the agency device, one man can make the contracts of a
lumdred men or be in a hundred different places at the same time.
At;eno', therefore, is one of tlie most common rclationshios today, and
Afhen it exists, one person has the right to act for another.
.-\genc\ is a relation based upon an express or implied agreement
A'heieby one person, the agent, is authorised to act for another, his
principal in transactions with third persons. The idea of reiatio.i in-
dicates that the agent is merely a connecting link bet-ween the principal
and the third party. T h e acts of the agent bind the principal to third
persons or give the principal rights against the third persons. Agency
is based upon consent and for that reason, it is called a consensual re-
lation. If consideration is present, the relationship is also contractual.
Tliere are two general rules regarding agencv. One, with certain
exceptions, whatever a man sui juris may do of himself he may do by
another. In other words, i person may, in general, act through an
agent. T h e second rule follows from the first: the a a s of the ageni are
tlic acis of ilie principal. T h e maxim is qui facit per aliiun facit per «e—
he who acts through an agent is himself acting.
^1 Who may be a Principal.—.-\iiv person, if he is competent to act for
liimsclf. may act through an agent. A person under a legal oi natural
di^;^!)Ililv or incapacity cannot appoint an agent. For example, the ap-
PRINCIPAL AND AGENT ISl
pointmeiu by a minor is ]ield void, and i£ an agent acts for a minor,
he wilJ be personaiJy Jiable to the third party. Groups of persons may
also appoint an agent or agents to act for diem. For instance, four
men, having formed a partnersiiip, may employ an agent to act for them
in the business transaction of the firm. Certain gioups of persons, on
account of the nature of the organisation, must act through agents. Thus
a group of persons orginised as a company can only make a contract
through an agent since the company is not a' living person.
Who may be an Agent.—Since a contract made by an agent is in law
the contract of the principal, it is immaterial whether or not die agent
has legal capacity to make a contract for himself. Thus a minor can
be agent; the agent is only a connecting link and is nor personally
bound by his acts performiid on behalf of his principal. The law re-
quires the principal and tlie third party to be competent to contract.
In considering, however, whctlier the contract of agency itself as
between the principal and agent is enforceable, the contract capacity oE
the agent becomes important. Whfire an agent is an adult of sound
mind (competent to enter into contract) then, where the agent has mis-
conducted Jiimself in tlif business of the agency, he will be rcsponsibie
to the principal for damages arising from sucli misconduct. But, if the
agent happens to be a person incapable of entering into a contract, eg.,
a minor, then the principal cannot hold the agent liable, in case of mis-
conduct or negligence (Section 184'). For example, where P, a princi-
pal, gi\es A, a minor, a ring worth Rs. 500 and asks him not to sell
it on credit or (of less than Rs. 450, and A sells the ring to C on credit
for Rs. 350, the transaction will positively bind P and C, but P will ])D\C
no right to claim damages .is against A for his misconduct, since the
latter happens to be a minor, and the contiact with a minor is void.
Had A been an adult, lie would have been liable to P for damages
sustained by his misconduct.
Capacity to contract must be distinguished from authority to con-
tract. Capacity means power to bind oneself; authority means power
to bind anotiier. Capacity is part of the law of status; authority is part
of the l a ^ of principal and agent. Capacity is usually a question of
law; authority is usually a question of fact.

CREATION^ OF AGENCY
.\ contract of agenc^'. like any other contract, may be express or
implied: but consideration is not an essential element in this con-
tract. The fact that the principal has consented to be represented by
the .i;;ent is a sutlicient 'detriment' and consideration to support tlie
promise by the agent to act in that capacity. It is of importance to
remember in tliis connection that if no consideration has p.i.'ised to t!,e
agent, "ne is only a gi.ituitous agent and is not bound to do the ivork
en'nisted to him. aliliough if lie begins the work, he must do it to the
satisfaction of his ijrinci|).il. Agency may also arise by estoppel, holding
out, necessity or subsei|ucni ratification by the i5iincip.i! of the act done
by the aRcnt. The last wpc is sometimes called ex post facto Ageniv.
Express .\gency.—The contract of agencv, with certain e\ceptio.os.
152 MERCANTILE LAW
as to \\riling and registration, may be made orally or in writing. In
fact, in a larjje number of business dealings agencies are created by word
of mouth, [or, if this weie not recognised by law, business could hard-
ly go on. The usual form of a written contract of agency is the Power
of Aiiorney, wiiich gives him the authority to act as agent on behalf
of the principal in accordance with the terms and conditions mention-
ed thciein. Where an agency is created to transfer or assign immov-
iblc property, the power of attorney or authority must also be registered
m India, and in England it should be given by ;Deed. Powers of attor-
ney \ary very much in scope, and may be divided into three classes—a
general power of attorney, a special power, or a particular power. A
gcneijl poivcr of aiionicy aiiilioriscs the agent to do all things on be-
h.ilf of the principal, ice., to j c t generally in the business of agency. A
sj)Cfi.il power of Jiiorney empowers the agent to perform a single trans-
act ion, e.g.. selling a house or borrowing money on a mortgage. A par-
ticular powiT of attorney is one which authorises an agent lo do a single
act, e g , to present a document before the Registrar for registration.

Implied Agency.—Implied authority may arise by conduct, situation

of parties, or liic necessities or circumstances of tlie cas% Implied
agcncv would, therefore, include agency by estoppel,^ agency by holding
out, agency of necessity.
Agency by Esiopiiel.—The rule of estoppel may be briefly stated
tliiis. ^Vhcrc a person by his words or conduct has wilfully led another
to bclic\c that certain set of circ.imstances or fdct."i exist, and that other
person lias acted on th?t belief, lie is estopped or pi^cluded from deny-
ing the truili of such statements. In the words of Lord Halsbury,
' Estoppel arises when you are precluded frtra denying the truth of
anything vhicli yon have represented as a fact, although it is not a fact."
Thus, wheie A tells B in tlie presence and within the hearing of P that
he (A) is P's agent and P does not contradict this statement, and later
on B enters into a transaction with A bona fide believing that A is P'»
agent, then P is bound by this transaction, and in a suit between him-
self and B, he cannot be permitted to say that A was not his agent,
even though A was not in actual face his agent. It is, therefore, said,
"If you lure a person out on a limb, you cannot saw the limb off."
Agency by Holding Out.-Although 'holding out' is a part of the law
of estoppel yet a distinction between the two does e\is'. In the case
of agency by holding out some afTirmativc conduct by the principal i»
necessary. A dealer in iron sent a waterman to buy on credit, and paid
for it afteiwards. He seni the same waterman a second time with
money, wlio bought the goods on credit pocketing the money. If was
held that the iron merchant must pay for the goods, as the previous
dealing justified the seller in assuming that the agent had authority to
buy on credit. The ironmonger became liable on the principle that hav-
jng held out the waterman as his agent on a previous occasion, he be-
came bound by subsequent transaction entered into under similar cir-
cumstances. But, where the agent ij held out as having OPIV a Umiterf
authority to do acts of a particular class, the principal is not bound by
an act outside the authority.
PRINCIPAL AND AGENT 155
Agency of Necessity.—Agency may also arise from the necessities o£ the
case.' This is, of course, not an ordinary event, and the limits within
which agency can aiise are clearly defined. A wife deserted bv her hus-
band, and thus forced to live separate from him, can pledge her hus-
band's credit to buy all necessaries of life according to the position oi
the husband even against his wishes. If a ship is in porf, and the ne-
cessaries for tiie voyage are wanting, or repairs to the ship are required,
the ship's master can pledge the owner's credit for these purposes. So
also a carrier of goods, in case of accident or upon ?n emergency, ise-
comes an agent by necessity for the owner to take care of the goods,
and for tliat purpose can pledge the owner's credit. Thus, where a horse
was sent by rail and at the destination it was not taken delivery of by
the owner so that that station master had to feed it, it was held that the
station master became the agent by necessity and the owner wts requir-
ed to pay the charges incurred by the station master. T h e doctrine of
necessity also extends to cases where an agent exceeds his authority, pro-
vided (a) the agent was not in a position to communicate with the''
principal, (b) had taken the reasonable and necessary course in the cir-
cumstances, and (c) had acted bona 'fide.
Agency by Ratification.—If the aeent had no autliority to contract on
oetuilf ill principal or exceeds such autiioriiy as ne naa, ine contract is
not binding on the principal. No one can become the agem uf another
person except by the will of that person. T h e principal may, however,
afterwards confirm and adopt the contract so made, and this is known
as ratification; agency by ratification or by subsequent authority arises.
This is also known.'as ex post facto agency or agency arising after the
event. The effect of ratification is to render the contract as binding
on the principal as if the agent had been properly authorised beforehand.
Ratification relates back to llie original mal^ng of the contract, so that
the agency is taken to have come into existence from the moment the
agent first acted, and not from the date of piincipal's ratification. The
rule is Omnis ratihubitio retrotrahiiuret mandate prior aequlparatur
(every ratification relates back and is equivalent to a previous command
or authority). The legal result of ratification is that a present act is
recognised as binding retroactively. This is so even if the other party
has in the meantime purported to repudiate the transaction. Ratification
is tantamount to prior authority, or, ratification is equivalent to an an-
tecedent authority
In Bolton Partners v. Lambert (1889) 4! Cli. D. 295, L made an
offer io M, the managing director of a companv. M accepted the offer
on the company's behalf, although he had no authority to do so. L then
gave notice to the company that he withdrew the offer. The company
subsequently ratified M's unauthorised acceptance. Held, as the ratifica-
tion dated back to the time of the acceptance, tlie v/ithdrawa! of the
offer was inoperative. An offer once accepted cannot be wfthdrawn.
But where an agent purports to accept an offer "subject to ratifi-
cation" the ¥ulc of relation back does not apply so that the contract will
be deemed to have been made on the date of ratification or apf-rov.-if
by the principal and the offer can -be withdrawn, before such ratification.

1. See Hinduttaa In?^ Co. v. Jaydlakshmsmma, 1959, A P. 562.

lai MERCANTILE LAW

In the above case M, the agent, had warranted his autliority and so the
•contract was complete and ihe ratification related back to the time of
the acceptance by M. In Watson v. Davies (1931) 1, Ch. 455, the agent
.had expressly accepted an offer subject to the principal's approval and
had thus made his lack ot authority known so that there had been no
finality about his acceptance, which had been conditional, and the tltird
jjarty could witlidraw his offer before ratification
A contract can only be ratified under the following conditions :—
1. The agent must avowedly or expressly contract as an agent for
a principal in contemplation [Keighley v. Durent (1901) A.C. 240]. In
other words, the act ratified must have been done by the agent not for
himself but intending to bind a named or ascertainable principal. So
that at the time of the act the tliird parties know that the agent is act-
ing for a principal [Imperial Bank of Canada v. Mary v. Begley (19.S6)
P.C. 193]. The agent must not allow the third party to imagine that
he is really the principal.
2. The contract can, therefore, be ratified only by a principal who
was named or ascertainable at the time of tlie contract. If the princi-
pal is named, he can ratify the contract even if the agent never intend-
ed that he should do so, but wanted to keep the benefit of the contract
for himself [Re Tiedemann (1899) 2 Q.B. 66].
J. The person ratifying must have been not only in contemplation
but he must have also been in existence at the time of the contract.
Thus contracts entered into by promoters of a company on its behalf
bfioic Us incorporation, cannot be ratified by the company after it comes
into existence [Keiner v. Baxter (1866) 2. C.P. 174]-.
?.Ioreover, the person who ratifies must be die peison on whose be-
Inlf the agent purported to contract.
4. The principal must have contiactual capacity at the date of the
comrart and at the date of ratificrtion. Thus a minor on whose be-
half a contract is made cannot ratify it on attaining majority.
In Boston Deep Sea Fishing, etc, Ltd. \ . Tarnham (1957) 3 All. E.R
204, after the iall of France in 1910, a French trawler, S.S. Jena, came to
an English port and was managed by the appellant company. In
1945 the French company which owned the travvler purported to ratify
the acts of the appellant. Held, it was unable to do so because at the
time when the acts were done the French company was an alien enemy
and therefore not competent principal.
5. The principal must, at die time of ratification, have full know-
ledge of the material facts or intend to ratify die contract wh;ue\ef the
facts may be (Section 198).
C. T h e principal must ratify the contract as a whole. He cannot
ratify in part ancl repudiate in part. He cannot icjert tlie Iniruens
attached to the tiansaction and accept only the benefits. Either the
contract is accepted in its entirety or rejected.
7 T h e ratification must take place witliin a reasonable time after
th?> contract is made, and, must be of tl\e whole contract.
2. Taqiuddin v. Gulam Mohd. 1960 A.P. 340.
TRINCIPAL AND AGENT 153

8 T h e ratification inusc pe ot such acts as the principal had the

power to do, e g , acts of dnectors whicli are ultra vires tlie powers o£ a
company cannot be ratified so as to bind the company.
9. Ratification can be made of \oidable contracts or e\en of torti-
ous acts of the agent, but .t cannot be made with regard to \oid or
•criminal acts An act whicli is a legal nullity cannot be ratified
10. Ratification cannot be made so as to subject a third party to
damages, or terminate an) iight or interest of a third person (Section 200).
A not being authorised thereto by B, demands on behalf of B, the
-delnery of a chattel, the pioperty of B, from G who is in possession of
It This demand cannot be ratified by B, so as to make C liable for
damages for his refusal to deliver Or, A holds a lease from B termin-
able on 3 months' notice C, an authoii-.ed person, gucs notice of tei-
mination to A T h e Notice cannot be ratified b) B, so as to be bind-
ing on A. )
CLASSES OF AGENTS
Agents are classified in \aiioiis ways according to iho-, point of view
adopted They may be divided into Mercantile oi Commeicial Agents,
and Non mercantile or Non conunercial Agents Anothei classification,
as based upon the cMeiii of liieir aiithoni), may be made into Special
Agents, Geneial Agents, and accoiding to some wi iters, Unneisal Agents
A special agent is appointed /for a specific puiposc oi occasion to
-which his authority is rcsinctcd He his authority onlv to do that pai-
ticulii act or acts in that particular tr msaction If a special agent does
an) thing outside Ins authoiity, the piincipal is not bound by it; and a
third pa'ty is not entitled to assume that the agent has unlimited
poweis, but should make due enquiry as to the extent of his authont\
A general agent, on the other hand, is appointed to do anything within
the authority given to him by the principal in all transactions, or m all
transactions relating to a specified trade or matter Third parties may
assume that sucli an agent has power to do all that it is usual for a
•general agent to do in the business in\olved, and e\en wliere the prin-
cipal has limited the agent's authoritv the tliird party mav safely do
business with him generally, unless he is aware of the limitation, m
which case he is bound by tlie limitation of the agent's authority \
uimersal agent is said to be one whose authority is unlimited and who
can do an\thing on behalf of his principal Strictly speaking, theie is
n o such agenc\, and the so called uni\ersal agent is no other than a gen-
eral agent with extensive powers For, there aie many acts which can-
not be perfonned by an agent. We do not get married by proxy, nor
ive paint a picture through an agent In fact where the work to be
done is obviously personal to a paiticular individual, no agent can be
employed.

MERCANTILE OK. COMMERCIAL AGENTS

Factors.—\ factor is a person to whom goods oi bills of lading or
other documents of title aie consigned for sile by a meichant residing ab-
road 01 It a distance from the place of sile He is entrusted vith pos-
session of goods and usuill) sells in his own name, without disclosing
156 MERCANTILE LA.W

that o£ his piincipal. A factor may sell upon usual terms as to credit,
may rereive payment of the price, and give valid receipts. He may
J ledG;e the gocdi in his possession. He has general lien on the goods
in his possession for all charges and expenses, and also an insurable in-
terest in them. He may also warrant the goods he sells.
Brokers.—"A broker is one who makes bargains for another, and
receives commission (brokerage) for dr ig so." Tlius, a bioker is an
agent employed to buy and sell- goods lor compensation known as "bio-'
kerage", and differs from a factor in not being entrusted with the pos-
session of goods for sale, and in not having authority to contract in his
01. n name. He makes a trade of finding buyers for those who wish tO'
sell, and selleis for tJiose who wish to buy. When he makes a contract,
he enters the te:ms in his book called die memorandum book and signs
it He then sends out "Bought Note" and "Sold Note" to the buver
and seller lespectively. As long as he describes himself as bioker, ivhe-
ther with or without the name of his principal, he incius no personal
liability on his contracts. A broker has no lien on the goods, as he has
no possession of goods; but on any books and papers of his principal
in his possession he has a lien An insurance broker will have a lien
on the policy for his general balance.
Commission Agents.—A commission agent ordinarily is a person em-
ployed to buy goods in a foreign market. He buys as principal, in the
fixed foreign market and ships the goods to his own principal chaiging
a fixed commission on the price paid. He is bound to gel the goods
as cheap as he reasonably can. He is an agent so far as lie is bound
to do his best for his principal, and may not make anv piofu bevond
his agreed commission. He is in the position of an independent pur-
chaser so far as his riglu to the goods is conrerned. 'He cannot pledge
his principal's authority without previous sanction. Tlie term 'commis-
sion agent' is also used for an agent commissioned to act on behrdf of
his principal within tiie country imder different circumstances and on
different tci" Generallv speaking, as pointed out bv Viscount Simon
LC. in L ' (Eastborne) Ltd., v. Cooper, 1941 A C . 108 at p. 120, such
;ontracts c,7i fall in three classes:
1. The first is the class in which the agent is promised a com-
mission l.y his principal if he succeeds in introducing to his
principal a person who makes an adequate oflet usually ao
offer of not less than the stipulated amourt.
2. T h e second class is of cases in which the property is put jnto
the hands of the agent to dispose of for the owner and the
agent accepts the employment, and, it may be, ,;\pends
money and time in endeavouring to carry it out.
3. T h e third class is of cases where the agent is promised his
commission only upon completion of the transa'tion which he
- has endeavoured to bring about between d>« olteror and his
prircipa!.
I r the cases falling under the first, class the only thing which the
agent undertakes is to introduce to his principal a person who is ready,
willing and prepared to take the property for the stipulate^ amount.
PRINCIPAL AND AGENT 157
He does not undertake to do anything further and if he performs what
he has undertaken to do he earns his commission. In the second class
of cases die agent is given full authority to transfer the property after
he has found a possible purchaser. He has accepted to expend time
and money in carrying out his part of the %vork and there is a sort of
implied term that the principal will not wididraw the authority he has
given after the agent has succeeded in finding a possible purchaser. In
such cases, ,ii the principal withdraws his instructions after the agent has
found a purchaser, the commission will still be payable. In the third
•class must be put contracts by which a person instructs an agent to ar-
range for the""! transfer of a property and promises to pay a sum of
money only in case the agent succeeds in getting the transfer completed.
The intention is to pay the amount of the consideration of the transfer
when it is received by the principal. It is obvious that in this class of
cases die commission will be payable only if the agent succeeds in hav-
ing the transaction completed. Till that event happens he has no claim
(Raja Ram Jaiswal v. Ganesh Prashad, 1959 All. 29).
Del Credeie Agents.—A Del Credere agent is an agent, who in con-
sideration of an extra remuneration called the Del Credere Commission
guarantees to his principal that die third persons with whom he enters
into contracts shall perform their obligations. Thu^ such an agent gua-
rantees to his principal that he will only sell to persons who will pay
for what they buy; and if the buyer does not pay, he (Del Credere agent)
will pay. The position of a Pakka adatia as agent is analogous to that
of a del credere agent. His legal position like that of a del credere agent
is partly tliat of an insurer, and partly that of a surety. He agrees for a
special remuneration to find a buyer or seller for his up-country cons-
tituent; and if he fails to do so he is liable in damages. But a Katcha
adatia is merely an agent and does not make himself responsible to tlie
pimcipal for the non-performance of the contract by the third party.
He is, however, responsible to the other adatia or shroff who acts on
behalf of the other contracting party.
Auctioneers.—An auctioneer is an agent who sells goods by auction,
i e., to die highest bidder in public competition. He has no authority
to ^^'arrant the goods sold and can deliver die goods only on receipt of
the price. He is the agent only of the vendor; but in English law, he is
also the agent of the buyer for the purpose of signing ,the memoran-
dum under die English Sale of Goods Act. As he has possession of- the
goods, he is bound to arrange for their proper storage, and is re pon-
sible to the owner for any damage caused through his negligenqfc. He-
is authoi ised lo receive oroceeds of the sale of goods, but on a sale of
l.-ind to receive only a deposit. He enjoys a lien on the goods for his
chavg!=s.
Bankers—The relationship between a banker and his customers is
ordiraiilv that of debtor and creditor, but he is an agent of his custo-
mer --vhrn he biivs or sells securities, collects cheaues. dividends bills or
nro-^K^orv notes on behalf of his customer. The banker is an a?ent in
so far ns he must nav the customer's cheque when the account'is in cre-
dit. Tl-.p banker hns a General lien on all securities and tjoods. in res-
pect nf die Q,eneral balance due to him by the cu'itomer which has come
158 MERCANTILE LAW
into the banker's possessfori in the course of his dealings as banker v i t h
his customer and which security and goods have not been left for specific
purposes, e.g., safe custody.

INDENTORS
All indenior or indenting agent is one ivho, for a commission, pro-
cures a sale or a puiciiasc on behalf of fiis principal, with a meicliant
aljroad.

NONCOMMERCIAL AGENTS
Nnn-commercial agents may be Estate Agents, who are employed tO'
negotiate the sale and purchase, ov lease, of immovable pioperty, or
House Agents, who are similarly engaged 'with respect to houses, shops,
etc., or Law Agents, wltose business it Is to look after the legal affairs of
their principals. Besides, there are Counsel (Barrister or Advocate), and
Attorney and wife.
Counsel (Barrister or Advocate).—According to the practice and tra-
ditions of the English Bar, an Advocate or Barrister, accepting a brief is
not an agent of the client, and although he undertakes a duty on his
client's behalf, he does not enter into anv contract with him. As a con-
sequence, the ordinary rule as to limits of an agent's authority does not
apply, and a counsel has wide powers as to the mode of conducting the
case for his client, and can even compromise it on his client's behalf.
T h e same is the case in India, at least in the three Presidency towns.
Attorney—Tltc English and Indian rule with regard to the .attorney
is that he can make a reasonable bona fide compromise if not specifically
prohibited by the client.
Wife.—The relationship between husband and wife has sometimes
led to difficult Questions, as to how far the wife is the agent of the hiis^
band. T h e Full Bench of the Allahabad High Court has laid down die
rule in Girdhari Lai v. Crawford (1887) 9 All. 146 at p. 15G, that "the
liability of a husband for a wife's debt depends on the principles of
agency, and the husband can only be liable, when it is shown that h e
has expressly or impliedly sanctioned what the wife has done. Wliere
the husband has expressly authorised his wife to borrow money or pledge
his credit, the position is simple : the husband is liable. T h e question
becomes difficult when a wife is regarded to have implied authority as
agent of her husband. Where the husband and wife are ]i\ing together,
the wife is presumed to have implied authority to pledge the husband's
credit for necessaries. But the husband may escape liability if he can
prove that (i) he has expressly forbidden his wife from borrowing money
or buying on" credit, (ii) the goods purchased were not necessaries, (iii)
he has allowed sufficient funds for purchasing the articles she needed
to the knowledge of the tradesman, or (iv) the tradesman has been ex-
pressly told not to give credit to the wife." Where the wife lives apart
from the husband, through no fault of heis. and is therefore entitled to
claim support or maintenance, she has an implied authority to bind the
husband for necessaries of life, if the husband does not provide for her
maintenance. Bi^t if the wife lives apart of her own will and without
PRINCIPAL AND AGENT ^ 159
any justificalion, she is not her husband's agent and cannot bind him
even for necessaries as the husband is under no obligation to maintain
her.

DELEGATION OF AUTHORITY BY AGENT

When tlie fact of agency is establislied, it is also established that the
agent has some authority, depending upon the type of agency, to act on
behalf of the principal and bind him by his acts. The nature and
quantum of authority need furtlier discussion; but at this stage, it is ad-
visable to state that ordinarily th? agent is expected to perform his
duties as agent himself personally. Delegatus non potest delegare—a de-
legate cannot further delegate, is the maxim. An agent being himself
a delegate of his principal, cannot pass on that delegated authority to
some one else. The reason for this rule is that confidence in a parti-
cular person is at the root of the contract of agency. An agent is
usually selected in reliance upon some personal qualifications, and it
would be unfair, if not injurious to the principal, if the authority to act
could be shifted to another. This is particularly true when the agent
is appointed for the performance of any task requiring discretion or
judgment. But to this general rule there are certain exceptions, ivhen
the agent is permitted to delegate his authority. He may appoint sub-
agents in the following circumstances :
(1) Where the principal has expressly permitted delegation of such
power; (2) where the custom of the trade permits delegation; (3) where
the principal knows that the agent intends to delegate his authority; (4)
•\vhere the nature of the authority is such that a deputy is necessary to
complete the business, (5) where the act to be done is purely ministerial
and does not involve the exercise of discretion, e.g., clerical or routine
work; (6) in an unforeseen emergency, the agent can always delegate.

SUB-AGENT AND SUBSTITUTED AGENT

M'here an agent under express or implied authority of delegation,
appoints another person to act in the matter of the agency, such other
person is called a "sub-agent", if he works under the control of the
agent; and a "substituted agent," if the agent walks out of the trans-
action and the newly appointed carries on the business of the agency.'
The relation of the sub-agent to the original agent is as between them-
selves, that of agent and principal. As the sub-agent acts under the
control of the agent, there is no privity of contract between the principal
and the sub-agent, and, therefore, the sub-agent cannot sue the princi-
pal for any remuneration due to him, nor can the principal sue the
sub-agerit for any moneys due, although the sub-agent binds the prin-
cipal, as regards third parties. But the principal and the sub-agt nt have
right to sue only the "agent", who is the immedijile contracting party,
for anything due to principal from the sub-agent, and for remunera-
' tion payable to the sub-agent by the principal. To this rule, there is
^one exception that, if the sub-agent is giu'lty of fraud or wilful wrong,
the principal has a concurrent right to proceed both against the agent
and the sub-agent. T h e privity of contract between the principal
and tlie s j-agent is established in such a ca.-ie. Where an agent im-
160 ' , MERCANTILE LAW
propertly appoints a sub-agent, i.e., appoints without authority to appoint,
the principal will not be bound by the acts of the sub-agent, nor can
he liold the sub-agent responsible for the letter's fraud or wilful wrong.
T h e acts of the sub-agent will, however, bind the agent, as regards third
parties as well as the principal.
The Indian Contract Act makes a distinction between an "ordinary
sub-agent" and a person who is put in relation with the principal and
called the "substituted agent" or "agent of the principal." The impor-
tant difference between the two is that in the case of the substitute there
is privity of contract between him and the principal so that the prin-
cipal can sue the substitute for accounts or damages and the substitute
can sue the principal for remtineration. The original agent who ap-
pointed or named this agent drops altogether from the transaction.
\Vhere A instructs B, his solicitor, to sell his property by auction, and
to employ an auctioneer for the purpose, snd B names C, an auction-
eer, to conduct the sale, C is not a sub-agent, but he is A's agent for
the conduct of the sale, and will be called a substitute or substituted
agent. As the original agent xvalks out of tlie transaction, he is requir-
ed to jcxercjse due diligence and care in choosing the substitute, and if
he is negligent in his ciioice he will be liable for damages to the prin-
cipal. Diligence here means the diligence which a man of ordinary
prudence would exercise in his own affairs-

AGENT, SERVANT OR INDEPENDENT CONTRACTOR

An agent may be either a servant or independent contractor; but
every servant or a contractor is not necessarily an agent. The rela-
tion between master and servant and that between principal and agent
was e.M^pIained by the Supreme Court in Lakshminarayan Ram Gopal
& Son Ltd., V. The Government of Hyderabad, 1954 S.C. 364.' Briefly
stated, it is as follows : A principal directs the agent as to what is to be
done, while a master has the further right to direct how the work is to
be done. A servant acts under the control and supervision of his mas-
ter and is bound to conform to all reasonable orders given to him in
tlae course of his ivork. An agent, though bound to exercise his au-
tliority in accordance with all lav/ful instructions o£ the principal, is
r o t subject in its exercise and the direct control or supervision of the
principal. An agent as such is not a servant, but a servant, especially
in superior service, is generally for some purposes his master's implied
agent, the extent of agency depending on the duties or position of the
servant. It is for this reason that an agent is sometimes described as
a' "superior ser^'ant." An independent contractor is independent of any
contiol or interference by the employer and uses his own means to
produce the result. Thus if the agreement between E and C provides
that C is to accomplish a certain result, e.g., to build for E a boat for
Rs. 500, and has full control over the manner and methods to be pur-
sued in bringing about the result, (i.e., building the boat") he is deem-
ed an independent contractor and E. who receives the benefit of his
services, is in no sense responsible to third parties for his actions.
4. See also State of Madras v. J.R.M. Contractors Co. 1959 A.P,
352.
PRINCIPAL AND AGENT 161

PART 4-B
I

DUTIES AND RIGHTS OF AGENT

DUTIES OF AN AGENT
1. T o carry out the ivork undertaken according to insti uctioni.—
If the agent fails to act according to instructions, the 'ordinary rules of
contract will apply and he will become liable for breach. He must act
within the scope of tlie auihoiity conferred upon him and cany out
strictly die instiuctions of the principal. Thus, where the piincipal ins-
tructed the agent to warehouse tlie goods at a particular place, and the
agent warehoused them at another place equally good but cheaper, and
tlie goods weie destroyed by fire, it was held that as die agent iiad not
acted according to instiuctions ot the principal, he was pliable for the
loss, even though he had acted for the beneht of the principal and the
loss had ensued without any neglect on his part.
2. T o follow the custom in the absence of instructions.—Where the
principal has not given any express instructions, the agent must follow
the custom pi evading in die same kind of business at the place where
the agent conducts business, otherwise he will be liable for any loss
sustained by the principal (Section 211).
3. To carry out the work with reasonable care, skill and diligence.
—What IS reasonable care and diligence depends on the circumstances
of each case, but generally the agent must at least exercise the same
degree of care, skill and diligence as he would exercise about his own
affairs. Where, by the nature of his profession, the agent purports to
have special skill, then the degiee of skill reasonably to be expected
from the membeis of that piofession must be shown. Thus, a solici-
tor, who IS an agent of his client, may be held liable for not possess-
ing the requisite skill. For example, where he instituted proceedings
in a Court having no juiis^hction, or whe^e he started proceedings under
a wrong section, and llie suit was therefore dismissed, the solicitor was
held liable for damages.
4. T o communicate with the principal.—In cases of difficulty, the
agent must communicate with the principal and get his instructions
(Section 214) Thus, where the goods were consigned by the principal
to a particular place and the agent took them to a different place for
sale in order to minimise the loss without communicating and getting
principal's instructions, and the loss resulted, the agent was held res
ponsible.
5 Not to make any profit out of his agency other than his agreed or
reasonable remuneration.—As die agent acts on behalf of his principal,
all moneys received by him on the principal's behalf must be paid over
to the principal. The agent can, however, deduct all moneys for his
remuneration or expenses properly incurred. This duty to pay over
moneys includes also the duty to pay over all illegal giatification le
ceived by the agent Where an agent leceives some monejs bona fide,
he will be required to pay over the same to the principal, but he is en-
titled to his reniunciation, but wheie his acts aie not bona fide, he will
also lose his remuneration Thus, where P directed A to sell a shop
 1<J2 MERC/VNTlLIi LAW

at ilic best price obiainablc. and A sold it to B on tJic understanding

iliai li would pa) A Ri. 2UU. it was held ili.ii A iiuist pay over Rs. 200
Lo 1' and lorgo liis Loniniibbion. Whtrc the third paiiy is guilty o£
iraud, ilic puncipal may rescind tlie contract.
a. To keep and render accounts.—It is tiie duty ol tiic agent to
keep true anil concct accounts of all his transactions and to be always
ready to pioduce them to his principal. In gcnci.d, lie siioukl not nnx
moneys belonging to his principal with his own monej, anil in these
citcunistances ihc agent is die tiustce of the funds in Jiis Jiands. JJut,
where the terms of the agency permit mixing, the agent may do so, when
he will be treated a debtor of the princijial. Ihus a banker holds
ins customers funds as the customer's debtor and is entitled to mix
them with his own.
7. Not lo deal on his own account.—An agent must jiot deal on his
own account in the business of tlie agency, as no agent is "permitted to
[Hit himself in the position where his interest conllicts with his duty."
An agent niiiiC not become a principal party to the tiansaction as
against his principal. IJut, if he wants to do^so, he must fully disclose
to the principal all ilie facts in lespect of the transaction and obtain his
consent, belore acting on his own account. Thus a broker employed to sell
stock, taniioi iiimsell buy, nor can a broker instructed to buy, become tlie
• seller himself, witliout obtaining a distinct consent to do so. If the
.igeiit acts on his own account without obtaining consent and without
(iisciosing all tiie material information the principal may claim tlie pro-
his which the agent might have made, or disclaim the losses if the busi-
ness has ended in a loss; and -where there has been an executed con-
tract, the principal may obtain rescision of the same without proving
fraud on the part of agent. So, wiiere a vakil, employed to bid for
certain jjrojjcriies, purchased Uie properties himself, it was held that
the principal could claim the properties. Or, where an agent, em-
jiloyed to buy grain, delivered his own grain to" the principal at a rale
higher ilian the market rate, it was held that he must account for the
piolit. Again where an agent for sale, ])urclia5ed the property him-
self, it was held that the sale was not binding. But, if the agent had,
in the above cases, told tlje principal that he himself was purcliasing or
selling, and had given the principal free and unbiased use of his own
diicrction and judgment in tlie matter, the transaction would be bind-
ing.

R. Not to set up adverse title.—When the agent has obtained goods

or jjiopcriy from the principal as an agent, he is precluded from setting
up his own title or setting up the title of third parties to the property.
0. Not to use information obtained in the course of the agency
against the j)rincii)al.—Where an agent has obtained any information in
ilic course of agency, the ,igent must on no account use it .ig.iinst the
iniircsi of ihc ])rincii)al. If an agent does make use of such information,
ihc i)riiuipnl cm sioj) him fiom doing so by an injunction.
If) Not lo dclcg.ilp auiIioriiy.-Siibjrti to the si\ rxrepiions noted
,iljo\e (pane Idd). an agent must not delcgaic liis authority to another
pcisoM, but perform the work liimself.
PRINCIPAL AND AGENT 163

RIGHTS OF AN AGENT
1. Right to receive remuneration.—Where the services rendered by
the agent were not voluntary or gratuitous, the agent is entitled to re-
ceive the agreed remuneration, or, if none was agreed, a reasonable re-
muneration. An agent becomes entitled to receive remuneration as soon
as he has done wha't he had undertaken to do even though the transac-
tion has fallen through either because the principal has failed to carry
out his part of the contract or because the tliird party has backed out.
But the agent must show that he has done all that he' had agreed to
do, before he can claim his remuneration. Thus, commission becomes
due to the broker, where he has procured a party Avho is willing to
open negotiations on a reasonable basis and is desirous of entering into
a contract with the principal.' The agent is entitled to commission,
where he has procured orders for the manufacturers, and they are un-
able to execute them owing to the outbreak of war. Even where the
contract becomes void because of bona fide mistake, the agent will be
entitled to remuneration, if he has carried out what he had bargained
to do. Where the agent is prevented from earning his remuneration
by some wrongful act or default of the principal, the agent can recover
by way of damages the actual loss sustained by him which, in cases
where he has done everything, will be the full amount of remuneration."
But where the ag'^nt has misconducted himself in the business of the
agency, he will not be entitled to his remuneration (Section 220). A
principal is entitled to have an honest agent and it is only the honest
agent who is entitled to any commission,

2. Right of lien.—Certain classes of agents, e.g., factors, who have

tlie goods and property of their principal in tlieir possession, have a
lien on the goods and property in • respect of their remunei'ation and
expenses and liabilities incurred. This lien is generally a particular.
lien confined to claims arising in respect of the particular goods and pro-
perty. But b)' special contract, an agent factor may get a general
lien extending to all claims arising out' of the agency. For the exercise
of a lien, the goods must be in actual or constructive possession of the
agent, and the possession must have been acquired by the agent without
prejudice to any of his duties. Thus, if the goods are in the agent's
possession the lien will not be affected even by the subsequent insolven-
cy of tlie principal, A properly appointed sub-agent also enjoys the
right of lien against the principal's goods. But an agent loses his right
of lien, where he parts with the possession of die goods. If, however, at
the time of parting with the goods he reserves die right of lien or where
goods are obtained from him by fraud or other unlawful means, he
will not lose his lien.
3. Right of stopjiage in transit.—This right is acquired by tiie agent
in tAvo cases. If he has bought goods on behalf of his principal either

5. D.S. Sahni v. Faqir Singh, 1960 J. & K. 6; Raja Ram v. Uanesh

Prasad, 1959 All. 29; Roopji k Sons v. Dyer Meaken, 1930 All. 515; Farid
Baksh V. Hcrgulal Singh, 1936 A.L.J. 1163; Giddys v. Horsfall (1747) I.
A.E.R. 400; E.II. Bennett v. Millet (1918) 2 A.E.R. 929.
6. Abdullah Ahmed v. Animendra K. Mitter (1950) S.C.R. 30.
164 MERCANTILE LAW
with his o-(vn money, or by incurring a personal liability for the price,
he stands towards tlie principal in the position of an unpaid seller,
and as such possesses the riglit to stop tlie goods in transit, if they have
been delivered:' to the carrier far transmission to tlie principal. Conver-
sely, where an agent (del credere) is personally liable to liis principal
for the price of the goods sold, he may exercise the unpaid seller's right
to stop the goods in transit on the insolvency of the buyer.
4. Right "of Indemnification.—As the agent represents the principal,
the agent lias a right to be indemniiied by the principal against all
charges, expenses and liabilities properly incurred by liim in the course
of the agency. Although the right of indemnity covers all liabilities in-
curred by the agent, yet the damages which the agent can recover from
the principal are those which directly, immediately and naturally flow
from the execution of the agency. K carried on the business of
commission agents. B entered into several forward contracts for the
purchase and sale of bullion through K. The transactions proved un-
profitable to B and loss aggregated to a sum of Rs. 21,500. The entire
amount was paid to third parties by K on belialf of B. Held, B must
indemnify K, as K had paid tlie losses for B.' Section 225 of the In-
dian Contract Act gives right to the agent to compensation for injuries
sustained by him by neglect or want of skill on the part 'of tlie prin-
cipal. He can also claim against his co-agents on the same grounds.
But the principal is entitled to plead contributory nv^gligency or com-
mon employment, wherever possible.

PART 4-C
EXTENT OF AGENT'S AUTHORITY AND PRINCIPAL'S
RESPONSIBILITY

SCOPE AND E X T E N T OF AGENT'S AUTHORITY

When the fact of agency is established, it is not enough to know tliat
he has authority to bind his principal, but we must Icnow the scope and
quantum of authority. The need to consider tliis fact arises because the
agent is bound to obey the instructions of the principal, having no right
to depart from them even for the principal's benefit. But he has also,
what may be called incidental or implied authority. Section 188' of
the Contract Act gives him an implied autliority to do all that may be
reasonably necessary for doing the act authorised by tlie principal. On
the basis of the section the authority of an agent includes that which
is—
(1) expressly given by the principal—Express or Declared au-
thority;

7. Kishanlal v. Bhanwarlal, 1954 S.C. 500.

8. "Section 188. An agent having an authority to do an act has au-
thority to do every lawful tiling which is necessary in order to do such
act. An agent having an autiiority to carry on a business has autho-
rity to do every lawful thing necessary for the purpose, or usually done
in the course of conducting business."
PRINCIPAL AND AGENT 165

(2) incidental to the autlioiity that is expressly given by the

principal—Incidental or Implied authority;
(3) customary for such agent to exercise—Customary authority;
(4) an apparent or ostensible authority, which arises by estoppel.
The first three kinds of authority may be classified as Real Autho-
rity as distinguished from Apparent or Ostensible Authority.
Express Authority.—An authority specifically bestowed by tlie princi-
pal on an agent tlirough written or oral communication is termed
express authority. Here the principal tells the agent to perform a cer-
tain act.
Incidental or Implied Authority.—An agent has implied authority
to perform an act reasonably necessary to execute the express authority.
To illustrate, if the principal authorises the agent to purchase goods
without furnishing funds to pay for them, the agent has implied inci-
dental authority to purdiase the goods on credit. Similarly, where A
is employed to find a purchaser for property he can describe the pro-
perty and state any circumstances which may affect the value. Again,
where A is engaged to recover a debt due to the principal living abroad,
he can adopt any legal process necessary for the puipose and give a
valid receipt for tlie money received. Also, the secretary of a co opera-
tive society authorised to carry on its business on sound lines is deemed
to have implied authority to buy goods on credit." But where A is au-
thorised to find a buver, he cannot enter into a contract of sale." A
station master has no authority to pledge the credit of the railway for
medical attendance on a sick passenger."
Agent's Authority in Emergency.-An agent has authority to do all
such things which may be necessary to protect the principal from loss
in an emergency and which he would do to protect his own property
under similar circumstances (Section 189). This kind of authority arises
only when the agent has no opportunity to contract the principal and
request instructions. For example, where, owing to delay in transit,
butter may be in danger of becoming useless, its sale by the railway
for tlie best price will be justified, as an authority exercised in emer-
gency.
Agent's Authority in Emergency.—An agent has authority to do any
act whicli, according to the custom or usage of the trade, usually accom-
panies the transaction for which he is authorised to act' as agent. For
example, where a salesman is authorised to receive payments for cais
sold, lie would be deemed to have implied authority to accept a che-
que instead of cash in the usual or customary way. But an agent with
authority to receive cheques in payment does not have implied autho-
rity to cash them.
Apparent Authority.—Apparent authority, if it may be called au-
thority, is one which is not real but which the principal by his words

9. Valapad Co-op. Stores v. Srinivasan Iyer, 1964 Ker. 176.

10. Durga v. Rajendra, 1923 Gal. 57.
II. Cox v. Midland Counties Rly. Co. (1849) 3 Ex. 2G8.
Ibb MERCANTILE LAW

or conduct reasonably leads a third party to believe that tlie agent pos-
sesses. If a principal creates an appearance that reasonably leads an-
other to believe that his "^ent has the authority to make contracts for
him, he cannot deny this authority when a third party relies upon this
appearance by making a contract with that agent. The result of ap-
parent authority is that a person is bound on a contract lie never wish-
ed to make. Tlie policy beliind apparent audiority is similar to that of
estoppel. Looking at the reasons from a broader perspective, the policy
behind apparent authority is of practical nature. . Remember that al-
most all business is carried on by agent. If business firms could avoid
their contracts merely by denying the authority of their agent in a par-
ticular case, almost no contract would be enforceable. Business as it is
known in the modern world could not be conducted. Because of these
pragmatic consideraiions, the opposite approach is taken. Businessmen
are entitled to assume that an agent has the authority that his principal
causes him to appear to have. For all these reasons, a contract negotiat-
ed by an agent whom the principal has clothed widi an appearance of
authority may be enforced just as if the agent actually had the real au-
thority he appeared to have. This will be so even if the principal
has instructed the agent not to make that very sort of contract.
The reason is obvious. If the principal has clothed his agent with
autliority to perform certain acts but has given the agent certain secret
instructions' which limit his authority, the third person is- allowed to take
the authority of the agent at its face' value and is not bound by the
secret limitations of which he has no knowledge. If the third person is
aware of the limitations, as for example, contained in a written au-
thority, he cannot hold the principal liable for acts of the agent which
are in excess of the limitations. The purpose of the rule that a princi-
pal is bound by apparent authority is to protect innocent parties, and
it has no .application when the person dealing with the agent has ac-
tual knowledge of die agents' powers.
Very often a title or a position automatically gives an agent a mea-
sure of apparent authority. A store manager, for example, would have
rather broad powers to contract. Therefore, naming an agent as Gene-
ral Manager but secretly limiting his authority to an "unusual degree will
result in his having an area of apparent authority. The apparent au-
tliority in this case stems from the title 'general manager.'
It may be observed that the mere assertion by the agent that he
has a certain measure of authority does not create apparent authority.
T h e source of the apparent authority must be traceable to some deed
or word of the principal. Were this not the case, any one could as-
sume the power to contract for almost any principal, merely by telling
third parties tliat he possessed the authority to do so. This sort of
thing is beyond the control of any principal. For this reason, the bur-
den is placed upon the third party to ascertain that there is reasonably
convincing evidence, stemming from circumstances, a statement, or an
impression that stem from the principal, that the agent does ha\e au-
thority for his act.
PRINCIPAL AND AGENT 167
RESPONSIBILITIES OF PRINCIPAL T O T H I R D .' .RTIES
The principal is, bound by all- acts of the agent done within ilic
scope of actual, appnient and. ostensible authority. In'otlier words, tlie
principal is liable for acts done by the agent %s'hen actually authorised
to do tliosc acts, as also for such acts as are necessary for the proper
execution of such authority. Again, where a principal'gives general au-
thority to conduct any business, he will be bound by cveiy act of the
agent incidental to such business, or which falls widiin the apparent scope
of the agent's authority'" or as it is often called the "ostensible authority"
of the agent. We have already dealt with the doctrine of apparent au-
thority, which may be re-iterated for purposes of emphasis. When an ap-
pearance has been created by the j^rincipal that his agent has a certain
measure of authority, and relying upon this appearance a third partv
enters into a contract, the principal ivill be liable for this apparent au-
thority even if he has instructed the agent not to make that sort of
contract. An apparent or ostensible agency is as effective as an agency
deliberately created. Appearance and reality are one. Where P au-
thorises A to sell goods, but privately instructs him not to sell for cre-
dit, and A sells them for credit to C. who does not know of the limi-
tation, the sale is binding on P. Where, however, the agent exceeds
the authority granted to him by the principal, the principal may either
disown such an act as is in excess of the authority or ratify tlie .same.
The principal is liable for misrepresentation or fraud of the agent
committed in the course of the employment or within the scope of the
employmfnt or within the. scope of the agent's apparent atuhorify
(Section 238). It is immaterial whether such acts are done for the
benefit of the principal or exclusively for the benefit of the agent, and
against the principal's interest. ' '^
The principal is bound by the admissions made by the agent. For
example, where a passenger lost his article by theft and the station mas-
ter reported to the police that the porter had absconded with the par-
cel it was held that the admission made by the station master was binding
on the railway, and the company was responsible to pay for the parcel.
The principal is bound by the information obtained by the agent
in the course of the business of the principal, on the presumption that
the agent has done his duty and communicated the information to the
principal, even though, in fact, he has not done so. Kn(j,wledge' of the
agent is said to be the knowledge of the principal: the principal is
said to have constructive notice. But, to be binding on the principal,
the information must be material to the business of the agency and not
irrelevant to it. Constructive notice will not be presumed where the
agent is guilty of fraud, for it cannot be reasonably expected that the
agent would ever communicate his own fraud to the principal.

LIABILITY OF UNDISCLOSED PRINCIPAL

The principal even though his name was kept secret by the agent
at the time of the contract is. on being discovered, responsible for the

12. Gavarsilal v. Sita Charan, 1963 M.P. 164,

168 MERCANTILE LAW

contracts of the agent.—It may sometimes happen that an agent discloses

the fact that he is an agent, but at the same time conceals his princi-
pal's name. Here the principal is liable, and not the agent, unless
there is a trade custom making the agent liable. But it is essential that
the undisclosed principal exists and is, in fact, the principal at the
time the contract is made. He cannot be brought into existence as a
principal after the contract has been concluded.
CONCEALED PRINCIPAL
T h e principal is liable to third parties even where the agent is also
liable, unless the third parties have elected to sue the agent, or led
the principal to believe that the agent alone will be held responsible. The
law which superadds the liability of an agent does not detract from the
liability of the principal. This will happen where an agent conceals not
merely the name of the principal but also the fact that there is a prin-
cipal. In this case, the third party must necessarily look to the agent
for payment or performance, and the agent may sue or be sued on the
contract. Careful consideration must be given to the position of the
principal: (i) when the third party discoveis his existence and wants to
make use of discovery, and (ii) wlien the principal decides to intervene
and assert any n'glits he may have against the third party. In the first
case, when the third party discovers that there is a principal, if he
has r|ot already obtained judgment against the agent, he (third party)
may ^sue either the principal or the agent, or both, and the principal
is not released from liability until a clear election has been made by
tlie third party to proceed against the agent alone. If the third party
chooses to sue the principal and not the agent, he must allow the prin-
cipal the benefit of all payments made by him to the agent on account
of the contract before the agency was disclosed. Secondly, if the prin-
cipal intervenes and sues the third party, then in the same way the
third party h entitled to be placed in the same situation at the time
of the disclosure of the real principal as if the "agent had been the con-
tracting party. For example, if the third party has made part pay-
ment to the agent, he must be allowed the benefit of it. Para 2 of Sec-
tion 231, however, states that "if the principal discloses himself before
the contract is completed, the other contracting party may refuse
to fulfil the contract if he can show that, if he had known who was
the principal in the contract, or if he had known that die agent was
not a principal, he would not have entered into the contract."
It is clear fiom the three circumstances that the effect of a contract
made by an agent varies according to the circumstances under which
the agent contracted, i.e., for a disclosed, undisclosed or concealed
principal.
PART 4-I>
PERSONAL LIABILITV OF AGENT T O T H I R B PARTY
We have seen above that when an agent contracts as agent on be-
half of a piincipal whom he names to tlie other party, the agent is
merely a connecting link between his principal and the other party,
and incxiTS no peisonal liability. As we have seen earlier, the essential
characteristic of an agent is that he is invrsicd with a legal power to
 PRINCIPAL AND AGENT 169

alter his principal's legal relations ^\ith third parties; the principal is
under a correlative liability to have his legal i-elatioiii altered. To this
rule, there are certain exceptions. An agent will be personally liable in
the following cases :—
When the contract expressly provides.—The thiul party may, when
contracting witli an agent, stipulate that the agent should make him-
self personally liable on the contract. If the agent agrees to this sti-
pulation he will be personally liable for any breach of ilic contract.
When the agent signs a negotiable instrument in his own name
without making it clear that he is signing it only as agent, he would be
personally liable as the maker of the note, even though he may l)e des-
cribed in the body of the note as the agent.
When the agent arts for a foreign principal, it is the agent who is
liable, not the principal.
When acting for a concealed princi[)al.—The agent n'ould be per-
sonally liable where he acts for a concealed pi iticipal because the third
- party could not look to the credit of a principal whose existence is not
disclosed, and relies mainly on the credit of the agent. The third partv
may, however, on discovering the identity of the principal sue the prin-
cipal also if he so chooses.
When acting for principal who cannot be sued.—Where the name
of the principal lias been disclosed, but no suit can be filed against him,
the agent will be personally liable as the credit is presumed to have
been given to the agent and not to the principal. For example, where
an agent acts for a minor or an .Embassador, he will be personally liable.
Agent liable for breach of warranty.—A person who professes to act
as agent, but has no authority from the alleged principal or has exceed-
ed his authority, is liable to an action for breach of warranty of au-
thority at the suit of the party with whom he professed to make the
contract [Cohen v. Wright (1857) 8 E. 8c B. 647]. T h e action is based
not on the original contract, but on an implied promise by the agent
that he h a d ' authority to make the original contract. For instance,
where an agent acts for a non-existing principal, he is personally liable.
But before the agent could be held responsible, it must first be shown
that: (i) he had made an untrue representation; (ii) the third party had
been misled or induced to deal with the agent on the faith of
such untrue representation; (iii) the principal had repudiated or refused
the transaction; (iv) loss had occurred to the third party; and (v) the
untrue representation was one of fact and not one of law. In Haji
Ismail V. James Short (1910) 8 M.L.J. 383, where broker acted upon a
wrong telegram due to a mistake on the part of the telegraph authori-
ties, it was held that the broker was personally liable.
Money paid by mistake or fraud.—Where an age-u receives money
by mistake or fraud from third parties, he can be sued therefor. Simi-
larly, where an agent has paid money by mistake or fraud lo tliiid par-
ties, the agent can him';el[ file n suit for the rccoveiy cf the amount.
When aiiihoiity is one "coupled with iutcicsi" or where trade-usage
or custom makes agent personally liai>ie,~\Vhcie an agent has an inter-
170 MERCANTILE LAAV
est in the subject-matter of the contract which he signs, his authoiity
is said to be coupled with interest. He is really a principal to the ex-
tent of that interest and may sue in his own name or be sued. \ au-
thorises B to sell A's land and out o£ the sale proceeds lo pay himself
the debts due- to him from A. P.'s authority is coupled with in-
terest. If a factor is authorised to pay himself out of the sale pro-
ceeds, or he is authorised to sell at the best possible nrice and if the
proceeds are insufficient to pay him off, to draw on the princijjal. this
gives the factor an interest in the goods. In the.se cases he becomes
personally liable to the extent of his interest.
For his Tort independently of contract or ton arising out of the
contract, as where it has been induced by the fraud of the agent, the
agent is severally and jointly liable with his principal. In the particular
form of agency known as -partnership, a partner is both an agent and
principal, and as such personally liable.

PART 4-E
TERMINATION OF AGENCY
Agency may terminate in the same manner as any other cont-act,
viz., by the operation of law or by the act of parties. In particular, a
contract of agency may come to an end— ,
* By performance of the contract of agency.—Where the agency is
one for a single transaction, the agency terminates when the transaction
is completed. For example, an agency for the sale of property ends when
the sale is completed and does not continue until payment of' the price.
By agreement between the parties.—The agency can be tenninaled
at any time and at any istage by the mutual agreement between the
principal and the agent.^ ^
By expiration of the period fixed for the contract of agency.—
If the authority is given for a fixed period, the agency comes to an end
on the expiry of the period even if the business is not completed.
By the death of the principal or the agent.—An agent with a power
of attorney to present a document for registration, presented it for re-
gistration after the death of the principal, and the Registrar knowing of
the, death of the principal registered the document. The registration
was held to be invalid." On the termination of the agency by the death
of the principal the agent must, on behalf of the representative of his
late principal, take all reasonable steps to protect the interests of the
principal entrusted to him (Section 209).
By the insanity of either party Doubtless it is true tliat an agent
need not be a person capable of entering into a contract 'so that a per-
son can appoint even a lunatic as his agent, if he so desires, but if an
agent becomes insane during the agency, the agent's authority terminates
as soon as the agent becomes insane. The authority will, of course, ter-
minate on the principal becoming insane, in which case the agent is
required to do everyting for the protection of the principal's interests.

13. Majid-in-Nissa v. Abdur RaKim (1900) 23 All. 233.

PRINCIPAL AND AGENT 171

By tlie insolvency of the principal and in some cases that of the

agent.—The bankruptcy of the principal terminates the agency, and also
that of the agent, except in cases where the act which the agent is asked
to do is merely formal."
AVhcre the principal or agent is an incorporated company, by its
dissolution.—A company, after being dissolved, comes to an end, and its
poivers as principal or agent terminate thereafter.
By the destiiiction of the subject-matter Where tlie subject-matter
in respect .of which agency was created has been destroyed, the agency
comes to an end. Thus, when the agency was created for the sale of a
horse or a house, and the horse dies or the house is destroyed by fire,
the agency necessarily comes to an end."
By the renunciation of his employment by the agent.—Generally, an
agent can, after giving a reasonable notice of his intention, renounce
the contract of agency, for a person cannot be compelled to continue
as agent against his will. Where an agency is for a fixed period and
the agent renounces it without sufficient cause before the time fixed he
shall have to compensate the principal.
By revocation by the prindpa].—The principal can revoke the au-
thority of the agent at any time. Where the agent is appointed to do
a single act, the authority can be revoked any time before the act is
begun. In tlie case of a continuous agency, notice of revocation is es-
sential to the agent and also to the third parties who have acted on
the agency, with the knowledge of tlie principal. If reasonable notice
is not given the principal will be liable to compensate the agent, and
be bound by the acts of the agency with respect to third parties. Notice
to the agent is also necessary in the case of agency for a fixed period.

AN AGENCY IS IRREVOCABLE IN T H E FOLLOWING CASES:

(i) Where the agency is one coupled with interest, i.e., one created
for effectuating any security or protecting any interest of the agent, it
is irrevocable during the existence of such interest." Where a factor has
made advances to the principal and is authorised to sell at the best price
and recoup the advances made by him, or where the agent is authorised
to collect moneys from tliird parties and pay himself the debt due by
the principal, the agencies are those coupled with interest and irrevo-
cable. Even the death or insanity of the principal does not terminate
the authority in tliis case.
(ii) When an agent has incurred personal liability the agency be-
comes irrevocable, for the principal cannot be permitted to withdraw,
leaving the agent exposed to risk or liability he has incurred.
(iii) When the authority has been partly exercised by the agent it
becomes irrevocable, in particular with regard to oblig tions which arise
from acts already done (Section 201).

U. Re Pollitt (1893) 1 Q.B. 455.

15. Trench 8= Co.. Leesten Shipping Co. (1922) A.C. '151.
16. Ramchandra v. Chinubhai (1943) 45 B.L.R. 1075.
172 MERCANTILE LAW

WHEN TERMINATION OF AGENCY TAKES EFFECT

Termination of agency takes effect or is complete when it be-
comes known to ilie agent, and as far as the third parlies are con-
cerned, when it becomes known to them (Section 208), and in case of
termination by revocation not from the moment revocation is made
by tlie princijjal but from the time of the knowledge of the agent or
the third parties of such revocation. Therefore, if an agent, know-
ing tiiat liis authority has terminated, enters into a' contract with a
third party who deals with him. bona fide, the contract will be binding
on the principal as against the third party.
Sub-Agents.—The termination of an agent's authority puts an end
also to the authority of the sub-agent appointed by the agent (Section
210). But the authority of a substituted agent will not be affected
thereby.

MEANING OF AUTHORITY COUPLED W I T H AN INTEREST

An agency is coupled with interest wlien the agent has an interest
in the authority granted to liim or when the agent has an interest in
the subject-matter with which he is authorised to deal. An agent has
an interest in the authority when he has given a consideration or has
paid for tlie right to exercise the authority granted to him. To illus-
trate, if the agent, in return for making a loan of money to the
principal, is given as security authority io collect rents due to the
principal such authority cannot be revoked by the principal. .An agent
has an interest in the subject-matter when for a consideration he is
given an interest in the property with which he is dealing. Hence,
when the agent is authorised to sell certain property of the. principal,
and is given, as security for a deln owed to him by the princi]3al, a
lien on such property, his authority to sell cannot be revoked by the
principal.
T h e emDlovment must, in its natine, be such as the authority of
the agent cannot be revoked without loss to the agent. Tiie interest
must be a substantial interest in the subject-matter of the agency, and
not the ordinary interest which a man usually has in getting remunera-
tion for his services. A mere arraiigement that the agent's remunera-
tion be paid out of the rents' collected by him as such does not give
him interest in the property within the meaning of Section 202 of the
Contract Act. Tliiis, an agent who sells cloth and is entitled by an
agreement with his principal to retain part of the price of the goods
has no interest in the cloth kept with him and is not a person who
has an interest in the property which forms the subject-matter of the
agreement within the meaning of his section (Dalchand v. Hazarimal,
1932 Nag. 32). But a vendee retaining' a part of the price to pay off
encumbrances is an agent with interest of the vendor (Subba Row v.
Varadiah, 1943 Mad. 885). In the words of Willis, C.J. in Smart V.
Sanders 5 C. B. 917, "the authority must have been given by an agree-
ment entered into for sufficient consideration for the purpose of con-
ferring some benefit on the donee of that authority."
PRINCIPAL AND AGENT 173

SUMMARY
Principal and Agent.—A person employed by another to act on be-
half of or represent that other in dealings with third parties is called
the agent. The person on whose behalf the agent acts is known as
tlie principal.
Generally, what a person can do himself, he can do through an
agent. And die acts ot the agent are the acts of the principal, lor he
wno acts dirough an agent is taken to be acting himseli. Altliough the
principal and the diird party must be competent to contract, an agent
need not have capacity ^ to contract, as the agent is only the connecting
link between die two parties, and his acts are the acts of the principal.
But a minor agent is.not liable to the principal for misconduct or neg-
ligence. Thus, a minor" can be an agent and can effectively bind his
principal, but he is not bound to the principal.
A contract of agency like any other contract may be express or im-
plied, but consideration is not an essential element in this contract.
The fact that the principal has consented to be represented by the
agent is sufficient detriment, and consideration to support the promise
by the agent to act in that capacity.
Agency may also arise by estoppel, holding out, necessity, or subse-
quent ratification by die principal.
In a large number of business ^dealings, agencies are created by
word of mouth or in writing, and are called express agencies. The
best example of written contract of agency is a Power of Attorney. A
power of attorney may be general, which authorises the agent to do
all things on behalf of the principal; or special, which- empowers the
agent to perform a single transaction.
Implied agency may arise by conduct, situation of the parties, or
die necessities or circumstances of the case. An implied agency includes
agency by estoppel, agency by holding out, and agency of necessity.
An agency of' estoppel arises where A tells B in the presence and
within the hearing of P that he (A) is P's agent and P does not contra-
dict this statement, and A contracts on behalf of P with B, P is bound
by this transaction, and in a suit between himself and B he will be
estopped or.precluded from saying that A was not his agent.
Agency by holding out arises where a person holds out another as
his agent and third parties contract witli the agent on the taidi of the
conduct of the principal. The principal is liable.
Agency of necessity may arise in a number of circumstances. A
wife is an agent of necessity of her husband and can pledge his credit
to buy all necessaries of life according to his station in life. A mas-
ter of a ship may pledge owner's credit for the purchase of necessities
for the voyage. A person may become an agent of necessity in an
emergency.
Agency by ratification—ex post facto—arises where a person acts on
behalf of another without knowledge or assent and afterwards his act
is adopted or ratified by die latter. If the act is not ratified, there
is no agency and the person acting :as agent is personally liable.
Agency may be general or special. They may be mercantile or non-
mercantile. A general agent is appointed for general purposes, all
174 MERCAN'IILE LAW

matters concerning the type of business on which he is employed. A

special agent is appointed for a special or a particular transaction.
Mercantile agents a r e :
Factor is a person to ivliom goods or bills ot lading or other docu-
ments of title are consigned ior sale by a merdiant residing abioad or
at a distant place. He gets the possession ot goods and may sell them
in his own name.
Broker maizes bargams for another, and leceives commission for so
doing. He does not buy or sell in his own name. He is merely a con-
necting link, between his principal and tlie third party.
Commission Agent is a person employed to buy goods in foreign
market as jjrincip.u and then ship tliem to his principal, charging a
fixed commission,
Del Credere Agent, in consideration of an extra remuneration, gua-
rantees to his principal the performance of tlie contract by tlie tnird
party. This agent makes himself liable for the performance of the con-
tract on tlie default by die third party.
i^u.cuon€.M sells goods by i^kictlon. as an. s-genl o£ Uve owner. Ln Eng-
lish law, he also becomes die agent of tlie buyer after riie sale is made.
Bankers are agents of their customers for collecting cheques, divid-
end warrants, etc., and for sale and purchase of securities lor dieir cus-
tomers.
Non-commercial agents are estate agents, law agents, counsel, attor-
ney, pleader and wife.
An agent cannot delegate his authority, as he himself is a delegate.
Theie are a number of exceptions to diis general rule.
An agent may delegate his authority in the following cases ;—
(a) where principal has expressly permitted delegation; (b) where
trade usage or custom permits delegation; (c) where tlie nature of tlae
authority is sucli that deputy is necessary to complete the business; (d)
where acts to be done are purely ministerial, i.e., clerical or routine
work; (e)' where an unloreseen emergency has arisen.
I'he person to whom authority is delegated is called a sub-agent,
who is really an agent of the oringinal agent. He is responsible to the
agent and can demand remuneration from -him. He will, however, bind
the principal to third parties, although tliere is no contract between
him and the principal.
Duties of an agent.—(1) To carry out tlie work undertaken accord-
ing to in»tructi'ons. (2) To follow die custom in the absence of instruc-
tion. (3) T o carry out die work with reasonable care, skill and dili-
gence. (4) T o • communicate with die principal. (5) Not to make any
profit out of his agency other tlian his remuneration. (6) To keep and
render true accounts. (7) Not to deal on his own account. (8) Not to
set up adverse title. (9) Not to use information obtained in the course
of the agency against die principal. (10) Not to delegate audiority.
Rights of an agent.—(1) T o receive remuneration for the work done.
(2) To exercise lien, where in possession of goods. (3) To stop goods
in transit. (1) To claim indemnification for all charges, expenses and
habilities incurred in tlie course of the agency.
I'HINCIPAL AND AGENT 176

Liability of principal to third parties.—(1) T h e principal is bound

by ail acib ol tlie agent clone witliin tlie scope of actual, apparent and
oitcnsibie ayihority. (Z) Piincipal is liable tor agent's Iraua and mis-
repicbcnidiion during the course ot llie agency, {p) Principal is bound
by tlie agent's admission. (4) He is bousid by tlie inlormation obtain-
ed by the agent in the course of die principal's business. (5) An Undis-
cioieU Principal is, on being discovered, responsible for tlie contract of
the agent. A Concealed Principal is liable even where tlie agent is also
liable, unless the diird party has elected to sue the agent, or nas led the
principal to believe that die agent alone will be responsible.
Agent's personal liabilities to ttiird parties.—An agent is personally
liable: (i) when the contract expressly provides for his personal liabili-
ty, (ii) agent signs a negotiable instrument widiout making it clear
mat lie IS signing it only as an agent, (3) when the agent acts for a
foreign principal, (4) when acting tor a concealed principal,»(5) when
acting for a principal who cannot be sued, (6) when acting for a. non-
c.xibtiiig principal, ij) where diere is a breach of warranty of audiority
on his part, (t5) where he receives money by mistake or fraud from a
third party, (9) where authority is one coupled widi interest, (IQ) where
trade usage or custom makes agents personally liable, (ll) for his torts
during die course of the agency, (12) in the particular form of agency
known as partnership, each partner is liable as an agent of the otiiers.
Termination of agency.—(1) By performance of die contract of
agency. (2) By expiration of die period fixed for the contract. (3) By
Uie aeatU of eidrer the principal or die agent. (4) By the insanity of
cither. (5) By the insolvency of the principal. (6) Where the principal
or agent is an incorporated company, by its dissolution. (7) By the des-
truction of die subject-matter. (8) By mutual agreement between die
principal and die agent to terminate die agency. (9) By renunciation
of his employment by die agent. (10) By revocation by the principal.
Agency is irrevocable—
(i) where agency is one coupled with interest;
(li) when agent has incurred personal liability;
(iii) when the authority has been pardy exercised by die agent.
Termination of agency takes effect when it becomes known to the
agent, and as far as the third parties are concerned, when it becomes
known to them.
The termination of an agent's authority also puts an end to the au-
diority of the sub-agent.

CASES FOR RECAPITULATION

I. H, the owner of a restaurant, sold the restaurant to F, who con-
tinued H as manager. W, who knew nothing of diis transaction or of
F, sold cigars to H for use of the restaurant. H had been expressly
forbidden by F to purchase cigars on credit. Being unable to obtain
K payment from H, W sued F. Held, W is entitled to recover from F
because (i) cigars and cigarettes would usually be dealt in at such a
TeM;iuv;iiu, and H was acting widiin die scope of his apparent or osten-
sililc authority as manager in ordering cigars; (ii) F could not, as against
W, bci up any secret limitation of that authority [VVatteau v. Fenwick
(18'J3) 1 Q.B. 346].
 176 MERCANTILE LAW

2. L owned some cottages and consulted G & Co., solicitors. She

was seen by S, tlieir managing clerk, who had authority to transact
conveyancing business on belialt ol his employers. S fraudulently in-
duced L to sign deeds, which in fact transferred tlie cottages to S.
With tlie help ot die documents S sold the cottages and absconded with
the proceeds. L sued G & Co., for the recovery ot the price of the pro-
perty. Held, G &: Co., were liable for the fraud of S, as the fraud was
committed in the course of his employment.
3.- A instructs B, a merchant, to buy a ship for him. B employs
C^, a ship surveyor of good reputation, to choose a ship lor A. C makes
tlie choice negligently and die ship turns out to be unseawordiy and
is iQst. The surveyor is liable to A for the loss of the ship and not B.
B had exercised due care in selecting the agent for nis principal
Ullustration (a) to Section 195].
4. A, at tlie request of a party, B, purchased and sent certain goods
to C. C appropriated die goods ior himself and wrote to A that he
would pay mm tthe price in a lew days. B was declared insolvent. A
sued C for the price of the goods. Held, C is not liable to pay A. A
was acting as the agent of B and could claim only from him. C's letter
(in the absence of any proof to the contrary) must be taken to have
been written by C as B's agent. It did not create any personal liability
oi C [Khushi Kam v. Mathura Das, 1917 Lah. 404].
5. S, who was a corn factor, was entrusted by Smart with a cer-
tain quantity of wheat to sell on his behalf. S subsequently advanced
the sum of £3,000 to Smart, which Smart failed to repay, Smart gave
orders that the wheat was not to' be sold. JMotwithstanding this S sold
it to secure his advance. In an action against him S pleaded that the
agency was irrevocable. Held, the agency was not irrevocable, as the
authority had not been given to secure die advance of £3,000, since it
had been given prior to, and Nindependently of the loan [Smart v. San-
ders (1848) 5 C.B. 895].
6. R, authorised by X to buy wheat at a certain price, exceeded
his authority and bought at a higher price from D. R bought in his
own name, but intended to,buy for K. K agreed with R to take die
wheat at die price, but failed to take delivery. Held, K was not liable
to D, as he could not ratify R's contract. R. had, at ttie time of making
the contract, merely intended to contract for K and had not disclosed
his intention to D LKeighley, Maxsted & Co., v. Duiant (1901) A.G. 240j.
7. K agreed to sell a hotel to B, who was acting as agent for a
company which was about to be formed. Held, B was personally liable
on the contract and no subsequent ratification could be made by die
company, as at the time of the contract the company was not in exis-
tence [Keliier v. Baxter (1866) L.R. 2 C.P. 174].
8. M employed B &: Co., as his agents to collect a debt fiom X. T o
do this B & Co., properly employed F, who collected die debt, B & Co.
owed F money, and F, not knowing at the time he was employed that
B & Co. were agents, claimed to set off the debt against the money
owed him by B & Co. Held, he was entitled to do so. If an agent acts
for a concealed principal, the principal may sue the third party but sub-
ject to right of the third party to exercise any defence which may be
available to him against die agent before tlie third party discovered the
existence of the principle [Montagu v. Forwood (1893) 2 Q.B. 350],
9. A enters into a contract witli B for buying B's motor car as
PRINCIPAL AND AGENT , 177
agent of C and without C's autliority. B repudiated the contract be-
fore C comes to know of it. C subsequently ratified the contract and
sued to enforce it. Held, B was bound" to sell the motor car to C, as
ratification by C related back to the date of the contract made by the
agent and repudiation by B was ineffective fBolton Partners v. Lambert
(1889) 41 Ch. D. 295].
10. N. P. RIy. Co., appointed A as its agent. After some time A
renounced his agency and the Railway Company sued for the issue of
an injunction against-A with a view to stopping A from quitting. Held,
no injunction could be granted, as no one can be compelled to work,
against his will. It was said, "It would be an invasion of one's natural
liberty to compel him to work for or remain in the personal service of
another. To do that would amoiint to involuntary servitude" [Arthur
V. Oakes 63 F. 310].
11. M.W.K. Co. agreed to act as agent of the A.C. Co. for a speci-
fied term, but it renounced .the contract before the expiration of that
period. Held, the agent had the power but not the right to abandon
the employment, hence it was liable t o pay damages for the breach of
contract [Alcorn Combustion Co. v. AL- W. Kellogg Co. 311 Pa. 166 A.
fi621.

12. A was running ? Way-side hotel. A I a.m. B applied and was

received as a guest in the hotel and paid Rs. 10 for a room to which
he was taken by a man who appeared to be in cliarge. B lianded over
Rs. 5,000 in bank notes to the man for safe-keeping by ilie liotel pro-
prietor. The man gave B a rece pt for the money signed by him for
and on behalf of A. In the morning B presented the receipt to A and
demanded back his money, when he learnt that tlie man was not in
the employ of A and had no. authority to receive the money. The man
having disappeared. B is entitled tc recover the money from A, as A
by his voluntary act, dr by his negligent act, had placed some one in a
position where it would appear to anyone coming to become a guest at
the hotel that he was properly incharge, and that, therefore, A made
himself by his conduct responsible for his acts, acting with the appar-
ent authority of a reception clerk or employee in a hotel, to receive pro-
perty of his guests [Kanelles v. Locke i2 Ohio App. Repts. 20 (1919)].

13. The conductor r a Dus, who had temporarily taken over the
wheel in the absence of the bus driver, injured A, a passerby, by his
negligent driving. A claims damages Irom the bus company. Held, the bus
company is not liable to pay damages to A. The principal is, not doubt,
liable for all torts committed by an agent (or servant) in the course of
employment, i.e., where the agent or servant does improperly what he is
employed to do propeily. But in the present case the driving of the bus
by the conductor could not be regarded as part of the course of employ-
ment, since this was not what he was employed to do, and, therefore, his
tort would not make his employer or principal liable IBeard v. London
General Omnibus Co. (1900) 2 0 - 3 . 530],
 Chapter V

Law of Partnership

PART 5-A
Partnership is now governed by the provisions of the Indian Part-
nership Act, 1932, which came into force on October 1, 1932, excepting
Section 69 relating to registration of firms which came into force a year
later. This Act repeals Chapter XI (Sections 239-266) of the Indian
Contract Act, 1872, which contained the law relating to partnerships.
The present enactment does not purport to alter in any substantial
way the law of partnership, but only to clarify it with a view to avoidihg
doubts and difficulties, and also for making it uniform with the law
ir^ force in England and other parts of the Commonwealth. Por this
purpose the present Act is mainly based on the English Partnership Act,
1890, and practically codifies the Indian law of partnership, though, as
was to be expected, it expressly provides (Section 3) that it is a branch
of the general law" of contracts and that the rest of the provisions of
the Indian Contract Act shall continue to apply to partnerships, ex-
cept so far as they are inconsistent with the express provisions of this
Act.

CHANGES INTRODUCED BY T H E NEW ACT

REGISTRATION OF FIRMS
One important change brought about by the Act is that every part-
nership firm, should be registered with the Registrar of Firms, in the
form of a statement signed by all the partners, and accompanied by a
registration fee of Rs. 3, stating—
(1) The name of the firm. (2) The principal place of business of
the firm. (3) Names of other places (if any) where tlie firm carries on
business. (4) The date on which each partner joined the firm. (5) The
names m full and addresses of tlie partners. (6) T h e duration of the
firm.
It is aiso provided that every change in the names and addresses of
the partners or place of business should be duly notified to the Re-
gistrar. It is to be noted that the Art does not expressly make re-
gistration compulsoiy, nor does it provide penalty for non-registration.
 LAW OF PARTNERSHIP - 179
as does the English law, but it introduces cert^iin disabilities, which make
registration necessary at one time or other. In fact, the Act has effec-
tively ensured tlie registration o£ firms without making it compulsory.

, EFFECT OF NON-REGISTRATION
As stated above, though registration in India is ODtional, it becomes
indirectly necessar)', so that if a firm is not registered the following con-
sequences will ensue :—
1. A| partner (or a person claiming to be or to have been a part-
ner) cannot bring a suit to enforce a right arising from a contract or
conferred by this Act, against the firm or his co-partners unless the firm
is registered and the name of tlie partner suing appears in the Register
of Firms as a partner in the firm. The only remedy of the partner or
partners desiring to bring a suit in such a case will be to ask for dis-
solution of the firm and accounts or for accounts if the firm is already
dissolved. For example, a partner of an unregistered firm cannot sue
his co-partners (the unregistered firm) for damagv,'S, for wrongful dismis-
sal or for share of profits. He can, however, bring a suit for dissolu-
tion of the firm and accounts.
2. An unregistered firm cannot file a suit, or take other legal pro-
ceedings, to enforce a right arising from a contract, or to claim a set-off
in any suit filed against the firm, tmtil registration ol the firm is effect-
ed,' and the persons suing are shown as partners in the Register of
Firms." But an unregistered firm can bring a suit to enforce a right
arising otherwise than out of a contract, e.g., for an, injunction against
a person wrongfully using the name of the firm, or for wrongful in-
fringement of trade mark, trade name, or patent of the firm.
3. As registration is not compulsory, an unregistered firm is not
an illegal association.'
4. The entries found in the register would be conclusive of the
fact, and if subsequent changes or modifications are not noted (as re-
quired under Sections 60-63), they will not be taken into acco^unt.
Tlie legistration can, however, be effected at any time, so that it is
open to the partnership firm on the eve of a suit to ask for registration.
Even if a suit has been filed, it would be open to the firm to withdraw
the suit, get itself registered and file a fresh su'it if it is within time.
T h e same is true where a suit was dismissed merely on the ground of
non-registration of the firm. The firm ,can file another suit within limi-
tation period after registration. But registration pending the suit does
not cure the defect.*

1. See Govindmal Gianchand v. Kunjbeharilal, 1954 Bom. See also

Sudarsanam v. Viswanadharn Eros. 1955 Andhra 12.
2. •>.. S. Bahal v. Kanpur & Co. 1956 Punj. 24.
3. Badridas v. Nagarmal, 1959 S.C. 559.
4. Jammu Cold Storage v. K. L. &: Sons, 1960 J. & K. :0l; D. N.
Singh v. G. Chandra, 1933 Cal. 497; Prithvi Singh v. Hasan AH, 1951
Bom. 6.
180 MERCANTILE LAW
The non-registration of a firm does not affect the folio-wing rights,
namely;- -
1. The right of the third party to sue the' firm or any partner.
2. The right of the partner to sue for dissolution of the firm
' or for accounts if the firm is already dissolved or for his
share of the assets of the dissolved firm.
3. The right of an unregistered firm to bring a suit to enforce
a right arising otherwise than out of a contract, e.g., for
the injunction against a person wrongfully using the 'name
of tlie firms or for wrongful infringement of trade mark, or
patent of the firm. An application by a partner for refer-
ence to arbitration can be made.^
4. The power of an Official Assignee or Receiver to realise the
property of an insolvent partner.
5. The rights of firms or partners or firms having, no place of •
business in India.
6. A suit or set-off not exceeding Rs. 100 in ajnount which is of
a nature cognisable by Small Causes Court.

PENALTY FOR A FALSE STATEMENT

The Act also provides that if any information suppjied to the Re-
gistrar of Firms is false to the knowledge of the person supplying the
same, he is liable to a penalty of imprisonment up -to three montlis or
fine or both.

PART 5-B
DEFINITION AND NATURE OF PARTNERSHIP
Partnership is defined by the Act (Section 4) as "the relation bet-
ween persons who have agreed to share the profits of a business carried
on by all or any of them acting for all." The English Act defines it as
"the relation which subsists between persons carrying on business in
common with a view of profit." There are five expressions in these de-
finitions whicli, if studied carefully, will tell us a good deal about part-
nership, namely :—
1. An association ot two or more persons.
An agreement entered into by all "persons concerned.
Business.
4. Carried on by all or any of them acting for all.
5. For sharing profits (of the business).
An Association o£ two or more Persons.—It is essential that there
must be more than one person to constitute a partnership, as no one
can be a partner 'with himself. T h e Act (Section 41) also provides that

5. Mohindra v. Gurdayal, 1951 Pat. 196.

 LAW OF PARTNERSHII- 181
•when the number of partners in a partnership gets reduced to one whe-
I' ther by death or insolvency, it would cease to be a partnership. The
Partnership Act does not say anything about the maximum number of
partners, but Section 11 of the Companies Act, 1956, lays down the ma-
ximum number at 10 for a partnership carrying on banking business
and at 20 for a partnership carrying on any other business for gain.
Accordingly, a partnership is illegal if it consists of more than 20 per-
sons, and if it is a banking partnership "of more than 10 per-
sons." Besides, a partnersliip may be illegal on the same ground as a
general contract, namely, when its object is forbidden by law, or is im-
moral or opposed to public, policy, or where it has become illegal by
some supervening illegality, e.g., war.
An Agreement or Contract.—A partnership can only arise as a re-
sult of an agreement or contract, express or implied,'^ between the part-
ners; it does not arise from status. This is an important feature that
distinguishes it from various other relations which arise by operation of
law and not from agreement. T h e co-owne>"s, or co-legatees do not
simply by reason of their community of interest become partners.
'\\'here, lor instance, a sole proprietary of a business dies, leaving a num-
ber of heirs^ who naturally inherit tlie business, such heirs do not ipso
facto become partners. Befoie a partnership can come into existence
there must be an express or implied agreement among the heirs that the
business should be continued in common. T h e agreement must be to
carry on business by way of present partnership, and an agreement to
carry on business from a future date will not result in partnership until
that date arrives. - '
Business.—It is essential that there must be a business for a part-
nership to-'exist. Partnership implies business, and where t^ere ,is no com-
bination to carry on business there is no partnership. The term "busi-
ness" is, however, used in' the widest sense, and covers all sorts of enter-
prises. It includes every trade occupation, or profession. It is not confined
to lengthy operation, but may consist of a single adventure or a single
imdertaking (Section 8). Persons may be partners for a single voyage
of a ship, or for one performance of a play, or a single contract to
build for someone.
Carried on by all or any of them. Mutual Agency.-This is a verv
important ingredient of partnership, as the underlying and fundamental
principle which constitutes partnership is the idea of 'Agency.' Tlie
other partners are bound by the act of one of them only on the prin-
ciple of agency. Agency is the foundation of a partner's liabilitv; in fact,
the law of partnership is a branch of the general law of agency. Each
partner is both an agent and principal for himself and others; a part-
ner embraces the character both of a principal and of an agent. That
is to say, each partner is an agent "^binding the other partners who are
his principals-and each partner is again a principal, who in turn is
bound by the acts of the other partners. Thus, an implied agency flows
from their relationship as partners with the result that ever\' per.son

6. Badri Prasad v. Nagarmal, 1959 S.C. 559.

7. In re. Kakaria Narasayya, 1953 Mad, 516.
182 ' MERCANTILE LAW
wiio conducts tlie business of the firm is in doing so deemed in law
to be the ayent of all the partners (Section 18). It is not necessary,
however, that evei7 partner must be actively concerned in the conduce
ol the business. \Vhat is essen'.ial is that tlie business is carried on, on
behalf of all the partners. So, tlie fact that partners have agreed that
the management of the firm is to rest with one of the partners does not
negative the existence of partnership.
Sharing profit.—The essence of a partnership is the attemiit to make
jirofit in business for the partners. Therefore, a piece of philanthropy,
though it may involve a good deal of business, cannot be a partnership.
And this principle applies to each individual, as well as the whole body
carrying on the undertaking, l^hus, if A carries on a business with B
and C on terms which exclude A from sharing any 'profit, .\ is not a
partner, as his carrying on of business is not for profit. Though shar-
ing in the profits of a business is essential, it does not iollow that every-
one who participates in the profits of a business is necessarily a part-
ner. A manager with a share of profits may claim to be a servant of
the firm and not a partner,

"PARTNERS", "FIRM" AND "FIRM NAME"

f

Persons who' have entered into partnership with one another are
called individually "partners" and collectively "a firm," and the name
under whicli tlieir business is carried on is called the "firm name" (Sec-
tion 4).
• In law "a firm" is onlv a convenient plirase for describing the two
or moi"e perions who constitute the partnersliip, and the firm has no
legal existence apart fiom tliose persons. It is neitlier a legal entity, nor
is it a person as is a corporation; it is a collective name of members of
a partnership. For the jnirposes of "determining legal rights, there i>
no such thing as, a firm known to the law."" Th.e riglits and obligations
of tlie firm are leally the rights and obligations of tlie individuals com-
jjosing the firm; and it is difficult to think of the firin apait from tlie
members constituting v.? But for the purposes of the Indian Income-
tax Act. it is an entity tiuite distinct from the partners composing it.
T'nder Section 3 of tliat Act it is assessable as distinct from the indi\i-
duals composing it."
T h e language in use in mercantile circles does not tally with this
and may easily mislead. It 1. uiidoulrtcdly convenient to speak of the
fnni's pio|>crty, debts of tiie fiiin, bur ihcse are not legal phrases and
.lie countenanced by the Act to a limited extent. T h e legal jjosition
has been exjiiessed thus: "The firm cannot |)osscss property; therefore,
it cannot be a debtor br a creditor. I h e rights whicli a partner
cnjox-,, and the duties wlifch he owes, are enjovcd against and owed
to the other partners, andVnot to the firm; and if an action lietwcen

8. Per S.R. Das, C.J. in Dulichand v. I.T. Conimr. Nagpur H)5f)

S.C. .854.
9. Kanhayalal v. Devi Dayal, 1936 Lah. 5M: Mohd. Abdul Kaiiin
<
.L Co. v. Commissioner of Income-tax, Madras (1918) 16 I.T.R. '112.
10. (.x)mmissoiier I. T., W. Bengal v. \ . W. Figgs & Co. 1953 S.C:.
LAW OF PARTNERSHIP 183
the partners be necessaiy to enforce such rights and duties, the indi-
vidual partners, and not the firm, are the parties ."o the action." Yet
the "firm" is often regarded as a "convenient symbol" or "shorthand
form" for collectively designating all partners regarded as joint creditors
•or debtors; and for convenience the firm name may be used for the pur-
pose of suing and being sued, pxovided that the names of all tlie part-
ners are disclosed. A firm as such cannot be a member of a partnership,
nor can a firm and a Hindu joint family legally constitute a partner-
ship.
Firm • Name.—Persons have a right to carry on business under any
name and style which they clioose to adopt, whether it be a combination
•of their own several names or the names of others or fancy names, pro-
vided they do not violate the rules relating to trade name or goodwill.
They must not adopt a name calculated to mislead the public into con-
fusing tliem with a firm of repute already in existence with a similar
name. They must not use %vords implying the sanction or patronage of
the Government, except with the express permission of the Government.
A partnership firm cannot use the word "Limited" as part of its name.

FORMATION OF PARTNERSHIP
In a contract of partnership, all the elements required for a valid
contract must be present. There must be free consent, consideration,
lawful object and the parties must be competent to contract. Thus, an
alien friend can enter into partnership, an alien enemy cannot. A per-
son of unsound mind is not competent, nor is a minor.'' Though a minor
cannot become a partner in a firm, yet if all the partners agree, he
may be admitted to the benefits of par.tnership.

POSITION AND RIGHTS OF A MINOR

Partnership is a relation resulting from contract, and a minor's ag-
reement is altogether void. Accordingly, a minor, being incompetent to
contract, cannot become a partner, nor ran a partnership be created with
a minor as a partner. But he can be admitted to die benefits of an al-
ready existing partnership if all the partners agree to admit him." How-
ever, even after such admission he does not become one of tlie group of
persons called a firm. He is not personally liable nor is his separate
property for the debts of the firm; but his share in the partnersliip pi'o-
perty and profits will be so liable. A minor cannot be adjudged an
insolvent even where tlie adult partners have been so adjudged. Sec-
tion 30 lays down the rights and liabilities of a minor admitted to the
benefits of a partnership as follows :' (1) A minor cannot become a part-
ner in a firm. (2) A minor may, with the consent of all partners, be
admitted to the benefits of the partnership. (3) A minor so admitted
will be entitled to his agreed share and can inspect books of account
of the firm. (4) He will not be personally liable for the debts and obli-
gations of the firm, tliough his share in property and the piofits of tlie

11. Devi Ditta v Thanmal (1933) 142 I.C. 203: 1933 I.ah. ISO. Chotc-
lal V. Raj Mai, 1951 Nag. 449. But See Sahai Bros. v. I.T. Conimr. 1938
Pat. 177.
 184 . MERCANTILE LAW

firm wiil be liable for the same. (5) He can bring a suit for account
and for his distributive shaie when he intends to sever his connections
with the firm, but not otherwise. But he has access to the accounts of
the firm and can inspect and copy any of them. (6) Within six montlis
of his attaining majority or when he comes to know of his being so ad-
mitted (whichever date is later), he has to elect whether he wants to
continue his relation and become a full-fledged partner, or sever his
connection witli the firm. He may give public notice" of his election to
continue or repudiate, but if he fails to give any public notice within
tlie period stated above, he will be deemed to have elected to become
a partner in the firm. It is well said: "If he chooses to be inactive,
his opportunity passes away; if he chooses to be active the law comes to
his assistance." (7) A minor who thus becomes a partner will become
personally liable for all debts and obligations of tlie firm- incurred since
the date of his admission to the benefits of the partnership." In this res-
pect the Indian law is different from the English law; according to the Eng-
lish law, a person who does not repudiate would be liable only from
the date of his attaining majority and not from the date of original ad-
mission. (8) Where the minor on becoming major or obtaining know-
ledge elects to sever his connections with the firm all his liabilities will
cease from the date of the public notice to this effect. (9) Although the
rights and liabilities of the minor during the six months after his at-
taining the age of majority continue to be those of a minor, yet, if he
has during this period represented himself to be a partner to a party,
he will be liable to that partv on the ground of holding out. But if a
minor oecomes major after dissolution of partnership and fails to exer-
cise his option, he is not liable [Shiva Gauda v. Chandrakant, 1965
S.C. 212].

CLA.SSES OF PARTNERS
Extent and Duration of their Liability.—A person who deals with
- a firm, so long as matters proceed smoothly and debts are paid or goods
delivered, possibly does not worry as to who the partners are; but as
soon as he has a claim against the firm which is not met, he has to look
fo- individuals who may be liable to meet his claim. Further, from a
legal point of view there are two aspects of a partnership, one from
within and the other from outside. T h e inside agreement will bind
the partners, but may have no effect on outsiders. Therefore, the claim-
ant would like to know who are the partners; and to what extent each
is liable The position of different classes of partners may be examin-
ed as follows :—
12. A public notice, as required by Section 72. is a notice to the
Registiar of Firms, and publication in the local Official Gazette and in
at least one vernacular newspaper circulating in the district where the
firm carries on business
This notice is also necessary in matters relating to
(a) retirement or expulsion of a partner, or
( /) dissolution of firm.
In other cases, notice to Registrar of Firms is not necessary
13. See Bhagilal v. I.T. Commr. 1956 Bom. 411.
LA^V OF PARTNERSHIP 585
ACTUAL PARTNER
A person who has by agreement become a partner and who ' takes
active part in the conduct of the partnership business is an actual or
ostensible partner. He is the agent of the other partners for the pur-
poses of the business of the partnership. All his acts performed in the
ordinary course of the business, so far as third parties are concerned,
bind him and the other partners.

PARTNER BY ESTOPPEL OR HOLDING O U T

As observed above, with regard to the partners themseh-es, a part-
nership is created by agreement between the partners, and in no other
way. But, as regards outsiders the partnership relation may also arise
by the conduct of the partners, and this in spite of contrary agreement
between themselves. This is said to be on the principle of estoppel or
liolding out, and the partners are called partners by estoppel or part-
ners bv holding out. We have already had examples of this principle
in agency. Section 28(1) of the Partnership Act states that "any one who
by words spoken or written or by conduct represents himself, or know-
ingly permits himself to be represented, to be a partner in a firm is liable
as a partner in that firm to any one who has on the faith of any such
representation given credit' to the firm, whether the person represent-
ing himself or represented to be a partner does or does not know that
tiie representation has reached the person so giving credit." So, where
a person conducts himself as to lead another, to believe him to be a
partner, although really he is not and on that belief the other person
gives credit, then he is estopped from denying that he is a partner. His
mouth is shut by his own conduct, and he is treated as a partner by
estoppel. Thus, if A, B and C carry on a business for profit, but under
very special condition as to C, that C is to contribute neither labour nor
money, and not to receive any profits, but to lend to the firm his name
as a partner, then C will be liable to every outsider who gives credit
relying on his being there as partner. Similarly, where a person, is held
out as a partner by another, and does not disclaim the partnership re-
lation even after knowledge that his name is being used as partner,
he will be liable as partner by holding out to any one who has given
ciedit on the faith of this representation. Thus, if A and B hold C
out to be a partner, thev cannot afterwards turn round and deny 'o a
creditor, who has acted on the.se representations, the fact of C being a
partner, though C himself might not be able to claim to be a partner.
Nor can C, if he has allowed himself to be represented as a partner,
escape a partner's liabilitv. Such a person, not beinfj in fact a partner,
will not be entitled to anv profit, but he will be liable as partner for
the firm's obligations. Instances usually arise where a nartner. havin?
rftired frorrT the firm, fails to give public or actual notice of his retire-
ment and if his name is continued to be used as a partner in the hills,
letter heads,- etc., of the firm, and if he does not take steps to stop
his name bcins so used, he will be liable to creditors who have lent on
the faith of his being still a partner. But, where after the retirement
of one nartner another is brought in. tlie creditor cannot sue all of
them. He must either depend upon estoppel or the real facts. Thus
186 MEPXANTILE LAW

where A and 3 carried on partnership business under an assumed name

"Z and CJompany," A retired, but gave no notice of tliis retirement, C, a
new partner, joined and tlae firm continued in its old name "Z and Com-
pany." A creditor filed a suit against A, B and C as partners; it was
held that he could not do that. He must either proceed against A and
B or against B and C but never against A, B and C, as A never held
himself out to be a partner with C." .

DORMANT OK. SLEEPING PARTNER

A person who is in reality a partner but whose name does not ap-
pear in any way as partner, and, therefore, he is not known to outsiders
as partner in the firm, is called a dormant, sleeping or secret partner.
.Such a partner will be liable to third parties who lent to the firm even
without knowing of his being a partner but subsequently discovering
the fact. The Act says that if an act is binding on the firm, every part-
ner will be liable for it. A dormant partner's liability may be said to rest
on his being in tlie position of an undisclosed principal. So, a' party
dealing with ostensible partners and intending, at the time, to give ere-,
dit only to them, may nevertheless proceed against the dormant partner
when discovered. While, as long as he remains a partner, he is liable
for the debts of the partnerihip, his liability ceases immediately on his
retirement from or on dissolution of the firm. He is not required, like
o'her known partners, to give notice in order to absolve himself from
liability for acts of other partners after he ceases to be a partner. T h e
(lorn.ant partner, as a rule, has no duties to perform, and consequently,
his insanity will not be a ground for dissolution, but he has the right
to ha\e access to books of accounts and to examine and copy them,

NOMINAL PARTNER
A person whose name is used as if he were a member of the firm,
but who is really not a member, and, is not entitled to .share the profits
of the concern, is called a nominal partner. Such a person is not a
necessary party to a suit relating to the firm, except in cases of suits on
negotiable instruments. But he is liable for all acts of tlic firm as if he
were a real partner.

PARTNERS IN PROFITS ONLY

A partner may stipulate with the other partners that he will be en-
titled to a certain share of the profits only without being liable for tlie
losses. Such a partner may ^ be called a partner in profits only. He
will doubtless be liable to third parties for all acts of the firm. Part-
ners of this kind generally have no part in the management of the
business.

^VORKING PARTNER
It may, at times, be ag.eed between the partners that one of them
.shall, liecause of certain Sj^ecial qualifications, work tlie business and
liave control over it. Such a partner is commonly known as a working

M. Scarfe v. Jardine (1^82) 7 A.C. 345.

LAW OF PARTNERSHI? 187

partner. It may be noted tliat the fact th.it the other partneis do not
take any part in ilie management of tlie bubiness does not absolve them
-of liability to third parties.

SUB-PARTNERS
Wliere a member of tlie film agiees to shaie tlie profits derived Iiy
him fioin the paitnership with a stianger, theiQ arises a sub-paitnership
between the contracting member and the strangei. Such stranger is
said to be a sub-partner, although he is in no sense a paitner in the oii-
ginal firm and has no-lights against it nor is he liable for its debls.^'

INCOMING PARTNERS
A pel son -who is admitted as a partner into an already existing firm
either with the consent of ill the paities or in accordance with a pie-
\ious contract between the paitners' peiniitting the introduction of a new
partner or partneis is called a new paitnei. The incoiiiing partner docs
not Ijccome lial)le for any act of the fiim done before he became a part-
ner, unless he agiees to be liable for obligations incuned befoie his ad-
mission into the fiim. Even such an agreement with his co-partners to
bear past liabilities only binds the partners inter se. ]t wiJJ not entitle
the creditors of the firm to liold him liable foi debts incurred bv tlie fiim
before he joined, in spite of the agieement, for theie is no prixity of
contract between the cieditors and tlie incoming paitner, and the other
partners were not his agents when they acted, nor can there be a pie-
'-umption of ratification, as ratification can only be of nn act done on b e "
half of tlie person who ratifies it As the lialjilitv of the incommg jjart-
ner ordinarily commences fiom the date wher he is admitted as a pait-
ner, so in order to hold him liable for the deists inclined bv the firm be-
fore he became a partner, it must be proved that—
(i) the firm as constituted after his admission assumed the liabi-
lity to pay the past debts, AND
(ii) the creditor agreed to accept the new firm as his debtois and
to discharge the old partnership from the liability.
The position of a minoi who^ has been admitted to the benefits of
the partnership and who, on attaining the age of ' majoritv, becomes a
partner, is not the same as that of a new partner. Sucli minor becomes
liable to third paities for all the debts and obligations incurred since
the date when'he was admitted to die benefits of the uarLnership and not
since the date of his becomfiig a partner.

RETIRED OR OUTGOING PARTNERS

A partner who goes out of a firm in •which the remaining partners
continue to carry on the business is called a letired or outgoing partner
A paitner may retire from a firm (i) with tlie consent of all :Iie other
partneis, (ii) in accordance with an agreement by the paiincrs, oi (iii)
wlieie the partnership is at will by giving notice in writing to all the

15 Sugar Syndicate v. Commr. I T . (1957) Andh. p. 332; Devii v.

Maganlal. 1965, S.C. 139.
188 MERCANTILE LAW

other partners of his intention to retire [Section 32 (1)]. A partner, whe-

ther active or dormant, wlio retires from a firm does not thereby cease
to be liable for partnership debts or obligations incurred before his re-
tirement. For ^example, A, B and C are partners. D is the creditor of
the firm. A retires from the firm. A still remains liable with B and C
to D. If two years after A's retirement the firm becomes insolvent, A
will siill be liable for such debts as were in existence at his reiiremeni
and are still undischarged. A retiring partner will also be liable to third
parties for all transactions of the firm begun but unfinished at the time
of his retirement, even though notice of his retirement is given to the
third parties. Furthermore, a retiring partner should see that all credi-
tors of the firm have proper notice of retirement, as he may be liable for
debts incurred after his retirement, if credit is given to the firm in the
belief that he is still a partner. This is another instance of the doctrine
of 'holding out." Thus a duty is cast on the partner who retires from the
firm to give public or actual notice of his retirement, and if he fails to
give such notice he will be liable for the subsequent acts of the firm to
all persons having knowledge of the fact of his being a partner and he
will still be liable even though the creditors had never dealt with the firm
before his retirement but only subsequent to his retirement."
A retiring partner may, however, be discharged from his liability by
the consent of the creditors, and this consent need not be embodied in a
formal agreement, but may be left to be inferred as a fact from the course
of dealing between the creditors and the firm as newly constituted. This
nile is the application of the general rule of the law of contract known
as "Novation." When a debt originally payable by one set of partners
becomes payable by another set o^ partners the technical phrase for what
has 'happened is "a novation of the debt." It is a well-settled law that
when a creditor of a firm agrees with the continuing partners to their
security in discharge of that of the former partners, the outgoing partner
is discharged for any liability to pay the debt. But there is not a priori
presumption to the effect that a creditor who is informed of the retire-
ment of a partner and does nothing is deemed to agree to discharge the
latter from liability. Also, the mere fact that a creditor of the firm, after
knowledge of the retirement of a partner, has treated the continuing
partners as his debtors is not sufficient evidence of 'novation.' Thu^.
where a creditor has proved his debt in the insolvency of the continuing
partners or has received higher rate of interest than before, or has taken
additional securities these facts do not in themselves show that he did not
intend to hold the retiring partner liable for' the debt. To prove nova-
tion, it is essential to show that there was an agreement, express or im-
plied, to make the new firm liable in place of the old. Where, after the
retirement of a partner, a new partner has been introduced and the re-
constituted firm has adopted an old debt and the creditor with knowledge
of these facts has treated them as liable ' j him, the Court will infer that
right against the retirins: partner was relinquished and the liability of the
new partner was accepted in its place along with the liability of the con-

Ifi. jagat Chandra v. Guonv 0925) 30 C.W.N. 11, 1020 Bengal Na-
tional Bank v. Jogindra Nath (1927) Cal. 714.
LAW OF PARTNERSHIP 189

tinuing partners. This is a case of novation by implied agreement, as

the old and tlie reconstituted firm cannot both be liable at once for the
same debt."
/
DEED OF PARTNERSHIP
A partnership is not necessarily created by an agreement in writing.
It may be by oral agreement, or agreement may be interred from the
conduct of the parties,'" though the business may involve lakhs of rupees.
But tlje agreement may be contained in an elaborate document called the
Deed of Partnership and drafted by a lawyer. The deed must be stamp-
ed according to the provisions of the Stamp Act. Broadly, the deed
should provide for the following: (I) the nature and place of business,
the name of the firm and names of partners; (2) the date at which part-
nership is to cpmmence and the period of its duration; (3) capital, bank-
ing account and who is to sign cheques; (4) how profits and losses are to
be shared; (5) management; (6) account; (7) whether firm to continue
after the death or insolvency of a partner; (8) arbitration clause.

TEST OF PARTNERSHIP
PARTNERSHIP OR NO PARTNERSHIP
It is often a very difficult matter to determine, in the absence of a
definite partnership agreement, whether a partnership does or does not
exist. Section 6 of the Act provides that "in determining whether a
group of persons is or is not a firm, or whether a person is or is not a
partner in a firm, regard shall be had to the real relation between the
parties, as shown by all relevant facts taken together," and not merely ®n
their expressed intention." Individuals cannot create a partnership mere-
ly by intending that partnership relation shall exist between them. T o
create a partnership there must be present the three elements, viz. (1^
agreement, (2) agreement to share profits of a business, (3) business carried
on by all or any of them acting for all. This relation may be sliown by
books of account, correspondence, evidence of employees, etc. In addi-
tion to this rule, the section lays down :
The joint use of the property, while not conclusive, is evidence that
a partnership exists, if the property is used in common in business for
sharing profits. Further, an active participation in the conduct of a
joint business venture may, in conjunction with other circumstances, lead
to the conclusion that a partnership exists, although even^ a servant may
manage the business and he is not a partner. Also, absence of manage-
ment does not prevent one from occupying the position of a partner. Also,
a joint venture that does not contemplate a quest for mutual profit can-
not qualify as a partnership. But, while there can be no partnership
without the sharing of profits, a sharing of profits is not a conclusive

17. P.D. Sharma v. Phanindra Nath (1931) C.W.N, 593; Scarfe v

Jardine (1882) 7 A.C. 345, 351.
18. Somayya v. Commr E.P.T.' (1956) Hyd. .87.
19. Ibid. Cox V. Hickman (I860) 8 H.L.C. 268; Manbbaribai v. B.
Mills, 1956 Nag. 225; Musa Saheb v. N.K. Mohd. Chouse, 1959 IMad. 379.
 MERCANTILE LAW

test that a partnerslijp exist!). Jt ii a strong evidence but not conclusive.

Tlieiefoie, explanation II to Section 6 makes it clear that the receipt of
a bhare of profit or of payment contingent or varying with the profits
does not of itself make the recipient a partner in the business or liable as
such.'" It goes on to specify ceUrtin persons who may receive a share of
the profits and yet be not partners. These persons are (I) a lender of
money; (2) a sen ant or agent receiving share of profits as his remunera-
tion; (3)' the widow or child of a deceased p a r t n e r receiving annuity;
the seller of goodwill of the business. T h e reason for specifying these
persons w)io may share in the profits is that in each case one of the es-
sential elements of partnership is wanting, name'y, the agency and au-
thority. The persons carr^'ing on the business cannot be said to be car-
rying it on, on behalf of the lender, servant, agent, annuitant or seller of
goodwill, and thus are not agents of the specified persons. Therefore, it
is said that the true test of partnership is Agency, and not sharing of the
profits.^
The Cloth Dealers' Association, the members of which could boy
cloth only from the quota allotted to the Association by the Central Gov-
ernment and the margin of profit was also fixed by the Central Gov-
ernment, is not a partnership merely because its members shared the
]3rofits earned by the Association. The doctrine of partnership necessarily
involves mutual agency between the parties. If the relationship consti-
tuted between the parties in respect of a certain matter do not expressly
or by necessary implication involve the right of one party to pledge the
other as an agent, there is no partnership (Bhawani Lai Lachchi RaVn v.
Badri Lai, 1964 M.P. 153, See dlso Chiman Ram v. Jayantilal, 1939 Bom.
410).
CREDITOR OR PARTNER
A creditor who advances monies on the stipiilation that he will have
a share in the profits earned by the firm besides a certain rate of interest
and further he is to have control over the conduct of the business, does
not thereby become a partner, but he is a creditor.'" Similarly, where a
man advances money at a rate of interest varying with the profits, he is
only a creditor. T o constitute a partnership there must be a "communi-
ty of benefit and not a conflict of interest as in the case of creditor and
debtor.
PARTNER OR SERVANT
T h e mere fact that a servant or an agent of a firm is given a share
of the profits of the business either in lieu of his remuneration or in
addition to it does not make him a partner with his employer or prin-
cip^l. It is a common practice in India to pay a gomashta or munim,
or manager a certain share of profits in the firm, in lieu of or in addi-
tion to his salary, in order to encourage industiy on his part, and not to
make him a partner.

20> Debi Prashad v. Jairam Das, 1952 Punj. 284.

21. Cox V. Hickman (1860) H.L C. 268; Musa Salieb v. Rfohd Ghouse,
1959 Mad 379: Devii v. Maganlal, 1965 S.C. 130.
22 Mollwo, March & Co. v. Court of Wards (1872) L.R. 4 P C. 436.
LAW OF PARTNERSHIP 19i
SELLER OF GOODWILL
A person who by way of bona fide agreement receives^by way of an-
nuity or otherwise, a portion of the profits, in consideration of the sale
by him of the goodwill of the business will not by reason only of such
receipt become a partner.
Theie are some otlier cases which are often confused with partners.
Wheie a retiring partner leaves his property in the firm as loan, but re-
ceives a share of profits as interest, he will be a creditor. Similarly,
where in a partnership a share of the profits is paid to the widow or
child or executor of a deceased partner, the mere fact of the receipt of
such share-will not make the widow or child a partner in the-business.

PARTNERSHIP DISTINGUISHED FROM O T H E R

ASSOCIATIONS ,

CO-OWNERSHIP AND PARTNERSHIP

There is a possibility that two co-owners may employ their property
in a business and share the profits, and still be not partners. We may
distinguish the two. Co-ownership is not always the result of an agree-
ment; it may arise by the operation of law or from status, e.g., co-heirs
of a property, persons to whom property is given jointly. Partnership,
on the contrary, must arise out of an agreement, express or implied.
There is no implied agency between co-owners, which exists in the case
of partners. Co-ownership does not necessarily involve community of
profit and loss, partnership does. One co-owner can without the consent
of the odiers transfer his rights and interests to strangers, a partner can-
not do so without the consent of all the partners. A partner, being an
agent of the other paitners, has a lien on the partnership property, a
co-owner has no such lien on the joint property. A co-owner can de-
mand division of property in specie, but no partner can ask for division
in specie. His only right is to have a share of the profits out of the pro-
perties.

COMPANY AND PARTNERSHIP

In a partnership, the members constituting it do not form a whole
as distinct from the individuals composing it. T h e firm has no legal
entity and has no rights and obligations separate from 'the partners. A
company, as soon as it is incorporated, say by registration, becomes a
legal entity and can sue and be sued as company like any natural born
person. In the case of partnership, there are rights and 'obligations as
against individual partners, but in the case of a company the rights and
obligations are as against the fictitious whole, the company, and not the
members composing it. The liability of partners is unlimited, but the
shareholders' liability is limited. Furdier, dissolution of the firm by
death of a partner, inability of a partner to transfer his interest so as
to substitute another person in his place as partner without the consent
of his co-partners, mutual obligations of partners to one anodier, are some
of the other features which distinguish a paitnership from an incorpora
ted company.
192 MERCANTILE LAW

PARTNERSHIP AND HINDU JOINT FAMILY FIRM

In Hindu law, a business is as heritable as any other property. A
joint Hindu family which carries on a trade handed down from its ances-
tors becomes a trading family. T h e 'interest in the trade passes by Sur-
vivorship to the surviving members, and every member acquires by birih
an interest in the profits and assets of the trade. This is not partner-
ship, but a co-parcenery, a relationship created by Hindu law, and each
member is called a co-parcener. A joint family firm is created by the
operation of law, whereas a partnership is the result of a contract. In a
partnership, the death of a member dissolves the partnership, the death
of a co-parcener does not dissolve the joint family firm. In a joint family
firm only the Karta or manager has an implied authority to borrow and
bind other members, in a partnership each partner can'do this. In part-
nership every. partner is personally liable for the debts and liabilities of
the partnership, while in a joint family firm, it is only the manager who
is personally liable for the firm's debts. T h e junior adult members aie
liable only if they are actual contracting parties or if they have by their
conduct adopted or ratified the transaction. Minor members of the fa-,
•mily ate never personally liable, but only liable to the extent of the fa-
mily property. The partnen have a right to demand accounts of the
partnership firm, a co-parcener cannot ask for an account of past deal-
ings; his only right is to ask for partition of the assets of the firm. All
associations arising by the operation of law or by status, and particularly
the Hindu Joint Family Firm, are excluded from the operation of the
Indian Partnership Act (Section 5).

CLUBS
Clubs are not associations for gain and are not therefore partner-
ships. T h e members of a club are not liable for each other's acts, but
the partners are so liable. No member of a club is liable to a creditor
of the club. A member of a club has no transmissible interest so that on
his death his heirs cannot claim to inherit any of his rights.

DURATION OF PARTNERSHIP
The parties are at liberty^ to fix the duration of the partnership or
say nothing about it. Where tlie partners stipulate that they, should
carry on business for a definite period of time, it is called a partnership
for a fixed term. When the term is over the partnership comes to an
end; but if the business is continued after the period originally
fixed, the renewed partnership will become a partnership at will, and in
the absence of any agreement or any course of dealing varying by im-
plication any term of the original agreement, the mutual rights and
duties of the partners remain the same, as far as they arc not inconsis-
tent with a partnership at will. Where a partnership is formed for the
purpose of carrying on particular adventures or undertakings, it is call-
ed a Particular Partnership which would presumably last only so long as
the business is not completed (Section 8). But if the firm proceed^ to
carry out other undertaking, then, in the absence of agreement to the
contrary, the rights and duties of the partners in the new undertakings
 LAW OF PARTNERSHIP 193
will continue to be the same as in the original undertaking. It is also
open to the partners either to say nothing about the duration or to agree
that the business shall be carried on not for any fixed period, but so
long as the partners are inclined to carry it on. Such a partnership is
called a partnership at will, because it is carried on at the willingness
and desire of the partners and is determinable at the 'will of any of the
partners, on his giving notice. Where, however, it is stipulated that the
partnership should dissolve by "mutual agreement only." it will not be
a partnership at will determinable by notice, for, unless all the partners
agree, dissolution %vin not take place. Such a partnership can be dis-
solved by court under Section 44 of the Act.

PARTNERSHIP PROPERTY

It is open to the partners to agree among themselves as to what is

to be treated as the property of the firm, and what is to be the separate
property of one or more partners, although employed or used for the
purpose of the firm. Therefore, in the absence of any such agreement,
express or implied, the property of the firm is deemed to include—
(a) all property, rights and interests which have been brought
into the common stock for the purposes of tlie partnership by
the individual partners, whether at the commencement of the
business or subsequently added thereto;
(b) those acquired in the course of the business with money be-
longing to the firm, including secret profit and personal bene-
fit derived by a partner;
(c) the goodwill of the business.
Difficulties, sometimes, arise .where a partner has drawn money out
'of the partnership and acquired immovable and movable properties in
"his own name. In general, such acquisitions by a partner in his sole
name, made with the partnership funds, will be treated as the property
of the firm. But to ascertain whether the property standing in the name
of a partner belongs to him or the firm, recourse should be had to the ac-
count books of the firm, which may show how it has been dealt with.
If it is credited as part of the capital of that partner, it will be his pro-
perty; but, if it has been treated as part and parcel of the partnership
property in the course of dealing between the partners, it will be deem-
ed to be the property of the firm. Further, any secret profit or personal
benefit derived by a partner will be deemed as acquired for the firm
and will have to be accounted for and paid to the firm. But the mere
fact that certain property is used or employed for the purposes of the
firm does not necessarily raise a presumption that it 5s property of the
firm. Thus, where a colliery belonged to A, but it was worked in part-
nership by A and B, who shared the profits of the venture, the colliery
did not become the property of A and B firm, but remained the propertv
of A. But, where a colliery was taken on lease by A and B for the pur-
pose of working it, it would be presumed to be the property of the firm.
In the latter case, it would become necessary to see whether the
191 MERCANTILE LAW
property w<is treated by tlie partners as part of the common stock or was
merely as ancillary to the carrying on of the partnership business

GOODWILL
The Act specially provides that goodwill of the firm is partneiship
ptopeit) Lord Macnaughten describes"^ goodwill as "the advantage
•which IS acquiied by a business, beyond the mere value of the capiial,
stock, fund and property employed therein, in consequence of the gene-
ral public patronage and encouragement which it recei\'es from constant
or habitual customers." By goodwill is meant the approbation of the
public as regards tlie business, an approbation varying with the age, cre-
dit and stability of the firm. Says Mr. Justice Warrington,"'' "it is the
advantage •\vhich a person gets by continuing to carry on and being en-
titled to represent to the outsid" world that he is carrying on a business
which has been carried on for some time previously." "Goodwill, I ap-
prehend", said Wood V.C.,^ "must mean every advantage that has
been acquired by the old firm in carr)'ing on its business, whether (on-
nected with the premises in which the business was previously carried on,
or with the name of the late firm, or with any other matter canning with
it the benefit of the business" In a recent Bombay case it was stated :*
"The goodwill of a business is inclusive of positive advantages, such as
carrying on the commercial undertaking at a particular place and
in a particular name, and also its business connections, its busi-
ness prestige, and several other intangible advantages which a busi-
ness may acquire." It is this which constitutes tire difference between
a business just started, which has no goodwill attached to it, and one
which has acquired goodwill by established reputation, and busi-
ness connections. T h e goodwill of a firm may have an appreciable
value, often it is the very sap and life of a business, witliout which the
business will yield little or no fruit. It is part of the partnership proper-
ty in which all the partners are jointly interested, and can be sold either
separately or along with the other pioperty of the firm [Section 5ij(l)].
Every partner is entitled to have the partnership property used exclusively
for the purposes of the partnership.

PART 5-B
RELATIONS OF PARTNERS TO ONE ANOTHER
The relation of partnership comes into existence by an agreement
between the partners, and such an agreement may provide for the mu-
tual rights and duties of the^ partners. It is indeed usual for the part-
ners to agree at the time of the formation of partnership about the con-
duct and management of the business, by providing as to the capital
each partner has to contribute, the proportion in which each partner

23. Trego v. Hunt (1896) A.C. 7, leading case on the subject.

24 Hill v. Fearies (1905) 1 Ch. 466 at 471.
25. Churton v. Douglas (1859) John 176, 188.
26. Neiv Gujarat Cotton Mills Ltd., v. Appellate Tribunal, 1957
Bom i n .
L.-UV OF PARTNERSHIP 195
will share the jarofits, and the rights and duties of the partners in
tlie business. Where. Iiowexer, partneis fail to provide for any of these
things, the rules laid down in the Act, and examined below, are appli-
cable.

RIGHTS OF A PARTNER
1. Right to take-part in Management [.Section 12(a) ].—Every part-
ner has a right to take part in the conduct and management of the
bu'ine'.i. It may be pointed out again that this rule, like most of the
following rules, is subject to any contract to the contrary between the
partners, and applies only when no agreement regarding conduct of bu-
siness exists.
2. Right to be consulted [Section 12(c)].—Every partner has a right
to be consulted and heard in all matteis affecting the business of the
partnership. Where there is a difference of opinion between the part-
ners, the decision of the majority of the partners will prevail, but
only in ordinary matters of routine, and that too if the majority has act-
ed in perfect good faith and as far as possible^^every partner has been
consulted. If the partners are equally divided in opinion, those who are
against the proposition in dispute will have their way. That is to say,
the uarticular resolution will not be carried. But, where the matter is
of importance and afltects the policy and nature of the business, or re-
lates to an alteration in the partnership constitution, a majority will not
be sufficient and unless all the partners .agree, no change can be aflFected.
Thus, in matters affecting the nature of business, even one dissenting
partner can prevent any change. T o illustrate, there must be unanimity
among the partners to change from life assurance busitiess to marine
insurance, to select the place of business, to enlarge the business requir-
ing additional capital or to sell the whole business.
3. Right of Access to Accounts [Section 12(d)].—Every partner, ac-
tive or dormant, has a right to free access to all records, books and ac-
counts of the business and also to examine and copy them. The part-
ner is not bound to exercise this right pei^sonally but may engage an
agent for the purpose, provided that the other partners have no particu-
lar objection to tliat agent. But a minor admitted to the benefits of the
partnership has only a right of access to "accounts" and inspect and copy
them, but not to "books."
4. Right to Share Profits [Section 13(b)].—Every partner is entitled
to share in the profits equally, unless different proportions are stipulat-
ed. There is no connection between the proportion of capital contri-
buted by the partners and the share in the profits earned, nor will the
fact that the work done by the partners is unequal affect the question
of their .shares. So, in the absence of special agreement, "equality", says
Pollock," "is equity, not as being absolutely iust, but because it cannot be
taken that any particular degree of inequality would be more just." It
may be noticed that a MINOR in the firm has no right to sue for his
profits when severing his connection with the firm.

27. Soma Sundaram Chettiar v. Savagan Chettiar (1930) Mad. 505;

see also Matisha Ram v. "Tej Bhan, 1958 Punj. 5.'
196 MERCANTILE LAW

5. Interest on Capital [Section 13(c)].—No partner is entitled to in-

terest on the capital subsa-ibed by him unless there is an agreement
express or implied or a trade custom to that effect. Again, interest ivhich
is allowed by agreement or trade custom, is payable only out of the pro-
fits, i£ any, unless agreed to be paid even in die absence of profits. Fur-
ther, where interest is payable on capital it stops running at the date o£
dissolution, unless otherwise agreed.^
6. Interest on Advances [Section 13 (d)].—A partner who has con-
tributed more than the share of the capital for the purposes of business
is entitled to interest at a rate agreed upon, and where no rate is stipu-
lated for, at six per cent per annum. This ; .leiest is payable out of
the partnership property as an item of expense and not necessarily out
of the profits. A partner-is not entitled to any interest on undrawn pro-
fits left in the business, unless there is an agreement express or implied
to that effect.^
7. Right to Indemnity [Section 13(e)].—A partner is entitled, in the
absence of an agreement to the contrary, to be indemnified by the firm
for all acts done by him in tire course of the partnership business, for
all payments made by him in respect of partnership debts or liabilities
and expenses and disbursements made in an emergency for protecting
the firm from loss, provided he acted as a person of ordinary prudence
would have acted in similar circumstances.
8. Joint Owner of Partnership Property (Section 14.)—Every part-
ner is, as a rule, a joint owner of the partnership property, and in the
absence of an agreement providing for the interest of each partner in
the property every partner is presumed to have an equal share in it.
Every partner is entitled to have the partnership property used exclu-
sively for the purposes of the partnership.
9. Powers m an emergency (Section 21).—A partner has power to
act in an emergency for protecting the firm from loss. But in doing so,
he must act as a prudent person would act in his own affairs in simi-
lar circumstances. A partner's right to be indemnified by his co-partner
for payments made or liabilities incurred in acting for the firm in an
emergency is co-extensive Tvith his authority.
,10. No New Partner to be introduced [Section 31(1)].—Every part-
ner is entitled to prevent the introduction of a new partner into the firm
•without his consent, unless there is an express contract permitting such
introduction.
11. No liability before joining [Section 31 (2)].—An incoming part-
ner will not be liable for any debts or liabilities of the firm before he
became a partner, excepting by his own. consent.
12. Right to retire [Section 32(1)].-Every partner has a right to
retire, if the contract so provides, failing which, with the consent of other
partners, and if the partnership be one at will, at any time on giving
notice to tlie other partner.'"

28. Motilal v. Sarup Chand (1936) 38 Bom. L.R. 1058.

29. Dinham v. Brandford (1890) 5 Ch. 519.
30. Anand Prasad v. Bhagwant (1932) All. 926.
LAW OF PARTNERSHIP 197
13. Right not to be expelled [Section 33(1)].—Every partner has a
right to continue in the partnership and not to be expelled from it, ex-
cepting wlien there is a clause in the agreement conferring a power of
expulsion by majority or any particular partners. But a power, of expul-
sion, where it exists, must be exercised bona fide, and' in good faitli and
not with any ulterior motive of getting an advantage, e.g., purchasing his
interest in the firm at a favourable rate.
14. Right to carry on competing business (Section 36).—Every out-
going partner has a right to carry on a competing business, but, without
vs'mg the firm name or soliciting the firm's customers or in any way re-
presenting liimself as carrying on the business of the firm, unless he has
been restrained by a reasonable agreement from carrying on a similar bu-
siness for a specified period of time within specified local limits."
15. Right after retirement to share in profits or interest (Section 37)—
Where a member of a firm dies or otlierwise ceases to be a partner as a
result of retirement, expulsion, insanity, or any other cause and the
surviving or continuing partners carry on the business with the property
of the" firm without any final settlement of accounts, viz., without the
sliare of the assets of the outgoing partner being paid over, or witliout
his interest being purchased by the remaining partners, the estate of such
deceased partner or the partner himself, as the case may be, is entitled
to share in the profit earned witlr the aid of the' assets of such outgoing
partner,"' or interest at six per cent per annum at the option of the legal
representative of the deceased partner or the outgoing partners. Tlie rule
applies to the case of an alien enemy where partnership is dissolved on
the outbreak of war, the alien enemy in such case has a right to claim
share of profits or interest after the ^yar is over.'" The option to claim
a share of the profits or interest can be exercised only when the accounts
of the subsequent business are made. And, as the right is an ahernative
one, a claim both for share of the subsequent profits as well as interest
will not be allowed. Further, once the election has been made, the party
xvill not be allowed to^go back on it, nor will he be permitted to claim
profits for part -of the period and interest for remaining period."

DUTIES OF PARTNERS
The relation of partners is founded on mutual confidence and the
laiv requires that a partner shall act towards the other members of the
firm with the utmost good faith. Evei7 partner must use his knowledge
and skill for the benefit of the firm. The fundamental duties of part-
ners are contained in Section 9 which reads : "Partners are bound to carrv
on the busincs'i of' the firm to the greatest common advantage, to be
just and faithful to each other, and to render true accounts and full in-

31. Mansha Ram v. Tej Bhan, 1958 Punj. 5.

32. Nagarajan v. Robert Hotz, 1954 Punj. 278; Mansha Ram v. Tej
Bhan, 1958 Puiij. 5.
33. Hugh Stevenson & .Sons v. Aktiengesttechaft Co. (1918) A.C. 239.
31. Vyse v. Foster (1874) 7 H.L.C. 318.
198 MERCANTILE LAW

formation of all things affecting the firm to any partner or his legal re-
presentative."
1. T o work for the greatest common advantage.—Every partner is
bound to carry on the business of the firm to the greatest common ad-
vantage. This is one of the first principles of lavir of, partnership, for,
like agency, mutual confidence is the foundation of partnersliip.
2. T o be just and faithful—Every partner must be just and faithful
to the other partnt'rs. Partnership being a fiduciary relationship, it is the
duty of each partner to exercise the lUmost good faith and fairness in his
dealings with his co-partners A partner, for instance, must be fair when
buying the share of .another or when exercising right of expulsion of an-
other partner.
3. To render true accounts A partner is bound to keep and ren-
der true, proper, and correct accounts of the partnership. He must per-
mit the other partners to inspect such accounts and to lake copies of
them either by themsehes or by their imobjectionaljlc agent at all rea-
sonable times. In addition to submitting statements of accounts, he
should be ready to explain them and also hand over to the firm all
monies of the firm -which may have come to his hands, and prodvice
relevant vouchers.
4. T o give full information.—Utmost good faith between the part-
ners is the rule and one partner must not take advantage of the other.
Every partner is an agent of the other partners and as such is bound to
communicate full information to them. Thus a partner who acquires
any information in the course of the partnership must pass it on to the
other partners, so tliat notice to one partner is taken to be notice to all
partners.
5. T o indeinnify for fraud (Section 10).—Everv paitner is bound to
indemnify the firm for any losff caused by his fraud in the conduct of
business. T h e liability of a partner is absolute and no partner can
contract himself out of it. If a partner commits a fraud on his ro-'
partners, he must indemnify them for any loss caused to them by his
fraud.
6. T o indemnify for wilful neglect [Section 23(f)].—Every partner
•who is guilty of wilful neglect in the conduct of the business and the
firm suffers loss in consequence, is bound to make compensation to
the firm and other partners'" It is to be noted that the liability here
is for wilful neglect or what is also called culpable negligence, and not
for failure on the part of a partner to carry out his ordinary duties. Not
only that, but the partners can contract themsehes out of this liability
which they cannot do in the case of fraud.
7. T o Share Losses [Section 13 (b)].—As in the case of profits, in
the absence of an agreement to the contrary, everv partner is bound to
share the losses equally with the others. If there is an agreement, then
in the proportion as the agreement pro\ides.

35. Thomas v. Atherstone (1878) 10 Ch. D 185.

LAW OF PARTNERSHIP 199

8. To Attend Diligently witliout Remuneration [Section* 12(b), 13

(a)].—Every partner is bound to attend diligently to the business of the
firm and, in the absence of any agreement to the contrary, he is not
entitled to any remuneration whether in the shape of. salary, commis-
sion or otherwise, on account of .his own trouble in conducting the part-
nership business. Thus, even a managing partner or a partner who does
much more work than the otliers will not. get any remuneration. But it
is usual for partners to agree, that a certain -partner, e.g., managing
partner, is to receive in addition to his share a salary or commission for
his trouble in conducting the business of the firm. Such an arrange-
ment would ordinarily come to an end on dissolution of the firrii. But
in exceptional cases where, for instance, one or more partners have addi-
tional burden thrown on them owing to the inactivity or idleness or
inability of another partner to do his share of the work, such • partners
would be allowed compensation for such additional services.^ This
rule is based on the duty of a partner to compensate others if he deli-
berately ceases to do his duty, so that the neglectful partner would be
requiied to pay out of his share 'to the partner who has to do his work
also. In Gokul v. Sashimukhi (1911) 16 C.W.N. 299, where the partner-
ship was with clie Pardanashin widow of a deceased partner and surviv-
ing partners, remuneration to the active partner was allowed.
9. T o hold and use property for the firm (Section 15).—In the ab-
sence of an agreement to the contrary, every partner is bound to hold
and use the jjartnership property exclusively for the firm. The property
of the firm, being the property of all tlie partners, must be held and used
only on account of land for the common benefit of ali the partners.
10. T o account for private profits [Sections 16 (a) and 60].—The
partnership property belongs to all the partners, and so a partner can-
not directly or indirectly use the property of the firm for his own private
purposes, or tr)' to get any advantage because of his connection with the
firm, and if any such advantage is derived by him, he must account for
the same and pay it to the firm. A partner, like a trustee, cannot make
private gain by reason of his membership with the firm. Thus, where
a partner in the course of the business has received an information and
uses it for any purpose competing with the partnership business, he
must pay over any benefit'that he may have obtained by the use of such
information. Where T was common partner in two firms publishing
newspapers, he was prevented from conveying information and news of
the one firm to the other.'"' Further, a partner cannot sell his own pio-
perty to the firm or purchase the firm's property without • making full
disclosures. He cannot bargain for a private gain from tlie customers
of the fiiri). This obligation continues even after dissolution of the firm
by the death of a partner, for any profits made by any surviving partner
or any representatives of the deceased after dissolution and before wind-

36. Harris v. Sleep (1897) 2 Ch. 80; Krishnamachari v. Samkaraska

(1920) 23 Bom. L.R. 13-13: 1921 P.C.'91.
37 Glassington v. Thwaites (1823) Sim. and St. 124; Abdul Razak
M Din Ahmed. 1959 Cal. 660.
.200 MERCANTILE LA\^

ing up belong to the firm. Thus, the liability of a partner to account to

the firm extends to any benefit derived by him from any transaction
affecting the partnership. T h e application of the rule is, of course, sub-
ject to any agreement between the partners.
11. T o account for profits of competing business [Sections 16(b),
II (2)].—Section 27 of the Indian Contract Act provides that an agree-
ment in restraint of trade is void. But Section 11(2) of the Partnership
Act permits' an agreement between partners that a partner shall not
carry on business other than the business of the partnership as long as
he is partner. In practice, such a clause generally appears in partner-
ship agreements. In the absence of any such arrangements, partners are
free to be interested in private business of their own, provided the same
does not compete with the business of the partnership. T h e rule con-
tained in Section 16(b) may be stated thus: No partner can carry on
any business which is likely to compete with the business of the part-
nership, except with the consent of the other partners. If a partner,
without obtaining the consent of the other partners, carries on a com-
peting business, he must account for the profits of such business to the
firm, and must also compensate the firm for any loss sustained by his
carrying on such competing business. Not only during the continuance of
the firm, but also after dissolution of the firm, and during the windine;
up, a partncr\ may be prohibited and can be restrained from carrying
on a competing business in the name of the firm or using the property
of the firm (Section 53).
12. T o act within authority.—Every partner is bound to act within
the scope of the actual authority conferred upon him. Where he ex-
ceeds his authority, he shall have to compensate the other partners for
any ensuing loss, unless they ratify his act.
13. Not to assign his rights [Section 29 (1 Sc 2)].—No partner can
assign or transfer his partnership interest to any other person, so as to
make him a partner in the business. But a partner may assign the pro-
fits and share in the partnership assets. Where such assignment is macle,
the person in whose favour it is made, would have no right to ask for
the accounts or to interfere in the management of the business so long
ai the business is continuing; he would be entitled only to share the
actual profits. Where, however, the partnership is dissolved, he would
be entitled to the share o£ the assets and also to accounts but only from
the date of dissolution.

PART 5-C
RELATION OF PARTNERS T O T H I R D PARTIES
PO^VER OF PARTNER T O BIND T H E FIRM
Every partner is"'an agent of the firm for the purposes of the business
of the fi.rm (Section 18). The law of partnership has often l)een stated
^o be a branch of the general law of principal and agent: this section
expressly recognises that doctrine. If two or- more persons agree to carrv
on a partnership business and share its profits, each is a principal and
LAW OF PARTNERSHIP 201
each is an agent for the other, and eacEi is bound by the other's con-
tract in carrying on the business, as much as a single principal would be
bound by the act of an agent, who was to give the whole profits to
his employer. This is the true principle of partner's liability [Cox v.
Hickman (1860) 8 H.L.C. 268]. A partner, indeed, virtually embraces
the character both of a principal and of an agent. So far as he acts for
himself and his own interest in the common concern of the partnership
he may properly be deemed a principal; and so far as he acts for his
partners he may as properly be deemed an agent. The main distinc-
tion between him and a mere agent is that he has a community of in-
terest with the other partners in the whole property and business and ,
liabilities of tlie partnership; while an agent as such has no interest in
either. Since, as between the partners and the outside world (whatever
may be their private arrangements between themsevles), each partner is
nn unlimited agent of every other in every matter, connected with the
partnership business, his acts bind the firm. T h e general authority of
fi partner "as agent of the firm is variously described as 'ordinary', 'apar-
ent, 'ostensible.' or 'implied.' T h e Indian Partnership Act calls it 'im-
plied authority' of a partner.

IMPLIED AUTHORITY OF A PARTNER

Sections 19(1) and 22 read together provide that the act of a partner
which is done to carry on, in the usuSl way, business of the kind car-
ried on by the firm, binds the firm, provided the act is done in the firm
name, or in any manner expressing or implying an- intention to bind
the firm. Such an authority of a partner to bind the firm is called liis
Implied Authority. The implied authority of a partner to bind the firm
is restricted to acts usually done in the business of the kind carried on
by the firm. A partner can no doubt do certain acts in an emergency
so as to bind the firm, but these acts do not form part of his implied
authority. The words "in the usual way" are put in because as soon as
a usual act is done in an unsual way the outsider may well be put on
inquiry into the unusual circumstances under which he is being called
u])on to give credit. It is not unreasonable to expect him to ask whether
the partner has authority to act as he is doing. If the outsider chooses
to pass what is unusual then he must not seek to chaige persons other
than die one 'svith whom he is actually dealing. So, a partner has im-
plied authority lo bind the firm by all acts done by him in all matters con-
cerned with the partnership business and which are done in the usual way
and are not in their nature beyond the scope of the partnership.
The question whether a given act has been done in carrying on a
busbicss in the way in which it is usually csrfied on must be determineri
by the nature of the business, and by the practice of the persons en-
gaged in- it. What is usual for one kind of business may be unusual
for anotltef. (?!g,, it is usual for one member of a firm of bankers to draw,
accept or cjulorse a bill of exchanfje on behalF of tlie firm, but it is not
usual for one of several solicitors to possess a similar prjwer, for it is
no part of ordinary' business oE a solicitor to draw, acifept or* endorse
bills of exchange. In the case of commercial partnerships grading
202 MERCANTILE LAW
firms), e\eiy partnet has an implied authority to pledge or sell the pait-
neiship goods, buy goods on credit for the partnership, borrow money,
contract debts and pay debts, on account o£ the partnership, make, draw,
sign, endorse, accept, tiansfer, negotiate, get discounted negotiable instru-
ments, in the name and on account of the partnership. Where the business
is not o£ commercial nature i.e., does not involve buying and selling o£
goods, a partner has no implied authority to borrow, pledge or to make
or issue negotiable instruments, though he may sign a cheque. Even
m tlie case of a clieque a partner has no implied authority in a non-trad-
ing concern to bind liis co-partners by giving a post-dated cheque, for he
•\M11 in effect be drawing a bill of exchange; and he cannot draw or
accept a bill of exchange. Any admission oi any representation made by
any partner concerning the partnership business is evidence against the
firm and will bind it. Tins is again on the piinciple that eveiy pait-
ner cliarges the paitneiship by viitue'of an agency to act for it. An ad-
miision or representation will bind the film even though made by a
paitner in fiaud of his copaitneis But, of coutse, if such fraudulent'
admission is made by the partner in collusion with the other party who
seeks to lely on it, it will not bind the firm.

NO IMPLIED AUTHORITY [Section 19(2)]

The Act, uith a view to a^oid litigation and to make the law as de-
finite as possible, has specifically enumerated ceitain acts which do not,
in the absence of anv usage or custom of (lade to the contiary, fall
within die implied authouty of a paitner stated in Section 19(1) above^
Section 19(2) reads:
"In tlie absence of any usage oi custom of trade to the contrary the
implied authority of a paitner does not empower him to—
(a) submit a dispute relating lo the business of the fiim to ar-
bitrationf*
(b) open a banking account on behalf of tlie firm in his own
name,
(c) tom]5iomise or lelinquish any claim or portion ot a claim by
the firm, y
(d) withdraw a suit or proceeding filed on behalf of the firm,
(e) admit any liability in a suit or proceeding against the film,
(1) acquire immovable property oil behalf of tiie firm,
(g) tiansfer immovable piopciiv belonging to the firm, or
(li) enter into a partneiship on I)ehalf of the fiim."
D holds peimanent leasehold light over a colliciy and liad woikcd
the collieiy himself foi some time. In 1919, he gi anted a sub-lease of
ihe colliery to M, a partner in a fiim having 3 othci paitncis. for a teini
of b \ears. The collierv was worked and Rs 17,000 became due to D D
filed a suit foi the leco^ely of the amount against M, tlie three paitneis

38. In Calcutta iheie is a tiade usage permitting a paitner to lefer

film's disnutes to arbitration.
 LAW OF PARTNERSHIP 203

and the firm. The other partners deny liability on the ground that
jherc was no privily of estate between them and D. Held, D can re-
cover only from M; there was no contract between D and the firm. It
Avas only between D and M, as M had no implied authority to enter
into such a contract (Devji v. Magaa Lai, 1965 S.C. 139).
It is. however, open to the partneis by means of an express contract
to extenil or limit tiie implied authority, but third parties will be bound
by such limitation only when tlicy have notice of such curtailment (.Sec-
tion 20).''
LIABILITY OF PARTNER FOR ACT OF FIRM
Section 25 of the Act lays dow n the general rule that every part-
^iier is lial)le for all acts of the firm done while he is a partner and that
the liability is joint and se\eral. Section 2(a) defines an Act of the Firm
as an "act or omission by all tlie partners, or by any paitner or agent
of tlie firm wliicii gi\es rise to a right enforceable by or against tlie
firm." It follows that all partners are liable jointly and severally for
nil acts or omissions binding on the firm including liabilities arising
from contracts as well as torts. In order that an act done may be an act
of the firm and t/ierefore binding on the ffim, ft is necessary that the
partner or the agent doing the act on belialf of the firm must have
<!onc tJiat act in the name of and on behalf of the firm and not in .his
personal capacity; and the act must have been done in the ordinary
tourse of the business of the firm. Two important points should be
noted in this connection. First, that if any act is binding on the firm every
partner, whether active or dormant, will be liable for it. Secondly, to
be binding on a partner, the obligation must have been in such • a way
as to bind the firm. An act done or instrument executed by a partner
will bind the firm only it it is done or executed in the firm name or in
a manner expressing or implying an intention to bind the firm. That
is to sav. the partner .should not hav£ acted in his individual or personal
capacity but as a partner of the firm and as agent of,the other partners
and in the firm name. The act of a partner must be within the scope
of the actual authority of the partner. Thus, if a partner buvs on credit
usual stock-in-trade, all the isartners are liable for the debt so incurred.
If the purchase does not fall within the business of the firm, it is not
an act of the firm and so does not bind the other partners. Where
A, B and C carry oh the partnership business as cloth merchants, and
A orders on credit two cases of Kulu apples on his own initiative, hjit
sends the order on the firm's note paper and in the firm's name, the
order is so clearly not for the purpose of the business of the firm that he
alone- is liable. A is not an agent of B and C for buying fruit, for the
' business is actually and also ostcnsively that of cloth merchants and not
that of fruiterers, and a third' party cannot reasonably assume atithoritv
to buy fruit.

LIVBILITV FOR T H E WRONGFUL ACTS OF PARTNER

Every partner is liable for the negligence and fraud of the otiicr
paitners in the course of the management of the business .\ paitncr
charges the firm by \irtue of an agency to act for it. A jirincipal is

39. Saramal v. Puran Chand (1924) 48 Bom. 170: 1021 Bom 2G0.
204 MERCANTILE LA^V

liable for the loss or injury caused to any third person by any wrongful
act or omission of an agent while acting in the ordinary course of busi-
ness. A piincipal is also liable for the tort of his agent if he has express-
ly directed him to do it. On the same principle the firm is liable for
any loss or injury caused to a tliird party by the wrongful acts or omission
of a partner if they were done by him while acting in the ordinary
course of the business of tlie firm, or with the authority of his co-part-
ners. AVhere one of the partners bribed the clerk of the plaintiff, who
was a competitor in the business, to disclose certain c-pnfidential infor-
mation, which it was the business of the firm to obtain by legitimate
means, the firm was held liable."
Fraud.—B and C, who carried on business in partnership as wine
merchants, were employed by A to purchase wine for him and sell
the same on commission. C represented that he had bought the wine,
had sold part of it at a profit, and paid the proceeds of such supposed
sale to A. In fact C had neither bought nor sold any wine, and the
transactions of which he rendered accounts to A were fictitious. B was
wholly ignorant of C's fraud. In a suit by A against bodi, it was held
that B was liable for the false representation of C."
Negligence.—So also, all the partners in a firm are liable to a tltird
party for loss or injury caused to him by tlie negligent act of a partner
acting in the ordinary course of the business. Thus, in Blyih v. Fladgaie
(1891) 1 Ch. 337, partners in a firm of solicitors were held liable in
damages on the ground of negligence of a partner for failure to dis-
charge the duty entrusted to him. A firm of taxi drivers would be liable
for the negligent driving of one of them, and a firm of surgeons for the
professional negligence of one of the partners, and a firm of newspaper
proprietors for the liability of one of them and so on.
Misappjopriation of money (Section 27).—Where a partner, acting
within .his apparent authority receives money or property from a
third party and misapplies it, or a firm in the course of its business
receives money or property from a third party, and the money or pro-
perty is misapplied by any of the partners while it is in the custodv of
the firm, the firm is liable to make good the loss (Section 27). This is
the liability of the partners for misappropriation of moiiey or property
belonging to a third party But if the receipt of money by one partner
is not witliin the scope of his apparent authority, then this recei])t can-
not be treated as receipt of the firm. a"nd the other partners are not
liable, imless money received comes into tlieir possession or mider their
control."
railure to Communicate Information (Section 21).—Notice to a part-
ner who habitually acts in the business of the firm, of anv matter relat-
ing to the affairs of the firm operates as notice to the fi)ni: except in
,the case of fraud on the fnm committed by or tvith the consent of thnt
pnrtv (Section 24). All the pattncrs are deemed to have received any

'!0. Hamlyn v. Houston & Co. (1903) K.B. 81.

-n. Rapp V. Latham (1819) 2 B & A 795.
•12. Mara v. Browne (1895) 2 Ch. 69.
 LAW OF PARTNERSHIP 205
information obtained by one o£ them in the course of the partnership
business, so that it can be said that notice to a partner is notice to the
fiiTO. When the partner is a party to a fraud and keeps back the infor-
mation, the firm will not be imputed with notice.

LIABILITY WHEN CEASES

Every partner is liable for all the obligations of the firm until the
date of his severing connection with the firm but his liability will con-
tinue to creditors subsequently also, unless there be a fresh contract or
what is called Novation or a tripartite agreement, by which the creditors
agree to accept the liability of the other partners and the incoming part
rers, if any, and exonerate tlie retiring partner. [Section 32(2)]. Fur-
ther everv partner, though he might have retired from the partnership,
would still be liable for the acts of the firm, even after retirement, i£
he has failed to give public notice as required by the Act. Similarly,
after dissolution of a firm the liability of partners to third parties for
I, acts of their partners whicli would otherwise have been binding on all
partners, continues until proper notice is given that the firm is dissolv-
ed. But the estate of the deceased partner or the insolvent partner will
not be liable for such act after the demise or adjudication, even if no
notice is given. The partner's liability would also continue even during
a winding up for such acts of another partner as may be necessary for
purposes of winding up but not for the acts of an insolvent partner [Sec-
tions 45(1) and 47].

PART 5-D
DISSOLUTION
The Indian Partnership Act has introduced a distinction between
the 'dissolution of partnership' and 'dissolution of firm.' Section 39 pro-
vides diat the dissolution of partnership between all the partners of a
firm is called the "dissolution of the firm." It follows that a partner-
ship may be dissolved without dissolving the firm. Dissolution of part-
nership involves a change in die relation of the partners, but it does not
end the partnership. For exampHe, where A, B and C were partners in
a firm and A died or retired or \«as adjudged insolvent, the partnership
firm would, come to an end; but if the partners had agreed that the
death, retirement, or insolvency of a partner would not dissolve the firm
then on the happening of any of these contingencies, the "partnership"
would certainly come to an end although the "firm" or as the -Act calls it, a
"reconstituted firm" might continue under the same firm name. Legal-
ly speaking, where A has gone out, the relationship which subsisted bet-
ween A, B and C, haying broken up and a fresh relationship between B
and C, or if D is brought in between B, C and D having been created,
there will be new or reconstituted firm. For, the partnership composed
of A, B and C is not the same partnership as that between B and C,
or between B, C and, D. This fact is further emphasised by the Act,
and Section 38 provides to the effect that a continuing guarantee for
the liabilities of a firm ceases as soon as there is a change in the consti-
tution of the firrh. So the dissolution of a partnership may or may
206 MERCANTILE LAW'
not include the dissolution of the lirm." but the dissolution of the finn
iiecessaril) mctins the dissolution of the j)ai tnershii) as well. On the
dissolution of a partneishlp the business may be carried on by_ the re-
constituted firm, but on the dissolution of the firm all business must be
stopped, the assets of the firm realised and distributed among the part-
ners.
DISSOLUTION OF PARTNERSHIP
It may be repeated that the dissolution of partnership ma> also in-
\olve the dissolution of the firm, (i.e., severance of the partnership rela-
tion between all the partners) or it may not (i.e., the CKtinction of the
lelationship between some of the partners). The dissolution of partner-
sliip takes place in any of the following circumstances :—
1. By the expiry of term Where the partnership is for a fixed
teim, the firm gets dissolved at the end of the period, unless the partnets-
have made a contract to the contrary [Section 42(a)].
2. By the completion of adventure.—Where a partnership has been'
constituted for carrying out a particidar adventure, such partneiship'
comes to an end on the completion of the adventure, in the absence
of any contrary agreement [Section 42(b)]."
3. By the death of a partner.—A partnership, whether at will or
for a fixed period, is dissolved by the death of a partner, unless there
is a contract to the contrary [Section 42(c)].
4. By the insolvency of a partner Subject to the contract between
the partners, a partnership whether for a fixed period or at will, is
dissolved lay the adjudication of a partner^ as an insolvent [Section 42(d)].
5. By the retirement of a partner.—Where a partner retires from
the partnership, then also the partnership gets dissolved, but not the
firm." If, however, a partnership firm consists of two partners only,
then on the retirement of one of the partners, the remaining partner
alone cannot constitute a partnership and it ceases to exist, as there
cannot be a partnership firm unless there are at least two partners."
In all the cases mentioned above the remaining partners may con-
tinue the firm in pursuance of an express or implied contract to that
effect. If they do not continue, the dissolution of firm takes place
automatically.
Dissolution of Firm.—In the following cases there is necessarily a
breaking up or extinction of the relationship which subsisted between
all the partners of the firm, and closing up of the business :—
1. By mutual consent.—.A firm may be dissolved where all the part-
ners agree that it should be dissolved. Just as a partnership is formed
by tlie consent of all the partners, similarly a partnership, tlie firm.

43. See Sundarsanam v. Viswanadhara Bros. 1955 Andhra 12.

44. Gherulal Parakh v Mahadeodas, 1959 S.C. 781.
45. Sundarsanam v. Viswanadliam Bros. 1955 A.P. 12.
46. Chunilal v. Ahmad Rowther, 1960 Ker. 156.
LAW OF PARTNERSFIIP 207
gets dissoived by all the partners agreeing to such a dissolution. This is
an application of the general rule that a contract may be discharged by
mutual • agreement.
2. By the insolvency of all the partners but one—We have seen
that the insolvency of one or more partners would only dissolve the part-
nership if the remaining solvent partners are two or more and they
agree to continue the business of the firm; yet, if all the partners but
one become insolvent, there must necessarily be a dissolution of the firm.
T h e dissolution is automatic or compulsory [Section 41(a)].
3. By business becoming illegal.—A firm is in every case dissolved
if the business of the partnership is prohibited by law, i.e., the object
for which the partnership was formed is unlaivfiil or becomes illegal as
a -result of some subsequent events. Here also the dissolution is auto-
matic or compulsory [Section 41(b)]. There is operation of law.
\4. By notice of dissolution.—Where the partrfership is at will, whe-
ther originally so or subsequently becoming one by a partnership for a
fixed time being continued beyond the stated period, the firm may be
dissolved at any time, by any partner giving notice in writing of his in-
tention to dissolve, to all the other paiftners. T h e dissolution in such
a case takes place from the 'date mentioned 'in the notice, or if no date
is mentioned from the date of the communication of~ the notice to tlie
other partners (Section 43). T h e notice inust not be ambiguous or vague.
It must be effectual. And a notice once given cannot be withdrawn
without the consent of the other partners. But if the partner giving
the notice dies while the notice is in the post, the dissolution will be
by death and not by notice. A firm cannot, however, be dissolved by
forcible expulsion of partner in violation of contract of partnership."

DISSOLUTION T H R O U G H COURT
A partnership for a fixed period, unlike a partnership- at will,
cannot be dissolved by a notice, and where it is not dissolved for any o£
the reasons mentioned above, it would be possible to dissolve it only
by a Court of Law at a suit of a partner'. T h e remedy of a suit is open
to partners of all kinds of partnerships, but it is of practical importan-
ce in the case of a partnership for a fixed period.
The following are the circumstances provided by Section 44 in
which a firm may be dissolved by the Court :—
1. Wlien a partner becomes of unsound mind.—The lunacy or
insanity of a partner does not ipso facto dissolve the partnership, and
the partner's authority to bind the firm continues, and also the lunatic
partner's property continues to be liable for subsequent debts till actual
dissolution. Even the acts of a lunalnc partner will continue to bind
the firm till dissolution is decreed. Therefore, the lunatic himself
through his guardian in order to protect his interests, • or other part-
ners, having lost his services or to save therriselves from the acts of the
lunatic, may file a suit for tlie dissolution of the firm. In either case
the Court may order dissolution which will commence from the'date of

47. Ramnarayan r. Kailiinath, 1954, Pat. 53.

208 MERCANTILE LAW

the Older of the Court. In the case of insanity of a dormant partner

dissolution will not be ordered by the Court, unless^ a very special case
is made out for dissolution.
2. Permanent incapacity of a partner.—As partnership proceeds
on the assumption that all partners would attend diligently to the part-
nership business, the firm may be dissolved by the Court at tlie instance
of any of the co-partners of a partner who becomes permanently incap-
able of performing his duties as a partner, e.g., he becomes blind, para-
lytic, etc. This rule will not apply to a dormant partner who has not
taken an active part in the business and whose incapacity is not likely
to affect the partnership business.
3. Misconduct ol a partner affecting the business.—Where a part-
ner is guilty of misconduct which is likely to affect prejudicially the
business of the firm, the Court may dissolve the firm at the instance of
any of the other partners. T h e guilty partner evidently is not entitled
to file a suit for dissolution. Where the partnership is at will he can
get the firm dissolved by notice. It is not essential that misconduct must
be in the actual carrying on of the business, all that is required is that
tire misconduct must be likely to affect prejudicially tlie carrying on of
the business. Gambling by a partner, misapplication of a client's money
by a solicitor, issuing of puffing advertisements by a partner in dentist's
firm, conviction of a partner for travelling without ticket, have been
held to be sufficient misconduct for dissolution of a firm.
4. Persistent disregard of partnership agreement by a partner.—
Where a partner frequently commits breaches of the partnership agree-
ment and the other partners find it impossible to carry on the partner-
ship business, the Court may dissolve the firm at the instance of any
of the other partners. Constant refusal to perform duties or studies,
prolonged and continued in attention to the affairs of the business by
a partner, or continuous quarrels, misappropriation of income and er-
roneous accounts by a partner are good grounds for dissolution.'"
5. Transfer of interest or share by a partner.—.\ partner cannot as-
sign away his interest so as to introduce a new partner, into the firm.
Therefore, where a partner has transferred the whole of his interest to
a third person or where his share has been attached under a decree or
sold under process of law; the other partners may sue for dissolution.
T h e partner at fault, of course, cannot apply for dissolution.
6. Business working at loss.—The Court may dissolve a partnership
when it is satisfied that the business of the firm' cannot be carried on
save at a loss. Thus, where the partners find that the business cannot
be carried on at a profit which was the motive for the formation of
the firm, but must necessarily end in loss, if continued for the stipulated
period, or in order to complete the particular adventure the partners
may ask for dissolution through Court.
7. Where just" and equitably—As the grounds mentioned Above
upon which a partner may apply for dissolution are not exhaustive the
Act in sub-section (g) permits a partner to seek dissolution on any other

48. Bhagwan Ram Kairi v. Radhika Ranjan Das, 1953 Ass. 125.
LAW OF PARTNERSHIP 209

ground idiich would satisfy the Court tliat dissolution is just and equit-
able. The subsection gives a discretion to the Court to dissolve a firm
•where it appears that a situation contrary to the good faith and essence
of agreement between the nnrtners has arise", or where the subsfr-tuiu
of the partnership firm nas gone or wnere iliciv; is C complete deadlock,
and there is a complete destruction of confidence between the partners
or they can no longer perform their duties."

WINDING UP
On the dissolution of a' firm, whether by an order of the Court or
otherwise, it becomes necessary that the affairs of the firip should be
woupd up, die assets realised, the liabilities paid out and the surplus, if
any, distributed to the partners or their representatives according to
their respective rights.
Partner's lien.—Section 46 provides to the same effect and^lays down
the rule that on dissolution of a firm, for the discharge of tlie liabilities
of a partner qua partner, each partner or his representative has a right
to have the pioperty of the firm applied in payment of' the debts of the
firm Wifb regard to the division of the surplus assets, if any, a part-
ner nas a right to Ziave the accounts adjusted' and the net assets divided
among the partners according to their .rights. In other words, he has a
right to have whatever may be due 'from co-partners 'deducted from
what would be othenvise payable to them in respect of their shares. This
right of a partner is often called a partner's lien. But, as pomted out in
Babu V. Gokuldas, 1930 Mad. 393, affirmed on aopeal to the Privy Coun-
cil (1934) M.W.N. 717, it is merely a convenient mode of referring to
the right and the word "lien" in relation to partners is not used in its
technical sense
After dissolution, the rights and obligations of partners coiuini e in
all things necessary for the winding up of the business. Thus, after dis
solution, the surviving partners have a right to continue the business, in
so far as it is necessary for the purpose of winding up, and all the acts
done by such continuing partners for- 'he purpose of winding up wil> be
binding -upon the other partners. This provision has been made tc en-
able the partners to complete all unfinishea transactions, and if necesiarv
for ivinding up, to borrow money or continue business in order tt. sell
the assets. But the authority given here is only for the winding up of
the affairs of the firm, and so, though un^nished transactions of the firm
may be completed, the continuing partners have no right to enter into
fresh contracts or incur fresh liabilities. It will be remembered that
th^''" estate of the- deceased partner or the insolvent partner is not liable
fot the acts of the firm, after the demise or adjudication, in snite of the
fact that no notice of dissolution is given (Section 45 Proviso) In a
tvinding up, however, all tlie property of the firrs will have to be sold
and realised.

Goodwill.—We have seen that the goodwill of the business is one o£

the important items in a partnership. It may be sold e-i'ieT scpTafviy

49. See 1954 Mad. 9 and 1954 V.P. 43.

 210 MERCANTILE LAW
or along witli uie omer property of the firm. Its vahmtion will depend
upon the facts and circumstances of each case. It was stated in Page v.
Ratliite (1896) 75 L.T. 371 that its value mav be taken to be equal t o
three years' net profits. It is open to any of the partneis to pui chase
the goodwill and carry on the business under the firm name.
Restraint of trade by buyer of goodwill.—Since ordinarily e\eiv part-
ner would have a right to carr^ on a business competing witJi that of
the buyer ot goodwill, provided lie does not use the firm name or solicit
the DM customers or make it appear that he is continuing the old busi-
ness, it becomes necessai-y for the buyer of the goowill in his own in-
terest to impose a reasonable restraint on such partner from carrying on
a similar business within specified limits and for a specified peiiod; and
such restraint would be binding on the paitner (Section 55). Fuither,
such a contract in restraint of ;rade may be made upon or in anticipa-
lion of the dissolution of the <irm by partners even when goodi\'ill is
not sold (Section 54)." •

SETTLEMENT OF ACCOUNTS
Usually the "arficles of pai tnershio" contain an accounting clause
according to which the final accounts between the parfneis are settled.
But in the absence of an agreement octween the partners the rule<;-
stated in Section 48 are to be ob^f-rved. The mode of settlement of ac-
counts between the paicners after dissolution, as dealt with in the section,
which incornorates the Rule in Garijer v. Mm'ray (1904) 73 L . J . CIi. 66,
is as follows :—
(z) Where the firm has suffered losses, or where the capital nas dwin-
dled, in either case, tlie undistributed profits, if any, should first of all
be applied to the payment ot such loss and to the making up of the de-
ficiency of capital. If the profits prove insufficient, the capital must be
applied for the payment of the losses. If even then there is loss, the
partners must contribute from their 'separate property pro rata, i.e., in
the proportion in which they would be entitled to share the profits if
profits had resulted.
(b) T h e second rule which deals ivith the distribution of the assets
may be stated thus:
T h e assets of the firm, including the oiiginal contiibutions of t h e
partners, and subsequent ones, if made to make up deficiencies of capi-
tal, must first be applied in paying the debts of the fiim due to third
parties, It after paving these liabilities, tliere be surplus, such surplus
should be applied to the payment to each partner of anv advance re-
ceived from him over and above the capital contributed bv eacli But
if the amount is not sufficient to pay up fully the advances, tlien the
advances should be paid rateably. If, howexer, there remains a surplus
after payment of these advances, then the surplus is due to him on ac-
count of capital. The resichie, if any, is to be divided among all the
partners, pro rata, i.e., in tne proportion in which they were entitled to
ihai-e profits. If, however, the assets are not sufficient, and the partners

SO. Krishnarao v. Shanker. 1954 Bom. 532.

LAW OF PARTNERSHIP 211
have agreed to share equally the profits and losses but have contributed
unequal amounts towards the capital of the firin, tlien, in the absence o£
any contrary agreement on the point, the deficiency of capital must be
regarded as losses and must be made up by contributions by the part-
ners in equal shares, widi the result tliat the losses finally suffered fay
the Darmers will he equal. The contributions by the partners towards
the deficiency _need not be actual; they may be notional, i.e., by adjust-
ment of the amounts payable to the partners as the distribution of capi-
tal. If, in such a case one partner is insolvent and nothing can be le-
coveied from him as his contribution to make up the deficiency, the
solvent partneis will not be liable to contiibute for him." After the part-
ners contribute their share of the deficiency they will be paid rateably
tlie amount due to them by way of return of tlieir capital (Section 48;
Garner v. Murray). ^
1. A, .B and C were partners •i\ho had agi"eed to share equally m
the profits and losses of the firm, and had contributed to the capital
Rs. 20,000, Rs. 10,000 and Rs. 2,000 respectively, making a total capi-
tal of Rs. 32,000. On dissolution it is found that, after paying the
debts of die firm and advances made by the partners, the assets are
Rs. 14.000, wliicli leave a deficiency of Rs. 18,000. This amount be-
ing losses each partner must contribute Rs. 6,000 to make it up.
After this is done the assets then available, Rs. 44,000-fRs. 18.000 =
Rs. 32.000 %vill be distiibuted rateably among tlie partners, so that each
will ha\e suffered a loss of Rs 6,000. In actual practice it will not be
necessaiy for A and B to pay Rs. 6,000 each in cash but notional adjust-
ment may be made so that C, whose capital contribution was only
Rs. 2.000 will have to pay Rs. 4,000, and out of the amount of Rs.
14,000-fRs. 4,000=Rs. 18,000, A ^\ill get Rs. 14,000 and B Rs. 4,000
2. Difficulty may arise where one or more of the paitners is insol-
vent and so cannot contiibute anything towards the deficiency Thus in
the above case if C is insolvent and nothing can be rerovcicd from him
the assets will be distributed as follows : A and B will have in the first
place to contiibute their shaie of the dcficiciirV- i.e., Rs. 6,000 each- and
the assets then available, R.s. (4,000-fRs. fi.OOO+Rs. 6,000= Rs 26 000
will be distributed between A and B in tlie pioportion of their contribu-
tions to the capital, i e., in the ratio of 2 to I.. A will (!;ct Rs. 17 3"3fi7
p. and B Rs. 8,666.33 p. and the ultimate result will he that A on llir
whole will have lost Rs' 8,666.33 p. and B Rs. 7,333.67 p. This i$ in ac-
cordance with the rule laid down in Garner \ . Mm ray, a leading rase on
the subject. The effect of the rule is that in such a case a partner who
has contributed a greater part of the capital may lose more than his other
partners, otherwise sharing equally with him »n the profits and losses of
the firm.
^
3. The same principle will apply if C 'in the case mentioi'icd in
illustration 1 above, though not insolvent, fails to contribute his share
of the deficiency. Out of the actual amount of Rs. '4 000, A i\fll arer
Rs. 11,333.33 p. and B^ Rs. 2,666.67 p. and the Court will pass a decree
51. 'Mulchand v. Bhemmal 1948 Sind. 35. See Venkayyamma v. Ti
rupaya, 1955 Mad. 32, where a partner has died.
212 MERCANTILE LAW
for Rs. 2,666.67 p. in favour of A against C and for Rs. I,3b3.33 p. in
favour of B against C.

PAYMENT OF FIRM DEBTS AND PRIVATE DEBTS (Section 49)

Difficulty sometimes arises when the assets of the firm are insufficieni
to pay the firm's debts or where the partners themselves have become in-
solvent or are not otherwise able to pay their private or individual cre-
ditors. In such a case there is likely to be a scramble between the part-
nership creditors and partner's private creditors, and difficult questions
anay arise as to' how to distribute the available funds between them. T h e
Act lays down that the partnership creditors should be first paid out
of the partnership assets and similarly private creditors out of the private
assets. In both cases, if there be surplus, the other set of creditors will
be entitled to share in it. It may be observed that this rule applies only
when a question arises as to the order in which the firm debts and se-
parate debts are to be paid from the joint and separate property of
partners. It does not, however, entitle a partner to insist that a cre-
ditor of the firm must proceed against the assets of the finn before pro-
ceeding against that partner individually All the partners, we have seen,
are jointly and severally liable for all the acts of the firm and it is, there-
fore, open to a creditor of the firm to proceed against the firm (all the
partners) or against any one or more of them.

R E T U R N OF PREMIUM ON PREMATURE D I S S O L T T T T O N (Ser. 51)

It may sometimes happen tliat a person is admitted as a partner into
an already established business on the newcomer paying a "premium"
to the pther partners for jJieir personal use and benefit. The conside-
ration for such premium is not only the creation of a partnership with
the newcomer but the continuance of that partnership for the period
fixed. Section 51, dealing with the question of die return of premium
on premature dissolution of the firm provides to the effect that where a
partner has paid a premium on entering into partnership for a fixed
term, and the firm is dissolved before the expiry of that term for any
reason other than the death of the partner, he (the newcomer) shall be
entitled to a refund of the whole or a reasonable portion of the premium,
as on a failure of consideration. But he will not be entitled to claim
the refund where the dissolution is brought about by his own miscon-
duct or where the partnership is dissolved by agreement and this agree-
ment does not contain any provision io^ the refund of the premium or
any part of it./
There are two pomts of great importance to be noted in this
connection. First, the rule stated above applies only to a partnership for
fixed ffrm; and does not deal with the case of a paitnership at will.
Secondly, the premium is paid by the incoming partner to the other
partner or partners for their personal use and not as a contribution for
the firm. In fact, premium has been defined as "a sum of money paid
by an incoming partner t6 the other partner or partners, not by way of
contribution to the firm ift which the payer is about to acquire an in-
terest, but for ps.f.cntai Mse and benefit of tire other partner or partners"
(Sirahan), ]i fpllo^vs that the refund or repayment is by a partner or
 LAW OF PARTNERSHIP 21S
partners who had received the premium, and not by the firm; it can-
not, therefore, be allowed to come jn competition with the claims of
the creditors of the firm."

LIMITED PARTNERSHIP
The Indian law does not recognise Limited Partnership, but, as we
have referred to English law also throughout the book, it may not be out
of place to describe here the important-provisions of the English Limited
Partnership Act, 1907.
T h e object of the Act is to allow some of the partners to be res-
ponsible only for the capital actually found by them, thus limiting the
liability of those partners, and leaving the others fully liable for the
debts of the firm. It will be noted the limitation of liability is entirely
different in scope, though similar in nature, to that constituted by the
Companies Act. The Act does not create limited partnership in the
sense that the Companies Act creates limited companies. T h e principle
of unlimited liability is left untouched for debts as regards partnership,
and where one or more partners are responsible to an unlimited extent
for the debts of the Jirm, the Act enables a new class of partners to b e
added whose liability is limited. So, we may say, that it is an Act for
creating partners with limited liability, but not partnerships.
Section 4 of the Act contains the important rules, and it reads : "A
limited partnership must consist of one or more persons called general
partners, who shall be liable for all debts and obligations of the firm,"
These partners, it will be noticed, are liable as any partners under tlie
general partnership law. The section further provides that the limited
partnership must also contain "one or more persons, to be called limited
partners, who shall at the time of entering into such partnership con-
tribute a sum or sums of capital, or property valued at a stated amount,
and who shall not be liable for the debts and obligations of the firm
beyond the amount so contributed." It will be noted that a limited-part-
ner is very much in the position of a fully paid shareholder. On the
same analogy his share capital must not be returned to him as long as
the partnership continues. Section 4 further provides that "a limited
partner shall not during the continuance of the partnership draw out
or receive back any part of his contribution, and if he does so draw
out or receive back any such part he shall be liable for the debts and
obligations of the firm up to the amount so drawn, out or received back."
A limited partner must not take part in the management of the part-
nership business, and has no power to bind the firm; but he has the
right to inspect the books of the firm, and to examine into the state
and prospect of the partnership business, and he may advise with his
partners thereon. If a limited partner takes part in management he is
liable for all debts and obligations of firm incurred while he so takes
part in the management as though he were a general partner. A limit-
J, ed partner may, with the consent of the general partners, assign his share iir

52. Bury v. Allen (1845) 1 Cal. 589; Exparte Broome (1811) 1 Rose
69.
214 MERCANTILE LAW

the partnership, and upon such an assignment the assignee becomes a luait-
ed partner with all the rights of the assignor.
(a) Every limited partnership must he registered; (b) registration
is effected by sending to the Registrar a signed statement containing tlie
fdilowing particulars: (i) The firm name, (ii) The general nature of the
^business, (iii) The principal place of the business, (iv) The full name
of eadi partner, (v) The term for which the partnership is entered into,
and the date of its commencement, (vi) A statement that the partner-
ship" is limited, and tlie description of every limited partner as such,
(vii) The sum contributed by each limited partner and whether paid in
cash or how otherwise,'^

SUMMARY
Partnership is defined as: "the relation between persons who have
agieed to share the profits of a business carried on by all or any of them
acting for all." The definition contains five elements which male a part-
nership, namely:
1. partnership results from a contract
2. between two or more persons who
3. agree to carry on a business
4. with the object of making and sharing profit;
5. this Ijusiness is conducted either by all the person's or by any
of tliem acting for all.
The minimum number of persons required to constitute a partner-
ship is two and the maximum number prescribed is 10 in the case' o£ a
banking firm and 20 in othei cases.
The essence of paitnership is the attempt to make profit in business
for the partners. Existence of contract, business and the intention to
make and share profit must be there.
.Persons who enter into partnership with one another are called in-
dividually "partners" and collectively "a firm" "Firm" is only a conveni-
ent phrase to describe the partners and has no legal recognition or exis-
tence apart from those persons. ,
In a contract of partnership, all the essential elements of a valid con-
tract must be present. A minor cannot become a partner by contract
but he may be admitted to the benefits of an already existing partner-
ship by the consent of all partners. Minor so admitted is entitled to
his agreed share and can inspect books of account, but he is not per-
sonally liable for the debts and obligations of the firm, though his share
in the property of the firm and the profits of the firm will be liable.
A minor must, within six months from his attaining the age of majority,
or on coming to know of his being so admitted (whiche^'cr date is later),
elect whether he wants to continue in die firm or sever his connections
with it. He must give a public notice of his intention within this per-
iod and if he fails to do so, he will be deemed to have elected to be i.
full partner. If he elects to continue or fails to repudiate, lie will be
liable for the firm's debts incurred since tlie date of his original admission
to die partnership.

53. Adapted from Tillyard, Commercial Law

LAW OF PARTNERSHIP 215
Partneiship is an extension of agency, and every partner is an agent
•of the'other paitners, so diat the acts pf a partner during the course of
business of a firm bind all the partners. Partners are of different kinds
with different liabilities, namely,—
Actual partner who has by agreement become a partner and takes
active part, in the conduct of die business. All his acts for the business
bind the other partners.
Partners, by estoppel or holding out.—A person may become a part-
ner by implied contract arising out of the conduct of the parties. Where
a person conducts himself so as to lead another to believe him to be a
partner, though really he is not one, and on that belief the other per-
son gi\es credit, then he is estopped from denying that he is a partner.
Such a partner is called a partner by estoppel. Similarly, where a per-
son is held out as a partner by another, and does not disclaim the partner-
ship relation, he will be liable as a' partner to any one who gives cre-
dit on tlie faith of this representation. He is a partner by holding out.
Dormant or sleeping jiartner is one who is in reality a partner but
whose name does not appear in any way as partner, and who is not
i n o w n to outsiders as partner. He is liable to third parties who subse-
quently disco\ei thi.s relationship. His position is similar to that of an
undisclosed principal.
Nominal partnei- is a person wUose name is used as if he were a
member of the firm, although he is not really a partner and is not en-
titled to shaie the profits of the concern. He is, however, liable for acts
of the film.
Partner in jDrofits only is a person who gets a share of the profits and
does not share losses. He is liable to outsiders. He takes no part in
the management of the business.
Sub-partner.—^Vhere a partner in a firm agrees to share with a
stranger the profits derived by him from the partnership there arises g
sub-partnership between the contracting member and the stranger, and
the latter is called a sub-partner. A sub-partner has no rights against,
'die firm, nor is he liable foi its debts.
New partner is one who is admitted into an already existing part-
nership. He does not become liable for debts and obligations of the
firm incurred before his joining the firm, unless he agrees to that. The
creditors of the firm can, in no case, look to him for payment of past
debts.
Retired or outgoing partner.-An outgoing partner continues to be
liable for obligations incuired before his retirement, and will continue
to be liable e\ en for future obligations, if he does not give public or
actual notice of his retirement.
Formation of partnership.—A partnership may be formed orally or
in wijting- but where it is reduced to writing, die deed o£ partnership
must DP Stamped according to the provisions of the Stamp Act.
Test of partnerslrip—To determipe ivhellicr or not the relation of
partnership exists between two or more parties, it is essential to look to
the intention of the parties and their contract as it appears fioin the
whole facts ot the case. To constitute a partnership, two or more per-
sojis must agree to carry on some business in common for sharing ]jiofit.
Therefore, two co-owners of property held not for canying on business
with the object of making profit do not constitute a partnership. Their
relation will only insult in co-ownership. The co-owners are not agents
inter se and o'le eaAnot bind the other by his acts.
216 MERCANTILE LAW

A creditor of the firm who stipulates to receive interest on the loan in

the form of share of profit of the firm, and also to have some control
over the conduct of the firm's business does not thereby become a part-
ner.
A servant of the firm getting a share of the profits of the business
either in lieu of remuneration or in addition to it is not a partner.
Duration of partnership,—A partnership may be-£pr a fixed period,
and when the. period so fixed for its duration is over, it comes to an
end. Where after expiration of fixed period the business is carried on, the
partnership -will become a partnership at -will. Where nothing is, said as to
the duration of partnership and the partners are free to carry on busi-
ness as long as they like, it is a partnership at will. It may also be a
single adventure or a single undertaking, when it lasts only until the
undertaking is completed.
Partnership property.-The partners may agree among themselves as
to what is to be treated as the property of the firm, and what is to 'be
separate property of one or more partners, although employed for the
purposes of the firm. In the absence of any such contract, tlie property
of the firm is deemed to include—
(a) all property, rights and interests which have been brought into
the common stock for purposes' of partnership by the individual partners,
(b) those acquired in the course of tlie business with money belong-
ing to the firm, and
(c) the goodwill of the business.
Goodwill is the advantage which is acquired by a business beyond
the' mere value of the capital, stock, fund and property employed there-
in in consequence of the general public patronage and encouragement
whiclr it receives from constant or habitual customers.

RIGHTS OF PARTNERS
1. To take part in the management of the business, unless other-
wise stipulated.
2. Every partner has a right to be consulted and heard in all mat-
ters affecting* the business. In case of difference of opinion, the deci-
sion of the majority of partners does not prevail unless the>matter is un-
important.
3. Every partner has a right of free access to all records, books and
accotmts of the business, and also to examine and copy them.
4. Every partner is, in the absence of a contract to the contrary,
entitled to equal share in the profits of the business,
5. A partner is entitled, in the absence of contract to the contrary,
to be indemnified by the firm lor all acts done, for ah payments made
and tor all expenses incurred for and on behalf of the firm.
G. Every partner is, as a rule, a joint owner of the partnership
property and each partner is presumed to liave equal share in it,
7. Every partner has a right to prevent the introduction of a new
partner into the firm without his consent, unless there is an express
contract permitting such introduction.
8. Every partner has a right to retire, if the contract so provides,
failing vhich -with tlie consent of other partners, and if the partnership
is at will, at any time on notice to the other partners.
9. Every p-artner has a right not to be expelled from the firm.
LAW OF PARTNERSHIP 217
10. An outgoing partner can carry on competing business witlaout
using the firm name or soliciting firm's customers.
Duties of partners:
1. To work for the greatest common advantage.
2. T o be just and faithful.
3. To render true accounts.
4. To gi^'e full information.
5. To indemnify for fraud and Wilful neglect.
6. To share losses.
7. To attend diligently witliout remuneration.
8. T o hold and use the partnership property for the ,firm.
9. T o account for private profits.
10. T o account for profits of .competing busine.ss.
11. T o act within authority.
12. Not to assign his rights.
Relations of partners to third parties:
All the partners are jointly and severally liable for all acts done by
any partner in the course of business.
Every partner has an implied authority to bind other partners.
An implied authority of a partner consists in doing to an act to carry
on in the usual way the business of the firm provided the act is done in
the firm name or in any manner expressing or implying an intention to
bind the firm.
A partner has, in the absence of usage or custom of trade, no im-
plied authority to—
(a) submit a dispute relating to the firm to arbitration,
(b) open a barking account on behalf of the firm in his own name,
(c) compromise or relinquish any claim or portion of 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 tq the firm, or
(h) enter into partnership on behalf of the firm,
Every partner is liable for the negligence and fraud of other part-
ners in the course of the management of the business.
All partners are liable for misappropriation by a partner of money
or property of a third party received .for or, lying in the custody of the
firm.
All the partners are deemed to have received any information ob-
tained by one of them in the course of partnership business.
Dissolution of partnership—
1. By the expiry of term.
2. By the completion of adventure.
3. By the death of a partner.
4. By the insolvency of a partner.
5. By the retirement of a partner.
 218 MERCANTILE LAW
Dissolution of linn—
1. By mutual agreement.
2. By insolvency of all the partners hut one.
3. By business becoming illegal.
4. Bv'notice of dis.soiution by any partner, wher-e partnership is ai
will.
Dissolution through Court—
1. When a partner becomes of unsound mmd.
2. ^Vhere a partner becomes permanently incapable of pcrlorming
his duties.
3. Where a partner is guilty of misconduct which is likely to affect
prejudicially the business of tlie firm.
4. Where a partner persists in disregarding the partnership agi-ee-
ment
5. Where a partner transfers his share or interest in the partner-
ship to a third per.son
6. Where the' business cannot be carried on save at a loss.
^7. Where the court finds it just anii equitable to dissolve the firm.
Settlement of accounts after dissolution-
Payment ot losses.—Where tlie firm has suffered losses or where the
capital has dwindled, the imdistributed prottts, if any, shotdd first of all
be applied to payment of losses and tc maKing tip of deficiency of capi-
tal. If profits prove insufficient, the capital must be applied to pay
losses. If even then there are losses, the partners must contribute from
their separate property pro rata^
Distribution of assets.—The assets must first be ajpplied m paying
the debts of the- firm due to third parties. Any surplus should then be
used to pay off partners' advances, if any. Any further surplus is to be
•distributed among partners rateably on account of capital. T h e residue,
if any, should be divided among all partners pro rata.
Payment of fuin debts and private debts.—Fai'tnership creditors are
first paid out of tlie partnership assets, and similarly private creditors out
of the private' assets; if there be a surplus, the other set of creditors will
be entitled to share in it.
CASES FOR RECAPITULATION
1. Certain iron merchants, being in financial difRculttes. assigned
their business to trustees for the benefit of their creditors. T h e trus-
tees carried on the business with the object ot paying oft the, creditors
out of the business. Held, the- creditors were not partners, in the busi-
ness. The trade was not carried on by or on account of tire creditors,
but the trade still remained the'trade of tlie debtors. The debtors were
' still tire persons solely interested in the profits, save only that they had
mortgaged them to their creditors [Cox v-. Hickman (I860) 8 H.L.C. 268].
2. A firm consisting of A and B partners and doing export and irr^-
port business entered into a contract with C, the creditor. C, in con-
sideration of moneys advanced or to be advanced from time to time by
him, was to receive a share of the net profits of the business of the firm
and large powers of control over the conduct of the business. But C had
no power to direct transactions or the course of trade. Held, C's powers
were powers of control only, given to provide to him largest 'possible
LAW OF PARTNERSHIP 219
securiiv. This was not sufficient to constitute him a partner with A and
B. [Mollwo, March & Co., v Court o£ Wards (1872) L.R. 4 P.C. 419J.
S. A and B puichase a tea shop and incur additional expenses for
purdiasing utensds etc., each contributing half of the total expense and
the shop is leased out on a daily rent which is divided between them
both. A and B are co-owners and not partners (Govindan Nair v.
Nagabhushanammal, 1948 Mad. 343).
4. A, B and C carried on a business for profit. C contributed
neither labour nor inoney, and did not receive any profits, but lent his
name to tlie firm. Held, C was liable to every outsider who gaVe credit
relying on his being tliere as partner [Waugh v. Carver (1793) 2 H.B.I.
235].
5. J and \V are in partnership as solicitors. P pays £1,500 to both
of them to be invested on a mortgage of a specified real estate, and
dtey jointly acknowledge receipt of the amount for that purpose. After-
wards P hands over another £1,500 to W alone on his rejiresentation
that it will be invested on a mortgage of some real estate of F, an-
other client of the fitm, such estate not being specifically desciibed. J
<lies and afterwards both these sums are fraudulently applied to his own
use lay W. W-also dies, having paid interest to P on both the sums till
within a short time before his death. W s estate is declared bankrupt.
HelJ, J's estate is liable to make good to P. the loss sustained by him
on account of W's fraud only to tlie extent of £1,500 (the first £1,500 paid
by P to both J and W) and not for the second £1,500 paid to W alone.
T h e first amount was t^ken for the purpose of making a specific invest-
ment or mortgage which was in tire ordinary course ^of business of a
firm of solicitors. The second sum of £1.500 was taken by W for the
general purpose of investing it, as the -problem states the money 'will
be invested on a mortgage of some real estate of F, such estate not
being specifically described.' To receive money for general purpose in-
vesting it is not an act within the scope of the ordinary business of a
firm of solicitors [Harman v. Johns'on (1853) 2 E. & B. 61].
6. A, one of the partners in a banking firm, advises B, a customer,
TO sell certain secuiities of B's which are in die custody of die bank, and
to invest the pioceeds in another security to be provided by A. B sells
out bv the agency of the bank in the usual way, and gives A a che-
que for the money which he receives and misapplies without the know-
ledge of the other partners. Held, the firm is not liable to make good
the loss to B. as it is no part of the^ ordinary business of bankers to le-
ceive moncv generally for investmfent [Bishop v. Countess of Jersey
(1854) 2 Drew. 143]. ' T
7. A, B, C and D enter into a partnership agreement for ten years
and B, C and T) are placed in charge of the, management of the busi-
ness. They carrv on the business well and make it a successful con-
cern. A, in order to resile fiom the agreement, creates obstructions in
the way of B, C and D and sues for dissolution. Held, he cannot suc-
ceed, for the court will not interfere at die suit of a partner who is
himself guilty of misconduct (Alanilal v. Keshabjipitamtter, 1952 Pat. 33).
8. M was a partner in a firm. T h e firm ordered goods in M's life-
time, but delivery was not made until after M's death. Held M's estate
was not liable for the price of the goods in M's lifetime [Bagel v. Miller
(igOJi) 2 K.B. 2121.
9. A, B S; Co. is a newly constituted firm and commences business
without registration. Y is indebted to the firm in the sum of Rs. 500
220 MERCANTILE LAW

and the firm files a suit against Y for the recovery of the said sum and
immediately diereafter gets itself registered. Held, the suit was not
maintainable as the firm was not registered and the subsequent registra-
tion was of no avail [Ram Prasad v. Kamta Prasad (1935) 33 A.L.J.
1243]. '
10. An unregistered firm sold glass' phials worth Rs. 2,700 to B,
who gave a cheque for the amount on the H.C. Bank, but the cheque
was dishonoured. R, who was a partner in tlie firm, demanded money
from B who paid only Rs. 1,500. In the meantime, the firm was dis-
solved and the sum of Rs. 1,200, the unpaid balance, was assigned tO'
R for realisation. R sued B for the recovery of the amount. B contends
that the suit is not maintainable as the firm was not registered. Held,
the suit is maintainable, and is not barred by Section 69 of the partner-
ship. The firm was dissolved before tlie suit was filed. Section 69(3.)
makes an exception in favour of a suit for realising the assets of a dis-'
solved firm (Radhey Shyam v. Beni Ram Mool Chand 1967 All. 28).
 Chapter VI

Sale of Goods

PART b-A

Not every one who agiees to buy or sell goods is fortunate enoiTgh
to find that the transaction tuins out as he had hoped. In many cases
those who are disappointed have to seek the assistance o£ the law in order
to enforce their rights. The law defining those rights is codified in an
enactment known as the Indian Sale of Goods Act, 1930, which came into
force on July 1, 1930. The Indian Sale of Goods Act follows more or
less closely the English enactment.

CONTRACT OF SALE OF GOODS

According to Section 4 of the Act, a contract of sale of goods is a
ronlract whereby tlie seller (i) transfers or (ii) r^grees to transfer the pro-
perty in (ownership of) goods to the buyer for a price. A contract of
sale may be (1) absolute or (2) conditional according as the parties de-
sire. It may be between one part-owner and another. T h e term "con-
tract of sale" is a generic term. It includes an actual sale as well as an
agreement to sell. "Wherf rt^e contract of sale is executed, i.e., the pro-
perty in goods has passed from the seller to the buyer, it is called a Sale;
but where the contract is executory, i.e., the transfer of the property in
goods is to take place at a futare time or subject to some condition
thereafter to be fulfilled, it is an AgreemenT to Sell.

SALE AND AGRF.EMENT TO SELL DISTINGULSHED^

The ditteience between sale and agreement to sell is of vital impor-
tance as the two have different legal - effects. T h e difference between
the two may be considered in tlie form of points of distinction.
1. In a sale, ^Ka pfopertv.in goods sold passes to the buver so that
the seller is n o . ^ o y e the owner of the goods, but it is the buyer who
owns them- while tn an agreement to sell, the ownership does not pass
to the buyer 'at the time of the contract so that the seller continues to
be the o^raes i-ititil the agreement to sell becomes an actual sale by the
expirv of c@*aln time or the fulfilment of some condition,
2. Ai^ agjeeimnent to seii is an executory contract, while a sale is
an execut^i contract.
\ 1. See Sales Tax Officer v. Budh Prakash, 1954 S.C. 459.,
222 MERCANTILE LAW
3. An agreement to sell is a contract pure and simple, and thus
creates merely jus in personan, i.e., gives a right to either buyer or sellei-
against the other for any default in fulfilling his part of the agreement.
A sale is contract plus coaveyance, and cicaies-^ jus in rem, i.e., gives-
right to buyer to enjoy goods as against the whole woild.
4. In a sale, the seller can sue for the price, en en though goods are
in his possession; but in agreement to sell, his only remedy is to sue for
damages if buyer fails to accept and pay for the goods.
5. In an agreement to sell, tlie seller being still the owner, he cait
dispose of the goods as he likes and the buyei's remedy for seller's breach
is a suit for damages. In a sale, however, seller's breach gi^es the buy-
er double remedy: a suit for damages against ilie seller, and the pro-
prietary remedy in respect of the goods so that if the goods are sold to
third parties," he can in many cases sue and recover them as owner fiom
the third parties.
6. If there is an agreement to sell and the goods arc destroyed by
an accident, the loss, as a rule, falls on the seller, even though the goods,
are in the possession of the buyer. In a sale, the lobs falls on the buver,
even though the goods are with the seller.
7. If, in an agreement to sell, the buyer who has paid the price,
finds diat the seller has become insolvent, his only remedv wouhl be to
claim a rateable dividend. In a sale, however, on the seller becoming
insolvent the buyer, as an owner, would be entitled to reco\er thp-
goods from the Official Receiver or Assignee- in insolvency.
8. If, in an agreement to sell, the buyer is adjudged an ' insolvent
before he pays for the goods, the seller may refuse to deH\-er the goods-
rmlcss paid for, as ownership has not passed to tire buyer. In a sale,
however, in these circumstances, the seller, in the absence of a lien o\cr
the goods must deliver to the Official Receiver or Assignee and v;ill be
entitled only to a rateable dividend for the price due.

.SALE DISTINGUISHED FROM O T H E R TRANSACTIONS

As the transfer of ownership by the .seller to the buyer for a price
paid or payable in money is an essential in.gi-edient of sale, it differs
from sc^•cral uther c!a.sses of contracts, which resemble sale in .some res-
pects. Since the Sale of Goods Act applies only' to contracts of sale
of goods and to no others, it is expedient to note here the points of
distinction between sale and other contracts. i

SALE AWD BAILMENT

In a contract ol bailment, goods are delivered by one person to an-
other for a certain purpose on the condition that when that purpose ij
over the goods will he returned in specie. The ownership does not pass
to the bailee. It is only the possession that is given to him. In sale,
the deliveiy of goods is made by the seller to the buyer for a price, and
the buyer becomes the owner o£ the goods and can deal with them as
he likes.
 SALE OF GOODS 22S

SALE AND GIFT

Where goods are transferred by one person to another without any
price or other consideration being given in return the transaction is
called a gift. In a gift the ownership of the goods passes to the donee
gratis, and thus the price element is absent, it is not a sale.

SALE, BARTER AND EXCHANGE

It is necessary for sale that goods must be e.vchangecl for a money
consideration called the price. Where goods are exchanged for goods,
it does not amount to sale but only to barter. If money is exchanged
for money, it will be a transaction of exchange and not a sale. But if
the consideration consists partly of money and partly of goods, it would
be a_contract of sale. If goods on either, side are deli\ercd in an ex-
change, any balance of money payable may be recovered as on a con-
tract of sale. So also, if the party liable to deliver goods in exchange
refuses to do so or is imable to do so, the odier party may recover the
value of the goods given in exchange.

MORTGAGE, PLEDGE AND HYPOTHECATION OF GOODS

A mortgage ot goods is a transter of interest in goods trom a mort-
gagor to a mortgagee to secure a debt. A pledge is a bailment of goods
by one person to another to secure pavment ot a debt. If the pledger
, makes default m paying tlie debt the pledgee mav sell the goods after
due notice to the pledger. A Jiypotliecation of goods is an equitable
charge on goods without possession, but not amountinc; to a .-mortgage.
All the three are different from sale, for the ownership is not transferred
by one party to the other in any of them. T h e essence of a conn act
of sale is tlie transfer of sjeneral property in goods for a price. T h e
essence ot a contract of mortgage is the transfer of special property in
goods from the mortgagor to the mortgagee in orcier to secure a deljt

ijALE AND CONTRACT F O R WORK AND LABOUR

A distinction has to be made between a sale and a contract for work,
and labour. The Sale of GoDds Acts, both English and Indian, do not
apply to contracts for ivork and labour. It is often diffitult to determine
the nature of the contract. The simple test is that when goods-
are ultimately to be delivered, it is a contract ot sale even though some
labour on the part of the .seller ol goods may be necessarv. Thus xvhcre
under a contract a dentist has to make artificial teeth for a person and
fit them to his mouth, the contract is for the sale of goods and, not for
labour and work.= Where, however, a printer prints a book on paper
supplied by the party, an attorney prepares a cleed, or an artist paints
the portrait of a person, these are contracts for work and labour and
not of sale. If a picture dealer engages an artist to paint a picture^ for
the dealer to sell in the ordinary w a y o f business, there is a contract
of sale of goods. The distinction is not of much importance in Indian
L law. as there is no enactment corresponding to the Statute of Fiauds
in India.

2 Lee v. GrlfTm (1861) 30 I.J.Q.B. 252.

 224 MERCANTILE LAW
SALE AND HIRE-PURCHASE AGREEMENT
A transaction of hire is a kind of bailment which differs from a con
tract of salt in tnat, even rli&ugh t'lp hirer pays money on considera-
tion of tlie use of goods, yet the ownership continues witn the person
wJio gives goods on hire. The hire-purchase contract is a development
'•of modern commercial transactions. Here the owner of goods delivers
the goods to a' person who agrees to pay certain stipulated periodical
payments as hiue charges. Though the possession of the goods is with
the hirer, the ownetship still remains with the original owner. If the
payments are made regularly, the hirer gets the option of purchasing the
goods on making the full payment. Before this option is exercised, the
hirer may return. the goods hired. The essence of hire-purchase agree-
ment is that there is no agreement to buy, but only -^n option is given
to- the hirer to buy under certain conditions so that the hirer has a
right to become the owner after paying regularly the stipulated rent or
to return die goods and put an end to hiring. Mere pavment of price
by instalments does not make it a hire-purdiase; it is a sale.
The distinction is of far-reaching importance particularly as regards
third parties. The transaction of hire-purchase protects the owner against
the insolvency of the buyer, for if the would-be buyer becomes insolvent
or fails to pay the instalments, the seller" has the right to take back the
goods as owner. Further, since ownership includes the risk of loss by
accident, it is usual for the seller to protect his interests by insuring
the goods, and the premium is paid by the hirer. Again, in a hire, tUe
hirer cannot pass on any title even to innocent and bona fide third par-
ties. And, if in a hire-purchase agreement, the hirer declines to take
delivery of the goods, the remedy of the owner will be in damages for
non-hiring and not for rent for the period agreed upon.

SALE AND AGENCy

A ti'ansaction of sale must be distinguished from one of agency, for
where a retailer obtains goods from a manufacturer or wholesaler, it
may become important to know whether he has got them on his own
account or as an agent. T h e significance of the distinction becomes
very important in case of loss of the goods or insolvency of either party.
"Where A & Co. were appointed sole agents for three years for the sale
of all the bricks of the manufacturers, it was held that the relation was
one of vendc- and purrhaser rather than of agent and principal.

W H A T IS A SALfc-ESSENTIAL ELEMENTS OF A SALE=

We are now in a better position tO lay down the essential elements
of a sale. To constitute a sale the following elements must be present:—
1. There must be some goods, the general property in which is
transferred from the seller to the buyer.
2. A price in money must be paid or promised to be a paid as a
quid pro Q«O on a transfer of property on a sale.
3. T h e contract of sale is consensual, bilateral 'and cumulative.

3. State of Bombay v. United Motors (India) Ltd., 1953 '^.C.J. 373.

SALE OF GOODS 225

There must be a seller and a buyer. Two persons are necessary to com-
plete a sale, as the same person cannot be both seller and buyer. A
person cannot buy his own goods, as there is nothing to buy. But, where
in law, one person has a right to sell another's goods, the owner may
himself buy such goods. This may happen where goods are sold. under
a distress or execution or by a pledgee as, in fact, t h e ' buyer and seller
are different persons. But the seller in such cases cannot buy, though
he is selling the goods of whicli he is not the owner because oT his fidtt-
ciary position. A part-o\vner may, however, sell his share to the part-
owner so that a partner can always sell to the other partners. Sirftilarly,
a partner can sell goods to his firm. But a club consisting of several
members does not sell, when it supplies liquor or meals to a member
ivho pays for them, though the transaction resembles a sale. T h e trans-
action is a release of the joint interest of the members, and the mem-
ber is in substance consuming his own property, and the mode of pay-
ment is a matter of internal arrangement regulated by the rules of the
club and agreed to by the member on his admission.
4. There must be a transfer of ownership from the seller to the
buyer. T h e transCev must be of the absolute or general property in the
goods sold. In law, a thing may in some cases be' said to have in a cer-
tain sense two owners, one of whom has the genei^al. property and the
other a special property in it; and the transfer of the special property
is not a snle of the tiling. For example, where goods are delivered in
pawn or pledge, only the special property is transferred to the pawnee,
and the general property remains with the pawnor, which he may trans-
fer to a third person subject to the rights of the pawnee. The same
rule applies to die case of a bailee.
5. AH the essential elements of a valid contract must also be pre-
sent.

PART 6-B
FORMATION OF A CONTRACT OF SALE
rORMALITIES 'OF T H E CONTRACT (Section 5)
A contract of sale is regulated by the genera! law of contract, name^
ly, there must be an offer to buy or sell goods and an acceptance of that
oiTer, parties competent to contract, genuine mutual assent, a thing the-
property in whicIi is transferred or is to be transferred for a money con-
sideration called the price paid or promised to be paid. A contract of
sale may be made in any of the following modes: (1) there may be im-
mediate delivery of the goods: (2) there may be immediate pavment
of price but the delivery to be made at some future date; (8) there may
be immediate delivery of goods and also immediate payment of price;
(4) it may be agreed that the delivery or payment or both are to be made
in particular instalments; or (5) the delivery or payment or both may
be given at some future date.
Under Indian law, except where specially provided by some law for
the time being in force, no formalities are required to constitute a valid
contract, as it is necessary in English law under certain circumstances.
226 MERCANTILE LAW
A contract of sale may be express or implied from the conduct of the
pnrties, and in case of express contract, it may be oral or in writing
or partly in writing and partly by word of mouth. A written offer to
seil goods may be accepted verbally or a verbal offer may be accepted
in wiiti/ig. So—also goods may be ordered by a letter and may be sup-
plied without further communication.

SUBJECT-MATTER OF CONTP,ACT OF SALE

GOODS
T h e subject-matter of the contract of sale is essentially the goods.
Section 2(7) in defining goods lays down that "Goods" means every kind
of mo\able propcity other than actionable claims and money; and in-
clude; 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
Tinder tlie contract of sale. According to this definition money and ac-
tionable claims are not goods and cannot be bought and sold. Money
heie means current money, i.e., the recognised currency in circulation
in the country, but not old and rare coins which may be treated as goods
and bought and sold as such. An actionable claim is a thing which a
per>.on cannot make use of or enjoy, but which can be recovered by hira
by means of a suit or an action. Thus a debt, due to a man from an-
other is an actionable claim and cannot be .sold as goods, although it
can be assigned. Since stocks and shares, according to English law, are
things in action and not goods, they have been expressly included by
the Indian Act in the definition as goods. Goodwill, trade marks, copy-
rights, patents are all considered goods. Similarly, water, gas, elec-
tricity, ships are regarded as goods and can be bought and sold as such.
Goods may be (1) Existing, (2) Future, or (3) Contingent. The Exist-
ing Goods may be (i) Specific, or (ii) Generic, (iii) Ascertained or (iv)
Unascertained.

EXISTING GOODS
Existing goods may be either ow^ed or possessed by the seller at
the time of the contract. Instances of sale of goods possessed but not
owned by the sellers are sales by agents and pledgees. Where the ex-
isting goQds are the subject-matter of a.contract, it is essential that they
must l>e in actual or possible existence, for a present sale can be made
only of a subject-matter having actual or possible existence. If, there-
fore. A sells his horse, ship or merchandise to B, believing that they
e\ist, when in fact the horse is dead and the ship is actually lost on the
higli seas and the merchandise is tutcrly destroyed by fire, no contract
will arise. If. however, the things sold be only partially destroyed at
the time of the sale, the bu)er may either abandon the contract or he
mav take the thing at a proportional reduction of the price according
fo the trims of the original bargain. T h e existing goods may be eithei
spcfiTic goods or ascertained goods, or they may be generic goods or
unascertained goods. Spcriric Goods means goods identified and agreed
\i]ior\ at the tirne ^ contract of sale is made. T o be specific, goods must
be actually idenu'/icd or indi\ idtialiscd, and not merely identifiable.
SALE OF GOODS 22?
Ascertained Goods, though sometimes used as specific goods, are not al-
ways identical with specific goods. The former term is really of wider
import. As contrasted with specific goofis, "Ascertained Goods" may be
intended to cover the case of goods which have become ascertained sub-
sequently to the formation of the contract, although they would not be
specific goods as defined by Section 2(4) of the Act. An examination
of goods by the buyer does not make them "ascertained."

GENERIC OR UNASCERTAINED GOODS

These are goods which are not specifically identified but are defined
only by description. A has ten cows. He promises to sell one of them
to B. pointing it out to B at the time of the sale. The contract in this
ca.ie is a sale of the specific cow. If, on the otlier hand, A merely pro-
mises to sell any one of the cows, the contract is for unascertained
goods. The cow will become ascertained when A makes up his mind as
to which one of the ten cows he will sell and B consents to buy that cow.

FUTURE GOODS
Section 6(1) makes it possible for a person to sell or offer to sell
future goods, i.e., goods which he does not own or possess at the time
of the contract, but which he will manufacture or produce or acquire
after the making of the contract. Future goods are not the same as un-
ascertained goods which form a class of existing goods. A contracts on
August 1, 1965 to sell B 25 bales of Broach^ cotton to be- delivered and
paid for on October I, 1965. This is a valid contract even though A
has no cotton bales with him and can acquire them only by purchase
in the market. Similarly, a person can make a contract of sale even
though the subject-matter of sale is not in existence,at all at the time
of the contract, provided that it be the natural product, or expected
•increase of something, to which the seller has a present right. For
example, a valid contract of sale may be made of the wine that the
vineyard is expected to yield during the coming year, or the wool that
•may grow on the sheep, or the fruit that may grow on the trees, or the
young that may be born of the sheep. So also an expectation depend-
ing upon chance may be sold, as where a fisherman agrees to sell the
casting of his net, before casting it. But a mere possibility or contin-
gency, not dependent on any present right nor resulting from any pre-
sent property or interest, cannot be made the subject-matter of a pre-
sent s.ile, though it may be valid as an executory agreement to sell. It
•must be remembered, however, that the present sale of future goods docs
not amount to sale proper but an agreement to sell the goods. Though
the seller may purport to effect a present sale of future goods, the trans-
action is only an agreement to sell, for a man cannot assign what has
ho existence, although he can agree to assign property which is to come
into existence in the future. Again, only those goods which can be the
subject-matter of ownership, i.e., tamed animals, birds in a cage,
fish in a pond, or fish caught by the fisherman, can be sold; but wild
animals in the jungle, birds in the air, fish in the sea or river, being
frge ; nd not owned by anyone, cannot be the subject-matter of sale.
228 MERCANTILE LAW

CONTINGENT GOODS
Section 6(2) is merely a particular instance of sale of future goods,
and categorically states that there may be contract for the sale of goods
the acquisition fli which by the seller depends upon a contingency which
may or may not happen. As a contract of sale may he either absolute
or conditional, a seller may contract unconditionally to sell goods to be
afterwards acquired, or he may contract to sell goods 'to airive', or to
agree to sell a .crop which is to be sown. The parties are left free t o
make what bargain they please. They may stipulate (1) that the con-
tract shall be conditional on the part of the seller 'only, i the price be-
ing payable in any event; or (2) that the contract shall be absolute oil'
the part of the seller, despite tlie uncertainty of his being able to ac-
quire the goods, and in such case he will be liabale to pay damages-
if he fails to perform his contract; or (3) that the contract shall b e
conditional on both sides, and, if the event does not happen, both par-
ties shall be freed from their obligations or (4) the buyer may have to
pay in any event, for "a man may buy the chance of obtaining goods."

PERISHING OF GOODS ^
\Vhere speciiic goods are the subject-matter of a contract, ol sale (botb
actual sale and agreement to sell) and they, without the knowledge of
the seller, perish at or before the time of the contract, the contract is
void. This is based on the rule that mutual mistake of s fact essential
to tlie contract renders tlie contract void. The parties are contracting
about something which unknown to them has no existence and, there-
fore, the intention of both of them is completely frustiated. , A ';old to-
B a specific cargo of goods which he honestly believed was on its way
fiom England to India. It turned out, however, that before the day
of the bargain, the ship conveying the cargo had foundered and the
goods were lost. Neither party was aware of the fact. The agreement
was held to be void. Under Section 7, a contract for the sale of specific
goods will also be void if such goods without the knowledge of the
seller have become so damaged as no longer to answer to their descrip-
tion in the contract. This is so because the goods have ceased to exist
in the commercial sense,'' i.e., their merchantable character as such hzB
been lost, although they are not physically destroyed. Where cemeift
was spoiled by water and converted practically into stone, or where sugar
became sherbat, and were, thus unsaleable as cement or sugar, they were
deemed to have been destroyed in the commercial sense and the con-
tracts were held void. But if the goods, though damaged, still answer
to the description, the contract is not void, and the buyer must take
the risk as to their quality and condition and pay the price. The Sec-
tion applies also to cases where the seller is irretrievably deprived of
the goods as when they have been stolen, or lawfully reauisitioned by
the Government or have in some other way been lost and cannot be
traced. '

DESTRUCTION OF PART OF GOODS SOLD

A difficulty is likely to arise where in a contract for the sale of
specific goods, only part of the goods are destroyed or damaged. T h e
SALE OF GOODS 229
•solution will depend upon whether the contract is entire or divisible.
If it is one and indivisible and part only of the goods has perished or
damaged, the contract is void. If the contract is divisible, it will not
be void, and the part available or in good condition must be accepted
by the buyer. In Borrow v. Phillips (1929) 1 iC.B. 574, where a contract
was made for a^ parcel containing 700 bags of groundnuts, and 591 bags
could be deli\ered, the remainder having perished for the purpose of
the contract (the 109 bags having been stolen), the contract was held to
be void, and the buyer could not be compelled to take delivery of the
591 bags.

GOODS PERISHING BEFORE SALE B U T AFTER AGREEMENT T O

SELL (SECTION 8)
Where- the contract does net amount to sale, but is only agreement
to sell, and the goods without any fault of either the seller or the buyer
perish or are damaged subsequent to the agreement, but before the risk
passes to the buver by the agreement to sell ripening into sale, the agree-
ment becomes \oid. This is based on the rule that impossibility of
performance, arising after the contract is made, absolves the parties from
their obligation. Section 7 lays down the rule as to ^ goods perishing
before the making of the contract; Section 8 lays down the rule as to
goods perishing after the agreement to sell but before the sale is effect-
ed. Also, under Section 7 the contract is void ab initio, but under Sec-
tion 8 it is not so, the performance on either side is excused as from
the time of the perishing of the goods. Four conditions under Section
8 must be fulfilled before the agreement can be avoided, viz.,—(i), the
contract must be an agreement to sell and not an actual sale; (ii) the
loss must be specific; (iii) the loss must not be caused bv the wrongful
act or default of either party, and if either party is at fault, the party
in default will be liable; (iv) the goods must perish before the risk
passes to the buyer, for if the risk has passed to the buyer, he must pav
for the goods, though rmdelivered. A had contracted to erect macliin-
ery on B's premises for a price to be paid on completion. During the
proa^ress of the work the premises and machinery were consumed bv an
accidental fire. It was held that both parties were excused from further
performance, and! A, having contracted for an entire work for a specific
sum could not recover the jjrice o£ the .work actually done.*
In cases where the agreement is avoided, it becomes void at the time
of the perishing of the goods, a|i"d not before. Consequently, the
right of either party previously vested jyill ,jiot be affected. For example,
where the price is pa\ able by the . \ W ^ r t at. g, date prior to the destruc-
tion of goods, the seller can sue'foVUJie price, if unpaid and, if paid,
the buver cannot lecover it.'' - \ ' '• .
On a bargain for the purchase of a horse, the horse was delivered
to the buyer upon trial for 8 davs, the agreed price being £'10. If found
suitable for the intending buvcr's purpose, the bargain was then to be
absolute The hoise died without fault in either party, within 8 days;

4. Applebv V. Myers (1867) L R . C . 651.

5. Blakel) v. Muller (1930) 2 K.B. 769.
 230 MERCANTILE, LAW
it was held in Elphic v. Barense (1880) 5 C.P.D. 321 that the intending
buyer was not liable for the price. The provisions of this Section, like
any otlier implication of law, may be negatived or varied by express ag-
reement, or by the usage of a particular trade, as pennitted by Section
62 of the Act. Thus, by virtue of Section 62, a C.I.F. contract is saved
from the operation of Sections 7 and 8, inasmuch as sucli a, contract be-
ing a contract for tlie sale of goods, cost, insurance and freight, is in
fact 'a contract for the sale of goods, lost or not lost,' the performance
of whicli is satisfied by die tender of documents, and is 'not afEected by
the loss or damage to the goods sold. It is a sale of documents and not
of goods. But if before the delivery of documents, war breaks out and
such delivery. becomes impossible of performance, the contract becomes
void not under these Sections, but under Section 56 of the Indian Con-
tratt Act, which contains a general provision applying to all the circums-
tances constituting impossibilities and supervening illegalities avoiding
contracts. As regards perishing of part only of the goods agreed to be
sold, the same rules as under Section 7 will apply.

T H E PRICE
PRICE
In respect of sales, die first rule is that no sale can take place with-
out a price.' If there be no valuable consideration to support a volun-
tary surrender of goods by the real owner to another person, the trans-
action is a gift, and is not governed by the rules 'relating to sales (Story
on Sales). Section 4(1) lays down that to constitute a contract of sale, the
transfer or agreement to transfer property in goods must be for a price.
Therefore price, which is defined by Section 2(10) as the money conside-
ration for a sale of goods, constitutes the essence of a contract of sale.
It may be money actually paid or promised to be paid according as the
agreement is for a cash' or a credit sale; but if other consideration than
money be given, it is not a sale. Moreover, the money must be given
as the price, i.e., as a quid pro quo on a transfer of property on a sale.

MODES OF FIXING PRICE

T h e price must either be certain and definite, or must be determin-
able by some method of calculation or some criterion prescribed by the
contract. Section 9 suggests five methods of fi.King the price, which are
given below:
1. T h e price may be expressly stated in the contract. This is pri-
marily what is intended to be done. T h e parties are fiee to fix. any
price they like, and the Court will not embark on an investigation as
to the adequacy of the price. Thus a man may sell at any price he
likes, and to undersell his trade rivals he may offer goods at a loss, or
a manufacturer may sell goods to a ^wholesaler on the condition that they
shall not be sold at less than a certain price. But that condition does
not bind a subsequent buyer even with notice for there is no privity
between him and the original seller. In the case, however, of patented
goods the sub-buyer may be bound by such a condition, if he has notice
of it.
SALE OF GOODS 231
2. T h e contract may provide for the mannCT in ivliich the price
is to be fixed." Tlie agreement may be to pay as mucli for tlie goods
as others pay. In such a case, notice must be gi\en to the buyer as to
how mucli others pay. No sale will be made if the price is agreed to
be whatever sum the seller be offered by any third party, nor if it is
left to be fixed only by one of the contracting parties.
3. \Vhere the price is not expressed in the contract nor is any pro-
vision made for its determination, it may be determined by the course
of dealings between the parties. Thus, in Browne v. Byrine (1854) 118
E.R. 1304, a usage to deduct discount in ^determining the price was im-
plied from the course of dealings.
4. Where notliing is said by the parties regarding isrice, the law
implies, in case the contract is executed and the goods sold are accepted
that the buyer agrees to pay a reasonable price; and where there is a
market price for the goods, that may be a reasonable price.
5. The price may also be left to be fixed by the valuation of a
third party, provided he accepts the duty and performs it. But if the
third party fails to make the valuation the agreement becomes void. If,
in pursuance of the contract, goods have been delivered by the seller
and accepted by the buyer, then the buyer is bound to nay a reasonable
price. If, however, one of the parties prevents the third party from
making the valuation, he would be liable to pay damages to the other
contracting party.

MODE OF PAYMENT
T h e seller is not bound to accept any kind of payment exceut in
tire currency of the country unless there is an agreement express or im-
plied to the contrary or unless the seller is estopped from disputing the
mode of payment. He is not bound to accept payment by cheque. AlsOj
the price should be in legal tender money._

EARNEST OR DEPOSIT
Sometimes it happens that the buyer pays part of the price in ad-
vance as security for the due 'performance of his part of the contract, and
jiQt as part-payment of purchase money.' The money so paid as security
is called Earnest or Deposit. If the purchase is carried out, tiie deposit
goes against the purchase-money, and only the balance of the price is
required to be paid. But if the sale goes off through buyer's fault, the
deposit unless otherwise agreed, is forfeited to the seller, and where it
goes off by the seller's default he must return the earnest money. If on
the breach of the agreement by the buyer the seller resells the goods,
and sues to recover the loss arising on such resale, the deposit, although
forfeited, is to be taken into- account as diminishing the deficiency.

ADDITION T O OR DEDUCTION FROM PRICE OF TAX

Section 64-A, which was added to the Act in 1940 and was amended
6, See Venkata Malla'j7a v. Ramaswami 8: Co. 1964 S.C. 818.
7. Amarnath Nikkuram v. Mohan Singh, 1954 M.B. 134; Thota
Sombayya v. Ramananda, 1960 A.P. 15.
-232 MERCANTILE LAW

in J963, makes provision for the addition to or deduction from a contract

price of any increase or decrease or remission in customs, or excise duty,
or any tax on the sale or purchase o£ goods imposed or increased . or
decreased or remitted after the contract for the sale of goods was made.

PART 6-C
CONDITIONS AND WARRANTIES
CAVEAT EMPTOR
The parties are at liberty to enter into a contract with any terms
they please. In the case of a sale of goods, the ordinary common law
maxim is Caveat Emptor—let the buyer beware. That is to say, the
buyer gets the goods as they tome and takes the risk of their suitability
for the purpose. It is no part of the seller's duty to point, out the defects
in the goods he is selling. By this is not meant that the buyer must
'take chance'; it means that he must 'cave.' If the buyer depends upon
his own skill and integrity and the goods turn out to be defective, it is
his own fault and he cannot hold the seller responsible. But the buyer
may want to be sure of the quality of the goods and may make known
to the seller the purpose for which he intends to buy the goods so as
to show that he relies on the seller's skill or judgment, and buys them
depending on the representations made by the seller. Such representa-
tions may. rank either as conditions or warranties, and in that case the
principle of Caveat Emptor will not apply, and the contract will be sub-
ject to the condition or warranty.
As the contract of sal,e is consensual, it may be either absolute or
conditional, as the parties please. As a rule, before a contract of sale
is concluded, certain statements are made by the parties to each other;
it always depends upon the construction of the contract whether any state-
ment made witfi reference to the goods is a stipulation forming part of
the contract or a mere expression of opinion which is no part of the
contract. A representation or statement will amount to a stipulation or
a promise, if the seller assumes to assert a fact of which the buyer is
ignorant; and will be a mere opinion not amounting to a stipulation
where the seller merely states an opinion or judgment upon a matter on
whicii he has no special kiiowledge and on which the buyer may be ex-
pected to have an opinion. A mere commendation by the seller of goods
or his wares does not amount to a stipulation and does not give right
of action.
A stipulation in a contract of sale made with reference to goods which
are the subject-matter thereof may be citlier a condition or a v/arranty.
Section 12 draws a clear distinction between a condition and a warranty.
If a .stipulation forms the very basis of the contract, or in the words of
the Section is essential to the main purpose of the contract it is a Condi-
tion. If, however, the stipulation though not essential to the main pur-
po'je of the contract is collateral to the main purpose of the contract, i.e.,
is a subsidiary promise, it is known as a Warranty. T h e effect of a
breach of a condition is to give the aggrieved partv a right to treat the
contract as repudiated; while in the case of a breach of warranty he
cannot repudiate 'the contract but can only claim damages. Thus if the
SALE OF GOODS 2S3

condition is not fulfilled the buyer has a right to repudiate the contract,
to refuse tlie goods, and, if he lias already paid for them, to recover the
price." In the case of a breach of ivarranty, however, the buyer must
accept the goods and claim damages for the breach of warranty. A man
buys a particular horse, which is warranted quiet to ride and drive. If
the horse turns out to be vicious, the buyer's only remedy is to claim
damages. But if instead of buying a particular horse, a man asks a
dealer to supply him with a quiet horse and the horse turns out to be
vicious, the stipulation is a condition and the buyer can reject the horse,
or keep the horse and claim damages. He can also get damages for
injury, if any, even when he rejects the horse. Of course, the right of
rejection must be exercised within a reasonable time."

EXPRESS AND IMPLIED CONDITIONS AND WARRANTIES

Conditions and warranties may be express or implied.. An express
condition or warranty is one stated definitely in so many words as the
basis of the contract. Implied conditions or warranties arc those which
attach to the contract by operation of Ifiw or custom. The law incor-
porates them into the contract unless tlie parties agree to the contrary.
Implied conditions and warranties .are enfor<;ed on the ground that the
law infers from all the circumstances of the case that the parties intend-
ed to add such a stipulation to their contract, but did not put into ex-
press words. The existence of an implied condition or warranty may,
ho\scvcr, be rebutted by proof of facts which show a contrary intention.
T h e contract of sale being consensual, bilateral and cumulative, and the
parties may alter at will the obligations which the law implies from the
general nature of the contract. Section 62 of the Act recognises the
maxims: Expressum facjt cessare taciturn: What is expressed makes what
is implied to cease; and Modus et conventio vincent legem: custom and
agreement over-rule law.
A sold pigs to B and it was mentioned that B was to take the pigs
sold "with all faults." The pigs were diseased and B suffered a heavy
loss. Held, as, it was expressly agreed that the seller was giving no
warranty and as he had done nothing to conceal the defect he was
relieved from all liability in respect of any defect in the goods [Ward v.
Hobbs (1878) 4 App. Gas. 13].

WAIVER OF CONDITION
Section 13, as amended, mentions three cases in which waiver of a
condition, or its sinking or descending to the level of a warranty, ope-
rates. The first two cases are given in sub-section (1) and are voluntary,
depending on the volition of the buyer, namely,—(1) where he may waive
the condition, or (2) he may treat the breach of condition as a breach of
warranty. The third case which is given in sub-section (2) does not de-
pend on the will of the buver, but creates an estoppel against Iiim by
his conduct and where waiver is comprehensively presumed by law. It

8. Antony v. A.yuppunni Mani, I960 Ker. 176; Wallis v Pratt

(1910) 2 K.B. 1003.
9. Haitley v. Humans (1920) S K.B. 475.
234 MERCANTILE LAW

arises when the contract is indivisible and tlie buyer has accepted the
goods or part thereof. In these cases the breach of a condition can be
treated only as a breacli of a warranty; and the buyer can claim com-
pensation for the loss suffered by him by breach of the condition in
respect of the goods accepted by him, as he would have a right to in
the case of a breach of warranty. T h e parties are, however, at liberty
to contract themselves out of this rule by including a stipulation to that
effect in which case tlie terms of _tlie contract must be strictly adhered
to, and will not be affected by these provisions.

T H E T I M E EACTOR IN BUYING AND SELLING

In general law of contract, where no time is. fixed for performance,
the contract is required to be performed witliin a reasonable time. As
regards contracts for the sale of goods, stipulations as to time, except
as regards time of payment, are usually held to be of the essence of the
contract. Therefore, if time is specified for delivery of goods or for doing
any other act; delivery must be made or act done at tlie specified time;"
and if not done, the other party can repudiate the contracts. Thus, if
A agrees to sell and deliver goods to B on a certain day, he must deliver
them on tliat day. If he fails to do so, B is entitled to put an end to
the contract. With regard to the time fixed for payment. Section II
lays down that it is not deemed to be of the essence of the contract,
unless it appears from the contract that parties intended that it should
be so. Thus, the failure by the buyer to pay on tlie .appointed day
does hot, as a rule, entitle the seller to treat the contract as repudiated,
though he may be entitled to withhold delivery until ^the price is paid
and resell the goods if the buyer does not pay or tender tlie price with-
in a reasonable time. Consequently, if before such resale the buyer ten-
ders the price, even though it be on a date after the date named in tlie
contract the seller cannot, in the absence of a stipulation to the con-
trary, treat • the contract as at aij end and refuse to allow the buyers to
have goods.

IMPLIED CONDITIONS AND WARRANTIES

We have seen before that even though in a contract of sale definite
representations might- not have been made, the law implies certain re-
presentations as having been made, and those are dealt with in Section^
14 to 17 of the Act. Such implied representations may amount to con-
ditions or warranties with the effects already noted.

IMPLIED WARRANTIES
As said before, a condition may sink to tlie level of a warranty in
cases in which the buyer is content with his right of damages or is not
in a position to reject the goods. The Act also provides for two more im-
plied'warranties,' namely, (1) implied warranty of quiet possession, and
(2) implied warranty against encumbrances.
1.. Implied warranty of quiet possession.—In a contract of sale, un-
less the circumstances of the contract are such as to show a different inten-
tion, there is an implied warranty that the buyer shall have and enjoy
SALE OF GOODS -35
^quiet possession of the goods. This means that where the buyer has
obtained possession of the goods, he has a right to enjoy tJiem, and if
the right of possession and enjoyment is in any way disturbed, he is en-
titled to sue the sfeUer for damages. It is a warranty that the seller shall
not, nor shall anybody claiming under a superior title, or under his
authority, interfere with tlie quiet enjoyment of the buyer.
2. Implied warranty against encumbrances.—The buyer is also~ en-
titled to a further warranty that the goods are not subject to any right
in favour of a third party, or tlie buyer's possession shall not be disturbed
by reason of-the existence of encumbrances. In other words, if the buyer
is required to, and does in fact, discliarge the amount of the encum-
brance, there is a breach of warranty, and he is entitled to, damages.
This clause will not apply if such encumbrances are' declared to the
buyer when the contract is made or he has notice of them. It should
be noted that the breach of this warranty occuis only when the buyer
discharges the amount of the encumbrance."

IMPLIED C O N D I T I O N S : CONDITION AS T O T I T L E T O GOODS

The first implied condition in EVERY contract for the sale of goods
is that tire seller, in an actual sale, has the right to sell the goods and,
in an agreement to sell, he will have it when property is to pass. As a
result of this, if the title turns out to be defective, the buyer is entitled
to reject the goods. In Rowland v. Divall (1923) 2 K.B. 500, it was held
that a buyer of a motor car who was deprived of the same owing to the
seller's ivant of title was entitled to recover the full price from the seller
even though he had used the car for some months, as the considera-
tion had totally failed. Btit this implied condition as to title may be ne-
gatived by an express term, as in Court sales, where only such rights as
the judgiuent-debtor has are sold. Court Officer selling in execution
debtor's goods gives no implied undertaking as to title.

SALE BY DESCRIPTION -
(i) Goods must correspond with description.—In a contract of sale
by description, there is an implied condition that the goods shall corres-
pond with the description. "W^here sale was made of a second-hand reap-
ing machine which the buyer had never seen, but which the seller had
stated to be almost new and used very little, this was, a sale by descrip-
tion and, when the machine was found to be old and repaired, there
was breach of condition, and the buyer could leturn the machine. This
condition is so important that even where the sale is by description as
well as by sample, and a sample has been approved of by the buyer,
and the goods are according to the sample, but do not answer to the
description, there would be a breach of this condition. In a sale of
English Sainfoin seeds, the sample was seen by the buyer but the goods-
turned out to be Giant Sainfoin, a different variety altogether. There
was a breach of condition as to description, and the buyer.could reject
the goods. If the seeds are sold further, the buyer can claim damages
on a breach of warranty. This condition applies to both specific and
unascertained goods.

• 10. ColHnge v. Heywood (1839 9 A. & E. 633.

23C MERCANTILE LAW
(ii) Condition as to quality or fitncis.—This condition and tliose in ,
respect o£ merchantability and wholesomenesj discussed below are Excep-
tions to the rule of Caveat Emptor. Ordinarily, in a contract of sale,
there is no implied warranty or condition as to the quality or fitness for
any particular purpose o£ goods supplied. But where the buyer makes
known to the seller the purpose for which he is purchasing the goods,
and the seller happens to be a person whose ctjurse of business it is to
sell goods of that description, then there is an implied condition that the
ijoods shall be reasonably fit for such purpose. T h e rule of Caveat
Emptor will not apply. Where an article is fit for one particular pur-
pose alone, and turns out to be unsuitable for d:at purpose when used,
it is easy to see that the condition as to fitness has been broken. In
Triest V. Last (1903) 2 K.B. 148 C.A., a hot water bottle was bought by
the plaintiff, a draper, who could not be expected to have special skill
and knowledge with regard to hot water bottles from a chemist who sold
such articles. While being used by his wife, the bottle burst and injured
her. Held, the seller was responsible for damages. But where goods
supplied can be used for several purposes the buyer must particularise
the specific purpose he has in view, and if this is not shown, the buyer
will have no remedy merely because it was unfit for the particular pur-
pose. In this case in order to succeed on a breach of condition, the
buyer must prove that he informed the seller of the purpose for which
he was buying and that the goods supplied are not fit for the particular
purpose. Where a pole was supplied for a carriage and it broke with
the result that the horse took fright and injuries were sustained, the
seller was held liable for costs and damages. Similarly, where timber
'was purchased for railway sleepers and they were found to be unsuit-
able for the purpose, the buyer could reject them.
Where, however, the goods supplied are purchased under a patent
or other trade name, there is no implied condition as to their fitness for
any particular purpose. So where the buyer wrote and said, "send me
your patent smoke-consuming furnace for fitting uo my brewery" and it
was found that the furnace supplied was not fit for the purpose, it was
held that the purchase was of a defined and well-known type of fur-
nace and so the sellers were not liable But if the seller supplies an
article of the description in which he usually deals under its uatent or
trade name there is an implied condition that it is of merchantable
quality. In the sale of a RefriRerator the name of the article itself im-
plies that the seller warrants the machine to be fit for a particular pur-
pose." On the other hand ^^•here an order was placed for six lorries
to be Used for "heaw traffic in a hilly countrv," and it was found that
t h e Fiat lorries supplied were unfit for the purpose and broke down, it
was held that the order was not for lorries of a particular trade or pa-
tent name, but lorries which would be fit for a particular purpose, there
wa-i breach of condition of fitness.
^VaTrantv of fitne<;'; would nko applv to coniracts for work and labour,
in the course of which mateiinls are purchaiied and supplied Where a
repairer bought fiom m.inuficturers si\ connecting rods, and fitted them

I. r.W. Evana v. Stells Benjamin, 1951 Cal. 740.

 SALE OF GOODS 237
to the plaintiff's motor car, and on account of a latent defect not detect-
able by ordinary diligence or skill, the rod broke, causing damage to the
engine, it was held that the implied condition of fitness applied to re-
pairs. But if the plaintiff had asked the repairer to get the rod from
the makers of the car or any other particular makers and fit it to his car,
then the repair would not be liable. ^
(iii) Condition as to Merchantability.—Where the goods are sold by
description and .they answer to the description, still there is another im-
plied condition that they shall be of merchantable quality. But, if the
buyer has examined the goods, there is no implied condition as regards-
defects which such examination ought to have revealed. If, however,
examination by the buyer dues not reveal the defect, and he approves and
accepts the goods, but when put to work, the goods are found to be de-
fective, there is a breach of condition of merchantable quality. P bought
black yarn from D and found it to be damaged by white ants. Held,
condition as to merchantability was broken. "^V'here, out of a bale of
1,000 pieces 90 per cent was found to be moth eaten, it was held that
there was a breach of tliis condition. Similarly, where hemp was danjag-
ed by sea water, cement turned into stone by sea water, or beer waS'
contaminated with "arsenic and dates contaminated with sewage, the con-
dition of merchantability was held to have been broken. But, where
in a sale of vegetable glue packed in casks, the buyer who came to ex-
amine them simply looked at the outside of the casks, and therefore,
the defect which could have been discovered by examination, was over-
looked, it was held that there is no implied condition and the buyer Was.
not entitled to any relief. Also, it should be remembered that mer-
chantable quality means that the goods comply with the description in-
the contiact so that to a purchaser buying goods of that "description the
goods would be a good tender. It does not mean that there will be
buyers ready to buy the goods, or that the goods will comply with the
law of a foreign country, so as to be saleable there.- There was a sale
of a auantitv of Webb's Indian Tonic Water, f.o.b. London and it con-
tained a percentage of salicylic acid and it was known that goods were-
required for sale in Argentina, where sale of an article containing this
acid was prohibited, but the seller did not know this. Held, ^ there was
no breach of condition of merchantability."
The implied conditions as to fitness for a particular purpose and
merchantabilitv must be construed reasonably, and a seller will not b&
held liable when the unsuitability of the article arises from some state
of affairs relating to the buyer of which the seller was not ijiade aware.
In Griffiths v. Peter Convav Ltd. (1939) 1 All. E R. 685, a woman, vich
abnormally sensitive skin, bought a Harris tweed coat, and got rashes
through wearing the coat. Held, there was no breach of condition
as she had not disclosed the fact of her skin beinsr abnormally sensitive.
Similarly, in Ingham v. Ernes (1955) 2 All. E.R. 740, it was held, that
where a hair-dye is sold to a customer who is allergic to a particular dye,
^ there is a duty on the part of ilie customer to disclose known peculiari-
ties.
(iv) Condition as to wholesomeness.—The condition of merchant*-
12. Sumner Permain &: Co. v. Webb & Co. (1922) I K.B. 55 C.A.
238 MERCANTILE LAW
ability includes another condition, namely, that of whoiesomencss in the
case of sale of provisions. So the provisions supplied must not only'
answer the description, but they must also be merchantable AND whole-
some or sound. F bought milk, from A, and the milk contained typhoid
germs. F's wife became infected and died. A was liable for damages.
C bought a bun at iM's bakery, and broke one of the teeth by biting on
a stone present in the bun. M was held liable.

SALE BY SAMPLE
(i) Bulk should correspond to sample.—In a sale by sample there is
an implied condition that the bulk shfill correspond witli sample in
quality.
(ii^ Buyer to have reasonable opportunity to compare.—In a sale by
sample, there is another implied condition that the buyer shall have a
reasonable opportunity of comparing the bulk with die sample.
(iii) Condition of Merchantability as regards latent defects.—In a(
sale by sample, it is further an implied condition of merchantability, as
reaiards latent defects, which would not be apparent en reasonable ex-
amination of the sample. Thus, in regard to the implied condition of
•merchantability, a right of repudiation' exists in the case of defects not
discerjiible by the ordinary inspection of a ^prudent buyer. "'Worsted
coating." quality equal to samples was sold to tailors. The cloth was
found to have a defect in the texture rendering the same unfit for
stitching into coats. T h e seller was held liable even though the same
defect existed in the sample, which was exarfiined. Also, where shoes
•werfe sold by sample for the French Army and it was found that the
soles contained paper not discoverable by ordinary inspection, held buyer
entitled to reject goods and recover price paid together with damages.

W H A T IS SALE BY SAMPLE
Section 17(1) rea^ds: "A-^ contract of sale is a contract for saie b y
•sample where there is a term in the contract, express or implied, to that
effect." Therefore the sale must purport to be by sample either by im-
plication or by an express provision. It cannot be assumed that in all
cases where a sample is exhibited the sale is a sale' by sample. The sel-
ler may show a sample, but decline to sell by it, and require the buyer
to inspect the bulk at his own risk; or^ the buyer may not trust the sam-
ple, and depend upon the implied condition, but • may ask for express
warranty. A'sale > of goods described as "waste silk" in the sale notice
•without aiiy reference to any sample, is not sale by sample even though
a sample was shown. T h e reason given is that -ivhere there is no men-
tion of sample in the written contract, it cannot be superseded by parole.
T h e sample was not shown as a warranty, but only to enable the buyer
to form a reasonable judgment of the commodity. "The office of a sam-
ple," says Lord Macnaughten* "is to present to the eye the real m e a n i n g
and intention of the parties with regard to the subject-matter of the con-
tract which, owing to the imperfection of language, it may be difficult or
impossible to express in words." But there may be a custom' or usage in
respect of certain commodities that sale would be by sample, even though
SALE OF GOODS 23ff^
the written contract is silent on tlie point; tliis is an example o£ implied
condition. A sale of tobacco is always considered to be a sale by sam-
ple by custom of trade.
"Sale by sample" should be distinguished from "sale by sample
as well as by description," as in the latter case it is not sutTicient that the
bulk of goods corresponds with the sample if the goods do not correspond
with the description. T h e sample in such cases is looked upon as a mere
expression of the quality of the articles, not of its essential character. In
Is'ichol V. Godts, (IS'15) 154 E.R. 426, there was sale of "foreign refined
rape oil" warranted only equal to sample. T h e oil tendered was the same as
the sample, but it was not "foreign "refined rape-oil" being a mixture of
it and other oil. It was held that the seller was liable, and the buyer
could refuse to accept.

, PART 6-D
PASSING OF PROPERTY OR TRANSFER OF OAVNERSHIP -
The main purpose of a sale is the transfer of ownership from the
seller to the bu\er. It is important to know the precise nioment of time
at which the property in goods passes from the seller to the buyer,
because:—
1. the general rule is that'risk follows the property or ownership
whether delivery has Ijeen made or not. If the goods are damaged or
lost by accident or otherwise, then, subject to certain exceptions, the loss
will ^fall on the owner of the goods at the time they are lost or
damaged;
2. 'when there is a danger of the goods being damaged by die action
of third parties, it is the owner -vvho can take action; and
3. in case of the insolvency of either seller or buyer, it is necessary
to know whether the goods can be taken over by the Official Assignee or
the Official Receiver. The answer will depend upon whether the pro-
perty in the goods was with the party who has become insolvent. "The
property" in the goods means ownership of the goods, as distinguished
from their possession.

PASSING OF PROPERTY IN SPECIFIC OR ASCERTAINED GOODS

In a sale of specific or ascertained goods the property passes to the
buyer at the time when the parties intend it to pass. T h e intention
must be gathered from the terms of the contract, the conduct of the
parties, and the circumstances of the case (Section 19). Specific goods,
as already explained, are goods identifie,d and agreed upon at the time
the contract is made. Unless a contrary intention appears the following
rules are applicable for ascertaining the intention of the parties:—
1. "Where there is an imconditional contract for th^ sale of specific
goods in a deliverable state, the property passes to the buyer when the
contract is made. Deliveiable state means such a state that the buyer
would be bound to take delivery of them. T h e fact that the time o£
del ivery or the time of payment is postponed does not prevent the pro-
240 MERCANTILE LAW
perty from passing at once. For example, if A goes into a shop and buys
a radio set, asking tlie shopkeeper to send it to his house and put it
down to his acco;mt, and the shopkeeper agrees to do .so, the ladio set
immediately becomes the property of A.
2. ^Vhen there is a contract for the sale of specific goods not in a
deliverable state, i.e., die seller has to do something to the goods to put
them "in a deliverable state the property does not pass until that thing
is done and the buyer has notice of it.
3. Where there is a sale of specific goods in a deli\'erable state, but
the seller is bound to weigh, measure, test or do something with refe-
rence to the goods for the purpose of ascertaining the price, the property
does not pass untiL that thing is done and tlie buyer has notice of it."
4. When goods are delivered to the buyer on approval or "on sale
or return," the property therein passes to the buyer—
(a) when he signifies his appioval or acceptance to the seller, or
' does any other act adopting the transaction;
(b) if he retains the goods, without giving notice of rejection,
beyond the time fixed for the return of goods, or, if no time
is fixed, beyond a reasonable time.
.•In Kirkham v.-Attenborough (1897) 1 Q.B. 201. K delivered jewellery
to W on sale or return. W pledged -it with A. Held, the pledge was an
act by W adopting the transaction, and, therefore, the property in the
jewellery passed to him, so that K could not recover it from A. /
'Sale or return' must be distinguished from 'sale for -cash only or
return', for in the l?Ltter case, the property does not pass to the buyer
until paid for. "
In Weiner v. Gill (1906) 2 K.B. 574, A delivered goods to B on tlie
terms that they were to remain his property until settled for or charged
(a sale for cash or return basis) the property did not pass to B until
either of those events had happened. Where B pawned the goods with
D, A could recover from D, the pawnee.

OWNERSHIP IN UNASCERTAINED GOODS

Section 18 provides that v;here goods contracted to be sold are not
ascertained or where they are future goods, ownership will not pass tO'
the buyer, unless and until the goods are ascertained. "A contract to selt
unascertained goods," says Lord Loreburn, "is not a complete sale but a
promise to sell." As to when the goods get ascertained Section 23 provides:
"(1) Where there Is a contract for die sale of unascertained or fu-
ture goods by description and goods of that description and in a deliver-
able state are unconditionally appropriated to the contract either by
the seller with the assent of the buyer or by the buyer with> the assent
of the seller, the property in the goods thereupon passes to the buyer.
"Such assent may be expressed or •implied, and may be given either be-
fore or after the appropriation is made. '

13. Union of India v. Dwarkadas, 1959 Pat. 59.

SALE OF GOODS 241
(2) Where, in pursuance of the contract, the seller delivers the goods
to the buyer or to a carrier or other bailee (whether named by the buyer
or not) for the purpose of transmission to the buyer, and does not re-
serve the right of disposal, he is deemed to have unconditionally ap-
propriated the goods to the contract."
The appropriation of goods may be made (1) by the buyer with the
assent of the seller, or (2) by the seller with tliis assent of the buyer;
(a) by putting the goods in suitable receptacles, or (b) by separating
tlie articles contracted for from the others, or (c) by their delivery by
the seller to a carrier without reserving rights of disposal.

APPROPRIATION
The ascertainment of the goods or their appropriation may be made—
(i) by tlie buyer with the seller's assent.—Where the goods .,re in
the possession of the buyer, as for example, where the buyer is a ware-
houseman for the seller in respect of 60 bales of cotton and agrees to
buy 25 bales out of them, the buyer, i.e., the warehouseman may, with
the seller's assent select 25 out of 60 bales, and when he has done so,
the goods (25 bales) become appropriated and the ownership in them
passes to the buyer.
(ii) by the seller with tlie buyer's assent.—The more common thing
is for the seller to appropriate the goods, but such appropriation must
be with the buyer's consent. In the above example, if the bales were
lying with the seller and he selected 25 bales out of the lot with the
buyer's assent, the ownership of those 25 bales would pass to the buyer
as soon as this is done. Therefore, we may say that the selection of goods
by the one party and the adoption of that act by the other converts that
which before ivas a mere agreement to sell into an actual sale. The as-
sent may be given subsequent to* the appropriation or even prior to it.
The seller may appropriate the goods—
(a) by putting- the quantity contracted for in suitable receptacles, as
for example, filling hogsheads with sugar and tlien getting the buyer's
assent thereto; or putting the oil into bottles or grain in bags, supplied
by the buyer;
(b) by sepayating the articles contracted for from the others, as for
instance, in a sale of jute, the marking by the seller of the quantity of
the goods required by the buyer, or in a sale of oil, setting apart the
ntimber of tins , con traded fur as those meant tor the buyer, will trans-
fer property;
(c) by delivery to the carrier or other bailee for transmission to
the buyer, without reserving the right of disposal; as for example, Iiand-
ing over the goods to the rdilway administration or a shipping company
or a motor transport agency. Where the buyer asks the seller to send
the goods by a carrier, the buyer's assent to the appropriation is taken
lo liave been given, and the carrier carries the goods as the buyer's agent.
But mere delivery to the carrier for transmission does not necessarily
pass property to the buyer, for it is quite possible that the seller may
242 • MERCANTILE LAW
deliver tlie goods to the carrier without intending to part with tlie
ownership of the goods. So, until the railway receipt or bill of lading
is made out, it is not possible to say on whose account the goods have
been shipped. "VVhere the goods are delivered to the carrier and the H / R
or the bill of lading is taken in tlie name of the seller or his agent, and so
the goods are deliverable to the seller or his agent, it is presumed that
the seller has resei-ved the right of disposal; and in such a case the pro-
]3erty in goods will not pass to the buyer. But where the documents on
delivery of goods to the carriers are made out in the name of the buy-
er, the presumption is that the seller has made the appropriation and
ownership passes to the buyer. But these are only presumptions, for it
is open to the seller, having taken R / R or B/L in the buyer's name to
send to his own agent with instructions to part with it only on pay-
ment of the price, or having taken it in his own name, send it endorsed
unconditionally to the buyer." Thus, delivery to the carrier may be
absolutely for tlie buyer, i.e., where no right or control is- reserved by
the seller. Or, the delivery to the carrier may be absolutely for the
seller, so that where the B/L is taken in the seller's own name or to his
order or in the name of a fictitious person, ownership does not pass
to the buyer.
Where tlie seller of goods draws on the buyer for the price and
transmits to the buyer the bill of exchange together witli the bill of lading
or''the railway receipt to secure acceptance or payment of. the bill of
.exchange, the buyer is bound to return the bill of lading or the railway
receipt if he does not honour the bill of exchange; and, if he wrongfully
retains tlie bill of lading or the railway receipt, the property in the goods
does not pass to him.'^
In Mohd. Sharif v. Off. Liquidator, 1964 Ker. 135, the buyer had
agreed to pay 6 5 % of the price on arrival of the goods and a bill was
drawn for tliat purpose and though the railway receipt was taken in the
name of the conisgnee it was not sent to him but was sent to a bank along
with the bill for the 6 5 % of the price and the railway receipt was to be
received by the consignee after retiring the bill. The consignee obtained
delivei7 of the goods from the railway not by retiring the bill and produc-
ing the ^railway receipt but by giving a letter of indemnity to the railway
It was held that the property had not passed to the buyer and that it wa?
really by a tortious act that he came into possession of the goods. The
fact that the railway receipt was taken in the name of the consignee did
not show that the property in the goods passed as soon as the goods were
appropriated and handed over to the railway.
Before concluding the subject of appropriation, two more essentials
may be noted here. The first point is tl}at the appropriation must be of
goods answering the description, both as to quality and quantity. Secondly,
the appropriation must be intentional, i.e, it must be made with intent

14. See Shep Prasad v Dominion of India, 1954 All. 747; See also
State of Madras v. V.P.V. and Sons, 1959 A.P. 23, M. Balkrislina Rao v
M.D.O and Sons, 1959 A.P. 30.
15. Section 25(3), as amended by the Sale of Goods (Amendment")
Act, 1963. '
 SALE OF GOODS 243
to appropriate goods to tlie specific contract; and it must not be due to
mere accident or mistake.

F. O. B. CONTRACTS
In the case of a contract for tlie sale of goods -wliicli are to be
shipped to a foreign port, a number of conditions are aittached by the
panics or by- custom and practice of merchants. T h e most usual of such
coi\tracis are F.O.B. contracts, i.e., "FREE ON BOARD." This means tliai
the property in goods passes to the buyer only after the goods have
been loaded on board the ship, and accordingly the risk attaches to the
buyer only on shipment of goods which may at that time be specific or
unascertained. Therefore, tlie seller or shipper has to bear all the .expenses
up to and including shipment of goods on behalf of tlie buyer.

C l . F . OR C.F.I. CONTRACTS
In foreign transactions, two tilings are guarded against, namely:
(i) the insolvency of the parties, and (ii) the perishing of the goods
thiough no fault of either paity. In order to protect the interests of
both the parties, it is usual to enter into a contract known as the C.I.F.
or C.IM. contract. The three letters C.I. and F. stand for COST,
INSURANCE and FREIGHT. Where the buyer orders goods from a
merchant abroad, the seller will insure the goods, deliver them to the
shipping company and send the B/L and insurance policy together with
the invoice and a certificate of origin to a bank and the buyer has to pay
the price (which includes cost of goods, premium of insurance and freight),
and receive the above documents from tlie bank. This method protects
the seller, for the goods continue to be in his ownership until the buyer
pays for them and gets the documents and the buyer is equally
protected, as he is only called upon to pay against the documents,
1 and the moment he pays he obtains the documents which would enable
him to get delivery of the goods, as so6n as they arrive! If. in the
meantime, the goods are lost at sea, neither will be put to loss, for either
the seller or the buyer, whoever is the owner at the time of the loss,
can make a claim against the insurer for such loss.' The buyer is bound
to accept the documents which represent the goods and honour the draft.
If after taking delivery he finds that the goods are not according to the
contract he may reject the goods and sue for damages."
The incidents of a C.I.F contract have been authoritatively explained
in several decisions, notably Johnson v. Taylor Bros. & Co., 1920 A.C. 144
and Bidden Bros. v. Clemens Hoist Co., (1991) 1 K.B. 214. In the latter
case, Hamilton J., as he then was, observed: "A seller under a* contract
of sale containing the C.I.F. terms has firstly to ship at the port of
shipment goods of the description contained in the contract; secondly to
jirocure a contract of affreighment, under which the goods will be delivered
-Tat the destination contemplated by the contract; thirdly to arrange for an
insurance upon the terms current in the trade which will be.available for
the benefit of the buyer; fourthly to make out an invoice; and finally to

Ifi. M. Gulamali 8: Co., v. P.M.S. Md. Yosuf, 1954 Mad. 268; Nara-
)an Swaini Chetty v. Sondaranjan & Co., 1958 Mad. 43.
244 MERCANTILE LAAV
tender these documents to the buyer so that he may know wliat (reight
he has to pay and obtain delivery o£ the goods, if they arrive, or recover
lor their loss if they are lost on tlie voyage. Such terms constitute .an
agreement that the delivery of the goods, provided they are in conformity
•with the contract, shall be delivery on board a s)iip at tiie port of
shipment. It follows that against tender of these doiuments—the bill of
lading, invoice, and policy of insurance—which completes delivery in
accordance with that agreement, the buyer must be ready and willing to
pay the price.""
"U will tJius appear," observed Chakra^•arti C.J., in Joseph Pyke & Son
v. Kedarnaih, 1959 Cal. 328 that although tlie seller is taken to have
pel formed the contract by delivering tlie shipping documents, it is not
delivery of any shipping docuiitents which suflicc. The documents must
show that the seller has shipped the goods and that the goods he has
shipped arc ol the contract quantity and description. The seller thus does
not difichargc his obligation by merely presenting to the buyer or making
available to him certain pieces of paper wiiK writings as to a conn act
of affreigment inscribed on them, but must also deliver the goods covered
by tlie contract, although the delivery is to -be to the ship. It is true
that after the seller has shipped the goods he is no longer responsible
for tiieir safe landing at the port of destination, but lie is not responsi!)]e,
because he has taken out a policy of insurance for the benefit of the
buyer and tlius made it possible for the buyer to look to the insurer
for compensation or reimbursement if tiie goods failed to I)e delivered
The fact, liowcver, 'remains that allhougii a C.I.F. contract is not a contract
by tiie seller that the goods shall arrive at tlie port of destination, it
is nevcrtiieless a contract to sliip goods complying with the contract of
sale. Indeed, as observed in Clialmers, sucli a contract"~is not a contract
for tlie sale of documents but a contract for ilic sale of insured goods,
to be imJDlemcntcd by the delivery of proi)er dociuiients." >\fter all it
is but plain common sense that a person, who purcliascs goods under
a C..I.F. contract, doe.s not intend to purciia'se mere paper and docs not
expect to get merely some documents, but lie intends to jjuichase and
get goods which he may either utilise himself or in wiiich he may
trade by disposing of them at a profit. It is a total misconception to,
.tliink that C.I.F. contracts' are altogether divorced from delivery of the
goods by them.
"To say that a seller under a C.I.F. contract performs the contract
wholly by delivering the shipping documents to the buyer is to state
only half the truth. The liabilities of the seller do not altogether end
with the shipping of the goods and the despatch or delivery of the shipping
documents relating to them. If, after the goods have been landecl, the
buyer finds them not to conform to the contract, either in regard to
(luantity or in regard to quality, he is entitled to reject them and repu-
diate the contract, although he may have previously paid the price. Indeed
as has been well explained in the very instructive judgment of Devlin

17. See Raj Spinning Mills v. A. & G. King Ltd., 1959 Punj. 45.
18. Sec Chdlmers on Sale of Goods, 13th Edition, pp, 112-113.
SALE OF GOODS 245
J., in Kwei Tek Chao v. British Traders & Shippers Ltd., (1954) 2 Q.B.
459, a buyer under a C.I.F. contract has two rights, one to reject the
documents and the other to reject the goods. T h e two rights are distinct
and, corresponding to them, there are two distinct obligations of the
seller, as the learned Judge also points out:
"In a C.I.F. contract the goods are delivered, so far as they are physi-
cally delivered, when they are put on board a ship at the port of shipment.
T h e documents are delivered when they~" are tendered. A buyer ^vho
takes delivery from the ship at the port of destination is not taking delivery
of the goods under the contract of sale, but merely taking delivery out of
his own warehouse, as it were, by tlie presentation of the document of title
to tlie goods, the Master of the ship having been his bailee ever since
he became entitled to the bill of lading."
It is true that it has sometimes been said that a C.I.F. contract is a-
contract for the sale of documents rather than a sale of goods. That
view owes its origin to the olwervations which Scrutton J., as he then was,
msde in the case of Arnhold Karberg & Co. v. Blythe, Green Jourdain
& Co. (1916) 1 K.B. 495, when dealing with it as a Court of first in-
stance. "The key to many of the difficulties arising in C.I.F. contracts,"
said the learned Judge, "is lo keep firmly in mind the cardinal distinc-
tion that a C.I.F. sale is not a sale of goods, but a sale of documents re-
lating to goods." That view was dissented from by the Court of .\ppeal
ivhich clarified ivhat the true position in law ivas. Bankes, L.J., for
example, observed that he could not agree with Scrutton J., in the view
taken by him. but would himself prefer to look upon C.I.F. contracts
as conk-jcts for the sale of goods to be performed by the delivery of do-
cuments. Warrington L.J. expressing disagreement with the statement
of Sc'rut'on J., observed : "The contracts (C.I.F.) are contracts for the sale
and purcJiase of goods, but they are contracts \vhich may be performed
in the particular manner, viz., the delivery of the goods may be effect-
ed first by placing them, on board a sliiw, and secondly by transferring
to the purchaser the shipping documents." In conclusion, Chakravarti
C.J. in Joseph Pyke and Son v. Kedamath, 1959 Cal. 328, observed:
"The delivery of goods is not unnecessary under C.I.F. contracts but the
obligation as to delivery is discharged by the delivery of the goods on
board a ship instead of directly and at once to the buyer. It cannot
be said that a C.I.F. contract is not a contract for the delivery of any
article. I have already pointed out that even after the shipping docu-
ments have been presented to the buyer and even after he has paid out
the. invoice price, he still retains the right to examine the goods ship-
ped to him and to reject them, if J i e finds any deficiency, in regard to
either .quantity or quality. It is thus impossible to see how it can be
said that under a C.LF. contract delivery of the goods to the buyer is
not material or is not contemplated." It is, therefore, not correct to say
that a C.I.F. sale is not a sale of goods, but a sale of documents relat-
ing to goods. It is more correct to say that it is a contract for the sale
of insured goods, lost or not lost, to be implemented by the transfer
of proper documents." "

19. Haskell v. Continental Express (1950) 1 All. E.R. 1033

•Zib MERCANTILE LAW
C.I.F.C.I. CONTRACrrS
Where ;the order for the supply of goods is placed with a com-
mission dgent, he is entitled to charge his commission for the work done
and interest for the time during which the price of the goods remains
unpaid. Such a contract is known as C'.LF.C.L-COST, INSURANCE,
FREIGHT, COMMISSION, INTEREST.

EX-SHIP CONTRACTS
In the case of contracts where delivery has to be made "Ex-Ship", the
ownership in the goods will not pass until actual delivery. It will, there-
fore, be for the seller to insure the goods to protect his interests. Even
if the buyer has paid the price against the documents, the buyer does
not thereby acquire an interest in the goods or even an insurable interest
therein,
RISK prima'facie PASSES WITH OWNERSHIP
As already observed, the question whether property has passed is
important, firstly, in considering upon whom loss will pass in the event'
of the destruction of the subject-matter and, secondly, in determining
ihcir rights of disposal of the goods although the price remains \\n-
paid. The rule in the first case is res peril domino—the loss falls
on the owner. But it is open to the parties to enter any contract they
please so that the risk can be separated from ownership. A buys goods
of B and property has passed to him; but the ^oods remain in B's ware-
house and the price is unpaid. Before delivery a fire burns do\yn the
warehouse destroying the goods. A must pay B the price of the goo'ds,
as A was the owner. Furs are,ordered "on approval" with invoice. They
are stolen by burglars. By the custom of the fur trade the goods are at
the risk of the person ordering them on approval. The buyer must pay
the invoice .price. A motor car is deposited for sale with a garage
, keeper "at owner's risk." It is damaged by the negligence of the garage
keeper's servant. The garage keeper is not liable. Under Section 26 of
the present Act the parties are allowed to provide by their agreement
that the risk shall pass at some time or on some condition not neces-
sarily simultaneous with the passing of the property.
The proviso to Section 26 lays down that where delivery of the goods
has been delayed through the fault of either buyer or seller, the goods
are at the risk of the party in fault as regards any loss which might not
have occurred but for such fault.

PART 6-E
TRANSFER OF TITLE BY NON-OWNERS .
GENERAL RULE AS TO TITLE
The general rule is that only the owner of,goods can sell the goods.
No one can convey a better title than-he himself has. If a person trans-
fers articles not belonging to him, the transferee gets no title. This rule
is expressed by.the maxim, "Nemo dat quod non habet" (no one gives
what he.has not). This rule protects the true owner, as the huvcr from
SALE OF GOODS 247
the non-owner does not acquire a better title than that what the seller
had; and the mere fact of an innocent and bona fide purchase from the
non-ownei is no answer to the claim of tlie' true owner. For example,
A, the hirer of goods under a hire-purchase agreement, sells them to B.
B, though, acting in, good faith, does not acquire the property in tlie
goods as against the owner, but, at the most, such interest as the hirer
had. There is a sale of a horse at a public auction. Unknown to the
auctioneer and the buyer, the horse has been stolen. The buyer obtains
no title against the true owner.

EXCEPTIONS T O T H E GENERAL RULE AS T O T I T L E

Section 27, while recognising the general rule that the buyer acquires
no better title than the seller had, provides for a number of exceptions
to it. Under the exceptions- to the general rule, therefore, the buyer
gets a better title to the goods than the seller himself has. The excep-
tions are discussed below.

SALE BY MERCANTILE AGENT

The first and most important exception to the general rule is in the
case of a bona fide buyer of goods with no notice that the seller had an
imperfect title to sell the goods, provided that the seller is a "mercantile
agent" in possession of either the goods or documents of title to goods,
with the consent of the owner and sells the goods in the ordinary course
of business as a mercantile agent. Thus, a person who in good faith
buys goods of a factor, broker or auctioneer, will get good title to them,
even tliough the seller has exceeded his authority, or authority has been
revoked by the true owner before the sale, provided (the buyer) did not
have notice of the authority bejng exceeded or its revocation.

SALE BY A CO-OWNER
A buyer in good faith of one of the several joint owners who is in
sole possession of the goods with the permission of his co-owners will get
good title to the goods, provided that he had no notice of want of au-
thority to sell. One of several co-owners holding a jewel in his safe cus-
tody is a person in such possession as is contemplated in this rule, and
a buyer in good faith and with no notice of defective title will get good
title to the jewel. (Section 28).

SALE BY A PERSON IN POSSESSION UNDER A VOIDABLE

CONTRACT
The next exception relates to a person who is in possession of the
goods under a contract which is voidable, and who, before the contract
is rescinded, sells the same to a buyer %vho buys in good faith and with-
out notice of the seller's defective title. T h e buyer in such a case will
get good title to the goods. T h e rule pre-supposes a contract, and does
not apply unless there is a contract. Thus it does not apply to a con-
tract originally void, or where goods are obtained by theft (Section 29).

SALE BY SELLER IN POSSESSION AFTER SALE

"^Vhere a seller, after having sold the goods, continues to be in pos-
248 MERCANTILE LAV

session of the goods, or a document of title to the goods, and again sells
them or pledges tlie same either by himself or through a mercantile
agent to a person who acts in good faith and without notice of the pre-
vious sale, sucli a person gets a good title to the goods. It is to be noted
that the possession of the seller must be as seller and not as hirer or
bailee. (Section 30).

SALE BY BUYER IN POSSESSION

Where a buyer who having bought or agreed tO buy the goods be-
ing in possession of the same or of a document of title to the same,
with consent of the seller, sells or pledges them either by himself or
through a mercantile agent, the buyer who acts in good faith and with-'
out notice of lien or of any other light of the owner gets a good title.
B agreed to buy a car and pay for it, if his, solicitor approved, and, hav-
ing obtained possession o£ the car, sold it to C, but the solicitor subse-
quently disapproved of the transaction. C, the bona fide buyer, got good
title, for B "agreed to buy it". It is to be noted that the consent of the
seller for possession of goods by the buyer must be free and real to enable
the buyer to give good title to a sub-buyer or a pledgee. If the consent of
the seller or his agent is absent, then an innocent ouyer or pledgee
cannot get any title to the goods.^ Also, a person who has got merely
an option to buy as in hire-purchase agreement cannot transfer title to
snb-buyer however bona fide, for option to buy is not agreement to buy.
Thus, where H entered into a hire-purchase agreement with B in relation
to a piano" on the condition that on paying 12 instalments of Rs. 100
each the piano should be his property, and after 6 instalments, B pan'n-
ed the piano with M, who took it in good faith; H can take back the
piano horn M.^ (Section 30).
In addition to the above expressly provided exception, the Indian
Sale of Goods Act recognises three more exceptions, as Section 27 com-
mences with the Tvords "Subject to the provisions of this Act and of any
other law for the time being in force." The three e:kceptions are as
given below.

SUBJECT T O T H E PROVISIONS OF SECTION 54(3) OF T H E ACT

An unpaid seller can stop the goods in transit or exercise his right
of lien; and where such unpaid seller has exercised his right and is in
possession of goods (of which ow'nership has passed to the buyer) he can
re-sell these goods. T h e buyer on such re-sale gets an absolute title to
the goods, even though the re-sale may not be justified in the circums-
tances.

SUBJECT T O T H E PROVISIONS OF ANY O T H E R LAW

Under Section 176 of the Indian Contract Act, a pawnee or pledgee
has a right to sell tlie goods pledged with him, and the buyer gets a bet-
ter title than what the seller has. Further, Section 169 of the sanie Act
provides power for sale to the finder of lost goods. Again, under tlie

20. Central National Bank v. United Industrial Bank, 19.54 S.C. ISl.
21. B. Motor Supply Co, v. Cox. (1914) 1 K.B. 244.
SALE OF GOODS' 219
Negotiable Instruments Act, a. holder in due course may get a better title
dian what his endorser had. Similarly, under Order 40, Rule 1 of the
Civil Procedure Code, Receivers appointed by Court have authority to
sell jjioperties. Also, Official Assignees under the Presidency-towns In-
solvency Act, Official Receivers under Provincial Insolvency Act, Liquida-
tors under Indian Companies Act and Officers of Court selling goods in e v
ecutiori under Order 21, Civil Procedure Code, and Executors and Adminis-
tratorsj all these persons are not owners, yet they sell properties belong-
ing to others and convey a better title to the buyers than they them-
selves possess.

SALE UNDER THE IMPLIED AUTHORITY OF OWNER, OR

TITLE BY ESTOPPEL
Tlie words in the last p^rt of Section 27 are "unless the owner of the
goods is by his conduct precluded from denying the seller's authority to
sell." This is really the application of the doctrine of estoppel, as the
sale may be made in circumstances which may preclude the owner from
disputing the authority of the person who sells. In a contract of sale,
estoppel may arise where the owner by any act or omission leads the
buyer to believe that the seller has the right to sell. In a sale hy an agent
widiin the scope of his apparent authority die buyer gets a better title
than what the seller has. The lessee of a public house who allows an-
other to sell the fixtures and fittings as if they are his own, whereby a
third person is induced to purcliase them bona fide, cannot recover them
from tlie purchaser. This is so because, as pointed. out by Lord Den-
man, if "a party who negligently or culpably stands by and allows another
to contract on the faitli and understanding of a fact which he can con-
tradict, cannot afterwards dispute that fact in an action against the per-
son whom he has himself assisted in deceiving." An owner may also be
estopped if he receives the sale proceeds ivith the knowledge that the
sale is without authority.

MARIiET OVERT
There is another very important exception in English law which has
not been recognised in India. According to English law, where a pur-
chase is made in what is called "iSfarket Overt", the buyer is absolutely
protected and thp ownership passes to him so that the true owner can-
not recover from the buyer. A market overt is understood as a sale at
certain prescribed places and times' in which cases a good title is passed
to the buyer in good faith and without notice of the defective title of
the seller. The lule of market overt is omitted in India, probablv be-
cause it is likely to be an incentive to theft, and because "it would be
difficult to specifiy places to which it should be applied."

PART 6-E
PERFORMANCE OF T H E CONTRACT OF SALE
DUTIES OF THE SELLER AND BUYER
It is the dutv of the seller to deliver the goods and of the buyer to
accept and pay for them, in accordance with the terms of the contract
950 MERCANTILE LAW

of sale (Section 31). Unless otlierwise agreed, payment and delivery are
concurrent conditions, that is, they both take place at the same time as
in a cash sale over a shop counter (Section 32). The seller has the duty
of giving delivery according to the contract and according to the rules
contained in the Sale of Goods Act, as stated below.
The buyer has the duty to pay for the goods and accept delivery. If
he wrongfully refuses to accept delivery, he must pay compensation to
the seller.

DELIVERY
Delivery is the voluntary transfer of possession from one person to
another. Delivery may be made by doing anything which the panics
agree shall be treated as delivery. Delivery to a wharfinger or a carrier
is generally regarded as delivery to the buyer.
Delivery may be actual, constructive or symbolic. Actual or physical
delivery takes place where the goods are handed over by the seller to
the buyer or his agent authorised to take possession of the goods. Cons-
tructive delivery or delivery by attornment takes place when the person
in possession of the goods acknowledges that he holds the goods on behalf
of and at the disposal of the buyer. For instance, where the seller
agrees to hold the goods as bailee for the buyer there is a constructive
delivery. Also, where a warehouseman or a carrier who holds the goods
as bailee for the seller agrees and acknowledges to hold them for the
buyer there is a constructive delivery. Symbolic delivery is made by in-
dicating or giving a symbol. Here the goods themselves are not deliver-
ed, (probably because they tire ponderous or bulky), but the "means of
obtaining possession" of goods is delivered, e.g., by delivering the key to
the warehotise where the goods are stored or the bill of lading which
will entitle the holder to receive the goods on the arrival of the ship.

RULES REGARDING DELIVERY

1. Delivery should have the effect of putting the buyer in posses-
sion. Thus, where the wood of fallen trees is sold the mere fact of the
buyer cutting them will not amount to taking possession of them until
he carts them away. In order to constitute delivery the buyer or his
authorised agent must have possession of the goods, i.e., the buyer should
be in a position i to exercise some degree of control over the goods
either directly or through an agent.
2. The sfeller must deliver the goods according to the contract, and
where there is a condition precedent to the performance of the contract,
the seller is" not bound to deliver, unless the condition precedent is satis-
fied. Again, unless otherwise agreed, delivery of the goods and payment
of the price are concurrent conditions. A contract of sale ahvavs invol-
ves reciprocal promises, the seller promising to deliver the goods sold
and the buyer to accept and pay for him. In the absence of contract
to the contrary, they are to be performed simultaneously and each party
should be ready and willing to perform his promise before he can r^ll
upon the other to perform his. Therefore, unless the sale is on credit,
the seller need not be ready and willing to deliver the goods before the
SALE OF GOODS 25^^
price is paid. If the buyer is insolvent or states tliat lie will not accept
delivery, this is a strong evidence 'hat he is not ready and willing to pay.
3. Though the seller is bound to deliver tJK goods according to liie
contract, yet he need not deliver them unfess the Ijuyer applies lor deli-
very (Section 35). T h e rule is not affected by 'the fact that the goods aie
to be acquired by the seller and when they are acquired, the seller no-
tifies to the buyer that they are in his possession, it is still the duty of
the buyer to apply for delivery. Thus, when the seller gives 'notice of
arrival of the goods, it is the buyer's duty to apply for delivery. The
demand by the buyer for delivery of the goods must be made at a reason-
able .hour. On the other hand, it is the duty of the seller to deliver
the goods when the buyer applies for delivery, and if the seller fails to
do so, he is guilty of a breach of contract.
4. The condition precedent imported in all contracts by this pro-
vision of Section 35, apart from special agreement, to^ the buyer's duty to
claim delivery, may, however, be waived by the seller and is waived by
him impliedly where he so incapacitates himself from complying with the
demand, by consuming, re-selling or otherwise disposing of the goods, as
to render the demand idle and useless. Whether it is for the buyer to
take possession of the goods or for the seller to send them to the buyer
is a question depending in each case on the contract, express or implied,
between the parties [Section 36(1)].
5. Where the goods at the time of the sale are in the possession of
a third person, there is no delivery by the seller to the buyer unless and
until such third person acknowledges to the buyer that he holds the goods
on his behalf [Section 36(3)]
6. Time of Delivery.—As said above, the goods must be delivered
as per the terms of the contract. Where the contract uses words like
"directly", "immediately", forthwith", "without loss of time", it has been
held that quick delivery is contemplated. Where, however, no time is
fixed for delivery of the goods, the seller is bound to deliver them
within a reasonable time. ~ Delivery must be at a reasonable hour. A
contract by a manufacturer to supply some specified goods "as soon as
possible", means withio. a reasonable time.
7. Tender of Delivery.—It is not, however, the duty of the seller
to send or carry the goods to the buyer unless the contract so provkles.
His only duty is to place the goods at the buyer's disposal so that the
buyer may remove them. He is to tender the delivery of goods, and
if the buyer is not willing to take them, he is excused from performance
and can maintain a suit against the buyer. But it is essential that the
goods must be in a deliverable state at the time of delivery or tender
thereof.
8. Place of Delivery. The place of delivery may be stated in the
contract, and where it is so stated, the goods must be delivered at the*^
place during business hours on a working day. Where no place is
mentioned, the goods are to be delivered at a place at ivhich they happen
to be at the time of the contract of sale, or if the contract is with
respect to future goods, at the place at which the goods are manu-
!?52 MERCANTILE LAW

factiued oi jjiociiiced. The buyer in these cases can ask to have the
goods made o\er to him at the seller's place of business and not aC
his own.
If the seller agrees lo dclher the goods to the buyer at a place
otiier than that where thev are when sold, the buyer must, in the
absence of agreement to the contrary, take the risk of deterioration,
necessarily incident to the course of transit.
9. Cost of Delivery.—The seller lias to bear the cost of delivery imless
the contract otherwise pro\ides. While the cost of obtaining delivery
is said to be the buyer's, the cost of putting the goods into deliverable
state nuist be boine by the sellei. In other words, in the absence of an
agreement to the country the expenses of and incidetital to making
delivery of the goods must be borne bv the seller, the expenses of and
incidental to receiving delivery must be borne by the buyer. Thus,
when the contract is for delivery "ex-ship", the seller must do all that h
necessary to release the shipowner's lien, and if "from the deck" pay all
chaiges to be paid, such as harbour dues, to enable the goods to be re-
moved from tlie deck. ^V'here goods are sold ^"F.O.B.", the seller must
bear the expenses of, and up to shipment. In a "C.I.F." contract, the
seller is, as between himself and the buyer, chargeable with the amount
of the freight and the insurance charges, and the buyer, if he pays any
such charges, can claim credit for them. Wharfage charges incurred after
shipment and delivei7 of tlie shipping documents fall on the buyer.
10. Duty to Insure Goods Where Goods Delivered to a Carrier.—
Where goods are delivered to a carrier or wharfinger, the seller is
bound to enter into a reasonable contract on behalf of the buyer with
the carrier for the safe transmission of the goods; and if he fails to
do so and the goods are destroyed, the buyer may decline to treat de-
livery to the carrier as delivery to him or claim damages. If the tran-
sit be by sea, the seller must inform the buyer in time, so that he may
have the goods insured. If the seller fails to do so, the goods would be
at Seller's risk during transit. This clearly applies to F.O.B. contracts.
But, it is open to the parties lo contract to the contrary and by usage
a term may be inferred authorising the seller to send goods at buyer's
risk uninsured. If the contract is a C.I.F. contract, the buyer is not
bound to take deli\*ery if the seller fails to insure, even though the
goods arrive safe (Section 39).
n . When the seller is ready and willing to deliver the goods and
requests the buyer to take .delivery and the buyer, does not comply with
this request -within a reasonable time, the buyer is liable to the seller
for (i) any loss occasioned by his neglect or refusal to take delivery;
and (ii) a reasonable charge for tlie care and custody of the goods.

ACCEPTANCE OF GOODS BY BUYER

The buyer has a right to have delivery as per contract, and accept
them when they are according to the contract.
Acceptance of goods by buyer takes place when the buyer—
(1) intimates to the seller that he has accepted the goods; or
SALE OF GOODS 253
(2) retains the goods after tlie lapse of a reasonable time, with-
out intimating to the seller that he has rejected them; or
(3} does any act to the goods which is inconsistent wiili tlic
ownership of the seller, e.g., a pledge or resale (Section 42).
In Ruben v. Faire (19-19) 1. All. E.R. 215, the phiintiff contracted to
sell to the defendant by sample a c|iiantity of "Linatex in -II ft. rolls,
5 ft. wide." Tlie defendant asked the plaintiff to ^seiid linlf of tliis ma-
terial to X to whom he bi.d resold it. The plaintiflE did so, and X
rejected it on the groimd that it did not correspond. The plaintiff
now sued the defendant for the price, and the defendant pleaded that
the plaintiff's breach of condition entitled them to rescind the contract
and repudiate all liability under it. It was held that there had been
a delivery and the buyer was deemed to have accepted half of the goods
and must treat the seller's breach of condition as a breach of warranty.
In a suit for price by the seller, he could only counter-claim for da-
mages. By Section 42,, if the goods are dch^'ered to a sub-purchaser at
the reouest of the buyer, there is a constructive delivery to the buyer,
and lie has 'accepted' the goods, as he has done an act 'inconsistent witli'
the seller's ownership in the goods. ,
When goods are delivered to the buyer which he has not previously
examined he is not deemed to have accepted them unless and until he
has had reasonable opportunity of examining them. He is entitled to
demand of the seller a reasonable opportunity of examining them in
order to ascertain whether they are in conformity with the contract (Sec-
tion 41). The buyer may, however, accept them at once, although a
reasonable time for making an examination has not elansed [Hardy &
Co. v. Hillerus & Fowler (1923) 2 K.B. 490].
If the seller sends the buyer a larger or smaller quantity of goods
than ordered, the buyer may (Section 37)—'
(1) reject the whole;,
(2) accept the whole;
(3) accept the quantity he ordered and reject the rest.
T h e contract was for- the sale of 4,000 tons of meal, 2 ner cent more
or less. The sellers delivered meal greatly in excess of the permitted
variation. Held, the buver could reject the whole [Payne and Roiiih v.
Lillico & Sons (1920) 36 T L.R. 569].
^Vhat the buyer accepts he must pay for at the contract rate. AVhere
the contract is for the sale of "about" so many kilos or tons, or so many
kilos or tons "more or less", the seller is allowed a reasonable margin.
If, however, he exceeds that margin the buyer cannot be compelled to
accept the goods.
If the seller delivers, with the goods ordered, goods of a wrong des-
cription, the buyer may accept the goods ordered and reject the rest, or
reject the whole.
If a buyer Jias a right under Iiis contract to reject goods, he is not
bound to return the rejected goods to the seller, but it is sufficient if
251 MERCANTILE LAW

he imimates lo tlie seller that he refuses to accept them (Section 4S). A

buyer cannot be compelled to take delivery by instalments.

INSTALMENT DELIVERIES
When there is a contract for the sale of goods to he tleliveretl by
staled instalments wliicli are to be separately paid for; and either buy-
er or seller commits a breach of contract, it is a qtieslion depending
on the terms of the contract and the circumstances of the case whetiier
the breach is a repudiation of the whole contract or a severable breach
merely giving a right to claim for damages (Section 38).
If the breacli is of such a^ kind as to lead to the infeience that
similar bleaches -vvill take place with regard to future deliveiies, the con-
tract can be at once repudiated by the injured party. For example, if
the buyer fails to pay for one instalment under such ciicumstalices as
to suggest that he will not pay for future instalments, or the seller
fails to deliver goods of die contract description under similar circums-
tances, the contract can be repudiated.
A sold to B 1,500 tons of meat and bone meal of a specified quality,
to be shipped 125 tons monthly in equal weekly instalments. After
about half the meal was delivered and paid for, B discovered that it ivas
not of the contract quality and could have been rejected, and he refused
to take further deliveries. Held, B was entitled to do so, as he was not
bound to take the risk of having put upon him "further deliveries of goods
which did not conform to the contract. [Robert A. Muiiro & Co. v. Tileyer
(19S0) 2 K.B. 312]. v
T h e tests to be applied are : first the ratio quantitati\ ely whicli the
breach bears to the contract and, secondly, the degree of piobability
that such a breach will be repeated.
A bought frota B Co. 5.000 tons o£ steel to be deliveted 1,000 tons
monthly. After the delivery of two instalments, but before payment was
due, a petition was presented to wind up B. Co., and A refused to pay
unless the sanction of the Court was obtained, being under the errone-
ous impression that this was necessary. Held, the conduct of A in so
refusing payment did not shotv an intention to repudiate the contract
so as to excuse the liquidator of B Co. from making further deliveries
[Mersey Steel & Iron Co. v Naylor (1884) 9 A.C, 434].

REMEDIAL MEASURES
RIGHTS OF T H E UNPAID SELLER

W H O IS AN UNPAID SELLER?
The seller of goods is deemed to be an 'unpaid seller (a) when th«
whole of the price has not been paid or tendered; or (b) when a con-
ditional payment was made by a bill of exchange or other negotiable
instrument, and the instrument ,has been dishonoured (Section 45). In
simple words, an unpaid seller is one who has sold goods on cash terms,
and does not include a seller who has sold goods on credit.
An unpaid seller has a two-fold right: One against the goods, and
the other against the buyer personally. The unpaid seller's right can be
SALE OF GOODS 255
exercised by any agent of the seller to whom the bill of lading has been
endorsed or a consignor or agent who has himself paid, or is directly
responsible for the price.

RIGHTS OF UNPAID SELLER AGAINST T H E GOODS

An- unpaid seller of goods, even though the property in the goods
has passed to the buyer, has (i) a lien on tlie goods remaining in his
possession; (ii) if the buyer is insolvent, a right of stoppage in transit
after he has parted widi possession of the goods; (iii) a limited right
of resale (Section 46).

LIEN
An unpaid seller in possession of goods sold may exercise his lien
on the goods, i.e., keep the goods in his possession, and refuse to deli-
ver them to the buyer until tlie full payment or tender of the price in
cases where (Section 47)—
(a) the goods have been sold without any stipulation as to credit;'
(b) the goods have been sold on credit, but tlie term of credit
has expired;
(c) the buyer becomes insolvent.
The seller's lien is a possessory lien, i.e., the lien can be exercised
only so long as the seller is in possession of the goods. Lien can be
exercised for the non-payment of price, not for any other charges. For
example, the seller cannot claim lien for godown charges which he had
to incur for storing tlie good^, in exercise of his lien for the price. When
an unpaid seller has made part delivery of the goods he can exercise lien
on the balance of the goods not delivered unless the part of delivery was
made in circumstances to show-an intention^ to waive the lien. The lien
can be exercised even though the seller has obtained a decree for the
price.

TERMINATION OF LIEN
Lien depends on physical possession. Therefore, the unpaid seller
loses his lien on the goods—
(a) when he delivers ' them to a carrier or other bailee for the
purpose of transmission to the buyer, without reserving the right
of disposal o£ the goods;
(b) when the buyer or his agent lawfully obtains possession of the
goods;
(c) by waiver of his lien (Section 49).

STOPPAGE IN TRANSIT
The right of stoppage in transit is a right of stopping the goods
while they are in transit, resuming possession of them and retaining
possession until payment .of the price, I t is available when (Sectjon 50)—
(a) the buyer becomes insolvent; and
(b) the goods are in transit.
256 ^MERCANTILE LWV
The buyer is insolvent if he has ceased to pay his debts in the
ordinary course of business, or cannot pay his debts as they become due,
whether he has committed an act of insolvency or not [Sec. 2(8)].

LIEN AND STOPPAGE IN TRANSIT DISTINGUISHED

l l i e points of difference between an unpaid seller's right of lien and
stoppage in transit are: (1) the right to stop goods aiises only when the
bu\er is insolvent, but the riglit to lien can be exercised even when the
buyer is able to pay, but does not pay; (2) lien is available only when
the goods are in actual or constructive possession of the seller, but the
goods can be stopped in transit when the seller has parted with possession,
and the buyer or his agent has not obtained possession, i.e., the goods are
in the custody of a "middleman" between the two; (3) when possession is
surrendered by the seller, his lien is gone, but his right to. stop commen-
ces and remains as long as the goods are in transit and before they
pass into the possession of the buyer; (4) the right of lien is to retain
possession, the right of stoppage is to regain possession.

DURATION OF TRAIJJSIT (S. 51)

Goods are in transit from the time they are delivered to a carrier
or other bailee for tlie purpose of transmission to the buyer until the
buyer takes delivery of them. The goods are still in transit it they
aie rejected by the buyer. The transit continues so long as the goods
are not delivered to the buyer or his agent in this behalf no matter
whether they are lying with the cairier or a forwarding agent, aivaiting
transmission, or are in actual transit, or are lying at the destination.
If goods are ordered to be sent to an intermediate place from which
they are to be forwarded to their idt'imate destination the transit is at
an end if fresh instructions ha\e to be sent to the intermediate place
before the goods can be forVcarded, but otherwise the goods are still
in transit. T h e transit is at an end in the following cases :—
(a) If the buyer obtains delivery before the arrival of the goods
at their destination.
(b) If, after the arrival of the goods at their destination, the
carrier acknowledges to the buyer that he holds the goods on
his behalf, even if a further destination of the goods is in-
dicated by the buyer.
(c) If the carrier wrongfully refuses to delii'er the goods to the
buyer.
When goods are delivered to a ship chartered by the buyer, whe-
ther they are in possession of the master of the ship as carrier or as
agent for the buyer is a question depending on the circumstances of
the case.
Where part delivery of the goods has been made to the buyer or his
agent"in that behalf, the remainder of the goods may be stopped in tran-
sit, unless such part delivery has been given in such' circumstances as to
show an agreement to give up possession of the whole of the goods.
 SALE OF GOODS 257
« O W STOPPAGE IN T R S N S I T EFFECTED?
The right to stop in transit may be exercised either by taking actual
possession of die goods or by giving notice of the seller's claim to the
•carrier or otiier person having control of the goods (Section 52). T h e
notice may be given either to the principal, whose servant has the cus-
tody at such a time as and under such circumstances as he 6iay, by the
•exercise of reasonable diligence, communicate it to his servant in time
to prevent the delivery to the consignee. T h e notice to- the principal
will take effect only after the lapse of a time reasonably sufficient for
him to communicate with his agent. T h e notice need not be a writ-
ten notice, and no particular form is necessary; all that is required is
to ask the carrier not to deliver the goods, to the buyer,, and it must
reach the carrier before tlie goods have been delivered by him to the
buyer or his agent, so that he may prevent deliveiy. A mere notice
to tlie buyer before the goods come to his possession that the seller
-wishes to exercise the right will not be sufficient. If the carrier, after-
receiving notice, wrongfully delivers the goods to the buyer, he does
90 at his own peril. His duty is to re-deliver the goods to the unpaid
vender, though, of course, at the vendor's expense. T h e seller's right
IS so strongljVmaintained that while the goods are in transit and the in-
•solvency of the\ buyer occurs, the seller may take them by means not
criminal.

EFFECT OF SUB SALE OR PLEDGE BY BUYER

This right of lien or stoppage in transit is not affected by the buyer
selling or pledging the goods or making any disposition of them un-
less the seller has, by his own conduct', precluded himself from exercis-
ing the lien or stoppage in transit by recognising the title of the sub-
buyer or the pledgee. . This is on the principle that a second buyer can-
not stand in a better position than his seller (i.e., the first buyer). W
sold SO maunds of barley out of a granary to A who sold 60 maunds to
K before the goods had been ascertained by W. K paid A, obtained a
delivery order and presented it to W, who expressed willingness to for-
ward the barley on being requested to do so. Held, W, the unpaid
seller has recognised tire title of K, the sub-buyer, and therefore was
estopped from exercising the lien whidi he has waived.^ Similarly,
where tlie sub-buyer produced delivery orders to the seller who endorsed
on them that he was willing to give delivery, but after delivery of part
of the goods,, refused to deliver the rest on the ground that the first
buyer had not paid the price it was held tliat the seller was estopped."
But it must be noted that consent of, the seller to the sub-sale is essen-
tial; it is not sufficient that the seller simply has notice of the fact of a
sub-sale. There must be a recog^nition of the sub-buyer's right to the goods
free of the seller's lien so as to evince an intention to renounce the seller's
right on the goods.
While the goods are in transit, if the buyer transfers the document

22. Knights v. Wiffen (1870) 5 Q.B. 660.

23. Ganges Mfg. Co. v. SourajmuU (1880) 3 Cal. 669.
258 MERCANTILE L A W

of title or pledges the same to a person in good faith and for considera-
tion, then, if the transaction is sale, the right of stoppage is defeated..
But, if the transaction is a pledge, the seller's right to "stop will be-
s\ihicct to the pledge. But where the pledgee has two securi-
ties, the unpaid seller can compel the pledgee to marshal his secu-
rities and to resort first to the other security, i.e., he may require the
pledgee to satisfy his claim against the buyer first out of any goods of
sccm-ities in- the hands of the pledgee, and if still anything is left un-
paid turn to the document of title so pledged [Section 53(2)].
It .should be noted that the exercise by the unpaid seller of his-
rights of lien or stoppage in transit does not amount ,to rescision of
the conirnct. He may retain or regain the possession of the goods, but
he does not regain the property in them, nor does he thereby cancel'
the sale. In no proper sense, does' he by the stoppage become the owner-
of the goods. What is then a seller, having retained or regained
possession of the' goods to do with them if the buyer, after notice tO'
take the goods and pay ^the price, remains in default? Must lie keep
tljem until he can obtain judgment against the buyer and sell them on
execution? What if the goods are perishable, e.g., f r u i t / o r expensive to
keep, as cattle or horses. Section 54 gives him a limited right to re-selE
the goods.

R I G H T OF RE SALE
TIic luipaid seller may re-sell—
(i) where the goods are perishable;
(ii) where the right is expressly reserved in the contract;
(iii\ where in exercise of right of lien or stoppage in transit
.seller gives notice to .buyer of his intention to re-sell, and the
buyer does not pay or tender the price within a reasonable
time.
T h e right of re-sale is the third right of an unpaid seller, the other
two being die rights of lien and stoppage in transit. T h e transaction
under the present right is called re-sale, because there has been already
a .sale by which the ownership has pa.ssed to the buyer,
A further valuable right is given to the unpaid seller, cnamely,
Right to Surplus or Profit. If on a re-sale there is a deficiency between'
the price due and the amoimt realised, he will be able to recover thin
from the buyer, Rut, if on such re-sale, a surplus is left, the seller
need not hand over this surplus to the buyer. The profit arising on a
re-.sale beIong.s to the seller because the re-.sale is the result of a breach
of contract on the part of the buyer, and such a buyer cannot take
advantage of his own wrong and claim the profits

NOTICE
The .seller is bound to give reasonable notice to the buyer that he
is going to re-sell the goods unless. the goods are of perishable n.iiure.
What is reasonable notice is a question of fact depending upon the
nature of the goods, the distance at which ilie parties are situated and
SALE OF GOODS 259
other circumstances of the case. The notice has been made compulsory
for two reasons. First, that the buyer may have an opportunity of
fulfilling the contiact by paying the price even at the last moment
before such re-sale. Secondly, if the buyer is still unable to pay, he
may at least see that on such re-sale tlie goods fetch -a proper price.
Therefore, if the re-sale is improperly conducted, although the subse-
quent buyer will get good title to the goods sold to him, the seller
connot keep the surplus, if theie is any; and if there is a deficiency he
cannot sue the buyer for it 'Where perishable goods were sold after a
delay of eight months, the le-sale was held to be improper.
This right of re-sale is, however, optional and the buyer cannot
demand re-sale. Thus, where the goods were in the possession of the
seller and were destroyed by fire, it was held that the teller was entitled
to the price and the buyer could not plead that the loss would not
have happened if the seller had re-sold the goods, since the seller was
not bound to re-sell. AVhere the riglit of re-sale is expressly reserved by
the contract of sale, it is not necessaiy that ownership should have passed
to the buyer, but the goods should have been ascertained or appropriat-
ed to the contract before the right of re-sale is exercised. But the parties
may provide for re-sale even without appropriation! of goods.

R I G H T OF ^VITHHOLDING DELIVERY
If the property in the goods has passed to the buyer, the unpaid
seller has a riglit of lien as described above. If, however, the property
has not passed, the unpaid seller has a right of withliolding delivery
similar to and co-extensive with his right of lien [Section 46(2)],

SUITS FOR BREACH OF CONTRACT

T h e Seller, in addition to his rights against the goods set out above,
has two rights of action against the buyer peisonally.
Suit for price.—1. Where the property in the goods has passed to
the buyer, the seller is entitled to sue for price, whether the possession
is with the buyer or the seller.
2. Where the price is payable on a certain day irrespective of de-
livery, the seller may sue for the price, if it is not paid on that day.
although the property in the goods has not passed.

SUIT FOR DAMAGES FOR NON-ACCEPTANCE

Where the buyer wrongfully neglects or refuses to accept the goods
and pay for them, the seller has alright to sue the buyer for damages
for non-acceptance. The measure of damages of the loss resulting from
the buyer's breach of contract ^vhich is, -where there is an available mar-
ket for the goods prima facie, the difference between the contract price
and the market price. An available market means that the goods can
be sold freelv because there is an existing demand.
R contracted to buy a "Vanguard" motor-car from T Ltd., who were
car dealers. R refused to accept delivery. Held, T Ltd. were entitled
to damages for the loss of their bargain, viz., the profit they would have
260 MERCANTILE LAW

made, as they had sold one car less than they otherwise would have sold
[Thompson Ltd. v. Robmson (1955) 2 W.L.R. 185].
When the seller is ready and willing to deliver the goods and re-
quests the buyer to take delivery, •which the buyer does not do withiia
a reasonable time, the seller may recover from the buyer—
i(l) any loss occasioned by the buyer's refusal 01" neglect to taie
delivery; and
(2) a reasonable charge for the care and custody o£ the goods.
T h e Buyer has the following rights to sue the seller for breach of
contract:

SUIT FOR NON-DELIVERY

Where the seller wrongfully neglects or refuses to deliver the goods
to the buyer, the buyer may sue him for damages for non-delivery (Sec-
tion 57). The measure of damages is, as in the case of a suit for non-
acceptance, the estimated loss naturally resulting from the breach of
contract which is prima facie, when there is an available market for the
goods, the difference between the contract price and the market, price
at the time when the goods ought to have been delivered or, if no time
for delivery was fixed, from the time of the refusal to deliver.
If the buyer purchased the goods for re-sale and the seller knew of
this, the measure of damages will be the difference between the contract
price and the re-sale price, if the goods cannot be obtained in the mar-
ket. If they can be obtained in the market the buyer ought to obtain
them there and so fulfil his contract of re-sale, with the result that the
damages will be the difference between the market price and the con-
tract price.
Where delivery is delayed, but the goods are ultimately accepted not-
withstanding the delay, the measure of damages is the difference bet-
ween the value of the goods at the time when they ought to have been
and the time when they actually were delivered [Elbinger Actien Gesell-
schaft V. Armstrong (1874) L.R. 9 Q.B. at p. 477].

SUIT FOR RECOVERY OF THE PRICE

If the buyer has paid the price and the goods are not delivered, he
can sue die seller for the recovery of the amount paid.

SPECIFIC PERFORMANCE
A huyer can only get his contract specifically performed, i.e., obtain
an order of the Court compelling the seller to deliver the goods he has
sold, when die goods are specific or ascertained. The remedy is dis-
cretionary and will only be granted when damages would not be ah ade-
quate remedy. Specific performance will be gi anted if the goods are -oE
«pecial value or are unique, e.g., a rare book, a picture or a piece of
jewellery.

SUIT FOR BREACH OF CONDITION

On breach of condition the buyer is entitled to reject the goods. Bu4
 SALE OF GOODS. 261
he cannot reject the goods, if—
(1) he waives tjje breach of condition, and elects to treat it as
a breach of warranty; or
(2) the contract is not severabje and .he has accepted tlie goods
or part of them; or
(8) the contract is foi specific goods, and the property has pass-
ed' to tlie buyer.
In all_these cases, as provided in Section 13, the condition sinks or
descends to, or is treated as warranty, and the goods cannot be reject-
ed but only a suit for damages can be filed.
L, in 1944, bought'from G a picture of Salisbury Cathedral said hj
G to be by Constable. In 1949 L found it was not by Constable and
claimed to rescind the contract and recover the purchase price. Held,
as the picture had been accepted it could not later be rejected [Leaf v.
International Galleries (1950) 2 K.B. 86].

* SUIT FOR BREACH OF WARRANTY

On breach of warranty, the buyer can either— '
(a) set up against the seller the breach of warranty in diminu-
tion or extinction of the price; or
(b) sue the seller for damages for breach of warranty (Section 59).
T h e measure of damages for breach of warranty is the estimated loss
arisiiig directly and naturally from the breach, which is prima facie
the difference between the value of the goods as delivered and the value
they would have had if the goods had answered to the warranty.

INTEREST
The seller or the buyer may recover interest or special damages in
any case where by law inteiest or special damages may be recoverable.
He may also recover the money paid where the consideration for the
payment of it has failed.
In the absence of a contract to the contrary, the Court may award-
interest at such rate as it thinks fit on the amount of the price—
(a) to the seller in a suit by him for the amount of the price—
from the date of the tender of the goods or from the date on
which the price was payable;
(b) .to tlie buyer in a suit by him for the amount of the price in
a case of a breach of, the contract on the part of the seller
—from the date on ivhich the payment was made.

AUCTION SALES
A sale by auction is a public sale, where goods are offered to be
taken by the highest biddei. It is a proceeding at which people are
invited to compete for the purchase of property by successive- offers, of
advancing sums.
The rules regulating sales by auction are contained in Section 64
which reads:
562 MERCANTILE LAW

•"64. • In the case of a sale by auction—

(i) Where goods are put for sale in lots, each lot is prima fade
deemed to be the subject of a separate contract of sale;
(ij) the sale is complete when auctioneer announces its com-
pletion by the fall of the hammer or in other customary man-
ner; 'and, until such announcement is made, any bidder may re-
tract his bid;
(iii) a right to bid may be reserved expressly by or on behalf of
the seller and, where such right is expressly so reserved, but
not otherwise, the seller or any one person on his behalf may,
subject to the piovisions hereinafter contained, bid at the
auction;
(iv) where the sale is not notified to be subject to a right to bid
on behalf of the seller, it shall not be laivful for the seller to
bid himself or to employ any person to bid at such sale, or
the auctioneer knowingly to take any bid from the seller or
any such person; and any sale contravening this rule may be
treated as' fraudulent by the buyer;
(v) the sale may be notified to be subject to a reserved price;
(vi) if the seller makes use of pretended bidding to raise the price,
the sale is voidable at the option of the buyer."
This section only deals with the rights and liabilities of the parties
to the contract of sale. It has nothing to do with the rights and
liabilities of the auctioneer either in relation to his principal or to tlie
buyer.
According to Benjamin sales by auction are of three kinds:—
(1) Sale without reserve where tlie employment of a puffer
renders the sale voidable.
(2) Sale with a condition that the highest bidder shall be the pur-
chasers, nothing being said about 'reserve.
(3) Sale, with a right expressly reserved to bid by or on behalf
of the seller,
A sale subject to a reserve price and the reservation of a right to
bid are distinct matters.
According to the usual practice a proposed auction is duly
advertised and a printed catalogue in the Case of goods together with
conditions of sale are circulated. At the appointed time and place the
auctioneer, standing at a desk or rostrum, "puts up" tlie several lots in
turn by inviting biddings from the persons present. He announces the
acceptance of the last bid by a tap with his hammer or by any other
approved or customary method, e.g., by shouting one, two, three or by
saying going, going, gone,' and so "knocks down" tlie lot to the person
who has made the bid.
An auction "witli reserves" is one where an up-set price is fixed
SALE OF GOODS "^^
below which the auctioneei- refuses to sell or reserves to himselC the
option of buying. An auction is said to be "without reserve" when the
goods are to be sold to the ' highest bidder whether the sum bid be
equivalent to the real value or not. It is not necessary that these parti-
cular words should be used; but what is necessary is that the seller should
make it plain, by whatever words, that tlie seller reserves the right. The
auctioneer can refuse to deliver the goods to the highest bidder, if he
by mistake knocks down the lot for less than the reserve price.
In Rainbow v. Howkins (IflO'l) 2 K.B. 322, the auctioneer by mistake
knocked, down a lot for less than the reserve. On finding this o u t . he
refused to complete the sale or sign the necessary memorandum. It was
held that the buyer had no remedy against the auctioneer, and that it
was immaterial that he did not know what the actual reserve,was. ^
It may be observed that clauses 3 and 4 of the. section prohibit secret
bidding or the use of pretended bids, or the employment of "puffers" on
behalf of the seller to raise the price at auction. Even when the sale
is with reserve or subject to an upset price only, the seller or in his
absence only one person acting on his behalf may bid. If niore persons
than one bid to the knowledge of the seller with a view to enhancing
the price the biiyer can avoid the contract treating the sale as fraudulent.
On the other hand, an agreement among intending bidders not to
compete against each other with a view to knocking off the article at a
low price (usually called a "knock out" agreement) has been held to be
not illegal. T h e seller can protect himself against too low a bid by
fixing a reser^-e price, beloiy •which he will not sell. Puffers, by-bidders,
white bonnets, ov decoy ducks are the various technical names of the
persons who, without having any intention to buy, are employed by the
seller to raise the price by fictitious bids, thereby increasing competition
among the bidders, while they themselves are secured from risk by a
secret understanding Vvrith the seller, that they shall not be bound by
their bids.
A "knock out" is a combination of persons to prevent competition
between themselves at an auction by an arrangement that only one of
their number shall bid and that anything obtained by him shall be
afterwards disposed of privately among themselves. Such a combination
is not. illegal.
"Damping" is the illicit or overt act of dissuading the would-be
purchaser from bidding or from raising the price by pointing out defects
or byr doing some other acts which prevent persons ^rem forming a proper
estimate of the price of the goods or by scaring them ,away by some other
device. Damping is illegal and entitles the auctioneer to withdraw the
property from the auction.

SUMMARY

A-contract of sale of goods is a contract" wherebv the seller transfers or

agrees to transfer the property in goods to the buyer for a price. It
includes actual sale and an agreement to sell. In an agreement to sell
the ownership does not pass to the buyer,••while in a sale the ownership
passes as soon as the contract is made. The essentials of a sale are: (i)
264 MERCANTILE LAW

there must be some goods, (ii) they must be exchanged for a money consi-
deration called the price, (ni) the buyer and'the seller must be tv.o differ-
ent persons, and (jv) property m the goods must pass from the seller to
the buyer.
A contract of sale is regulated by the general law of contract, i e ,
offer and acceptance, parties competent to contract, mutual assent, subject
matter and money consideration. Goods aie of two t\pes, viz, CMSting
goods or future goods. Existing goods are those which are owned and
possessed by the seller at the time of the contract. Future goods aie
goods to be manufactured or acquired or produced by the seller after
making the contract of sale. Existing goods are either specific or asceriain-
ed goods or generic or unascertained goods Specific goods are goods
identified and agreed upon at the time the contract of sale is made.
Generic goods are those' which are not specifically identified but are-
defined by description only.
Caveat Emptor.—Let the buyer beware The buyer gets the goods as
they come and takes the risk of their suitability for his puipose. It is not
the duty of the seller to point out the defects in the goods If liie buyer
depends upon his own skill and integrity and the goods turn out to be
defective, it is his own fault and he cannot hold the seller icsponsible
Conditions and Warranties.—But the purchaser may make known to
the seller the particular purpose for which he intends to buy the goods so>
as to show that he relies on the seller's skill and judcjmcnt and the seller
makes certain representations with regard to the goods, whicli representa-
tions may rank either as conditions or wananties \\'here a condition or
wairanty appears in a contract of sale, the principle of caveat emptor does-
not apply.
A condition is a stipulating essential to the main purpose of the con-
tract the breach of which gives rise to a right to treat the coiuiact as
repudiated A warranty is a stipulation collateral to the mam puiposc of
the contract, the brcadi of v\hich gives lise to a claim foi damnscs but not
to a right to reject the goods and treat the contract as repudiated.
Conditions i n d warranties may be expicss or implied They are
express where they arc agreed upon between the bu^er and tlie seller
at a time of the contract. The conditions or warranties wlijch are not
expressed but are recognised by law are implied conditions and warranties
Implied warranties are two in number, nimclv, (i) warianty for quier
possession, and (ii) warranty against encumbrances
Implied conditions are 8 in numljcr, tlie first applies lo all kinds oF
sale and 2nd to 5ih to sales bv description and 6th to 8ih apply to vales
by simple General Implied Condition js tliat the seller has got a title
to the goods
Sale by Description,—(i) Goods sold should correspond lo description,
(ii) Goods bought for a particular purpose must he fit and suitable for
that purpose (in) Tlie goods must be mcrrhnntablc (h) The goods in
the nature of provisions must be mcichaniablc .iiul wholesome.
Sale bv Sample.—(i) Bulk should correspond to sample. (li) The
buvcr should have reasonable opportunity of compaung tlie bulk with
the sample, (ui) As regnrds defects which aic not apparent on reasonable
examination of sample goods must be meichant.ibic
Passing of Propcrtv.—Ascertained Goods. In .nn UPromliiioinl con-
tract for sale of specific goods which are in deh\ciabic snic, ilic pio[icriy
SALE OF GOODS 265
in the goods passes to the buyer as soon as \he contract is entered into,
even though the payment of the price or the delivery of the goods or
both are to take place at a later date. In the case of specific goods wliiclk
are not in a deliverable slate and the seller is bound to do someihing lo
the goods to put them into a deliverable state the ownership will not
pass to the buyer until tlie goods are so put and the buyer has notice
thereof.
In the case of sale on approval the ownership of the goods passes to
the buyer (a) when he signifies his approval or acceptance to the seller or
does another act adopting the transaction; (b) if he does Tiot signify his
approval or acceptance to the seller, but retains the goods without giving
notice of rejection then, if a time has been fixed for the return of the
goods, on the expiration of such time and if no time has been fixed, on.
the expiry of a reasonable time. If buyer rejects the goods he should give
notice of rejection to the seller.
Ownersliip in Unascertained Goods.—Where the goods contracted to
be sold are not ascertained or where they are future goods, ownership will
not pass to the buyer unless and until goods are ascertained.
» The ascertainment of goods or their appropriation may be made (i) by
the buyer with the seller's assent, (ii) by the seller with the buyer's assent
The seller may appropriate' the goods (a) by putting die quantity
contracted for in suitable receptacles, (b) by separating articles contracted
for from others, (c) by delivery to carrier or otner bailee for transmission
to buyer, without reserving right of disposal.
Risk follows Ownersliip. The general rule is that the loss falls on the
owner. When tlie property in the goods is transferred by the seller tc>
the buyer, the risk, in general, will fall upon the buyer. But the general
rule may be qualified by an express contract between the parties in whicli
case the risk may be separated from ownership.
Transfer of Title by Non-Oivners.—The general rule of law is that a
seller cannot pass a better title to the buyer than he has. To this rule
the Sale of Goods Act provides some exceptions, under which buyer gets-
better title than the seller's. They are:
(i) Sale by a mercantile agent, (ii) sale by a co-owner, (iii) sale by
persons in possession under voidable contract, (iv) sale by seller in posses-
sion after sale, (v) sale by buyer in possession, (vi) re-sale by an unpaid
seller where he exercises his right of lien or stoppage in transit, (vii) sale
by a pawnee or pledgee where the loan is not repaid on a stipulated date,
(viii) sale by certain persons under special rules of Jaw, such as Receivers,
Official Assignees or Receivers, Liquidators, Officials of Court, Executors-
and Administrators, (ix) under the implied authority of the owner.
Duties of Seller.—The first duty of the seller is to deliver the goods.
Delivery may be actual, syrabolic, or constructive. Where goods are hand-
ed over by t h r seller to the buyer it is an actual delivery. Where goods
are incapable of being handed over by one person tr> atiother a symboF
indicating the title to the goods, e.g., the key of a warehouse containing
the goods, may be given, and it will be symbolic delivery. Where delivery
is given by attornment, i.e., a formal acknowledgment of the person who
is in actual physical possession of the goods that he holds tlieni on behalf
and at the disposal of the buyer there is a constructive delivery.
The seller must deliver the goods according to the contract and where
there is a condition precedent to the performance of the contract the
seller need not deliver unless the condition is satisfied.
Unless otherwise agreed, delivery of the goods and payment of the-
26G MERCANTILE LAW

pi ice are concurrent condiiions. The seller must be ready and willing
to deliver the goods to the buyer and the buyer must be ready and willing
to pay the price to the seller.
It is not the duty of the seller to send or carry the goods to the buyer
unless the contract so provides; his only duty is to place tlie goods at the
'buyer's disposal. It is the buyer's duty to demand the delivery and accept
it when tendered. But the goods must be in a deliverable state at the
time of delivery or tender thereof.
Subject to the contract to the contrary, the goods must be delivered at
the place at which they h.Tppcn to be at the lime of the contract of sale,
or if the toiuract is with i c p e c t to future goods, at the place at which
the goods are manufactured or produced. The seller bears the cost of
delivei-y unless the contract otherwise provides.
Where the goods are delivered to a carrier the seller is bound lo enter
into a ' reasonable contract on behalf of the buyer with the carrier for
safe transmission of the goods. In a transit by sea the seller must inform
the buyer in time so that he may insure the goods.
Rights of Buyer.—lo have delivery as per contract. To gel delivery
of the goods of actual quantity contracted [or. If the goods oiTered are
in quantity more or less than that contracted for, or if, what is offered is
mixed with goods of diHerent description, the buyerj has a right, subject
to the usage of trade (i) to reject the goods, if less is delivered, (ii) to
reject the excess or even tlie whole, if more is offered, and (iii) it the
goods arc mixed with others not ordered, to reject the whole or those not
according to the contract.
If the contract is an instalment contract, and the terms'of tlie contract
permit, the buyer has a right to repudiate the whole contract, for any
defect or non-delivery of any instalment and where he has accepted goods,
to claim compensation.
Where the buyer has no opportunity to examine the. goods before-
hand, he has a right to a reasonable opportunity of examination of the
goods for delivery.
The buyer has a right to sue for damages for breach of warranty or
for non-delivery of the goods, or for interest. He may also sue for specific
performance.
Duties of Buyer.—To take delivery of the goods and pay for them.
Also to pay any incidental charges for the care and custody by tlie seller
if the goods are kdpt by him on behalf of the buyer.
Duties of Seller.—^Vllere the buyer wiongfully neglects or refuses to
accept and pay for the goods, the seller has a right to sue for damages
for non-acceptance of the goods.
Where property in goods has passed to the buyer, the seller has a
right to sue for the price of the goods whether.the possession is with the
buyer ov the seller. Even where ownership has not passed but ilie buyer
lias agreed to pay the price on a certain day fixed irrespective of his
obtnining delivery of goods the seller may claim the price.
Rights of Unpaid Seller.-The unpaid seller has a lien on the ^oods
or any p a n of -them remaining in his possession, or a right of stoppage
in transit when the buyer becomes insolvent and the seller has parted
with possession to the carrier and in certain circumstances he lias the
riglit to resell the goods. An unpaid seller in possession o^ goods may
exercise his lien on the goods and refuse to deliver them to ilie buyer until
the full payment or tender of the price, in cases where (i) the goods have
been sold without any stipulation as to cre<lit, (ii) the goods have been
SALE OF GOODS 267
sold on credit but term of credit has expired, (iii) the Iniyer becomes
insolvent. The unpaid seller may exercise lien even when in possession
as bailee for buyer.
The right of stoppage in transit is an extension of the right of lien,
but it arises only on the insolvency of the buyer.
The right of stoppage in transit is a right possessed by an unpaid
seller who has parted with the goods but the goods have not yet come
into the possession of the buyer, to stop the goods in transit with a view
t o exercising his lien, if the buyer has become insolvent. The unpaid
•seller may re-sell the goods, (i) where the gpods are perishable; (ii) where
•the right is expressly reserved in the contract; (iii) where in exercise o£
•right of lien or stoppage in transit seller gives notice to the buyer of his
intention to re-sell, the buyer dO'CS not pay or tender the price within^a
Teasonable time.

CASES FOR RECAPITULATION

1. L. was shopping in a self-service super market. He picked up
a bottle of soft drinks from a shelf. While he was examining it, the
bottle exploded in his hand and injured him. He sued the Aerated
Drinks Co., which had bottled the drink, to recover damages for breach
of condition arising from the sale of food. Held, L would not succeed.
A warranty or condition does not arise unless there is a sale. No sale
occurs when a customer in a self-service supa' market takes an article from
a shelf since he may decide not, to buy and pay for it and return it to
the shelf. As diere was no safe,. there was no implied condition (Lock
V. Confair's Beverage Co., 366 Pa. 158).
2. The plaintiff, a housewife, ordered from the defendants, coal
merchants, 'a ton oi coalite' and it was duly delivered to her. When part of
the consignment was put on fire in an open grate in the plaintiff's house an
explosion occurred which caused damage. The plaiiitifl sued the defen-
dants for. damages. Held, the defendants were liable to pay damages;
for there was a breach of the condition of merchantable quality. The
goods were bought by description and defendants dealt in them, and
there was an implied condition tliat 'coalite' was of merchantable quality.
The explosion'proved the breadi of tliat condition [Wilson v. Rickett,
Cockerell & Co. (1954) 1 All. E.R. 868].
3. There was a contract for the sale of goods to be^'about tlie speci-
fication stated below'. The contract pro\ided that the property in ,the
goods was to • be deemed to have passed to the buyers when the goods
were put on board, and if any dispute arose the buyers 'were not to re-
ject the goods but tire dispute was to be referred to arbitration. The
buyers rejected the goods and tlie s"ellers sued them for damages for
breach of contract. Held, the sellers •v.-ere not entitled to recover any
damages as .there was no breach of contract on the part of the buyers.
T h e buyers were justified in rejecting the goods and were not bound to
accept them subject to allowance to be fixed by arbitration. The clause
did not operate so as to force the buyers lo take the goods which were
neither within nor about the specification, nor commercially within its
meaning [Vigers Bros. v. Sanderson Uros. (1910) 1 Q.B. 608]. .
4. On 6th May, A- entered into a contract for the sale of 814 tins
of Kerosene oil to B, and received Rs. I,OdO in part payment _of the price.
T h e goods were not with the seller at that time but had been despatched
from Calcutta on 25th April A had received the R/R which he endorsed
in favour of B. The goods never reached the destination, as tliey were
268 MERCANTILE LAW
burnt on or about !2th May while in transit. Held, the buyer has t*b
bear the loss, as the property in the goods had passed to him and the
seller could not be called upon to r e t o l d the price (Shanker Dass v.
Bhana Ram, 1926 Lah. 406j.
ol P sold barley to B by sample, delivery to be made at T railway
station.' B sold the bailey to X. T h e barley was delivered at T railway
station and B, after inspecting a sample of it, sent it on to X. X rejected
it as not being according to sample. B seeks to reject the goods. Held,
B cannot reject the barley. B's action in inspecting a sample and tlien
ordering the.barley to be sent on to X was an acceptance of the goods
by him, and he could not afterwards reject the goods [Perkins v. Bell
(1893) 1 Q.B. 193].
6. B bought a motor car at an auction sale conducted by C, an
auctioneer. The car was sold on behalf of A who had no title to it, and
the owner subsequently recovered it from B. B sues C for the return of
the price. Held, B cannot recover, as he knew that C ivas an agent and
the sale was of specific goods. It was stated that where an auctioneer,
disclosing the fact that he is acting as an agent but not disclosing thp
name of tlie principal, sells specific goods, he does not warrant the goods
or his princioal's title to the goods [Benton v. Cambeil, Parker & Co.
Ltd. (1925) S ' K . B . 410].
7. A bought from B a shipment of nuts, and B sent to A the bill
of lading. A handed the bill of lading to C in return for a loan and
then became in.solvent. B attempted to stop tlie goods in transit, but C
claimed them. Held, C had a good title to the goods, which defeated
B's right to stop the goods in transit [Leask v. Scott. Bros. (1877) 2 Q.B.
D. 376].
8. A manufacturer conti-acted to supply 30 tons of apple-juice in
accordance ivith sample to a wine merchant, to be delivered in weekly
truck-loads. He crushed the apples, put the juice in casks and kept it
pending,delivery. After 20 tons had been delivered, no further deliveries,
were made through the delay of the bi'iyer in breach of the contract not-
withstanding requests for delivery instructions from the seller, and ulii-
mately the undelivered juice went putrid and had to be thrown aivay.
Held, the juice was assembled by the seller for the pm'pose of fulfiUinp'
the contract and kept ready for delivery as and when the buyer proposed
to take; after the delay, therefore, the juice was at the risk of buyer, who
must suffer the loss [Demby Hamilton Co. Ltd. v. Barden (1949) 1 All
-E.R. 435].
9. A agreed to buy from B a car and pay Rsr. 8,000 for it, if his
solicitor approved. A took possession of the car and sold it to C. T h e
solicitor subsequently disapproved of the transaction. B sued C for the
recovery of Rs. 8-,000. Held, B Cannot recover the price of the car. G,
the bona" fide buyer, got good title, for A "agreed to buy it". It was a
sale by buyer in possession [Martin v. Whale (1917) 2 K.B. 480 C.A.].
10. A, a jeweller, was entrusted with a diamond by P with the
instructions that A-should obtain offers for it, and if any such offer was
approved by P, A should sell it to the offerer. Acting contrary to P's
instructions, A sold the diamond to S who bought it in good faith.
Thereafter A absconded with the price money. P sued S to reto^er the
diamond. Held, P cannot recover'the diamond from S as the sale was
made by A, the jeweller, as a mercantile agent in the ordinary course of
his business, though contrary to P's instructions [(1929) 3 Bom.'L.R.]. "^
11. A bought from B a second-liand refrigerator for Rs. 450 and
SALE OF GOODS 269
ft v^as agreed betv.'een A and B diat the re£iigerator should be put in
Older at a cost of Rs 320. A look delnei) and admiited that us condi-
tion was satisfactoiy Later, A lepoied to B that the re£ngeiator was
not in working order and B tooU dwa> two paits o£ it for repaiis. The
full bill for repairs had not, howevei, been paid and B claimed a l''en
on die two parts for die balance of the original cost of lepairs and
refused to letuin the same until he was paid the balance due lor the
repaus Held B's refusal to return the two parts until payment of the''
balance for the lepairs is not justified He has no right of lien.' T h e
contract had been fully peiformed and the lelrigerator was handed over
-once and the lien had ended. It did not revive when the seller under-
took the work of-repahring the two parts (Edaljee v Cafe Johan Bros.
1943 Nag 249)
12 A oidered a certain quantity of new red chillies and B sold
to him goods said to answer to those described while they weie in transit
fiom Calcutta to Cuddalore. The Contract was c i f and A paid ior
the goods on presentation of shipping documents. The goods were
cleared at Cuddalore port by A's clearing agents and railed to him to
Alandur wheie he had his place of business On inspection, the goods
"H'ere found to be greatly deteriorated, white in colour and the seeds fal-
ling out A rejected the goods but retained them as security for the
price ahead paid. Held, tlie contract was for the delivery of new chillies
and the buyer could properly reject tliem as there was a breach of condi-
tion on the pait of the sellers (Muthu Kishan v Madhavji Devi Chand,
1953 Mad. 817). But after rejection the buyer cannot retain the goods
as security for the price already paid or othenvise m satisfaction of his
claim for damages arising out of non delivery He can only charge the
seller, in ivhom the goods revested after rejection, for keeping the goods
safely [Lyton & Co. v. M & Baker Ltd. (1923) 1 K B. 685]
13 The plaintiff, who wished to buy a motor car, approached the
defendants, a fiim of motor car dealers, and told them that he wished to
buy a car suitable for touring purposes The defendants recommended a,
Bugatti Car and so he ordered an eight cylinder Bugatti car The car
•was supplied with a guarantee which expressly excluded 'any other
•guarantee or warranty, statutory' or otherwise. The car was unsuitable
for touring purposes and the plaintiff repudiated the contract and sued
the defendants for recovery of the price. T h e defendants raised the
defence of the exemption clause in the contract. Held, the plaintiff was
entitled to reject the car and recover the price, as the car was not ht for
the purpose for which it was bought; the exemption xrlause did not apply
^ a l d r y V. Maishall Ltd. (192^) 1 K B . 260].
14. A contract was made for the sale of some china clay f o b at
Fowey The buyer chartered a ship and gave notice to the sellers who
delivered the clay on board at Fowey. The destination of the clay had
never been communicated by the buyer to the sellers, but in fact it was
carried to Glasgow No bill of lading was signed and before the ship
left the port the sellers heard of the insolvency of the buyer and gave
notice stopping the goods. Held, the clay being in the possession of the
master of the ship only 3= a carrier the transit was not at an end, and the
notice to stop was given in time It was obseived by the Appeal Court
that delivery of goods by the seller to the carrier, even though the carrier
be nommated and hired by the buyer, is only constructive, -not actual
delivery to the buyer, inasmuch as the contract with a carrier to carry
goods does not make the earner the agent or servant of the person with
whom he contracts Till tlie goods are in actual possession of the buyer
270 MERCANTILE L A W "

the transit is not at an end, and it makes no diilercnce that their

ultimate destination has not been communicated by the buyer to seller
[In Ex. p Rosevear China Clay Co., Re Cock (1879) 11 Ch. D. 560],
15. X sold copper to Y and sent him a bill oE lading, indorsed in-
blank, together with a draft for the price. Y was insolvent and did not
accept the draft but handed the bill' of lading to Z, in fulfilment of a
contract for the sale of copper to him. Z paid for the copper and took
the bill of lading without notice of X's right as tmpaid seller. X
•stopped the copper in transit. Held, Z can sue the carrier for non-deli-
very, as the seller had lost his right of stopping the goods in transit. An
unpaid seller's right of stoppage in transit is defeated against a transferee
who takes in'good faith and for consideration [Cahn v. Pockett's, etc., Co.
(1899) 1 Q.B. 643].
16. X, a dealer in cattle food, sold to Y, another such dealer, 15,000
tons of meat and bone meal of a specified qurlity to be shipped 1,250-
tons monthly in equal instalments. After about half the meal was-
delivered and paid for, it was found that it was not of the contract
quality, and Y refused to take further delivery. Held, Y was entitled to-
refuse to take furtlter delivery, as he was not bound to take the risk of
having put upon him further deliveries of goods which did not confoim.
to the contract [Robert A. Munro & Co. v. Meyer (1903) 2 K.B. 312].
17. A sells and consigns to B goods o£ the value of Rs. 12,000. B-
assigns the railway receipt to C to secure a specific advance of Rs. 5,000
on the railway receipt. Before the goods reach the destination B becomes-
insolvent being indebted to C for Rs. 9,000. A gives notice to stop the
goods in transit. A can stoji the goods in transit but subject to the
pledge of C. Since the pledge was to secure a .specific advance of
Rs. 5,000, C can recovei that amount from the goods or from A. A v/ilt
have to pay Rs. 5,000 to C and can rank as creditor of B in insolvency,
C will rank as creditor as to Rs. 4,000.
18. A possessed a car which lie knew to be stolen. He secured a:
loan of Rs. 1,000 from B on the security of the car. Subsequently he
sold the car to C for Rs. 3,000. After the purchase C paid Rs. 1,800 to-
B in full payment of mortgage on the car. The real owner claimed and
recovered the car from C. C sued to recover Rs. 3,000 and Rs. 1,800'
Iron' A and B respectively. C can recover Rs. 3,000 from A, but he will
not get anything from B.
19. A, the seller, sent some goods to B, the buyer, by a truck owned
by a firm carrying on tiic business of carriers of goods. Before the goods-
arrived at the dcitrination, B became insolvent. C, pui porting to act on
behalf of A, sent a notice to the firm not to deliver the goods to B. In
fact, C had no authority to do .so. B's receiver formally demanded the
goods from the carrier firm, tendering the ft eight at the same time. T h e
firm refused to deliver to tlie receiver. Immediately after, the firm
received a telegram from A confirming the notice given by C. Held, the-
transit was at an end and the carriers were wrong in refusing to deli\'er
to the recei\'er and were liable in trover. The later attempt by tlie seller
to ratify the stoppage of the goods by C was of no effect [Bird v. Brown
(1850) 154 E.R."1433].
20. There was a sale by sample of mixed worsted coatirgs to be in
quality and weiglu equal to the .samples. It is found that the goods owing
to 1 latent defect will not stand ordinary wear when made up into coats.
T h e same defect appeared in the sample but could not be detected.
SALE OF GOODS 271
Held, the buyer can reject the goods as the' defects in the cloth were not
discoverable by the ordinary inspection [Driimmond v. Van Ingeii (1877)
12 App. Ces. 284].
21. A film of confectioners' materials agreed to sell condensed milk
in tins of a. certain standard to N who received the shipping documents-
and paid the price. The goods arrived bearing a brand wiiich was a a
infringement of a registered trade mark of another manufacturer and
were, therefore, detained by the customs autlioritics. Held, the sellers-
had broken the implied condition relating to title to the goods. As the
selleis had no right to sell these goods, the buyer could get back the price
and sue for damages [Niblett v. Confectioners' Material Co. Ltd. (1921)-
3 K.B. 387].
22. 2,000 gross of "200-yard reels" of sewing cotton were sold on
condition that goods were to be deemed in all respects in accordance Vvith
the contract unless the buyers took objection within 14 days after the
arrival of the goods. 18 months after delivery goods were found to be
short in quantity, the length per reel being on an average 6 per cent short.
Held, the condition aijplied only to quality and not to quantity and the
buyers were entitled to damages [Beck & Co. v. Szymanoski & Co. (1924)

23. M made a hire-purchase agreement with N for a motor-car of

whicli N was described as the owner. M paid four of the twelve month-
ly instalments and then learned that X claimed to be the owner of the
car. He nevertheless paid iho balance of the instalments and exercised
his option of purchase. X then demanded the car and M gave it up to
him. M then sued N to recover the full price and N counterclaimcd
for a reasonable sum as liiring charges for the car during the period it was
with M. Held, M was entitled to recover the full price paid by him to
N, but N could not get anything. There was a breach of condition of
title treated as a beach of warranty and so M could get back the
amount paid by Iiim. But N could not get anything because there was
a total failure of consideration for which, had he been .so minded, M
could have sued in quasi-contract and which prevented N from recover-
ing any sum of money whether under the hire-purchase contract or by
way of quantum meruit. [Warman v. Southern Counties Car Finance
Coop. Ltd. (1949) 2 K.B. 576].
24. R bought a radio iet from B, the local distributor of HGE Ltd.,
for Rs. 675 with a one-year guarantee of satisfactory service. 'Ihe radio
set proved defective from the very beginning and had to be repaired
by the local distributor twice and once by the manufacturing company.
But it was not foiuul satislactoiy. R claims relund of its price. Held,
R's case came under the purview of. exceptions (1) and (2) of S. 16 of
tlie Sale of Goods Act, 1980, and he is entitled to refiuid of the price.
T h e radio was not of merchantable quantity nor was it fit for the pur-
jjose, i.e., as a tad o set [Ranbir Singh v. Hindustan General Electric Cor-
poration Ltd., 1971 ^om. 97].'
 Chapter VII

Insurance

PART 7-A

In business, as in private life, there are dangers and risks of every

3cind. The aim of all insurance is to make provision against such dangers
-ivhich beset human life and dealing.' He who seeks safety, called the
insured or assured, pays a certain sum, called the premium, to the insurer
or underwriter who, in consideration of this premium, takes upon him-
•self the risk insured against and undertakes to make good to tlie assured
any loss which he may sustain by reason of the named peril.
T h e risks which may be insured against include fire, the perils o£
the sea (marine insurance), death (life insurance) and accidents and
burglary. In fact, nowadays the happening of practically any event may
•fae insured against at a premium commensurate with the risk involved.

N A T U R E OF T H E CONTRACT OF INSURANCE
T h e contract of insurance is called an^ aleatory contract because it
•depends upon an uncertain event. If such a thing happens, e.g., if the
house is burnt down or the ship is stranded, die insurer will pay the
value of it. At first sight this would seem to be a wagering transaction,
the insurer betting with the assured that his house will not be burnt or
his ship will not -sink and giving him the odds of its value against the
premium. .It is because of-this uncertainty that Lord Mansfield^ described
insurance as "a contract on speculation." But the modern view is that
insurance contracts are not speculative or wagering contracts. Insurance
is not merdy a gamble on an uncertain future. In reality, a contract of
insurance i^ a perfectly valid contract; for the assured, is only indemnified
for his loss, antl he does not gain by the happening of tlie event insured
against; he does not make a profit of his loss. Moreover, the assured
must,have an insurable interest in the subject-matter insured; while in a
wager no insurable interest is present. Therefore, although it is an
aleatory contract, depending upon an uncertain event, it is not a
wagering or a speculati<'e contract nor is it merely a gamble on an i|n-
rertain future.

1. Carter v. Boclim (1765) Sm. L.C. 546.

INSURANCE S"!!
FUNDAMENTAL PKINCIPLES OF INSURANCE
Insurance trans,aciioiis are concluded upon principles ^sfliich on
examination prove simple and almobt self-evident, yet tlrey are constantly
being imoked, and we must ne\er lose sight oE them. These principles
are common to all types of insurance including lite assurance, exceptmg
the principle of indemnity which does not apply to lite assurance. These
principles are (i) good faith, (ii) insuranrce interest, (iii) indemnity,
(iv) mitigation ot loss, (v) attachment of risk, (vi) causa proxima.

GOOD FAITH
A contract of insurance is a coiuiact, ubieirimae fidei, a contract
based on utmost good faith aiid if the utmost good faith is not
observed by eitlier party the contract may be avoided by the other.
Since insurance shifts risks from one party to another, it is essentia' that
there must be the utmost good faitli and frankness between the insured
and insurer; the whole truth must be told about the subject-matter of
insurance and all circumstances surrounding it, in order that the under-
writer ni'iy kno^v the extent of his risk and how much he must charge
for the'insurance of it. The withholding ot any relevant intoimation is
a most serious matter, and the underwriter can declare the contract void
on discovering it. The obligation to make a full and true disclosure applies
to \all types of insurance. The duty to disclose continues up to the
conclusion ot the contract and co\ers any material alteration in the
character of tlie risk which may take place between proposal and accept-
ance." Fraud invalidates the insurance, and deprives the party committ-
ing it of all his rights. arisnig out of the contract. Concealment or
misrepresentation of material facts,'s fatal to th'e , contract; but in case
of innocent misrepresentation the premium is returnable on the avoid-
ance of the policy. Non-disclosure of a lact of which the assured was
ignorant is not fatal . to the contract. He need not mention what tiie
insurers know.

INSURABLE INTEREST
The second principle is that the assuied must have an actual interest,
called the insurable interest, in the subject-matter of th^; insurance:
either he must own part or whole of it, or he must be in such a position
that injury to it would affect him adversely. He must be "so situated
with regard to the thing insured that he would ha\e benefit from its
existence, loss from, its destriiciion.'" Any person may 'be said to have
an interest in the subject-matter of insurance who may be injured by die
risks to which the subject-matter is exposed, or would but for those
risks have a certainty of advantage. To illustrate this point we may
take an example from marine insurance. The owner of a ship runs a
2. See Vijaykumar v. New Zealajid Ins. Co., 1954 Bom. 347; See-
thamma v. Bombay Life Ass. Co., 1954 Mys. 134; IColhatkar v. W I L l
Co., 1951 Nag. 325; V.K.S. Selly v. P.L. & G. Ins. Co., 1958 Mys. 53; Rattan
Lai v. Metropolitan Ins. Co., 1969 Pat. 413; Looker v. Law Union and
Lock Ins. Co. (1928) 1, K.B. 554.
3. Lucena v. Crawford (1806) -1 Taunt. 325, per Lawrence J.
fm MERCANTILE LAW

risk of losing his ship, the charterer of the ship runs a risk of losing
his freight, and the ownei of the cargo of losing his goods and profit.
All these persons are interested because they all run a risk, have some-
thing at stake, ^something to lose by the happening o£ the peril insuied
against. It is the existence of insurable interest in a contract of insurance
that differentiates and distinguishes it from a mere wager or a gaming
contract. But it is essential that the insurable interest must be actual and
real and not a mere expectation or an anxiety. It must be pecuniaiy in-
terest; a purely sentimental interest would not be enough. A contract of
insurance effected without insurable interest is void.

INDEMNITY
The third fundamental principle is that excepting hie assurance
and personal accident and sickness insurance, a Contract of insurance
contained in a file, marine, burglai'y or any other policy is a contiact
of indemnity. This means that the assured in the case of loss
against which tlie policy has been made shall be fully indemnified but
never more than fully indemnified. - Thus, the insurer does not agree to
pay a specific sum on a certain contingency but undertakes to indemnify
the insured what he actually loses by the happening of the event upon
which the insurer's liability is to aiisc, and in no case is the iiisuied
entitled to make a profit of his loss. If tlie house is buint clown, the
insurer will'pay the value of it. At fiist sight this migh't appear to be
a wagering transaction, the insurer betting with the insuied that his
house will not be burnt down and giving him the odds of its v.ihie
against the piemiiim But so long as the insured is only indemnified foi
the loss and does not make any gain by the happening of the event
insured against, the contract is valid. A contract of insurance, howe^el,
ceases to be a contract of indemnity if the insurer promises to pay a
fixed sum on the happening of the event insured against ivhetlier the
assured lias suffered any loss or not. From their very nature contracts
of life and accident insurance belong to this class and in their case in-
demnity is not the governing piinciple. In these cases, the value of the
jjeril insured against cannot he appraised in, money, and therefoie, ilie
injury or death cannot really be indemnified. Even contiacts of fire t>i
burglary insurance need not necessarily be contracts of indemnity If
the insurer agrees to pay a certain fixed sum irrespective of loss, the con-
tract is not one of indemnity. An insurance was against loss of certain
specified articles including a pearl necklace, and the necklace disappear-
ed. The insurer under agreement with the insured 'gave him some
other articles to take its place. The necklace was later found. The
Court held that the insured could retain the articles supplied by the
insurance company.

MITIGATION OF LOSS
The next essential piinciple is that, in the event of some mishap
to the insured property, the owner (the insured) must act as though
he were iininsuied, and make every effou to prcseive liis propeity
He must lake such steps to this end as he considers prudent, and should
INSURANCE 27o
his property be touched by peril, he must do everything m his power,
lo minimise the Iq^ss and to save what is left. In a word, he must act as
a prudent uninsured person would do in similar circumstances. But it
must be remembered in this connection that though a man is bound to
do his best for his insurer, he is not bound to do it at his own peril.
So, if reasonable effort was made and precaution taken ^o save the pro-
pel ty, the insurer will be liable for all loss resulting from the peril in-
sured against.

RISK MUST ATTACH

Tlie next principle is that a contract of insurance can he enforced
only it the risk has attaclied If the risk is not run tlie consideration
fails, and therefore the premium received by tlie insurer must be return-
ed. It is so even where the cause of the risk being not run is the fault,
will or pleasure of the assured. 'I'he underwriter receives a premium for
running the risk of indemnifying the assured, and if he does not run. the
risk, tiie consitleration for which the premium was put into his hands
fails and therefore he must return it.' While a policy does not attach
tillv the risk begins, it can equally not attach after the risk is determin-
ed one way or otUer, except in those special insurances where both par-
ties being ignorant of the position of the thing insured, contract to
insure it lost or not lost.°

CAUSA PROXIMA
I'he last principle is that in order to make the insurer liable for
a loss, such loss must have been proximately by the peril insured against.
"Every loss that clearly and proximately results, whether directly or in-
directly, from the event insured against is within the policy." Thf maxim
in causa proxima non remota spectatm-, i.e., the proximate and not the
remote cause is to lie looked' to, and if tiie cause of tiie loss is a peril
insured against the assured can recover. "The question, which is the
causa proxima of a loss, can only arise where there has been a succession
of causes. When a result has been brought about by two causes, you
must in. .. .insurance law, look to the nearest cause, although the result
would, no doubt, not have happened without the remote cause."' In this
case the peril insured against was collision with anodier sliip, resulting in
delay and mishandling of cargo of oranges which deteriorated. The
Master of the Rolls held that the damage to oranges was not direct re-
sult of collision, but of delay and mishandling and as these causes were
not insured against .the insured could not recover. "The law will not
allow the assured to go back in the succession of causes to find out
what is the original cause of loss,'"* Tlie last or the effective of the
causes is to be looked into and others rejected.

'1. Tyrie v. Fletcher (1777) 99 E.R. 1997.

5. Picard, Elements of Insurance Law, p, 3.
6. Stanley v. Western Ins. Co. (1868), 3 E.X, at 74, per Kelly, C.B
7. Pink v. Fleming (1899) 25 Q.B.D. 396, per Lord Esher, M.R.
8. Ibid.
276 MERCANTILE LAW

CONTRACT OF INSURANCE ONE FROM YEAR T O YEAR

T h e g£nei;il l u k is tliat except in the case o£ life assuiance a con-
tract of i/iiurance is a comiact from year to year only, and the •in!)Ur-
ance aiitomaticail) comes to an end after Ihe expiry of tlie year; but it
can be continued for a liiuher period, if before the expiry of the year,
the insured expresses his intention to continue and pays the premium, A
contract o£ life assurance i? not a contract for a year only, but is a con-
tinuing contract with a provision that if piemium is not paid every year
at or about the specified time the contract would lapse. 'Ihis distinction
is of great importance with regard to the duty of disclosure and the ope-
ration of conditions subsequent to the assignment of the policy oi its
proceeds, and days of grace.

PREMIUM
The premium is the price for the risk undertaken by the insiiici-.
It is ilie consideration for the insurance. 'I'he premium necil not always
l)e a money payment, although in majority of cases it is so. Any consi-
deiation sufficient for a simple contract may become the premium m a
(oniract of insurance. For example, in the case of mutual insuiancc,
it consists of a liahilily to contribute to the losses of other members of
ihe mutual society.
The rale of premium is based upon Uie average of losses as com-
paied Willi piofiis. All circumstances affecting the risk like locality, the
consmiction and use of the property, are taken into consideration. In
life' assurance, the piemium is calculated on the average rate of mor--
i.dity and a piemium which on that ordinary average will prevent the
insuiancc company fiom being the loser is charged. Over and above
i-siimates ami averages the premium includes an additional sum for office
cxjjenses anil other charges. The amount of the premium may not al-
ways be a fixed sum, for it may be arranged to vary according to the
(lianges in the i isk at any time. We have observed before that pay-
ment of the ])remium constitutes, in cases, a condition precedent to the
creation of a binding conliact of insurance. Though pre-paymeiu of the
I)remiuin is not a condition implied in law as precedent to the liability of
the insuier, it is the general practice of the insurance companies. In such
rases unless the premium has been paid, the contract will not be effec-
tive even alter an agreement to issue and accept a policy.
Prima facie premiums are payable in cash to the insurer at the prin-
cipal place of business, and payment in any otlier form may be refused
by the company. But the payment may be effected in the form of set-
tlement of accounts, or a claim of the insured against the insurer may
be set off against the premiinns due under tlie same or other policies,
even though the claim is unlicjuidated; but the insurer is not bound to
apj)ropriatc the money due for claims towards premium' unless directed
10 do .so. Furthei, ilie premium mav be uaid bv iiisialmeiils and liie
payment of ihe fiist iiisialment is ilie i)crformaiKc of ilie rontiition that
insurance is not to attach unless the piemium is paid. The policy re-
mains in foice for the entire period specified. 'Ihe premium is gene-
 INSURANCE 27f

raily fixed at an annual rate but for the sake of convenience it is ai-
ranged between tiie parties that it may be paid in half yearly, cjuarteily
or even monthly instalments. In such cases, it is further provided that
if the assured dies in any one year before all the instalments for diat
year have been paid the balance may be deducted from the sum insuied.
The policy would, however, lapse if there is a failure to pay any instal-
ment when it falls due or within any days of giace which may be allow-
ed.' Payment to the agent is sufficient if such agent is exniessly-or im-
pliedly authorised by the company to receive payment or is held out
by the company as a person having such authority. But where the as
sured knows tlint the company has limited the autiioriiy of the agcnl
as to the receipt of premiums, payment to such agent is not binding

DAYS OF GRACE
The days of grace are tlic days allowed liy the insurance company
after the expiiy ol the stipulated period of insurance during which
the asbuicd can pay the premium in order to continue or to renew
the -jjolicy of insurance. If tlie contract of insuiance is only for a
year, the days of grace are meant to afford to tlio assuicd an addition-
al opportunity of renewing the contract and not of continuing it. So,
if the insured has not agreed before the year is over to lenew the con-
tract, and the loss happens during tiie days of glare, the com]jaiiy is
not liable. Also in insurances where the insurer reserves the option
to renew the risk, the insured is not covered during ihe days o£ grace
if the renewal premiums remain unpaid, i.e., before it is~tendered and
accepted. If therefore before the expiration of the vear ihc company
gives notice to the insured that luiless an increased i)!ciniiim is jjaid
the insuiance would not be renewed and if the insurer refuses to pay,
the company is not liable on the destruction by fire of the premises
of the assured after the expiration of the year but within the days ot
grace. In tlic case of contract of life insurance, on the other hand,
the insurers have no option but to continue the policy on the pay-
ment of the premium evet7 year, as the policy, creates a continuing
risk. On the non-payment of the premium the jjolicy merely lapses.
If, therefore, death occurs during the days of grace without riie pav-
inent of the i)>'emium, the morev due tinder the policv becomes payable.

RETURN o r PREMIUM
•We have seen above that premium is the censideration for the risk
uin by the insurers, and if the risk insured agaFast is not rim, then
the consideration fails, the policy does not attach, and as a consequence,
ihe premium paid can be recovered from the insurers. The general
principle applicable to the claim for the return of premium is that it
the insurers have never been on the risk, thev cannot be said to have
earned the premium. The ri.sk is never run where before the policy
comes into force the subject-matter of insurance ceases to exist, or
where it is wrongly described, or %vliere the assured had never anv in-
surable interest in the sub)cct-ni.Ttter. or where the policy issued is
ultra vires the coinpanv. or where the policv is void on .iccount of some
 278 MERCANTILE LAW

illegality, or where the policy is void on account of some breach of a

condition precedent. But where the insurance is avoided by the in-
surers on the ground of breach of warranty the premium can only be
recovered if it is shown that there was a breach ab initio. Where, liow-
evcr, the risk l\ai begun to run n o ' mattef for how short a period, the
premium cannot be recovered; and so a breacli of condition subsequent
is no ground for ordering the return of the premium, as the risk has
once attached. ^V'liere the value of the interest insured turns out in
fact to be less than the amount insured, a proportionate pari of the
premium must be returned, for the insurers have only been liable to
indemnify the assured and in the event of a loss would only have paid
the actual value of the subject-matter destroyed. Therefore, the insur-
ance has not really attached in respect of the amount over-insured and
a- proportionate part of the premium has never been earned by the insur-
ers. The over-insurance must be made in good faith otherwise no portion
of the premium would be returned. This does not, howe\'er. mean that
the risk which has begim to run can be apportionfc<l and'a proportionate
premium returned imlcss the risk is divisible, and has attached only to
some separable part of the subject-matter.

POLICY
The policy is a formal and enforceable 'stamped document signed
and issued by the insurance company embodying the terras of the contract
between the parties. Although it is a universal practice of insurance
companies to issue policies, yet, except in marine insurance, there is no
rule of law requiring the issuing of a policy or its being in any" parti-
cular form. A policy is only a documentary evidence of a contract
of insurance between the parties, and neither law nor custom disfavours
oral evidence to prove the terms of the contract of insurance. The ex-
igence of a policy, therefore, is not necessary for the validity of a con-
irari of insurance, other than marine insurarite. A contract of marine
insurance shall not be valid unless it is expressed in a Sea or Marine
Policy.
The article: of as.sociation of evcrv insurance company usually pro-
vide the mode in which the company is to be bound, and policies must
be issued in accordance with the provisions contained therein, before the
assured tan .sue on the insurance. But where there is a clear proof of
agreement lo insure, the Court will order the company to issue a policy
in accortlancc with such agreement. No company, whose business is confin-
ed to certain classes of risk, can issue a valid policy not covering such
risk. All insurance policies must be stamped. A policy is a unilateral
document and the assured is no oarty'to it. It is issued bv the insurers
•ind bears the seal of the company, and is signed by certain responsible
olTueis of the company. It does not purport to be signed bv or on
behalf of ilic insured. But the assured can enforce his ri^ht under it.
if he has done ei'er\thinR required of him, and he is also bound bv if.
If a condition ^appears for ihc first time in the nolicv which was neither
(oniemplated nor agreed upon between the parlies, rlie assured is not
 INSURANCE 279
hound by the contract, unless he accepts this condition. Delivery of the
policy to~the assured is not essential to make a binding contract; and
the risk will attach where no policy is delivered, if the contract is other-
wise complete and the first premium has been paid. When the policy
ii under the seal of the company, it becomes operative from ihe time it
is foimnliy* "signed", sealed and delivered to the assured or his agent.
Tiie policy when issued is the property of the assured even though it may
be retained by the insurers for convenience 6nly, for "there is no duty
on the part of an insurer to get the policy of insurance into the physical
possession of the assured." ."Vnd mere delivery to the assured does not
amount to an acceptance by him of the terms of tlie contract. Furtlier,
as the deliver)' of the policy is not a ncccssni-y condition to the attaching
of the risk, similarly, its production is not a condition nrecedent to the
payment of the money due under it. Its non-production may be ex-
plained by showing that the poliq' is lost or it is in the hands of a per-
son who does not part with it.

INTERIM RECEIPT, CERTIFICATE OR COVER N O T E

A cover note or interim certificate is a document which the insur-
ance company, on receiving the proposal, may issue pending the execu-
tion of a policy or the final decision of the directors as to acceptance
or rejection of the proposal. It acknowledges receipt of premium and
forms a binding contract of insurance during the interval between the
proposal and the final acceptance or rejection bv the insurers. The
practice of issuing cover notes is very common in fiic. bin-glaiv or acci-
dent insurance business.

REINSURANCE
Every insurance company has a limit to the risk it is willing to under-
take in respect of an individual policv. Thus, if an insurance company
finds thai it has entered into an in.surance contract which is an expen-
sive proposition for it or if it wishes to minimise the chances of any
possible loss, without, at the same time, giving up the contiaci. it will
re-insure n portion of the risk with some other insurance companv or
companies. This de\ice is known as re-insurance. Siinuose a man wisliing
to insure liis house for Rs. 50,000 goes to an insurance conioanv. wliich
will accept the risk if it is satisfied as to the condition of the ])iopcriy.
BUI if its own limit is probably Rs. 25,000, it will ariange with another
comjiany to re-insure or take up so much of the risk as exceeds iis liniii.
i.e.. Rs. 25,000, so that if the house is burnt down the original insurers
would pav the owner Rs. 50.000, but they would he rerouned Rs. 25.000
by tiic reinsurance office. Re-insurance can be resoited w in all kinds
of insurance. Re-insurance is a contract which instu-es the thing originally
insured, and by which an insurer is to be indemnified against anv loss
wliich he may sustain by reason of being him.self comnclled lo (lay (lie
assured under the oiiginal contiact of insurance. .\ contract of insuranrc
creates in the insurers an insurable iiiicresi sufTicicni to support a re-
insurance 10 the full amount of llieir liabilily on ihe original ])oliry. But
a rnniract of reinsurance is alwav<; a contract of indrninifv. Hcnrc (lie
280 MERCAiNllLE lA^V

re-insurers befoie''paying money must be satisfied that the sum originally

insured has been paid by the re-insured.
The re-insurance is subject to the clauses and conditions in the ori-
ginal policy, and is also entitled to any benefits which the original insur-
ance policy is entitled to. If the original' contract is altered without
the consent or knowledge oE the re-insurers, the re-insurers are discharg-
ed. As a policy of re-insurance is co-extensive with the original policy,
the former caimot remain in force for a period exceeding the duration
of the original policy. If, therefore, the original policy lapses or the in-
surance comes to an end tor any other reason the re-insurance policy also
ceases to exist automatically from that date. Just as in the case of an in-
surance so in a re-insuranc,e the parties must show the utmost good faidi.
If information possessed by le-insured and material to the risk be not
Lommimicated to the re-insnrer the policy of re-insurance will !je void.
The re-insured must inform the re-insurer not only all the facts disclosed
10 him by his assured, but also such facts as he learned subsequent to
the original contract. A re-insured being himself an assiu-ed, is re-
Cjuired not only before, but after the contract comes into force, to act
with the greatest good faith. Though misrepresentation or non-disclo-
sure of a material fact by the re-insured will avoid the policy, yet repie-
sentation as to the nature of the risk will not help the re-insurer xvho
has formed his own judgment of the nature of the risk. Re-insurers are
entitled to b^ subrogated to all the rights of the original insurers includ-
ing the right of the insured to which the original insurers are siib-
rogated."

DOUBLE INSURANCE .
When the same subject-matter is insured with two or Uiore insurers
and the total sum insured exceeds the actual value of the subject-matter,
it is known as double insurance and it a.mounts to over-insurance. As
slated in Section 34 of the Marine Insurance Act, over-insurance and
double insTU-ance are valid unless the policv otherwise provides. For ex-
ample, if A insure.s hi.s factory for Rs. 1- lakh with three insurers as :
with X for Rs, 40,000, with Y for Rs._^ 35,000 and with Z for Rs. 50,000,
ihere is' double - insurance because the aggregate of all ihe policies cA,
ceeds the total value of A's factory. If A insure.s with X for Rs. 'fo,000,
with Y for Rs. 30,000 and with Z for Rs. 30,000. llicrc is no double in-
surance.
In cast/ of loss, the assured may claim payment from the insiu-er'; in
such order as he thinks fit, but he will not get more than his actual loss,
as each contract of insurance is a contract of indemnity. The advant-
age of double insurance is that it protects him against loss in the event
of one or more of the insurerji becoming insolvent, he can recover up
to the value of the policy from the solvent insurer. The insurers as
between themselves are liable to contribute to the loss in proporlion (o
the amount for which each one is liable. Note, there is no double in-
surance in ca.se of life insurance. Human life is priceless and a person

9,' Assicurasioni, etc. v Empress Ass. Corp. (1907) 2 K.B. 814,

INSURANCE 281

(an get his life insured with as many insmcrs as lie likes; lite insurarite
is not a contract of indemnity. In India, Life Insurance Corporation o£
tndia being the only insurer of life there is no question of double in-
surance of life.

PART 7-B
SUBROGATION AND CONTRIBUTION
IN FIRE AND MARINE INSURANCE
SUBROGATION
As observed before, the essence of fire and marine insurance is in-
demnity, which means that the assured shall be fully indemnified. He is
not to make a "profit of his loss" and it is this rule that gives rise to
the doctrine of subiogation. The right of subrogation is a necessary corol-
lary of the principle of indemnity and is essential for its preservalion.
It is inherent in and springs from the principle of indemnity and the
basis of the right is justice, equity and good conscience so that the in-
surer may reduce the extent of his liability within limits" If the assured
recovers the full extent of the loss from the insmer and then he gets
compensation from third parties in respect of the same loss, the assured
would be moie than fullv indemnified and the whole doctrine of indem-
nity would be done away with." Subrogation is the substitution of one
person in place of another in relation to the claim, its rights, remedies
or securities. The doctrine is applicable to both fire and marine insur-
ance, by which, on indemnifying the insured for his loss, "tlie underwriter
is entitled to the advantage of every right of the assured, whether such
right consists in contract or in remedy for tort or in any other right."
Having satisfied the claim of the assured, the insurers stand in his place;
they are subrogated to all his rights, and if he also receives compensation
hoin mine other person in i-espect of the same loss he mast pay over that
amount to the insurers. He cannot take with both hands. To illustrate
the doctrine, we may give the facts of the case Castellain v. Preston."

A vendor .contracted with a purchaser for the .sale of a^house which

had been insured against fire by the vendor. There was no mention of
Ihc insurance in tlie contract of sale. A fortnight later t h e , house was
damaged by fire and the vendor received £330 under his policy. Subse-
([uently the purchase was completed i^nd the purchase money agreed upon
paid without any deduction of the sum received by the vendor from the
insurers. Held, in an action by the insurance company against the ven-
dor that the insurers were entitled to recover a sum equal to the insui-
ance money.
In another case, a ship is posted at Lloyd's as "r ;.sing" and the lui-
derwriter on Iier hull pays a total loss. If the' vessel should subsequently

10. Vasudeva v. Caledonian Ins. Co., 1965 Mad. 159.

11. North England Iron Steamship Ii-s. Asson. v. Armstrong (1S7'.))
30 L.J.Q.B. 81; John Edward k Co., v. Motor Union Ins. Co. (1922^ 2 K.B
249. ^ '
12. Castellain v. Preston (1883) IJ.QB.D. ,H80 at p. 38. per Brett L.J.
 282 MERCANTILE LAW
arrive, she is then the property of the underwriter." Or, where goods
are jettisoned for the general safety, the underwriter On payment for a
total loss of the jettisoned goods, stands in ^i.e place of the assured and
is entitled to general average compensation for the jettison." . The insur-
ers, liowever, liave only the rights which the insured himself has; for, in
ilic words of Lord Cairns, "the right of the underwriters is merely to
make sucli claim for damages as the assured hin^self could have made
and it cannot of course be made against the assured himself."
In Simpson v. Thompson," two ships A and B belonging to the same
owner came into collision. The insurers of the ship A indemnified tlie
owner and then sued him as owner of the ship B for negligence, claim-
ing the amount they had paid in respect of ship A. Held, they could
not recover, as both vessels were owned by p n e a n d the same person, no
remedy "^had been transferred to the underwriter, inasmuch as a person
cannot sue himself. '
The insurers having contracted to indemnify, they cannot insist on
others being sued first, thougli after having indemnified tlie assured, the
underwriters stand in his place and can enforce whatever rights to con-
tribution or damages the assured was . entitled to." The result is that
the owner has two remedies and he may avail himself of which he pleases,
though he cannot retain the proceeds of both, so as to be repaid the
value of Jils loss twice over. '

CONTRIBUTION
Contribution is the right of the insurers to claim from others some pay-
ment towards the loss, and arises only where there is double insurance, i.e.,
where two or more policies have been taken out the total amount whereof
exceeds the total value, of the loss suffered. Remember, it takes place
where different insurers insure the same interest in respect of the same
property and the same perils. It resembles the remedies between co-
sureties whereby the liability of each may be made proportionate.' As the
contract of insurance is a contract of indemnity, the assured cannot get
more than the actual value of the property or the amount of the loss.
The insurer is only entitled to contribution where he has paid the assur-
ed: The assured may sue all insurers together, or provided the policy
is not subject to average, he may recover the whole amount of damages
from one and let that one seek contribution of the amount paid by him
in excess of ratable proportion of loss. Ratable proportion is such a
proportion of the loss as the amount of the policy or item under -which
los<, occtirs bears to the total insurance under the same heading. Thus,
if A insured his house with B company for Rs. 20,000, and witli C com-
pany for Rs. 10,000 and the house is damaged to the extent of Rs. 6.000,
A mav sue B company and recover the entire sum of Rs. -0.000 from it.
B company can then sue C company for contrilnition. T h e loss xvill
he divided ratably as follows :—

1.8. Houstman v. Thornton (1810) Holt N., 212.

M. Dickinson v. Jardine (1866) L.R. 3 C.P. 6.89.
1.'). (1877) 3 A.C. 279.
16. Dickinson v. Jardine, Ibid.
 INSURANCE 283

20,000
B Company g„ „„Q- of 6.()()(»=:Rs.4,000

10,000
C Comjjany-jjij-g^g of G,000=Rs. 2,000

But tlie interest insured must be the same; if not, the insurers of the
peison who would have been"liable if no insurance whatsoeNcr had been
effected will have to bear the loss. Thus i n -
North British and Mercantile Co. v. London, Liverpool and Globe
Ins, Co. (1877) 5 Ch, D. 569, goods were burnt whilst in a warehouse. The
merchant had insured the goods and the wharfinger had also done so to
cover his common Law liability. T h e merchant's insurers having paid
the loss sued the wharfinger's insurers. Held, that the .merchant's insui-
crs could recover the whole amount of the loss as this was a case of sub-
rogation and not contribution, since each insurer represents his assured
and the right of the bailor against the bailee is not to contribution merely,
but to complete indemnity.

DISTINCTION BETWEEN SUBROGATION AND CONTRIBUTION

1, Contribution implies more than one contract of insurance each
of which undertakes a similar, it not identical, liability in respect of the
same subject-matter and the same interest therein. .Subrogation does
not imply more than one insurance.
2. The object of contribution is to distribute the actual loss in such
a way that each bears his proper sliare. No one insurer is more liable
•lian any other, no more than the whole loss can be recovered. In case
of subrogation, thtf object is substitution of one person in place of an-
other .so that the one who is substituted succeeds to tiie rights and re- ~
medies of anothey person.
i. In contribution, the insyrer, after making pi^vment to the as-
sured, recovers the amount that he has paid in excess of his share from
other insureis. In subrogation, after satisfying the claim, the insurer
stands, in the place of the 'assured. He may I'ecover from a third party
who would have been liable to pay had there been no insurance.
'Tor subrogation to arise, the assured must have concurrent remedies
against the person causing the loss and against the insurer. Tliere need
not be more than one policy nor need that offer complete indemnity.
All that is necessary is that there should be, besides the insurer, another
person liable to the insured, or other means of indemnity open to the
assured other than and besides recourse to the insured In subroga-
tion the aim is to shift the loss on him who woidd have been liable if
there had been no insurance; in contribution the aim is to spread tFie
loss cquitablv amongst the different underwriters who Iiave insured the
•same interest.'"^

17 Porter's Laws of Insurance. 8th ed., p 2'JI

 Chapter VIII

Marine Insurance

PART 8-A

MARINE INSURANCE
The law relating lo marine insurance is now found in tJie Marine
Insurance Act, 1963, and references in this section are to that Act, unless
the contrary is expressed.
A contract of marine insuiancc is an agreement whereby the insurer
undei takes to indemnify the assured, in the manner and to the extent there-
by agreed, against marine losses, that is to say, the losses incidental to
marine adventure (Section 3). There is a marine adventure when (1) any
insurable jDroperty is exposed to maritime perils; (2) the earnings or
actfuisition of any freight. pa.ssage money, commission, profit ol- other
pecuniary benefit, or the security for any advances, loans, or dibunsements
is endangered by the exposure of insurable property to maritime jjcrils;
(3) any liability to a third party may be insured by the owner of. or other
person interested in or responsible for, insurable property by reason of
maritime perils [Section 2(d)].
Maritime Perils (sometimes called Perils of ihe Sea.s) means the perils
consequent on, or incidental to.' the navigation of tlie sea, that is to say.
perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seizures,
restraints and detainmcuts of |jriiiccs and )jcoplcs. jettisons, barratry and
arty other perils wliich are eithei- of the like kind-or may be designed
by the policy [Section 2(e)]. Tlie term "jjerils of the seas" icfers only
to fortuitous accidents or casualties of the sea. and does not include the
ordinary action-of the winds jind waves.

T H E POLICY
A contract of marine insurance must be embodied in a marine policy
which may be executed and issued either at the time of the conclusion
of the contract or,' as is generally the case, afterwards" by initialling of
the slip by the insurer or undenV'riter (Section 24). According to Section
25, a marine policy must specify—
1. the name of the a.'-sured or of some ])crson wlio efTecls (he inMii-
ance on his behalf;
MARINE INSURANCE 285
2. tlie subject mailer insured and tiie lisk. insured against;
3. the voyage, or period of "'lime, or both, as ihe case may be, cov-
ered by tlie insurance;
4. the sum or sums insured;
5. the name or names ot the insurer or insureis.
A marine policy must be signed by or on behalf ot the insurei; and
where a policy is subsciibed by or on behalf ot the two or more insurers,
each subscription, unless the contrary be expressed, constitutes a distinct
contract with the assuied. The subject-matter insured must be designat-
ed in a marine policy with reasonable certainty.

TYPES o r POLICIES
Marine policies are of different kinds and are known by different
names, according lo the manner of their execution or the risks tjiey cover.

VOYAGE POLICY
\Vheie the coniiati is to insure the subject-matter "ai and liom"
or from one place to anothei oi olheis, the policy is called a voyage
policy. A\'here the subject-matter is insuied "from" a. particular place,
the risk atiaclus onl> when the ship starts on the voyage insured (i.e., as
soon as ii leaves the port of conimcncenient) and ends as soon as liie ship
enieis ilic port of destinaiion. Where llie shiiJ is insuied "ai and
from" a particular place, and she is at tliat^ place in good safely
when ilie coniiaci is concluded, ilie lisk aiiaches immediately; and if she
be not at that place when the contract is concluded, the risk attaches as
soon she arrives there in good safety.

TIME POLICY
AVheic the contiaci is to insuic the subject-mattci for a defmiic
period of time, the policy is called a time polity, e.g.. from noon Januaiy
1, 1965, to noon Januaiy 1, 19G6. No time policy can be made for a
period exceeding twelve months, and if it is so made, it shall be invalid
(Section 27). In a lime jjolicy the subject-maUer is covered during the
period of insurance no mailer where the ship is and how many voyages
it makes. A contract for both voyage and time may be included in the
same. policy.

VALUED POLICY
A vahie<l poliq' is a policy which .specifies the agiced value of the
subject-matter insured. In the absence of-fraud, this \alue is conclusive
as between the insurer and the assured, whether the loss be partial or
total; but it is not conclusive in determining whether there has been a
constructive total loss (Section 29).

UNVALUED POLICY
An unvalued policy is a ijolicv which does not .specify the value of the
subject-matter insured, but subject to the limi' of the sum insured, leaves
the in.surable value to be - subsccpicntly ascertained (.Section 30). The
•,86 MERCANTILE LAW

insuniblc \alue is asceitained aj. iollowb : -

(1) JII insiuauce oii ship, the insurable value is the value, at the
comnienccmeni of the risk, of the ship, induding her outfit, provisions
and sioies for the officers and crew, money advanced tor seamen's wages,
and other disbursements incurred to make tlie ship fit for the voyage or
adventure contemplated by the policy, plus the chaiges of insurance
upon the whole. In the case of a steamship, the insurable value includes
also the machinery, boilers, and coals and engine stores owned by the
assured.
(y) In insurance on freight, the insurable value is the gioss amount
of the freight at the nsk of the assured, plus the, charges of insiuance.
(3) In insurance on goods or merchandise, the insurable value is
the prime cost of the property insuied, plus ^he expenses of and inci-
dental to shipping and the charges of insurance upon the whole.
(4) In insurance on any other subject-matter, the insurable value
is the amount at the risk of the assured when the policy attaches, plus
the charges of insurance (Section 18).

FLOATING POLICY
A floating policy is a policy which describes the insurance in general
terms, and leaves the name or names of the ship or ships and other par-
ticulars to be defined by subsequent declaration. The subsequent dec-
larations may be made by endorsement on die policy, or in any other cus-
tomary manner, and must be made in order of shipment. They must,
in the case of goods, compiise all consignments within the terms of the
policy, and the value of the goods or other property must be honestly
stated. If the value is not stated until aftei notice of loss or arrival, the
policy must be treated as an unvalued policy as regards the subject-matter
of that declaration (Section 31).

WAGER OR HONOUR POLICY

It is a policy in which the assured has no insurable interest or the in-
surer or underwriter is willing to dispense with the proof of interest. If
the property contains-such woids as "Policy Proof of Interest''—"P.P.I.",
or "Interest or No Interest" or "Interest Admitted" or Witliout Bene-
ht of Salvage to the Insurer" or any other words to that effect, it is un-
enforceable at law, being a "Wagering Contract." Although valueless in a
Court of law, such policies continue to be common, the assured trusting
in the honour of the insuicr that payment will be made and indeed these
policies enjoy great respect as they are invaiiably honoured by fhe un-
derwriters (Section 6).

INSURABLE INTEREST
The peison who effects an insurance, or issues iVistructions for effect-
ing it, must have an insurable inteiest in the subject-matter. It is not,
howevei, the owner alone who may insuie but every ]3erson having an in-
surable interest in the marine adventure. By Section 7, a peison h.is an
 MARINE INSURANCE 287
insurubk iiuerest it he is iiueiested iu u marine adveiiiuri; iu coiisequea-
ce of wiiich he may beiieii: by the safe airival of insurable propeny or be
prejudiced by its loss, damage-or detention. 'I'lius the owners, sliippers,
agents and odiers have insurable interest iu respect of money advanced. A
mortgagee of a vessel has insurable interest to the extent of his mortgage,
a bailee in respect of property left in custody and care, and charterers
of vessels. An underwriter has an msurable interest in respect of risk
underwritten by him, which he may re-insure. The lender of money on
bottomry or respondentia in respect of die loan. The master or any
member of the crew of a ship has an insurable interest of his wages. The
assured has it in the charges of any insurance which he may effect. All
persons irrespective of nationality have die right to jjiotect their property
by insurance, excepting alien enemies.
The assured must have insurable interest at the lime of the loss
though he may not have been interested when the insurance \vas actually
effected.
>- Where a shipper of cargo, having insured it, assigns the policy to a
purchaser of the cargo while the ship is at sea, and after this assignment
the ship is lost, die assignee will be entitled to recover under the jJolicy,
as he has acquired an interest at the time of the l6ss, though hei Jiad no
interest in the cargo at the time it was originally'shipped and insured.
It sometimes happens that the goods of a merchant are exposed to the
perils of the sea before he has news of their shipment, or an opportunity
of protecting them by insurance. In such a case the subject-mattei: is in-
sured "lost or not lost," when the assured may recover inider the polic/
althougli he may have acquired interest subsequent to the loss. But if at
the time of effecting die insurance the assured knew of the loss antl the
underwriter did not know, it would amoiuit to concealment and bieach
of good faith, and the contract would become void. Where neither the
underwriter nor the assured has knowledge of the loss, the assured will
be entitled to recover for' such -^loss.

INSURABLE VALUE
I lie Aiarine Insurance Act, 1963 maKes a distinction between insur-
able Interest and Insurable value. An insurable interest, as we have
seen, is that interest which the law requires a- person to have to enable
him lo effect a valid insurance. Insurable value is the amount of the
valuation of the insurable interest for the purpose of insurance. If there
is no express valuation in the policy, then, by virtue of Section* 18, the in-
surable value of the subject-matter insured is to be ascertained as follows:
1. In an insurance on die ship, the insurable value is the value of
the siiip at the commencement of the risk. The ship includes lier outfit,
provisions and stores for the officers and crew, money advanced for sea-
men's wages, and oilier, disbursements, if any, made to make' the ship
.^seawordiy for the voyage or adventure, plus tlie insurance charges on
Uhe whole. .'V steamship includes its' machinery, boilers and .coal and
engine stores.
2. In an insurance on the freight, whether paid in advance or not.
iJ88 Ml'RCAN r i L E LAW

liic insunibk value is. the giObs piuouui ol the ticiglu ai tlie risk ol the
ubbuieil, phi6 the diaiges o£ insurauce.
i. In an iiiiuiduce on liie goodb and meichandise, the insurable
value ib the i)iime cost oi the cargo insured, plub the expenses 9I and
incidental to shipping and the charges o£ insuiance upon the whole.
i. In an insurance on an) other subject-mattei, the insurable value
is the amount at tiie risk ol the assured when the policy attadies, plus
the cliarges ot insurance.

DISCLOSURE AND REPRESENTATION

A contract ol liiarine insurance, like an) otliei contract ol insurance,
is one in which tlie utmost good faith (uberrimae fidei) must be observed,
and i£ it is not, the contract is ^oidable by tlie insurei. The assured
must disclose to the insurer eveiy material circumstance wliicii is known
to him, and he is deemed to know everything which he -ought to know
in the ordinary course ol business. A circumstance is material il it,
would influence the judgment ol a prudent insurer in fixing 01 deiei-
mining whether to take the lisk (Sections 19 and 20). The following
are examples ol the concealment ot tacts, which have been held to be
material, entitling the insurer to avoid the contract :—
T h e fact tliat the ship ,li<ul grounded and sprung a leak before tlic
insuiance was cllccted.' A nieuhant, on hearing tiiat a vessel similar to
his own was captured, eflected an insurance without disclosing this in-
formation." 'I he nationality of the assured concealed at a time when
his nationality was important." In an insurance on a ship, tlie fact that
tlic goods cairied wcie insured at a value greatly exceeding their real
value.'
In every case, however, whether a circumstance is material or not
depend.? on the jjarticular facts. In the absence of inquiry by tlie in-
surer, die following circumstances need not be disclosed :—
(a) those which diminish the risk;
(U) those which it is supeiliuous to disclose by reason of any
insurer in tlie ordinary course of his business;
(t) those as to which the intormation is waived by the insin-er;
(d) those whicli it is superllnous 10 disclose by reason of any
e\piess or implied warranty.
If the insurance is effected by an agent, the agent must disclose to
the insuier every fact wliich the assured liimsclf ought to disclose and
also every material circumstance known to the agent. The agent is
deemed to know e\cry fact wliich he ought to know in the ordinary way
of business or which ought to li;nc been communicated to liiin (Section
21).

1. Russell V. Thornton (1859), 20 L.J. Ex. 9.

2. De Costa v. Scandert (1817) 2 K.B. 184.
S. Associated Oil Carriers Ltd., v. Union Ins. Socy. of Canton Ltd.
4. lonides v. I»ender (1874), L.R. 9 Q.B. 531 (1917) 2 K,15. 181.
MARINE INSURANCE 289
In addition t,o his duly to make a full disclosuie, the asiured is under
a duty to see that every material lepresentation made dining the ne-
gotiations lor the contract is true. If any mateual icpicsciitatiou IJL
untrue the insurer nwy avoid the contract (Section 22)
I he method followed m effecting a contract of marine insurance
•differs from that adopted m othei forms of msuiance In a contiact
of insurance, othei than manne insurance, a proposal form is filled in
b) the assured and forwarded to the insuiance company ioi its accept
aiice. .Marine business is often dotie through an insurance bioLer, who,
on receipt of instructions from his principal, prepaies a buef memoran-
dum of the risk, called the "SLIP' I his slip is shown by him to an
underwriter at Lloyds or to an "Insurance Coippany" undeiwriter. If
the risk, is accepted the uaderwntei quotes a late of piemium and if
accepted by the broker, it is enteied on die slip The underwiitcr then
"wiites his line' (i e., (he amount he is iwlimg lo undetwnte), initials
this figure and dates it Should the undeiwntei accept only a portion
of the value of the slip, the broker takes his slip round to several under-
wnteis until the full value is coveied T h e slip has no legal value as
it IS not stamped and also the Marine Insurance Act piovides t^iai a
contract of Manne Insurance can only be entered into by means of a
duly Stamped polic). But at Lloyd's, the slip initiated In a membei
of the organisation will be binding on him undei the lules of the
Lloyd's Where a policy has been issued aftei the slip, the slip may be
relcired to as regards the dale of the contract and the 'intention of the
panics.
Liequentl), a covei note or an iiisuiarr; note is issued instead of
tlie blip, as prcliminaij step to the final piepaiation of the policy Ihese
documents also do not constitute a contiatt But all of these have
moia! woith. as the code of honoui by v/Jucli the undenviitei is bound
IS \ery strong, and i^e would in^ariabl) • issue a policy oi pav the loss
occasioned by the peril before the issue of the policj
A contract of maiine insurance is deemed [o be concluded when the
pioposal of the assuied is accepted bv the insurei, whether the policy
be then issued or not; and for the puipose of showing when the propo-
sal was accepted, refeience may be made to the slip, coveiing note or
other customary memorandum of the contiact, although it be unstamp-
ed (Section 23).

DC BLE INSURANCE
Double insurance is wheie txvo oi more policies are effected by or
on behalf of the assured on the 'ame adventure and interest or any
part thereof and the sums insured exceed the indemnitv allowed by the
Act, e.g, if A insured piopeity wouh Rs 10,000 with \ foi Rs 7 500
and with Y for Rs. 5.000, there iS a double iiisniance, becuise the mea
suie of A's indemnity, viz Rs '0,000, haS been L^cecdcd li \ hati in
suied vAth X for Rs 4,500 and vith Y foi Rs 5 500 these uould be no
double insurance [Section 34(1)]
^\'liei.? the assured is over-insuied b) double ir.sui.mce h e uia), un
:i90 MERCANriLi;. LAW

ie;^ tlie ^policy otherwise provides, tiaim paymeai Irom l i e insurers jn

sucn order as he may dunK ht, provided he does not lecover more dian
lus indemnity. 1£ the pohqf is a valued pohcy, the assured must give
credit as aga^jnst tlie valuation tor any sum received by him under any
other policy without regard to the actual value o£ the subject-matter
insured. It tlie policy is unvalued; the assured must give credit, as
against the full insurable value, for any sum received under any other
policy. It thf assured receives any sum in excess of his indemnity, he
IS deemed to hold such sum in trust for the insurers, according to their
right of contribution among themselves [Section 34(2)]. As between
insurers, eacli is liable to coninbuic to the loss in proportion to ilie
amount for which he is liable. If any insuier pays more than his pro-
portion he can sue the others for contribution (Section 80).

WARRANTIES

In a contract of marine insurance, there are two kinds of conditions

known as ' warranties." A warranty, according to Section 35 of the Act,
IS an undertaking by the assured that some condition shall be fulfilled,
or that a certain thing shall be or sliall not be done, or whereby he
confirms or negatives the existence of a particular state of facts. A
warranty may be express or implied. An express warranty is a condi-
tion whiclv IS set forth in the policy or attached tliereto; and an implied
warranty is an essential condition implied by law, though not written
in tlie pohcy. Strict compliance with these warranties is absolutely es-
sential, for pon-compliance with any one of them is fatal to tlie contract
and absolves the underwriter from all liability. But non-compliance witii
an express warranty is excused when, by reason of a change of circums
tances, the warranty ceases to be applicable to the circumstances of the
contract, or when compliance with the warranty is rendered unlawful
by any subsequent law.

EXPRESS AVARRANTY
There can be and, in practice, are express warranties of endless
variety, but space will not permit reference to them all. We may tpn-
sider here, as illustration, the most commonly met with express war-
lanties. One of them is a warranty that the ship will sail on or be-
fore a certain date. If tlie ship had started on her voyage even though
it has not as yet quitted tlie port, the warranty is satisfied, provided
she moved with everything ready and with the intention and ability to
leave port. The 'Tree of Capture and Seizure" (F. C. & S.) clause and
the "Memorandum" are two of the best known expiess warrantie«. F.C.
&: S. clause reads:
"Warranted free of capture, seizure, arrest, restraint or detainment,
and the consequences thereof or of any attempt thereat (piracy except-
ed), and also from all consequences of hostihties or war-time operations
whether before or after declaration of war." When this clause remains
in the policy it overrides all the perils stated in the. policy to which its
terms are opposed Gold bullion having been "commandeered" by the
Transvaal Government whilst in transit from the mine, in anticipation
MARINE INSURANCE 291
oi ihe outbreak of war which occurred some dayb iubiequeiiily ilie gold
was held to have been "seized" and under-wiitei was declared exempt
[rom liability."
'Ihe ordinary marine policy contains ceitain piovisioiis ni legaid to
particular average which are embodied in wliai is called a "Memoiandum."
I h e memorandum reads: "N.B. Corn, hsh, salt, fruit, ll'oui, and seed are
warranted tree from average, unless general, oi the sliip be stianded—
sugar, tobacco, hemp, flex, hides and skins aic warranted fiee from
a\eiage, under five pounds per cent, and all other goods, also the ship
.ind Height, are wananted fiee liom average, under thiee pounds pei cent
unless general, or the ship be stranded," The memoiandum piovides
minimum limit to the underwriteis' hability in lespcct ol claims for
particular average by exempting him from such claims, eiiliei absolutely
01 under certain percentages, unless the ship be stranded. It is important,
in tills tonneciiou, lo remembei that il the v'>hip suaiids, the under-
wiiter will be liable foi all damages to tlie ship or cargo caused pic-
\ious to stianding or subsequent to it, e\en where the btraiuling is not
the direct cause of the damage.
The IVIarine Insurance Act mentions two fouiis of cxpiess warran-
ties, namely, (i) a wananty ol neutrality, and (ii) a wau.inty of good
' satety. Sections 38 and 40 specifically deal witli these. U'heie the sub-
ject-matter is expressly warranted neutral, it must be so at die com-
mencement of the risk and, so far as the assuied can^coiuiol the inattti,
the neutial charactei preserved during the risk. Where the subject-mat-
ter insured is warranted "well" or "in good safety" on a pai titular day.
It is suflicient if it be safe at any time during that day.

IMPLIED WARRANTIES
These wairanties are hi tlie iiatuie of pieliminaiy essential condi-
tions which must be complied with in order to iciidei a contiact of
marine insurance ^•alid, and theii non-compliance is fatal to the coii-
iiact. Ihese warranties .lie: (i) sea-wonl»iness, (li) legaliiv ol \o>age

SEA->V()RTHINESS
In cveiy "voyage" policy the ship must be sea-woiiliy at the com-
mencement ol the vo),i^e, oi 11 the \oyage is divisible iiuo ihsiiiin stages,
at the commencement ol each stage. To be se.i-woilliy a sliip must l)e
leasonabiv In in all lespccts to cncouiiiei llie peiils ol the \oyage she
is about to muleitakc. bhe must be sound is legaids her hull; she must
not be overlo.ided, her cargo must be pioj>eily stored. She must be
lully manned and her ollicers and crew must l)e ciricioiit. She must be
fit to cairy the cargo to tlk- destination comemplaied by tlic policy, i.e.,
she must be "cargo-ivoithy." It is to l)e noted that tlieie is no hard
and last standard of sea-woithiness, for it v'aiios with ciiciiinstances of
each particular case, and each ventute must be considcied on its ov.'n
merits. Thus a ship which is reasonably fit for a voyage flora London
10 Bombay may be totally unfit foi a trip to the coast of labrador uii
less she has fittings peculiar to a Semi-Aictic <o\age. Fuithci. \vheie a

5. Robinson Gold Mining Co. v. Alli.mce Maiine .'\. Geuei.i) Insni

ance Co. Ltd., (1910) 2 K.B, 919.
292 MERCANTILE LAW

voyage is made in distinct stages the ship must be sea-worthy at the

commencement of each stage.
In BouiUin v.cLupton." three steamers which were trading on the
Riye Rhone had been sold for service on the Danube, and we're in-
sured for the voyage from Lyons to Gallatz. In order to pass under a
number of low bridges on the Rlione, the steamers left Lyons without
masts, and continued their journey as [ar as Marseilles, where they were
fibed with -rpasts snd generally prepared for the voyage to Gallatz.
w h e n the vess Js entered the Black Sea storm arose, and they all found-
ered. The underwriter declined to pay on the ground that the steam-
ers were not sea-worthy for the whole voyage when they left Lyons—
the place of commencement of die voyage. But the Court held that the
warranty had" been compiled witli, for different degrees of sea-worthiness
were necessary for the different stages of th^e voyage and at the commen-
cement of each stage the ship'' were properly equipped, fn descending
the Rhone they were "sea-worthy" for the Rhone; and from Marseilles
to Gallatz they were ready for the sea.
This warranty is required to be literally complied witli; strictly
speaking, e\en ignorance or innocence will not be an excuse. Where
a ship-owner has done everything in his power to make his ship fit for
tlie voyage, and in spite of all care, has failed to discover some latent
defect, such defect would defeat his object and deprive him of his right
to recover for a loss.
In Quebec Marine Ins. -Co. v. Comm. Bank of Cahada,' where a ship
had been insured for the voyage from Montreal to Halifax, when she
sailed there -was an undiscovered defect in her boilei, which became
visible after some time and 'became -so serious as to necessitate her re-
turn to Montreal for' repairs. After the repairs she resumed her voy-
age, but was lost in bad weather. It was held the assured could not
recover as die ship was not sea-wortliy when she originally started on
the' voyage.
In Tim^ Policies there is no implied warranty of sea-woithiness

LEGALITY
The second implied %varranty is that the venture insured is a law-
ful one, and diat, so far as tlie assured can control the matter, thei.ad-
venture shall be carrie'd out in a laivful manner. Therefore, an insur-
ance of an adventure which is illegal according to law, e.g., smuggling,
is void. If the adventure is a legal one, but the master or ciew, without
the knowledge of the owner, indulge in smuggling on their own account,
there would be no breach of the implied warranty, and the contract
will not become void so as to absolve the underwriter of liability. A
policy of i)?(surance effected for the purpose of insuring an alien enemy
i.s void, because it is illegal.
However, there, is no implied warranty as to the nationality of a
ship, or that her nationality shall no't be changed during the risk (Sec-
tion 39). In a policy on ^oods or other.-movables there is no implied
wairanty that the goods or movables are sea-worthy (Section 42).

6. (1863) 33 L.J.C.P. 37.

7. (1870) L.R, 3 PX;. 234.-
 MARINE INSURANCE 293

T H E VOYAGE
The subject-matter may be insured by a voyage policy "from a
port" or "at and from" a port. The policy "from" a port only pro-
tects the subject-matter of the insurance from the time of sailing from
tlie port, e.g., an insurance "from Bombay to London" only attaches
when tlie ship has actually left the precincts of the port o f Bombay,
and is on her voyage to London. But an insurance "at and from" a
port protects the subject-matter insured whilst at the port of departure
previous to the- ship's sailing and also from the time of leaving it, and
o a her voyage. If the ship is at a port and is insured "at "aha from"
the port, thf insurance attaches immediately it is effected and con-
tinues to protect her whilst she is making the necessary preparations for
the voyage.^ If a ship is insured for a voyage "at and from" a port which
she has not then reached, the insurance commences immediately on her
arrival at the port in a reasonably good physical safety. Should .the ship
arrive at the port soi damaged that she cannot lie there in safety until
repaired, the policy does not attach.

DEVIATION AND CHANGE OF VOYAGE

The voyage must be accurately described in the policy, and properly
performed. The ship must follotv the course specified in the policy,
or if not specified therein, the usual and customary course. If the ports
of call are named, she must take them in order named or, if not named,
in the order customary to the voyage, but she can rniss out'tmy or all
of them. When a ship starts from her port of departure tor her port
of destination, but proceeds by an unusual or bv an improper course,
or takes the porls of call by an order different from the one specified or
customary, there is a deviation; and if the deviation takes place without
any lawful excuse, the insurer is discharged from 'liability as from the
time of deviation, even though the ship may have regained her route
before any loss occurs. On the other hand, the -underwriter is liable
for any loss from perils insured against which occurs previous to the
deviation. Furthermore, the voyage must be commenced and proceeded
witii witliout unreasonable delay. If the adventure insured, is not pro-
secuted throughout its course with reasonable despatch, there will be a
vaiiation in the risk, and the underwriter will be discharged oF liability,
»•! from the time when delay became unreasonable. It should be noted
(Iiat vari.ition in the risk does not necessarily mean increase in the risk.
The onh question is whether the risk has been varied.

In African Merchants Co. v. British and F o r e i ^ Marine Ins, Co. a

sliip wns insured "at and from Liverpool to the Wcit and/or South-West
coast of Africa, during her stay and' trade there, and hack to port of
discharge in the United Kingdom." The ship arrived at the "African
coast, discharged her outward cargo there and then loaded her home-
ward cargo. Instead of sailing on the homeward voyage, which would
have been the reasonable thing to do, she stayed a month in Canada
•Bay. by instructions of the owners, in order that her master and ti-ew
could help salving of the cargo of another vessel which had been wrecked
there. Whilst there she was driven from her moorings bv n liea^'\' stonr
a. Palmer v Marshall (1831') 8 Bing.'76.
 294 MlillGANTJLE LAW

and became a total loss. Tin's delay was held to l)c a de\iation wliich
had discharged the undeiwiiter from liability.

CHANGE OF VOYAGE
Where the destinatioti is specified in tlie policy and the ship, after
the comraencenicnt of risk, sails for another destination, no risk attaches
lo the polity from the time when the determination to change the voy-
age became'manifest. Wliere. before the commcncemem of the voyage
ilie destination is altc'ied, no risk attaches to the policy at any time.
Change of voyage differs from deviation in that the policy is void from
the moment a change of voyage was contemplated, whereas a <leviation
must become a fact before the validity of the policy is bvonght into <)ucs-
tion. Thus, if a vessel originally intended to sail on a voyage from
Liverpool to Karachi via the Suez Canal proceeds on a voyage to Cal-
cutta, via Cape Town and is lost on the Portuguese Coast, the under-
writer is relieved from any liability for^ the loss, although the vessel,
at the time of loss, was on that part of the course common to both voy-
ages. According to the law she was on an entirely different voyage.

Justifiable Deviation.-Tliere are certain circumstances in which de-

.viation or delay would be excused, and these are set forth in the T\In)ine
Insurance Act. Deviation or delay is excused—
1. where authorised by any special term in poliry:
2. where caused by circumstances beyond the control of tiie mas
tcr and his employer;
3. deviation by the vessel being blown out of her couvsc by viok-nt
stales or being ordered during war by the Naval Authorities to deviate
from her-ordinary course in order to avoid the danger of submarines;
4. \vhoic reasonably necessary in order to comply with an express
or implied"warranty, e.g., delay in making the ship .sea-worthy at the
commencement of a stage of the voyage;*
/ 5. where reasonably necessary for the safety of the shi\) or suliitct-
matter in.sured, e.g., putting into port for repair a ship which has been
severely damaged by violent weather;
6. for the purpose of saving human life, or aiding a .ship in disiiess
where human life be in danger;
7. tvhcre reasonably necessary for the purpose of obtaining medical
or surgical aid for any person on board the ship. The excuses under
claiises 5 and fi .ire based on the ground of humanity. Tn the rase of
(5) it is essential that thfe danger must be to human life and not to
property;
8. where caused by the bainitrous conduct of the master or rrew, if
hairatry be one of the perils insured against.
When the causes which excuse deviation or delav re.nse to he ope-
rative, the ship must restimc her course wiith rea.sonable despatch.
Witli regard to "Time I'olitiis", the cMut date and hour of the •
coinmencement and teimiii.iiioii shoiild alwavs be insetted in the policy,

9. Boirillin v! Lupion (IHC,^) HS I,.f.C.I'. :i7.

MARINE INSURANCE 295
but in il^e alDsence o£ hour, the clay will be deemed to begin £rom and
end at midnight.
Name of Vessel. The name of th^ vessel should be inserted in the
policy. When once an insurance on cargo has been effected, the vessel
cannot be changed without the sanction of the underwriter. But if the
original ship meets with disaster during the voyage, the cargo may be
transhipped to another vessel for safe conveyance to destination.
Commencement of Risk. On Ship. This has already been dealt with,
while discussing an insurance "from" and "at and from" a port.
On Goods or Freight. In the absence o£ any special clause, the risk
on goods and freight commences immediately, and not until, the goods
a>e on board the vessel.
Termination of Risks. On Ship. In the case of insuiance on hull, for
voyage, the risk continues, after tlie vessel has arrived at her port of
destination, "until she has moored at anchor twenty-four hours in good
safety"; for when the ship arrives with cargo the twenty-fotS hours will
begin to run after the ship has been moored at the usual place for the
discharge of cargo.
On Goods and Freight. In tlie absence of any stipulation to the
contrary, the risk on goods and freight terminates as soon as the goods
are safely "discharged and landed."
Perils. Perils are the risks ivhich the underwriter agrees to take
upon himself, and are inserted in the policy. Perils of the Sea are all
perils, losses, misfortunes of a marine character or a character incident
to a ship as such. The following casualties come within the definition
of perils of sea, namely, "those happening during the voyage ivhich rea-
sonable skill, diligence and care cannot guard against and those which
cannot be foreseen as the necessary ,or ordinary incidents of voyage,"
e.g., when a vessel strikes upon a sunken rock in fair weather and sinks;
a loss by foundering, owing to a vessel coming into collision with an-
other vessel, even when the collision results from the negligence of the
other vessel. They do not protect ordinary "wear and tear" which re-
sult from the inevitable action of the winds and waves. The test is
that there must be some casualty, something which could not be fore-
seen as one of the necessary incidents of the adventure. The purpose of
the policy is to secure an indemnity against accidents which may happen,
not against events which must happen."
"Fire" is the next peril, and the underwriter is liable for the loss
caused by it. "Men of War, enemies" include all damage or loss sus-
tained owing to tlie hostile acts of an enemy. "Pirates, Rovers" cover
losses caused by marauders plundering indiscriminately for their own
ends. TJie terms include passengers who mutiny, and rioters who attack
the ship from the shore. "Thieves are robbers using force or violence
not clandestine thieves or pilferers or pickpockets, from amongst the pas
sengers or crew." "Jettison" is the throwing overboard of cargo, or the
rutting and casting away of masts, spars, rigging or sails to lighten the
ship in ,Tn emergency. ^Losses by jettison are recoverable under the po-
licy. But no jettison of cargo owing to its inherent vice is covered by
the policy. For example, the jettison of fruit which has become rotten
on account of delay, or of hemp shipped in an improper condition
which as a result becomes dangerously heated is not covered.

10 Xantho's case (1887) VI Asp. M.L.C, 207: 12 A.C. 503; Buller and
othcis V. Fishtrs and others, 3, ESP. 67.
296 M E R C A N l l l t I \^\

"Arrests". 1 his clause refers lo political or executive acts and does

not cover a loss caused by riots or by ordinary judicial ptocesi Seizure
in time of war by enemies or stoppage of vessels belonging to ncutnl
poivers suspected of cari-yjng enemy goods, etc, are examples of political,
etc acts.-
"F. C. and S." Clause. Free of Capture and Seizure clause is- ipe
cially inserted under whicli the underwriter absolves himself-from any
loss caused by capture or seizure of the vessel
"Banatry." Includes every wrongful act wilfully committed by the
mHster or crew in contravention of their duties, thereby causing pieju
dice to the owner or charterel, and is coveied by the policy. Examples
of barratry are . wrongfully scuttling a ship, intentionally runnrng her
on shore, or setting fire to her.
"All other Perils." At first sight these uords would seem to co\ei
losses from whatever source arising But it is not so These words in-
clude only those perils which are similar to those which have been enu-
merated in the policy, i e , perils or losses ejusdem geneiis with those
wliich have been previously specified.
"Sue and Labour" Clause. This welt-inown clause is supplemental
to, and distinct from the contract of insurance, and enables the under-
writer and the assured to work togethei with a view to prescn'ing the
property, after accident, covered by the policy and to make the best of
tlie bad bargain Under.this clause all expenses incuned by the assured
or hfs agents or servants in mitigation of losses after the casualty has
occuried are payable by the underwriter. No expenses incuned for
averting the occurrence of peril would be paid under this clause
"Waiver" Clause. This is really supplementary to the "Sue aild
Laboiii" Clause, provided simply to assure that, in the event of a ca-
sualtv. either paity to the contract may take such steps, oi incur sucli
expenses, as are contemplate'd under the Sue and L.iboui Ci.msc, to
iiiiiiiiiiisc a loss without picjudice to the rights of the assured on fhe
one Jiand and the underwriter on the other.
"Memorandum" or "N.B." Clause, ''''or i:s -meaning and discussion
sec page 214 et. seq. supra.
"t. P. A." Clause. The Fiee from Paiticular Avciage Clause is. in
effect, an extended application of the memoiandum It ]Jre^ents' ihe
assured from recovering in respect of anv losses other than the loss in
curred hv a general average sacrifice Pui claims under Sue and La-
bour Clause will be m "ntainable.
"The Collision' or Running Down" Clause This cl.iuse lealh
.imounts 'o ail additional contract to the cotmact of iiisuiaiice itself
whc-ob-. ilic underwriter agiees to pay up to the amount of his policy,
thiecfoiiHlis of any sum which the owner of the ship insuicd may have
to pnv to (he owner of another ship for damage caused as the lesult
of flic rollisiort
Tiifliinaree" Clause. This cl.iuse derives its name from a steamei
Inchmaree, .i case in respect of which went up to the House of Lords,
\\hose decision necessitated its insertion in die policv The said \C5sel
was iiisuicd under a lime nolic\' in the ordinary form When the don
kcv engine «as sri lo wort for navigation purposes in ordci lo pump
waier into the main boiler, a kalye. which oiight to have been kepi
open had litfii cither accidcfHaUy or negligently, closed with the result
ihai ihc \i I'M iiisieid of Rising into the. boilci. uas foiced into the
III clianilx I of ilie donkry-pU'mp and split it Tlie House of l o i d s
MARINE INSURANCE 297
iield that tliis was not a loss covered by an ordinary marine "policy, be-
ing neither a peril of the sea nor coming ^vithin the general '.yords "all
other perils, losses, etc."" Among other things, this clause covers cer-
tain losses caused by (i) the negligence of master, mariners, engineers,
pilots, crew; (ii) explosive; (iiij a latent defect in any machiner/. But
the clause is not -to be taken to include any other risk except those mep-
tioned therein.
Contintiation Oause. This is a very comiuon clause in time policies,
the effect of which is to place the shipowner, when the ship is at sea,
on the expiration of the policy (which we knovj cannot be i.ssaed for'
more than a year), and in consideration of a pro rata additional pre-
mium, in the same position as if he had insured his vessel for the parti-
cular voyage in the course of which the policy expired, instead of for
a portion only of the time occupied in the prosecution of that voyage.
Re-Insurance Clause. This clause is used in cases of re-insurance,
i.e.? where an underwriter, who has accepted a risk, re-insures the whole
or part of that risk with another underwriter, either becaiise he deems
the risk undesirable, or because he has accepted a greater responsibility
in re.spect of a particular risk than he thinks it piudent to' retain. The
clause reads: "Being a re-insurance subject to the same clauses, and
conditions as the original policy or policies, and to pay as raay be paid
thereon"—i.e., on tlie original policy. In order to be paid on the re-
insurance under this clause two conditions must have been complied ivith,
namely, (i) the loss which has bepn paid must have beea a loss for ivhich
the re-insuring undenvriter is legally liable; and (ii) it must have been
a loss for which the re-insuring underwriter is, under the particular
terms of the re-insurarice policy, also liable.

ASSIGNMENT OF POLICY
A marine policy is assignable by indorsement or in any other cus-
tomai7 manner, and the assignee can sue on it in his''own name subject
to any defence' wijich would have been available against the penson v,'ho
effected the policy. The, assignment may be made either before or after
loss, but an awired who lias parted with or lost his interest in the sub-
ject-matter insured cannot assign.

PART S-B
LOSSES
CAUSA PROXIMA
Proximate Causc.—Before dealing with the kinds of losses .and their
adjustment, the fundamental principle underlying the contract.of marine
insiuance may be re-stated and explained for clear understanding. This
principle is that the loss for tvhich the underwriter is to be made liable
must have l)een. proximately and directly caused by the peril insured
against. The principle is most rigoromly applied to the contract of
marine insurance. An underwriter is not liable for damage to cargo
directly caused by rats or vermin; but if it is destroyed bv sea water flow-

1!. Thames and Tvf.JiT. Insurance Co. v. Hamilton Fiaser k Co.

(1887) 12 A.C. 484,
 298 . MERCANTILE LAW
ing through a hole gnawed by rats in a bathiootn pipe, the underwriter
will be liable, as the proximate cause of damage is the .sea water, and
the rats' partiality for lead pipe being the remote cause. In anotlier
case, where hides and tobacco were shipped in the same vessel,, and the
hides became putrid by reason of sea water during a storm, and the
stench from them spoiled the tobacco, the damage thus caused -was held
as liaving been proximately caused by perils of the s6a." It must be
noted that an underwriter is not liable for any loss if it be caused by
the wilful act or default of the assured himself. But it loss was occa-
sioned Ijy negligent navigation of the master or carelessness of a seamen,
the underwriter would be liable, Furthermore, in the case of goods, the
damage must be actual damage to the goods tJiemsehcs, and not suspi-
cion of, or what is called sentimental damage,
The question, which is the causa proxima, of a loss, can only arise
where there has been a succession of causes. When a result has been
brouglu about by two causes, we must, in marine insurance law, look
only to the effective or predominaiu cause although the result would,
no doXibt, not have ha])pened witliout the remote cause. 'Proximate'
does not mean "the nearest in time." The cause which is truly proxi--
mate is that which is proxiniate - in efficiency, whifh is the effective
cause.
KINDS OF LOSSES
A loss may be either Total or Partial. Total loss mav be subdivided
into two classes; (i) Actual Total Loss, and (ii) Constructive Total Loss.
The case of partial loss arises when the subject-matter of the insur-
ance is partially lost. Partial loss is ^also of two- classes, (i) Particular
Average, and (ii) General Average.
ACTUAL TOTAL LOSS
An actuaP total loss occurs when the subject-matter insured is des-
troyed or so damaged as to cease to be the thing of the kind insured,
or where the assured is irretrievably deprived of ,the subject-matter.
From this definition it is clear that besides actual or absolute destruc-
tion by a peril insured against, goods are deemed toybe totally lost where
they are so damaged as to cease to exist in specie, i.e., when they no
longer answer to the denomination under which they were, insured, or
cannot be utilised as the thing insured. The well-knoWn ca"s& of Roiix
V. Salvador''' illustrates this point.
A ship %vith a cargo of hides started on its voyage from Valparaiso
to Bordeaux. During the voyage it sprang a leak and put into Rio De
Janeiro, wliere it was found that the' hides were in a state of incipient
putridity as a result of inflowing sea water. If they had been carried
to the destination they would have become entirely putrid and value-
less as hides, and they were consequently sold at Rio Ac Janeiro. This
was held to be total loss.

12. Hamilton v. Pandorf (1887) M Aps. l^f.L.C. 212.

13. (1836) 3 Bing. N.C. 266.
 MARINE INSURANCE ' 299
A ship is posted at Lloyd's as "missing" or is captured and seized by
tiie enemyi it is an actual total loss as it is deemed to be irretiuevably
lost to the owner even though it is still in existence. So also where the
subject-matter is lost to the owner by any decree of llic court, founder-
ing at sea in a gale, or sinking after collision, or a vessel which is "miss-
ing" are simple instances of actual loss of ship, cargo, and freight.

CONSTRUCTIVE T O T A L LOSS
A constructive total loss occurs (to use the words of the Marine
Insurant!: Act) where the subjert-matier insured is leasonably abandoned
on account of its actual total loss appearing to he unavoidable, or be-
cause it could not be pieservcd from actual total loss widiout an ex-
penditure which would exceed its value when the expenditure had been
incurred. In particular there is a constructive total loss :—
1. when the assured is deprived of the possession of his ship or
goods by a peril insured against, and (a) it is unlikely that he can re-
cover the shin or goods as the case may be, or (b) the cost of recovciing
the ship or goods,- as the case may be, woidd exceed their value %vhen
recovered; or
2. in the case of a damage to the ship, where she is damaced by a
peril insured against that the cost of repairing the damage woidd exceed
the value of the ship when repaired; or
.8. 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 (Section 60).
In Moss V. Smith," Maul, J. explained the doctrine of consiructn'-
total loss in these words: "A man may be .said to have lost a shilling
when he liad dropped it into deep water, though it might be possil)le
by sopie very expensive contrivance, to recover it. Tlie shilling exists,
and it could be recovered at a price, but what man would be foolish
enough to spend, say, two shillings in order to recover one?" The
safer course would be to abandon the shilling in the deep water, in which
case that shilling would be a constructive total loss.
In Roux V. Salvador," Lord Abinger observed: "TJie underwiiter
engages that the object of the insurance shall arrive in .safety at its
destined termination. If, in the piogress of the voyage, it becomes total-
ly destrovud or annihilated or if it be placed by reason of the perils
insured atjainst in .such a po.sition that it is wholly out of the power
of the assured oi of the undenvriter to procure its arri^Til. he is bound
bv tlie letter of his contract, to pay the sum insured. But there arc
intermediate rases. Yi.e., there mav' be frustration of adventure) there
may be a forcible detention which mav last so long as to end in the
impossibilitv of bringing: the ship or the goods to their destination.
There mav be .some other peril which renders the ship imnavigable with-
out anv reasontible hope of repair, or bv Tvhich the goods are partly lost,
or .so damaeed, that, fhev are not worth the expense of bringing them,
or what remains of them, to their destination. In all these cases or in
similar cases if a prudent man. not insured, would decline any further
expenses in prosecuting an adventuie the termination of which wilJ
probably ne\er be successfullv accomplished, a partv insured mnv, foi
11. (Ifi-l.-i) 2"C.B. 94 at n 103.
ir>. (IR.%) 5 Bing. N.C."26fi.
 300 ^[ERCANTILE LAW

his own benefit as well as that o£ the undenvriter, treat the case as one
of a total loss, and demand the full sum insured. But if he elects to do
this, and the tiling insured, or a portion of it still exists and is vested
in him, (he very principle of indemnity requires that he should make
a cession of all his right to tlie recovery of it, and that, too, within a
reasonable time after he receives the intelligence of the accident, that
the undei-writer may be entitled to all the benefits of what may still
be of any value and that he may, if he pleases, take measures at his own
cost for realising or increasing the value." T h e last portion of the above
statement refers to "Abandonment" and "Notice of Abandonment."
Abandonment and Notice of Abandonment.—Where there is a
' conslructiye total loss, tlie a.ssured may either treat the loss as a partial
loss or abandon the subject-matter insured to the insurer and treat the
lo.ss as if it were an actual total loss; but in the latter case it is essen-
tial for him to give with reasonable diligence after the receipt of in-
formation about the casualty, notice of abandonment to the insurer,
otherwise the loss w i l l j i s treated only as a partial loss. Abandonment is
the surrendei^ing of t!ie interest of tlie assured in whatever may remain >
of the subject-matter insured and all proprietary rights incidental there-
to, to the underwriter, and clajming from him a total loss. This cession
of right is necessary in order to entitle the underwriter to whatever re-
mains of the property, and enable him, if he so wishes, to take means
for the protection of his own interest. There is "no special form of
notice of abandonment but it must be worded as to give exnlicit; inti-
mation to the underwriter that the assured abandons linconditionaHiv to
the underwriter his whole interest in the subject-matter insured. It is
usual for the word "abandon" to. be used in the notice.
If the underwriter accepts the abandonment, he pays the total loss,
and realises what he can with the property which has been abandoned
to him. But if he declines to accent the abandonment it is then neces-
sary for tlie assured to issue a writ against the underwriter to recover
the loss. Tlie Court will look at the state of facts existing at the time
of the writ to determine whether or not a constructive total loss has
occurred.

PARTIAL LOSSES
PARTICULAR AVERAGE
1. A ))articiilai- average lo.ss is a partial loss of the subject-matter
insured caused by a peril insured against, and which is not a general loss.
2. Expenses incuried by or on behalf of the a.ssured for the safety
or preservation of the subject-matter insured, other than general aver-
age and sahagc diarges arc called particular charges. Particular charges
are not included in particular average (Section 6'IV •
Tlic damage, in order to be a particular a\'Prage. must be acciden-
tally and fortuitously caused by a peril .insured against and if concerns
solely the person interested in the subject-matter insured and the under-
writer, and no question of conttibiition by various parties in the adven-
ture arisen, as it is in the case of a General .Average loss. These two
points are of particular importance, as they are the distingiii.shing fea-
MARINE INSURANCE 301
tuics between paiticuui avwage aiul general a'.eiage. In oidci to get
a clear idta oL paruculai average :.ome imaginary cabes ina> be given
aa illustraiion. A ship meets with loul weather, as a lesuk oL wludi
he sustain stnoti. damages sucii a^ \,Ktkage ol hei propfcUei, ai se\erc
strain lo ih', hull, the damiigc so occasioned is a paiticiilar a%eiage on
ship. And it during violence ol the weather sea water gets into the
hold and dc-niages ilie cargo, die damage ao occasioned lo the caigo is
paniculai a\erage on cargo Again, i[ the carc-o is lor example, sugar,
and hall of U becomes sherbat b) getting disjohed m die sea waiei, that
damage is a paiticulai a\eiage on iieight. '1 lus is so because half of the
sug.'i cannot be dtiiveied at ihe dc-imaiion, invoking a loss of freight
on that half, for the sugar is no inoie there to be earned to and de-
Ineicd a> the destination.
PVRTICL'LVR AVERAGE ON SHIP
Suppose a ship his suffered a considerable damage in heavy weatiier.
Oidiiianlv, tixe owner will icpaii the .':hip, and the measuic of the un-
dei'.vritei's liability will be the aciual cost of lepairing il:e ship, piu-
dciitly and leasonablj incuirtd. less the deductions "new loi o l d , (i e,
less the iinprovcnient rtsuUmg fiom the repair) unless, as is now usual,
the polio provides tor the full paviiieut of costs In settling the claim
(if paiiiculai average on ship no regaul i> paid to insured \alue ot the
ship as agreed between the assured and the underwriter. It is tlie tea
sonable actual outlay for repairs which lomi the basis of the claim.
A\ hen the total aiiiount of the particular aveiagc ha^ been detei
niuicd. ihc next qiiCsMon is to asc'vitain the amount iccoveiablc uiidti
the various policies Fhis is done by apportioning the paUictih'i .nci-
age in the proportion which each undcuviiters policy oi sub-icript'on
beais 10 the total iiisuied value. The liabilit\ of the underwrite! on
ship is oidinarily limited to the amount of his policv so far as an)
one accident is concerned But it may, and often docs, liappen tliat a
vessel meets with seveial accidents, in whidi case the underwriter i-,
liable to pa} succe<:sive losses, even though tlie total amount of surli
sucicrs'^ne losses may far exceed the amount of his ijolicy unless theic is
a rontr.irt to the contiary. For example, vvheie a ship during the cur-
lenc) of the policy has been damaged, and has been lepaiied, and is
subsequently totally lost, the underwriter will have to pay ihe total plus
the particular average loss. And if the repair-, are not made, and the
ship is totally lost before the expiration of the risk, then the owner can
recover onlv for a ^otal loss, and not for a particular average damage.
since the repairs have never been effected and he has suffered no loss
so fai as thev are concerned. And if in such a case the total Ic-s was
not caused bv the peril insuied against, then the undcrHTiter will not
bf liable for anvlhing at all
WUczc particular average repnirs lik\-e not been effected and the
vosel is not totallv lost before the e^piiv of the poiicv, the iindciurf-
ic's hafiilitv \r, respect of the paiticulai aveiagc would lie aseeitrfined
\)) cstimatint; the COM of lepairs The point mav be dlnsn.Tied by
rncTs of it) examiile. A ship insuied with undcrwiiti • .K for i vov.inc
eustaiiied particular average damage, and the damage was iinicpaired
302 MERCANTILE LAW
when the policy expired] Immediately'--on' the expiry ot X's policy the
snip was coverea by i's policy, and uefore tlie particular average damage
attaching to X's policy had been repaired, the ship was totally lost.
It was held tliat X would pay the estimated cost o£ repairing the parti-
cular average damage, whicli would be a clear prolit' to the owner of
the ship, whilst V would pay a total loss."
PARTICULAR AVERAGE ON FREIGHT
freight is money payable either lov thq hire of a vessel or for the
conveyance of cargo Irom one port to another. JFreight, therefore,
suffers any physical damage by perils insured against in the same way
as a vessel or goods. To constitute a particular average on freight there
must be partial loss in respect .of it. Suppose a" cargo of sugar is ship-
ped from" Bombay to London, freight not being prepaid, arid during
the voyage, and owing to the peril insured against, one half of the sugar
IS dissolved in sea water. There is a loss of one half of the freight,
and the underwriter would be liable to one hdll of the amount for which
the freight was insur'ed.
PARTICULAR AVERAGE ON CARGO
• A claim for particular average on cargo arises when the cargo has
been either partially damaged by the peril insured against, or a portion
of the cargo is totally lost. If, for example, out of a shipment of one
hundred bales of cotton, twenty arrive at their. destination depreciated
by sea water to the extent of t\venty-five per cent; or 5 bales arrive totally
worthless; or all the hundred bales arrive depreciated to the extent of
sevent-five per cent or even more, in all these cases the claim is one of
particular average on cargo. To arrive at the depreciation "of damag-
ed cargo, the sound value of the cargo has first -to be found out and
then the gross sound value and the gross proceeds are to be compared.
This shows -the amount of the loss which is usually worked out at so
much per cent on the sound value. It is to be noted that the com-
parison is made between gross values and not between net values. The
reason for doing "this is to avoid marked fluctuations becoming a factor
in the loss and also because by comparing net proceeds, although the
actual loss would remain unalterecf, the ratio of depreciation would" be
increased, to the prejudice of the' underwriter, because of deductioti of
ordinary charges frofti the .souiid value. An example will make this
clear.
Sound Value Rs. 1,000
Less Charges Rs, 100-

Net Sound Value Rs. fioo

Gross Sound Value Rs. 1,000 Net Sound Value Rs. 900
Proceeds (at auction) Rs. 500
Gross Proceeds Rs. 500 Less Charges Rs. 100

Los;: Rs. 500 Net Proceeds Rg, 400

, Depreciation 50 per cent. nut depreciation on sound value of

Rs. 900 is 55f per cent.
16. Lidgett v. Secretan (1871) 1 Asp. M..L.C._^^_,„.„.
 MARINE INSURANCE ^"5
It is to be observed that there is a fundamental difference between
the adjustment of claims for particular average on cargo. In the case
' of a ship, the reasonable cost of repairs is paid for by the underwriter
without regard to the insured value. But in the case of cargo the per-
centage of depreciation is always applied to the insured value to arrive
at the liability of the underwriter. If the insured value is less than
the gross sound value, then the underwriter pays proportionately less
of the loss, and if the insured value is more than the gross sound value,
the underwrite! pays proportionately more.
Suppose of sea-damaged bale of cotton,
Gross sound value Rs. 100
Gross proceeds Rs. 50

Loss Rs. 50

or a depreciation of 50 per cent.

If the insured value is Rs. 80 die unafeiwriter is liable for 50 per
cent of it, or Rs. 40; or if the insuied value is Rs. 120, the underwriter
is liable for 50 per cent of it, or Rs. 60.

6ENERAL AVERAGE
The Marine Insmance Act (Section 66) provides:
(1) A general average loss is a loss caused by or directly consequen-
tial on a general average act. It includes a general average expenditure
as well as general average sacrifice.
(2) There is a,general average act where any extraordinaiy sacrifice
of expenditure is voluntarily and reasonably made or incuned in time
of peril for the purpose of preserving the property imperilled in the
common adventure.
(3) Where there is general average loss, the party on whom it falls
is entitled, subject to th« conditions imposed by maritime law, to ratable
contribution from the other parties interested, and such contrilnition is
called a general average contribution.
On analysing the section we get the following essentials of a general
average contribution, namely:
1. The common adventure must be in peril.
2. The sacrifice must be voluntary, i.e., it must be the intentional
act on the part of man as opposed to an accidental loss by maritime peril.
3. The sacrifice or expenditure must be prudently or reasonably
made.
4. The sacrifice or expenditure must be extraordinaiy in nature.
5. The object of the sacrifice or expenditure must be nothing other
or less, than the preservation of the property imperilled in (he common
adventure. In other words, it must not be for the safety of the ship
^one, or of the cargo alone, nor merely for the completion of the ad-
venture.
6. The loss must be the direct result of a genera! average act.
ij04 M E R C A K l l L E LAW

J he foJlowiiig idC'ihcci oi expensps nia) g n e use to General A\er-

age Couiubution :—

SACRIi?ICE
Sdcrifirej. ol sSiip.—IL m time oi pen\, the mastei volunt.uily dLitioy^
any part of Uie sh\p, oi pins any oi htx apisu'tciicUicei or appliances
to i. use foi vvhich the) wete not ititeuded, dt the ribk. of Je»troymg
or mJViring thern, aai, lobs oi damage iiui<, caused loi the common '.afety
IS (o bf made good i)} gcntial conliibulion I he cutting awaj of masts
spars and sads, dir scuttiing ol a \essel ni ordci to admit uatci to ev-
tinguish a fiie aie examples ot xoUmta') sacriiices ol a ship I h e jsmg
ol a sail in connection uiih stopping a leak oi to cover vp hatches bro-
ken by sinppmg on sea dvsring a storm ate examples of using the appur
tenances for purpose^ other than tliose loi which die) .ire oiiginally in-
tended I h c amoimi to be made good m gencial aveiage m uspect
ot saciifice ol any pari of the \(.s--e], or hei niachineiy, is rnejsuied by
tliL reasoiK'We costs ol re23dir<. lei-s the usua" deduction^ "new for old'
{jomcimics it ir)ay happen diat a general aveiage soCnnce foUo'ivs a paiti-
cuiai aveiage damage resulting conpnitly m the condemnation ot the
ship Suppose, for example, a lessd is very senousiy dami.ged in vio
lent weadier, subsequently she gets into another stoiin, and whilst on
hei beam ends, the mastei cuts away hei masis and geai m ordei to light
her On her airival at a po>i of lefuge she is copdcraned and sold
In such cncumslances ;n order lo anive at the amount to be allowed
in gcneial aveiage, inc method to be adopted is to deduct fiom it\e
value of tiie vessel the estimated cost of repairing the particular average
damage Th.s would give the value of the vessel imniedia'ely piecedmg
the geneial average sacnhre, ana the difference between that value and
the sum realised by the sale, is the amount of the general average sacn
lice'" An e\?niple vili make this point more cleai •
Suppose the sound v.ilue of the ship to be Rs I 00,000
Deducr estimated cost of lepauing paiticular
aver,>ge damage Rs 75,000
Value of ship immediately preceding geneial
aver^Jgc saciifice Rs 25,000
Amount realised by sale of ship Rs 2,000

Amount to be made good in general average

in respect of sacrifice Rs 23,000

Sacrifice of Caygo and Freight.-Saci ffiLe of cargo for the common

good by jettison, l e throvnng overboard of caigo. or damage to ciigo
by pouung watei on it to extinguish a hie w the burning of cat go- as
fuel foi (he engines Jo avert loss of ship m d cargo gives rjse to a claim
foa geneial average contrioution Wh-^n a sacrifice of cargo also invo!
ves a loss of fieig\E, it follows that the freight so sacnfied is also made
good in general average I-a the event of goods h.-'ving be^n jetti^o.ied

17 llendeison v ShanUand (!896) "C Com f'as 33S

MARINE INSURANCE 305
or otherwise sacrifictd, the amount to be allowed in general a^•erage is
the net value which they would have had on the day o£ discharge at
the port o£ destination, less the charges, which would have been incur-
red had the goods arrived instead o£ having been sacrified, e.g., freight
if not prepaid, discount, duty, landing and sale charges.

EXPENDITURE ^
All extraordinary expenditure properly incurred in time of peril for
joint picservation of the common adventure is the subject of general
average contribution. Thus, if a ship puts into a port of refuge to re-
pair a general a\erage sacrifice, the cost of entering the port of refuge,
the cost of dischaiging, waiehousing, and reloading the cargo, and the
co'^t of leaving the port of refuge, are the subject's of general aveiage,
because all the expenditure so incurred is the consequence of a general
a\eiage act. W'heie there is a general average loss the party on whom
tJie lo 5 falls liis entitled to a ratable contribution from all the other par-
ties who are interested in the adventure. Whatever comes under the
head of gf^neral -average loss must be shared by those who have benefited
by the saciifice or adventure, and the contribution that they make is call-
ed a general a^erage cojltribution.

RAISING FUNDS
The incurring of expenditure at a port of refuge entails the advanc-
ing of funds to meet it, and the actual out-of-pocket expenses which
Iia\ e been reasonably incurred for interest and for commission for ad-
vancing funds are allowable in average. In the olden days forced sale
of cargo or loans on bottomry or respondentia in order to provide funds
were fairly common but one seldom hears nowadays of such instances as
the cable and the wireless usually enable such provision to be ai ranged.
For the sake of completeness, however, we may briefly, refer to these
subjects.

FORCED SALE OF CARGO

The sale of cargo in order to raise funds can be resorted to by the
master only when he has failed to obtain money by other means. Where
the caigo has been properly^ and rightly sold at a port of refiige, and
it realises more than the net value which it would have realised had it
been brought on _to the destination instead of being sold, the ou'ner of
the goods is entitled to the actual proceeds at the port of refuge." But
conversely, if the goods realise less than they would have fetched Mt the
destination, then the owner of goods is entitled to their net value as if
they had arrived at destination. H,e is entitled to any niofit and is not
to suffer any loss. •

BOTTOMRY AND 'RESPONDENTIA'

Bottomi7 is a monetary loan obtained in cases of urgent necessity
on the security of the ship or ship and cargo jointly; and Respondentia is

18. Richardson v. Nourse a819) 3 B. &: Aid. 237.

fr^Oe MERCANTILE LAW
a loan similarly obtained on the security of the cargo alone, the sum.
so advanced being repayable to the lender a certain agreed number 06
days after arrival of the vessel as specified in the dociiment tailed- Bot-
tomry or Respondentia Bond. I£ the vessel is lost before arrival at des--
tinadon, the lender Joses his money, as it is' only payable on condition'
that the ship and"/or cargo arrive.

SALVAGE
Sa^lvage is the reward under maritime law to a salvor for saving, or
helping to save, property, at sea, ^ or property and lif^ conjointly. T h e
salvor who saved thi^ property has a possessory lien on it for' the reward
of his services. But if the property is not in his possession he has whair
is called a maritime lien, Le., a claim which he can enforce by, legal
process in the Court of Admiralty. When he goes to,this Court, the re-
muneration awarded to" him is called a Salvage Award. It is to be noted
that no salvage will be awarded if the services of the salvor were of nO'
material assistance in salving the vessel. Moreover, the services must
have been rendered by third parties, i.e., who are, strangers to the ad-
venture. These salvage charges are recoverable from the underwriter
as partial loss. , Salvage, recoverable under maritime law by ,a' salvor in-
dependent of contract, should be apportioned^ over the values on which
it was assessed. In recovering from underwriters, where the insured value-
is less than the contributory value, the amount recoverable is reduced iri
proportion, in exactly the same manner as in dealing with general aver-
age contribution. In Balmoral Steamship Co. v; Marten,=° a vessel was
valued in the policy at and was insured for f 1.8,000. Salvage services were
rendered to her, and a salvage award was made by the Admiralty Court,
the amount being based on a valuation of £10,000. It was held that the
underwriters were only liable for this ,of the amount so awarded.
If the salvage services were rendered necessary as a consequence of
unseaworthiness of the ship, the underwriter on the hull would ,not be
liable for any portion of the remuneration awarded to the salvor.

19. Ibid.
20. (1902) VII Com. Gas i:92.
 Chapter IX

Fire Insurance

PART 9-A

A fire insurance is a contract to indemnify the insured for destine

tion of or damage to property caused by fire. The insuier undei takes
to pay tlie amount of the assured's loss not in excess of the maKimum
amount stated in the policy. It will be noticed that a contract of fire
insurance is essentially a contract of indemnity, and not against accident
but against loss caused by accident. If a person has insured his house
for Rs. 50,000, the insurer is not necessarily liable to pay that amount,
although the house may have been totally destroyed by fire; but he will
pay the actual loss within the maximum limit of Rs. 50,000. So if the
property was over-insured and die actual loSs to the insured does not
exceed Rs. 40,000, he will'get only that amount. Or, if he had under-
insured it, he %vill get the actual loss not exceeding Rs. 50,000, even if
the property is totally lost and was worth more than the sum insured.
It is because of this rule that a number of insured have complained,
though mistakenly, that tliey were not "put in the same position as they
were before the fire."

AVERAGE CLAUSE
~ It is becoming very common in policies of fire insurance to insert a
condition called the average clause, by which the insured is called upon
to bear a portion of the los? himself. This condition is called the pro
rata condition of average. The main object of this ,clause is to check
under-insurance and to encourage full insurance, and above all, to im-
press on the property-owner the necessity of having his property accu-
rately valued before insurance. Under the average clause, the insurer and
insured share the loss in proportion to the risk that each is carrying-.
T h e proportion of the loss is ascertained by a rule of three as under,
namely, real value of property covered: insured amounts: : damage done:
damage payable. Thus, if a policy containing average clause is for
Rs. 40,000 upon a subject-matter whose value is Rs. 50,000 and the actual
loss is Rs. 10,000 the insured will only get T^TT^^ of Rs. 10,000
50,000
I.e., Rs. 8,000 and the balanea of Rs 2,000 the insured will bear himaeJf
for he is considered to be his oivn insurer for Rs. 10,000, the diflferifsce
^QS MEltCANTlLE LAW

between the actual value a'tid insured arnount, and bears the ratable pro-
portion of loss, viz., Rs, 2,000. This condition comes into operation i£
the assured is under-insured and in the case of partial loss he would be
paid in the ratio above mentioned; but if there is a total loss, he is
entitled to be 'paid the full sum insured.
Insurable interest. In the case- of fire insmance, the insured muist
have insurable interest in the subject-matter both at the time of effecting
the policy and at the time of the loss.^
Insurable Interest in Property.—In the case of goods, insurable in-
terest arises- on account of (a) ownership, (b) possession, and (c) contract.
Ownership may be absolute or limited. It may be legal or equitable.
As an example of the latter, a purchaser' of property after the contract
of sale but before the payment of purchase price has an equitable interest
in the property.- Persons with a limited interest in the goods may insure
not only to the extent of tlieir own interest but also to cover the interest
of others in the goods. The most common examples are carriers, whar-
fingers, mercantile agents, etc. If the party insuring intends to cover the
interests of all concerned in' the property and not merely his own interest,
he may, in .the event of a loss, recover the whole amount of such loss,
and not only the value of his limited interest. He will, however, hold
the amount above the value of his loss, in trust for the person entitled
thereto. A person in lawful possession of goods may insure them with-
out instruction from the o-ivners, and even wiiliout their knowledge.' A
commission agent who purchased gold in order to send, it to various deal-
ers at different places was held to fiave insurable interest in the gold."
A shareholder has no insurable interest in the property of the company
of which he holds shares,* nor has a simple creditor of the company."
As regards contract, typical instance is provided by the case of bailee and
bailor. Bailees have insurable interest in the goods entrusted to them,
and can insure the goods to their full value. In case of loss bv fire, they
will get the amount and after satisfying their own claim, k e e n , t h e ba-
lance in trust for the real owner. An insolvent debtor who is in posses-
sion of goods which have vested in-- the Official Receiver has an insur-
able interest in the goods found.

Immovable Property.—The insurance of buildings may be effected by

any one interested in them. T h e owner can alwavs insure. So may a
tenant whetlier for life, or from vcar to ye.ir, in virtue of lifs interest in
the propcrtv. A puichascr of immovable property acciuircs interest fi'om
the date of the execution of the contract of sale. l)ut if the policv is
effected bv the vendor, tlic pni'cliascr (annot claim anv benefit of it.
Tlie .seller continues to po'sscss interest as long as the price is not paid

1. Sadlei's Co. v. Badcock (1743) 20 E.R. 733; Sec also Section 30

Indian Contract Act.
2. AV,itcrs v. Monarch Life Ass. Co. flSjfi) 25 L.T-Q.B. 102.
3. Commciri.il Union Ass. Co. v, Rinivaj joliurmull 10,^1 Cnl. 285;
\\'i]!iams V. Bnltic Tiis. .Xs-io. Co. of IfOndon Ltd. (192-1) 2 K.R. 282.
4. M.icauia v. Noiihcrn In?. Co. 1925 A.C. 019.
5. "Moran, Gallowiiy S: Co. v. Uzielli (1905) 2 K.B. 555.
FIRE INSURANCE 309
to him, and can recover under a fire policy if loss accrues before the pay-
ment of price. A mortgagor may insure and recover the whole amount
of the loss, for he is liable personally for the amount of the mortgage
debt, and the loss of the property means a reduction of his total assets.
Mortgagees, on the other hand, have insurable interest only to the extent
of the mortgage debt. A creditor has no insurable interest in the pro-
perty of the debtor, unless the creditor has a right to proceed against
the property of the debtor before he effects an insurance.'

T H E RISK
The i-isk in fire policy commences from the moment the cover note,'
or the deposit receipt, or the interim protection is issued and continues
for the term covered by the contract of insurance. It may even date
back, if the parties so intend.
In Indian Trade and Gen. Ins. Co. v. Bhailal, 1954 Bom. 148, a cover
note was issued on 18tli June which assured the risk from, I5th June and
it appeared that, unknown to both parties, the goods had been destroyed
by fire on the 16th June, held the insurance company was liable and
that no question of mistake under Section 20 of the Contract Act arose.
A contract of fire insurance is_a contract of one year only with op-
tion to the parties to continue it for a further period on the payment of
the stipulated premium. It is customary to allow certain days of grace
in which to renew the policy, and if fire should occur during these days
of grace, the insurer would be liable. As has been said before, the days
of grace caji give protection only if the assured intended to renew the
policy, In case no days of grace are allowed, the insured will not be
entitled to get anything, if fire occurs after the expiration of the term
of policy and before its. renewal.

W H A T IS FIRE
The word fire as used in the expression "loss by fire" is to be con-
strued fn its popular and literal sense, and means a fire which has
broken bounds. Therefore, fire which is used for ordinary domestic pur-
poses, or even for manufacturing, is not fire, as long as it is confined
within, the usual or proper limits. Fire means the production of light
and heat by combustion; and unless there is actual ignition there is,no fire
within the meaning of the term in an ordinary' policy,' heating, un-
accompanied by ignition is not five. "Loss or damage occasioned by fire
means loss or damage either by ignition of the articles consumed, or by
ignition of that part of the premises, where the article is. In one.case
there is loss, in the other case, a damage occasioned by fire.° Jf a»i ac-
tual fire or burning is the proximate cause of the loss, and that fire is
accidental or fortuitous in its origin so far as the insured is concerned,
then such loss is covered by the policy. The cause of the fire is irama*
terial, unless it was the deliberate, act of the insured. Fire risks, do not

6. Stainbank v. Forming (1851) 11 C.B. 151.

7. Indian Trade and General Ins. Co, v. Bhailal, 1954 Bom. 148.
8. Everett v. London Ass. Co. (I865'> 34 L.J.C.P. 299.
9. Ibid.
310 MERCANTILE LAW

include damage by explo«on, unless th« explosion causes actual ignition

which spreads into fire.
Fire by spontaneous combustion ii • usually expected in fire policie»i
feut in the absence of such exception', it is .submitted that it would be
covered. Damage from lightning is not included in the fire risk but
if lightning causes ignition, the loss, would be covered. The same rule
applies to loss or damage caused by electricity. Damage which occurs
as a result of smoke 'or of .putting out the fire would also be covered
by the fire risks. " Any loss resulting from apparently necessary and
bona fide efforts to put out a fire, whether it be by spoiling goods by
water, or by throwir.3 articles of furniture out of the window, or even
by destroying a neighbouring house by explosion for' the purpose of
arresting fire; in fact, every loss directly, or if not directly at least con-
sequently resulting from the fire is within the policy."" Loss by theft
during a fire is covered as a fire risk." Almost every fire policy excludes
certain articles, either on account of their special value, or on account
of Aeir being liable to danger and destruction. The exceptions may
also relate to certain causes for which the insurers are not prepared to
accept liability, for example loss or damage caused by earthquake, riot,
military power, or civil commotion." Even loss by fire caused by the in-
sured's negligence is covered. In Harris v. Poland (1941) 1 K.B. 462, H
hid jewellery in her grate under the coal. Later, having forgotten this,
she lit the fire and jewellery was damaged. Held, H could recover un-
der a fire policy.
The rate of premium varies according to the degree of hazard or
risk involved. Where more than one rate would apply to a risk the
figure to be charged is that which will produce the highest net premium.
If a godown contsins twenty bales of cotton and ten bales of cloth,
the rate charged will be the one payable on cotton, which is higher than
the one for cloth.

ASSIGNMENT
In English law a policy of fire' insurance can be assigned only with the
consent of the insurer. It is said that a contract of property insurance,
whether the event insured against is fire or theft or burglary or accident,
is a personal contract, entirely distinct -from the subject-matter of insur-
ance, and, therefore, the assignment of the subject-matter does not mean
the assignment of the policy of the insurance. Thus, if property insur-
ed against first is assigned, the assignor of the.property, in the event of
loss, .cannot recover under his policy, because his interest in the proper-
ty will have ceased; and the assignee of the property will not recover,
in case of loss, for he has not acquired any interest in the fire policy.
.In order that the assignee of the property may take the benefit of the

10. Stanley v. Western Ins. Co. (1868) 37 L.J. Ex. 73, at p. 75 per,
Kelly, C.B. ' ' ^
11. Levy V. Bailey (1831^ 131 E.R. 135; Marsden v. City & Countv
Ass, Co. (1865) 35 L.J.C.P. 60. '
12. Curtiss & Sons v. Mathews (1918) 2 K.B. 825.
H R E INSURANCE 311
policy of fire insurance, it is essential that the policy should be duly
assigned to him at the time of the assignment of property, and the
consent of the insurer to hold the assignee assured must be obtained.
- U n d e r Indian law the position is the same, but consent of the in-
surer is necessary to make a valid assignment of policy; only notice is
sufficient. Thus, in India, under Sections 130A and 135A of the Trans-
fer of Property Act, in the absence of any express provision prohibit-
ing assignment, a fire insurance policy may be assigned by writing either
by endorsement in the policy or in ^ny other customary manner. But
the assured must have insurable interest at tlie time of assignment and
if he parts with or loses his interest in the property insured, an assign-
ment of the policy thereafter by him will be of no effect. Before loss
the policy can only be assigned to a person who has acquired some in-
terest in the property, e.g., the purchaser, or a mortgagee, or a bailee,
or a pledgee; for otherwise the assignee will have no insurable interest
in the subject-matter at the date of the loss. Therefore, in..India, the
iaw is more clear and simple. By Section 135A of the Transfer of Pro-
perty Act. all that is required f o r ' a valid assignment of a fire policy is
that it must be by an endorsement or any other writing. Notice to
the insurer of the assignment is necessary only to malce him liable to
the assignee if he pays the money to die assured even after such notic6.
(in a valid assignment the assignee becomes entitled to all the benefits
under the contract and can sue the insurer on the contract in his own
name." Under Section 49 of the Transfer of property a transferee
for consideration of an immovable property insured against fire, is en-
titled to call upon the transferor to apply any money received by him
under a fire policy, to reinstate the property.

P A R T 9-B
SPECIAL FIRE POLICIES
VALUED POLICY
Under an ordinary fire policy the insurer merely indemnifies thq
assured. . But even contracts of fire insurance need not always be con*
tracts of indemnity. If the insurers agree to pay a certain fixed sum
- on a fire policy irrespective of the loss, the contract is not one of indem-
nity. A departure in this direction has been made in the "valued policy"
under which the insured can recover a fixed amount, agreed at the issue
of the policy without the necessity for any further proof of value at
the time of the fire.

R E I N S T A T E M E N T OR REPLACEMENT POLICY
Lately, insurers have gone a step further to complete the bread:»
of the principle of indemnity in the shape of "replacement" or "reinstate-
ment policies. A clause is inserted in the policy under which the in-
jured can recover not the value of buildings' or plant as depreciated,
but tlie cost of replacement of tlie property destroyed by new property
of the same kind, or the insurers may themselves reinstate the property

13. See Gyarsilal v. Sitacharan, 1963 M.P. 154.

aa. M £ R C \ N T I L E L VW

:i><-tead of p'i)ing in cash In both case<i we ha\e rhe example of "new

laipps for old "

CONSEQUENTI4L LOSS POLICY

This t\pe o£ rolic\ i'; attain of recent ougm and is also known as-
loss of Piofits Insurince Under this t\pe the insiued is jndemmfied foi
the loss of piofits which he sustains thiough mteiuiption oi cessition
of his business as a result of fire The usual i3olic\ COACIS loss of net
1 jofit p q m e n t of standing chaiges, i e„ debentuie interest, salaues,
laics, ta\es, etc and mciease m the cost of %\orking, e g , taking up of
tcinpoiai) premises, having orders completed by othei firpis at extra
cost, extia acheitismg, etc Although apparenth such compensation ap
peais to go be)ond indemnifv, )et actually undei a properly dn,itecl
policv dieie is hardly any chance of the insuied gaining an advantage
bv the occiurence of a fiic The woist that can happen is that the
complete security may tend to make the insuied less cieful m guarding
Jus piopeity against fire.

CL\IMS
On the happening of anv destruction oi damage the insured ot -iny
othei DCisoii on his behalf must forthwith gi\e notice of fire to the
in'unnce company so thai they mav take piompt steps to safeguaul
tlieu intCiests. e g m dealing with the sahage, and also ludge foi (hem-
selTcs the cause and nature of fire and the extent of the loss 1 his
dim on the pai t of the insured is incorporated in the policy and is
ivwiallv a condition precedent In that case failure to gi%e notice may
a\oid the policy altogether The assured is further ienith-6d bv the
teims of the policy to furnish the insiirers withia a sppcified time full
pa-ticnlais of the loss and damage ard the proof of the \alue of the
property and if it is fully destroyed, of its existence Failure to do so
irav move fatal to the claims of the! assured, as the delivery of the
particulars is a condition precedent to his right to recoier the los^" But ^
•tihere the insureis repudiate their liability 6n the policy before the par-
tJculais are due, the assured need not submit any particulars." If the
assuied prefers a fraudulent clain he would forfeit all benefits under
the policv, whethei there is conditio.; to that effect in the policv or ,
not and whether the fiaudulent claim is in respect of all or part of the
policx''" Geneiallv the fraxid consists in ovci-vahiation. If ovei-valua-
tion IS due 10 mistake it is npt fraudulent for \aliiation is generally a
nnttei of opinion" But in the great maiority of cases, the expert ag-
sessois letamcd bv the officrs are in a position to arriie at a fair \aUia'
tion satisfactory to both thf insured and insurers.

U. Mason v Harrey (I85S) 22 L.J, Ex, SSfi,

15 Vc Coleman's liepositories Ltd and Life 8c Health AGS Assoc
flQO?) 2 K B 798
Ifi Britton v Roval Ins Co (]8fi6) 4 TV QO'j
17 Dalby v Indian S. Lond Life Ass Co (1954') ]'i C 365
 Chapter X

Life Insuratice

PART 10-A

DEFINITION

Li£e assurance may be defined as a contract in which the insurer,

in consideration of a certain premium, either in a lump sum or by other
periodical payments, agrees to pa)' to the assured, or to the person for
TvJaose benefit the policy is taken, a stated sum of money on the hap-
pening of a particular event contingent on the duration of human life.
Thus, under a Whole-life Assurance, the policy money is payable at
tlie death of the assured, and under ,an Endowment Policy, the money
is payable on the assured's survi-ving a stated period of years, e.g., on
his attaining the age of n.'^. or at his death should that occur previously.

LIFE ASSURANCE AND O T H E R FORMS OF INSURANCE

DISTINGUISHED
The distinction between life assurance and marine and fire insurance
is based on the principle that the risk insured against in respect of life
policies is a certain event and in the case of the other two it is an un-
certain event, The distinction is based on the principle that the risk,
insured against in respect of life policies is a certain event.
Life Assurance differs from the other forms of insurance in the fol-
lowing respects, namely :—
1. In life assurance the event is bound to happen sooner or later,
the only uncertainty being the actual time of its occurrence,
but in the case of fire, marine or accident, it is not certain
that the event insured against will happen at all.
2. Fire, marine ai^d accident insurance are contracts of indem-
nity.- The assured cannot recover the whole of the amount
insured if the loss be less- than that and. in no case can he
.recover more than the loss suffered by him. The amount re-
coverable is measured by the extent of the assured's pecuniary
loss. In life assurance and personal accident insurance, the
- sum insured is payable irrespective of any proof of loss and
to the full extent of the amount insured. Life assurance is
not a contract of indemnity, but in a way it constJtiir/>? a form
of investment.
314 MERCANTILE LAW

3. In a marine or fire policy, the assured is required to have an

insurable interest in terras o£ the policy and such interest
should be capable of valuation in terms o£ money. But in a
life policy, the insurable interest is one required by law and
such interest cannot be measured in terms of money.
4. In a contract of life assurance insurable interest has only l,o be
proved at the date of the contract and it is net necessary
that the assured should have insurable interest at the time when
the policy falls due. In fire and marine insurance, the assured
must have insurable interest at the time of the loss though
he may not have been interested when the insurance was ac-
tually effected.
5. A contract of fire or marine insurance is a contract from year
to year only, and the insurance automatically comes to an end
after the expiry of the year, though it can be renewed for a
further period of one year if the assured expresses his inten-
tion to continue the policy and pays the premium. A con-
tract of life assurance is not a contract for a year but is a
continuing contract with a provision that if the premium is
not paid every year at ox, about the specified time the con-
tract would lapse.

LIFE INSURANCE IS N O T A CONTRACT OF INDEMNITY

A-s we have already seen, life insurance is not a contract of indem-
nity. It stands on a totally different footing from fire and marine in-
surance. In the leading case Dalhy v. T h e India and London Life As-
«urance Co. (1854) 15 C.B. 365, Parke, B. observed: "The contract com-
monly xalled life assurance when properly considered is a mere contract
to pay a certain sum of money on the death of a person, in considera-
tion of the due payment of a certain annuity for his l i f e . . . .This species o£
insurance in no way resembles a contract of indemnity.'
In this case, the Anchor Co. had issued policies on a life to a total
of £3,000. They had reinsured £1,000 with the India Co. Subsequently
the policies for £3,000 were surrendered, but the Anchor Co. kept up the
£1,000 policy with the India Co. On the death of tlie life assured, it
was held that the Anchor Co. could recover.
In Law V. London Ind. Life Policy Co. (1855) I.K. & J. 223, L insured
the life of his debtor for Rs. 5,000, the amount of the debt. Tlie debtor
paid/back the debt in due course. It was held L could recover the
amount of the policy on the death of the debtor.
It may be further emphasised that, althDugh life insurance may be
•said to partake of indemnity in the sense that one dependent on the in-
sured may be piotected to some extent against loss of that support, yet
the policy calls for a specified amount which may be more or less than
the value of the anticipated benefits of the continuation of the life. T h e
interest which one has jn his own life, or in the life of another, is diffi-
cult to estimate ih rupees and paise; hence it is said that indemnity finds
no place in life insurance.
Another feature of life insurance precludes it from being a contract
of indenmity. Life insurance policies (except term policies) increase in
X l f E INSURANCE 315
value yearly; and therefore life insurance is usually considered as an
investment device.

INSURABLE INTEREST
A contract of life assurance require? that the assured must have at
the time of the contract an insurajjle interest in the life upon which the
insurance is effected. In a contract of life assurance, unlike other insur-
ance, interest has only to be proved at the date of the contract; and it
is not necessary that-the assured should have insurable interest at the
time when policy falls due. T h e reason for this rule is that contract
•of life assurance is not a contract of irdemnity.
In the following three cases insurable interest is presumed and no
proof IS necessai7, viz., (i) own life, (ii) liusband in the life of wife, and
^iii) wife in the life of husband.

PERSON IN HIS OWN LIlfE

A person is presumed to have an interest in his own life and every
part of it, and can insure for any -sum whatsoever, and as often as he
pleases. Such interest in a person's own life is incapable of pecuniary
valuation, hence there is nothing to prevent liim bona fide insuring -his
own life as many times as he likes for his own benefit, even though when
insuring he intends to assign the policy to anotlier person. But if ab initio
the insurance is intended for tbe benefit of another person only and that
fact is concealed, that insurance is void for the lack of insurable interest,

RELATIVES
A wifo has an insurable interest in the life of her husband, and a
husband has an insurable interest in the life of his wife. These tliree
cases in which insurable interest is not required,to be proved but is
presumed, form an exception to the general rule that insurable interest
in life assurance means pecuniary interest. The interest in these three
cases is much higher than the pecuniary interest and is incapable of
valuation. Therefore, no other relationship, as such, gives rise to an in-
surable interest. It must be shown that (a) the person effecting an in-
surance on the life of another is so related to that other person as to
have upon him a claim for support enforceable by law, or (b) the re-
lative is in fact supported by the person whose life is assured. Mere
natural love and affection is not sufficient to constitute an insurable in-
terest. Thus, a father has not necessarily an insurable interest in the
life of his child, nor a chiFd in the life of his father. In these cases
pecnniarv interest must be proved. So, a son has an insurable interest
in the life of father who supports him but not in the life of the father
dependent on him for supportk nor in the life of mother whose fune-
ral expenses he may be called upon to pay. A sister has an insurable
interest in the life of a brother who supports her. The fact that a child
•or other relative was rendering valuable domestic service to the assured
and that the loss of service Would entail tlie employment of'hired labour
•does not create an insurable intei-est,
315 MERCANTILE LAW
PERSONS N O T RELATED
A CTeditor has an insurable interest in the h'fe of his debtor to the
CAtent of the debt; and although tlie debt may have-been repaid -since
the date of the insurance, die creditor can on the dropping of the lite
of the debtor recover iirotn the insurer the policy money, thus making'
a profit out of the debt. A creditor can insure the life of his debtor
up to the amount of the debt at the time of issue of the policv. T h e
creditor can recover tlie policy money even though the debt becomes
tinie-barred before the life drops. It is to be noted that although tne
creditor has insurable interest in the debtor's life he has nt) insurable
interest in the debtor's property. A creditor has also an insurable in-
terest . in the lifei of a surety and the surety has an insurable interest in
the life of the principal debtor. Similarly, a joint debtor or ioint surety
has an insurable interest in the life of another joint debtor or ioint
surety to the extent of his proportion of the debt. But a promise by
tire creditor to a debtor with consideration not to reauire payment of
the debt during his life does not give' the -debtor ^n insurable, intere:.!,
in tlie life of the creditor.
An employee has an insurable interest in the hie of the employer^
arising out of contractual obligations to employ him for i stipulated
period at fixed salary. An employer may also have an insurable interest-
in. the life of tlie employee who is bound by the contract to serve for
a certain time. A partner has an insurable interest in the life of a ro- .
partner to the extent of the capital iiivested by the latter.

POLICIES
Life assurance,-m an attempt to meet the varying wants of the com-
munity, has taken on many forms. First of sil we have 'Whole Lite
Policy, which matures only at the death, whenever it may occur. Secondly^
we have Endowment Policy, in which the^ sum insured is payable after
the expiration of a certain term of years if the policy-holder is alive, or
at his death if he dies .previously. This policy combines the essential
feature of life assurance (payable death) with the advantages of a sav-
ings bank (as amount is payable after certain period and can be tised
by the policy-holder himself). Thirdly, Joint Life Policies are issued
under whicii the sum assured is payable at the death of the fir<;t of the two
livfs, Lastly, Survivorship Policy is also granted under (he •sura assured
and is payable at the death of the last or .survivor of two Hves.
Similar policies may be issued for three or more lives, and are
uccasionally of value in business transactions, A Survivorship Policy is
one under which the sum assured is payable if one person dies before
another and in that event only. Term A,<.surance provides for payment
only in the event of the life dropping before a certain" date or age.
This type is frequently adopted as collateral security for a loan. Such
a policy provides for a low premium at .the outset with a gradual in-
crease, and is thus known as Ascending Scale Policv, or with lar^e sub-
sequent interest when It may be converted to whole life or enflownienr
policv and is known as Convertible Terms Assurance. Thc^c -i^olicies are
usually for a short period and are also called Short TeiTn Policies. T h e r e
LIFE INSUR.WCE 317
are also Sinking Fund Policies, wliich are effected by payment o£ yearly pre-
miums lu oidei to secure a fund at the end of a certain, period for the
na)raent ot debts m connection with joint stock companies with a re-
deemable debenture debt. A life policy may be with profit or without
proht A peisoii who holds with profit policy shares in the piofit of the
office, but pa)s a higher rate of premium. A holder of policy %vithout
profit does not share in the profit of the company, and pays a lower
rate of premium.

SURRENDER VALUE
The iuriender value of a life policy is die amount which the insur-
•ers are prepared to pay in total discharge of the contract, in case the
assuied wishes to suirender his policy and evtinguish his claim upon
it. T h e suirender values are based on the actual premiums paid, and
usually the policy is required to ha\e lun for two or three years before
the sunender value IMU be allowed Sunender values increase with
•(each pa)meiit of premium. Some compahies guarantee a minimum sur-
render ^alue of '10 per cent of the total premiurp paid.

LOANS ON POLICIES
^\here a policy has a suirender value, it also htis a loan value, and
assurance companies usually lend 95 per cent of the sunender value,
keeping the balance of 5 per cent as margin for a vear'j arrears of in-
teiest The loan mav be repaid at the convenience of the borrower,
and in case it is not repaid it keeps alive with interest accumulation,
to be deducted from the policy money becoming payable bv the insurcis
either on its final sunender or on its maturitv- This is the best in\est-
ment that an insurance company can make, as theie is ne^e^ anv darker
of the monev being lost.

P V I D U P POLICY V4LUE
T h e paid up value of ii policy is the amount to whrth the sum as-
sured jvoulcl be reduced at any time if the assured reouested a re-
arrangement of his contract so thaf~no fuither premium should be pay-
able The amount on the paid up policy is payable on the happening
of the event assured against.
Check on the Power of Insuier to avoid life policy on the ground
of misstatement.—Section 45 of the Insuiance Act, 1038 expressly l.ns
down an e.vception to the yeneial rule of utmost good faith. T h e gene-
lal luie is that the assuicd must disclose everything which is likely
to affect the judgment of the insurei and what is stated must be tuith-
ful. Afisreprcsentation of a fact oi its concealment will entitle die in-
surei to a\oid payment of (he claim. Houevcr, in India, this riglit is
subject to these limitations After the e \ n i n of two yc-irs from the date
on which tlie policy was effected, the insuier cannot challenge it on tiie
*,ground of ini^istHtcmont unless he cnn prove that the misrepiescnt^rion,
concealment or suppression of facts was fiaiululcntlv made bv the policy-
hohlci and he knew that the statement was f^lse and made it with full
kno\i ledge rnd understanding of its falsity. In other woids, the insurer.
318 MERCANTILE LAW

in order to avoid the liability to £ay the claim, must prove that the mis
representation or concealment was made with fraudulent intention.

ASSIGNMENT OF LIFE INSURANCE POLICY

Life insurance policies are freely assignable as pctionable claims.
They may be sold, mortgaged, or settled, provided the procedure laid
down in Section 38 of the Insurance Act, 1938 is followed. Section 38
lays down as follows;
1. A transfer or assignment of a policy of insurance, whetlier
with or without consideration, may be made by an endorsemeiit upon
the policy itself, or by a separate instrument, setting forth the fact of
transfer or assignment signed by the transferor or his agent and attested
by at least one witness.
2. The transfer or assignment shall be complete and effectual upon
the execution of such endorsement duly attested. Except where die
transfer or assignment is in favour of the insurer, it shall not be ope-
rative as against the insurer and shall not confer upon the transferee or
assignee any right to sile for the amount of such policy or the moneys
secured thereby, until a notice in writing of the transfer or assignment
togetlier witli the Said endorsement or instrument itself, or a policy of
the same certified to be correct, by both tl..e transferor and the trans-
feree, has been deli-ifered to tlie insurer at his principal place of bu'.iness.
3. T h e date on which the notice is delivered to the insurer shall
regulate the priority of all claims under a transfer or assignment as bet-
ween persons interested in the jiolicy. Where' there are more instru-
ments tlian one, transferring or assigning the policy, the priority of the
claims under such instruments shall be governed by the order in which
the said notices are deliyered.
4. On receipt of the notice, the insurer shall recoid the' fact of
such transfer or assignment together with the date thereof, and also the
name of the transferee or assignee. T h e insurer shall, on the request
of the person who gave the notice or of the transferee or assignee, grant
a written acknowledgment of the receipt of such notice on payment of
a fee not exceeding one rupee.
5. Subject to the terms and conditions of the transfer or assignment,
the insurer shall, from the date of the receipt of the notice, recos^nisc
the transferee or assignee named in the notice as the only person entitled
to the benefit under the policy. The transferee or assignee shall be sub-
ject to ail liabilities and equah'ties to which the transferor or assignor
was subject at ilie date of the transfer or assignment The as^igtfte
may also institute any proceedings in relation to the policy without ^he
consent of the transferor or assignor, ®r without making him a party' to
such proceedings.
6. An assignment in favour of a , person made with the condition
that it shall be inoperative or that the interest shall pass to some other
person on the liappening of a specified event during the lifetime of the
person whose life is insured, and an assignment in favour of survivor or
survivors of a number of person"!, shall be valid.
 LIFE INSURANCE 31^

NOMINATION BY T H E POLICY-HOLDER
Sset nalB makes the following provisions regarding nomination by
a poliq'-holder:
1. T h e holder of a policy of life insurance -on his own life may,
when effecting the policy or at any time( before the policy matures for
payment, nominate a person to whom the amount due thereunder shall
be paid after his death.
2. The nomination, in order to be effectual, shall be either incor-
porated in the text of the policy or endorsed thereon and communicated
to the insurer who shall register it.
3. T h e nomination can be changed or cancelled by the assured
any time before the policy matures for payment, and notice tliereof given
to the insurer. Unless a written notice of such change or cancellation'
of the nomination is delivered to the insurer, he shall not be liable for
any claim under the policy made bona fide by him to a nominee legis-
» tered in the records, or mentioned in the text of the policy.
4. T h e policy-holder is entitled to receive from the insurer, and
the insurer shall furnish, a written acknowledgment of having regis-
tered a nomination or a cancellation or change theieof on payment of a
fee of one rupee.
5. A transfer or assignment made in accordance with Section 38
shall automatically cancel a nomination. But tne assignment of a policv
to the insurer in consideration of a loan granted by him within the sur-
render value of the policy, or its re-assignment on repayment of the
loan shall not cancel a nomination but shall affect the rights of the no-
minee only to the extent of the insurer's interest in the policy.
6. Where the policy matures for payment during the lifetime of
the person whose life is insured, or where the nominee dies before the
policy matures for payment the policy money shall be payable to the
policy-holder or his heirs or legal representatives, as the case may be.
7. Wherfe the nominee survives the policy-holder, the policy monef
shall be payable to the nominee.

CLAIMS
A person, claiming on the maturity of the policy, must satisfy the
insurance company that he is entitled to receive the money on account
of his being the owner of such policv, or because the actionable claim
is vested in him as legal representative, or as nominee, or as assignee.
Primarily, the assured is entitled to get payment but after his death his
legal representatives acquire this right.

PROOF OF AGE AND DEATH

« On the ripening of a life policy, insuiance company requires a-
satisfactory and reasonable proof of age, if not already given and admit-
ted, and of death of the assured. Death may be proved by direct fivi-
dence or bv death certificate or bv evidence of prolonged absence or
other facts from which the fact of death may be properly Inferred. The-
320 MERCANTILE LAW

company will, as said above, require a stiict piooE o£ age of ike assured
befoie satisfying any claim imdcr a life policy. Age can be proved by a
certified copy of an entry ii. the register of births; in the absence ol! this,
an. eniiy in the horoscope, or family Bible, or in any family pedigree,
or uDori-any tombstone or family poi trait, etc> T h e evidence of a per-
son who is older in age than the assured is also considered siifificjent)
It is incumbent on the assured to give proof of his- age, during his life-
time, and ii he docs so. the insurance comoanv either writes across the
policv the woids "age admitted" oi issues a certificate stating that the
age lias been admitted as correct. ^Vhen this has been done, the legal
representatives aie nat requiied to give any proof of the age." Once the
company has admitted the age, it is preducled from disproving the age
as admitted, unless it can show that the admission was obtained bv
fraud." Hence again, the company cannot refuse to pav the claim, if the
age turns out to be more than what was given, but it must pay the claim
after deducting the amount; of the difference of premium between the
two ages.
When the money under the policy becomes pavable, the company
is in the position of a debtor and the nomiiiiee, assignee or legal represen-
tative is in the position of a cieditor The companv does not hold the
monev on any trust* If the assured piefers a fraudulent claim, he
v.'G-.-.ld foifeit all benefits under the policv, whether there' is a condition
to that effect in the policv or not ° In joint insurance, fraudulent claim
of one of the joint assured would equally hit the claim of the other
assured."

SUICIDE
Suicide implies a wilful and intentional taking of one's own life.
Policies of life assuiance usually contain a condition by which the liabi-
lity of the insurer is modified and limited in case of suicide by the as-
suretl and if the condition is broken ^.e., the assured commits suicide)
the insurers cease to be liable. But where there is no condition in res-
pect of suicide the Habjlity of the insurer differs in English law from
that under the Indian law. Under English law, in the absence of anv
expicss condition to that effect, a policv of life assurance will be avoided
when the assured commits suicide while of a sound mind, for his act
amounts to a crime, and it would be contrary to public policy to let
anv one make capital out of his own crimes.' But if the assured com-
mits suicide while of unsound mind the policv cannot be avoided under
the Indian law. a policy cannot be upset on the ground of public policy
in CISC of suicide even of a sane assured.''

T. Section 32, Indi.ln Evidence Act.

2. .Sectiori 58. Indian Evidence Act.
3. Oriental Govt. Security Life Ass. Co. v. Narasimhachari ngOH 25
^rad. 1S3.
-f. Mathews v. Northern Ins. Co. 0879) 9 Ch. 80.
5. Britton v. Royal Ins. Co. (1866) 4 F. & F. 905.
6. Guardian Ins. Co. v. Rustomji (1936) 162 I.C. 443.
7. Bcresford v. Royal Ins. Co. (1936) 54 T.J..R. 789 H.L.
8. Northern India Ins. Co. v. Kanya Lai, 1938 Lah. 561.
 ACCIDENT INSURANCE
The terra "accident" is not easy to define so far as to determine accu^;'
rately the distinction between an injury or death by accident and an in-
jury or death by natural causes. To understand the meaning of the term,
recourse may be had to the decided cases.
Lord Macnaughten defines" an accident as "an unlooked-for mishap,
or an untoward event which is not expected or designed." In the term
accident some "violence, casualty or vis major is necessarily involved." lt\
is something unexpected as opposed to something proceeding from na-
tural causes.'" An injury is accidental where it is the natural consequen-
ce , of an unexpected cause, or the unexpected consequence of a natural
cause. 'Running over of the assured by a tram is an instance of the for-
mer; and injuring his spine by_Iifting a heavy burden in the ordinary
course of business is an instance of the latter." If a man stumbles and
sprains his ankle, he meets with aa accident because he did not intend
to stumble, but a man with a weak heart who, while running to catch
a train, injures it, does not meet with an "accident."^ If the cause and
the result are both natural, injury cannot be called accidental.^'' Death
by sunstroke is not accidental but death by downing is.
Accident may also happen by the acts of third persons. For die pur-
pose of the accident policy, it is immaterial whether the acts of the third
party are innocent, negligent or even criminal. It is accidental so far
as the stsured is concerned."
Accident insurance consists of three branches : ^
(a) Personal accident insurance, including insurance against sick-
ness;
(b) Property insurance, including burglary, fidelity, insolvency, etc
(c) Liability insurance, including motor insurance, workmen's
compensation insurance, etc.
Personal Accident Insurance—A contract of personal accident insur-
ance is a contract whereby a sum of money is secured to the assured or
his legal representative in the event of his disablement or death by acci-
dent. It is a contract against injury or death resulting trom accident.
Personal accident insurance is akin to life assurance and is not a con-
tract of indemnity. The insurer usually undertakes to pay specified sums
in the event of temporary or permanent disability, whether partial or
total. Other sums are agreed to be payable in the event of death, or
loss of limb, etc., as the result of an accident. For example, the insurer
may agree to pay Rs. 10,000 for the loss of both eyes, and Rs. 5,000 for
the loss of one eye; or Rs. 50,000 for permanent disablement and Rs. 1,000

9. Fenton v. Thorley (1903) A.C. at 448.

10. Sinclair v. Maritime Passengers Ass. Co. (1861) JO L.J.Q.B. 77.
11. Re Etherington 8: Lancashire Sc Yorkshire Accident Ins. Co,
(1909) 1 K.B. 591; Theobald v. RIy. Passengers Ass. Co. (1851) 10 Exch.
45.
12. Scarr v. General Accident Ass, Corp, (1905) 1 K.B. 387.
13. Ibid.
14. Trim Joint District School Board Management v. KeUy (1914)
A.C. 667; Letts v. Excess Ins. Co. (1916) 32 T.L.R. 361.
 Wl,r )S.<-^A1.N i JiJ-,r. J^/iVV
yiz
for temporary dibability plus Rs. 10 per week during ilic period of dis-
ability and so on.
A policy -ol personal accident insurance generally provides tor sur-
auce.against the event oL bodily injury or death "caused by violeiu, ac-
cidental, external and visible means." Therefore, the injury or death
must not only be accidental but must allso be caused by accidental meaijs.
The assured or hib legal representative, 'as the case may be,- must show that
an accident occurred within the meatyng of the policy, and tliat die in-
jury or death was caused by such accident. As this is not a contract ol
nidemnity, die insurer cannot deduct from die amount payable to the
assured any sum received by him from a person responsible for the acci-
dent. Neithci is the insurer subrogated to the rights ol/damages tJiai
the assured may have against a third party. The existence of the in-
surance does not alleci the amount recovurablc Ironi Uit; third parties.'^
T h e contract ot peisoiial accident insurance is made in the same
manner as in the case oi life and the lire insurance, i ue iundamental
principles ol insurance, such as insurable interest, good iaiili, apply to
this nisurancc just as they do to any other form oi jusurance. i u c doc-
trine ol proximate cause is ot particular imponaiicc in tins contract ot
insurance. If the accident is tire direct or immediate cause of injury or
death die insurer is liable. He is also liable it the immediate cause ol
deatli or disablement is a part oi the train ol events set in motion by
the accident. Jiut if diere are other intervening causes lite disease, or
piiy^ical infirmity, and such odier causes have some connection with the
accident or injury, the dectrine of proximate cause must be resorted to
for deteimining the liability of die insurer. It the disease is already in
existence at the time the accident takes place, and the effect of each is
independent ot the otlier, deatli or disablement by such accident is cov-
ered by the policy." If, on! die odier hand, accident is merely respon-
•^ible for die exaggeration ot die effects of the disease, death or disable-
ment caused under these circumstances is not covered.'" If, however, the
accident brings out a disease whicli was merely latent in the system, the
insurer is responsible."^ If the accident happens first and the disease
follows, death or disablement will be taken to have been caused by acci-
dent, as the disease is only a link in the chain of causation.^"
As is common in all kinds of insurance policies, certain causes are
excepted from the operation of die peril. l\\ .personal accident policies
the most important exceptions relate to the <X)nduct. or the physical con-
dition of the assured. The policy may provide tliat if at the time of the
accident the assured is occupied or engaged in any occupation, trade or
business, involving more danger to his safety oi life, the company will
not be liable.'" There may be a clause tliat if at> the time of the accident
the assured is under the influence of liquor so mucli as to upset the tvork-
ing of his intellectual faculties, the insurer will not be liable.
Coupon insurance is almost unknown in India, but in the Western
countries, insurance against railway accident is often effected by means of

15. Bradburn v. Great Western Rly. (1874) '14 L.J. Ex. 9.

16. -Smitli V. Accident Ins. Co. (1870) L.R. 5 Ex. 302.
17. Fiiion V. Accident Death Ins. Co. (1864) 17 C.B. 122.
18. Fidelity & Casualty Co. of New York v. >richeli (1?)17) A.C 59^
19. Mardford v. Accident Ins. Co. (1903) I K.B. 584.
20. Cox V. Employers Liability Ass. Corpn. (1916) 2 K.B. 629
 L i r h INSURANCE S23

a ticket purchased like a railway ticket at a station. These insurance tic-

kets enable passengers to protect themselves against accident by the pay-
ment o£ a very small sum. '
Pi-operiy Jnsurance.—Contract o£ property insurance is a contract of
indemnity," and die principle o£ subrogation is applicable to it. Proof
by the assured of loss is an essential element o£ property insurance. The
policies of insurance against, burglary, house-breaking or theft usually pro-
vide their ov/n definition of die risk insured against,^' but in the absence
of-such definitions, resort must be had to criminal law for the definition.
Iq^ constitute a loss within the meaning of the policy, it is necessary that
a criminal ollencp falling within the scope of the policy, must have been
committed." Further, it must be shown that the property insured has
been carried away permanently from tlic premises. Policies against loss
by (Jieft generally cover "theft following upon actual, forcible qnd violent
entry upon the premises." '
Articles of special value, or those held in trust, are usually excluded.
Also, Joss or damage capable of being covered by a different kind of insur-
ance is excluded, e.g., loss by theft following a fire.
A description of the premises containing tlie property msured is an
pssential part of the contract, for the risk varies according to the character
and locality of the premises."' and the risk attaclies^ only whilst the pro-
perty is in tlie premises defined in the policy. If the assured parts with
I lie insured property or removes it from the specified locality, the insur-
ance ceases to be effective. The assured is usually required to take all rea-
sonable precautions to protect the insured' property. After the loss has
laken place, the assured is usually required to notifv the police a's lo tlie
loss.
Fidelity Insurance.—In tliis insurance the insuier undertakes to indem
nify tlie assured (employer), in consideration of certain payments, up to
ri certain specified amount insured agarnst lor loss arisnig through tiie
liaud, or embezzlement on the part ol the employees. This kind of in-
siuince, which is also known as "hdelity guarantee" insurance, is fre-
quently adopted as a precautionary measure in cases where new and un-
tried employees are given positions of trust. The "collective" policy
embracing all employees falling within certain categories, or alternative-
ly, the whole staff, has become ver common ^
Motor Car Insurance.—The owner ol a motor vehicle may, and usual
ly does, insures his vehicle against any damage that it may suffer. He
may also insure against personal accident to himself and other occupant;
of the car. He may insure his car or may not do so, but he MUST now
insure in respect of the liability which he may incur to others in conse-
quence of the use of his vehicle. This is known as "Compulsory Insur-.
.nice of Motor Vehicles against Third Party Risks" which has been pro-
vided for in Chapter VHI of the Motor Vehicles Act, 1039.
A policy of motor vehicle insurance, therefore, serves three purposes,
inasmuch as it is an insurance {\) on property—the motor \'ehicle, (ii)
against personal accident, and (iiji) against liability for accidents. The
|jolicy covers loss or damage due to accident, thefi, fire or self-ignition and
wilful damage. The peisonal accident insurance in :i motor accident
21. Dane v. Mortgage Ins. Corp. (1894) i Q.B 54.
22. Wasserman v. Blackburn (1927) T.L.R. 99; Leizard Bros, v
lliookes (1932) 38 Com. Cas. 48.
23. Re George &; Goldsmiths, etc., (1899) 1 QJB. 595.
21 Pciso'i \. Commercial Union Ass. Co. (1876) I.A.C. 489.
324: MERCANTILE LAW

policy covers two classes of accidents, namely, (a) if the accident happens,
in connection with the insured vehicle the insured is protected along with
the other occupants of the car, (b) if the accident happens in connection
with other vehicles the assured is covered to the extent of all accidents
happening whili he was travelling in ^siich other vehicles/'
The delivery of a certificate of insurance to the assured imposes upon
the insurers the duty of satisfying by payment to the third party any
judgment subsequently obtained by him against the assured. The effect of
this and other provisions in the Act is to compel the insured to satisfy
those claims, notwithstanding tliat he may be entitled .to avoid or caticel
the policy.
SUMMARY
A contract of insurance is a contract by which one party, called the
insurer or underwriter, undertakes, in consideration of a certain sum; call-
ed the premium, to make good to the other party, called the assured, any
loss which he may sustain by reason of the peril insured against.
The risks which may be insured against include fire, accident, burg-
lary, the insolvency of a debtor, the perils of the sea (marine insurance)
and death (life assurance).
Fundamental Principles of Insurance
1. A contract of insurance is a contract jiberrimae fidei—contract
based on utmost good faith.
2. The assured must have insurable interest in the subject-matter of
the insurance', i.e., either he must own part or whole of it or he must be
in such a position that injury to it would affect him adversely. Bfit insur-
able interest is meant pecuniary interest in the subject-matter.
3. Excepting life assurance and personal accident and sickness in-
surance, a contract of insurance is a contract of indemnity and indem-
nity only.
4. In the event of some mishap to the insured property, the insur-
ed must act as though, he were uninsured, and make every effort to pre-
serve the property.
5. A contract of insurance can be enforced only if the risk has
attached. If the risk is not run die consideration fails, and, therefore,
the premium received by insurer must be returned.
6. The loss must be proximately caused by the peril insured against.
7. Except life assurance, a contract of insurance is a contract from
year to year, aldiough it can be renewed if the assured so desires.
Life Assurance.-In Life Assurance, the insurer agrees to pay to the
assured or to the person for whose benefit the policy is taken a stated sum
qf money on the happening of a particular event contingent on the du-
ration of human life.
Under a Whole Life Assurance, die policy money is payable at the
death of the assured; while under an Endowment Policy money is pay-
able on the assured's surviving a stated period of years, e.g., on his at-
taining the age of 55, oy at his death should that occur previously.
Insurance Interest.-l! A person has insurable interest in his life and
can insure it for any sum whatsover, and as often as he likes.
2. A wift Tas an insurable interest in the life of her husband, a
husband in the life of his wife.

25. Singh, B. N . : Insurance Law and Practice, p. 466.

LIFE INSURANCE 325
3. A creditor has an insurable interest in the life of his debtor to
the extent of the debt.
4. A person has an insurable interest in his relative if (a) he has
by such relation an enforceable claim on him, or (b) the relative is sup-
ported by the assured.
Mere love and affection is not sufficient to constitute insurable in-
terest. Thus, a parent as such has no insurable interest in his child
and vice versa.
5. An employee has an insurable interest in the life of his emplo-
yer and vice versa.
6. A partner has an insurable interest in the life of a co-partner
to the extent of the capital invested by the latter.
Surrender Value.—Surrender value of a life policy is the amount
which the insurer is prepared to pay in total discharge of the contract,
in case the assured wishes to surrender his policy and extinguish his
claim on it. The surrender value is based on the actual premium paid,
and policy is required to have run for 2 or 3 years before surrender
value will be allowed.
Paid-up Policy Value is the amount to which the sum assured would
be reduced at any time if. the assured requested a re-arrangement of his
contract so that no further premiums should be payable. The amount
on the paid-up policy is payable on the happening of the event assured
against.
Life Policies are freely assignable as actionable claims. They may
be sold, mortgaged or settled, provided that a written notice to the in-
surer is given of such assignment, so as to make the assignee's title effec-
tive against the insurer. Assignment may be made by the execution of
an instrument in writing or by a mere endorsement on the policy.
Claim.—A person claiming money on the maturity of the policy
must satisfy the insurer that he is entitled to receive the money either
(a) as the owner of the policy, or (b) because the actual claim is vested
in him as legal representative or as nominee, or as assignee.
On the maturity of the life policy the insurer requires a satisfactory
and reasonable proof of age and death of the assured. Death may be
proved by direct or indirect evidence.
In the absence of any conditions to the contrary, suicide does not
avoid the policy in India.
Fire Insurance.—A contract ^f lire insurance is essentially a con-
tract of indemnity. Subject to the maximum of the amount of the po-
licy the insurer indemnifies the assured for any loss caused by fire with-
in a specified period.
Average Clause.—A condition, called the average clause, is usually
incorporated in a fire policy, by which the insured is called upon to bear
a portion of the loss himself, in the case of under-insurance. If a pro-
perty is'orth Rs. 5,000 is insured for Rs. 4,000 and suffers a loss of Rs.
1,000 [he insured will get 4/5ths of 1,000, i.e., Rs. 800, and the balance
of Rs. 200 will be borne by the assured.
Insurable Interest.—In fire insurance, the assured mvfet IMVC insur-
able imciest both at the time of effecting the policy and-at/ili'fe time o(
the loss. In consequence of this fact a fire policy is not,'..-,ssignable. In
the case of goods, insurable interest .irises, on accoiuit of owire^pjliip, los-
sessioii :uid contract. The insurance of n building may he cltectecl by
anyone interested in it, e.g., owner, tenant, purchaser, mortgagee.
326 AtERCANTILE LAW

The-risk on fire policy commences from die moment Uie coier note,
or the deposit receipt or the interim protection note is issued.
The word Tire' is to be construed in its popular and liber.il sense,
and means a fire which has broken bounds: Actual ignition is essential.
Subrogation.—The Essence of Ere insurance is indemnity, and there-
fore the assured cannot make a profit of his loss. The iiilc gives rise to
the doctrine of subrogation, which means that on indemnifying the as-
sured, the insurer is entitled to the advantage of every liglu of the (insur-
ed. Having satisfied the claim of the assured the iiibuiei stands in his
place; he is subrogated to all the rights of the assured.
Contribution.—Where a person effects two or more insurances in
respect ot the same subject-matter and the same perils, he will recover
only the actual loss, even though the total amoimt with different instneis far
exceeds the los^. If any insurer pays more titan his share of the lial)i-
lily, he can claim contributions from others, so tjiat the li.ibility of eacli
is made proportionate to the risk covered.
Claims.—Before his claim will be met the assured is required to
cause a notice of fire to be given to the insurer, and also furnish full
particulars of the loss and damage and, the proof of the value of the
property, and if it is totally destroyed, even of its existence at the time
of the fire.
Marine Insurance.—Marine insurance is a contract of indemnity in
whicJT the underwriter agrees to indemnify the assured for loss or da-
mage caused to the subject-matter insured by the perils of the sea.
A contract of marine insurance must be embodied in a marine
policy, otherwise the insurance contract will be void. The marine policy
must specify (i) the name of the assured, (ii) the sulijeci-matter instucd
and the risk insured against, (iii) the voyage, or period of time, or Ijoih.
(iv) the sum insured, and (v) the name or names of ilie insurers.
Implied Warranties.—There are two implied wan.inties, namely,
seaworthiness and legality of voyage, which must • be complied with to
render the contract of marine insurance valid.
In every voyage policy the ship must be seaworthy ,u the conuiiciice-
ment ot the voyage, or if the voyage is divisible into distinct stages, ai
the commencement of eacli stage" T o be seawoithy a sliip must be lea-
sonably fit in all respects to encounter the perils of the voyage she is
about to undertake.
T h e adventure insured must be a lawful one, ami --') far as the as-
sured can control the matter, it shall be cairicd out in .1 lawful manner.
T h e ship must follow the course specified in the iK)licy,'or if not
specified therein, the usual and customary course. It must not deviate
from the voyage without any lawful excuse, and the vovage must com-
mence -without unreasonable delay.
Where the destination is specified in the policy, .md the ship, aftei
the commencement of the risk, sails for another destination, no lisk at-
taches to the policy from the time when change of voyage is ronieni-
plated.
Losses.—.\ loss may be cither 'I'oial 01 I'wi ii.nl. Tmal loqs 1in.H' (K
actual or constructive, and partial loss may he p.niictihn ,.y..M ^ c 0 1
general average.
An actual Total Loss occurs where the suljiccl-in.iiici iM-,u)cd is <1 1 1
iroyed, or so damaged .is to cease to be :J iliing <>[ the kind i n ^ u \ i ' i l
or the assured is irretricvablv 'IcjiriicJ of ilip sjihjci 1 uiiiiici.
LIFE INSURANCE S27
A Constructive Total Loss occurs xvhere the subject-matter insured is
reasonably abandoned on account of its actual total loss appearing to be
unavoidable, or because it could not be preserved from actual tptal loss
without an expenditure which would exceed its value when the/expendi-
ture has been in(uiied. Notice of abandonment must be given to the in-
surer within a leasonable time.
A Particulai Average Loss is a partial loss accidentally and fortui-
tously caused to tiie subject-matter by fiie peril insured against. Parti-
cular average loss becomes' pavable bv the undeiwiiter only when it has
been actually incurred.
A General Average Loss is a paitial loss which occurs when any extra-
ordinary 'Kicrifice or CKpenditure is voluntarily and reasonably made or
incuired in time of peril for the purpose of prcsen'int? tiie property im-
perilled in the common adventure.
\ sacrifice may be made by'deslio\ing any pail of the ship, or by
throwing overboard any. part of the cargo.
Kottomry and Respondentia are monetary loans obtained in cases
of lugent necessitv and are covered by General Aveiage Loss. Bottomry
is a lo'in obtained on the sccuritv of the ship, or ship and caigo joifitly.
and respondentia is a loan taken on the security of the cargo alone.
Accident Insur,viice consists oC three branches, namely,
(•\) l^eisonal .Vccident Insurance whereby a sum of money is
secured to assuied or his legal lepresentati",e in the event of
his disablement or death b\ accident.
(h) Piopeifv Insurance, including bin-g!ar}, fidelity and insol-
venq Propertv insurance co^e^s all loss of property - by
burglai\. theft or house-breaking, or b\ any other act which
' is a ciiminal oftence.
hi Fide!il^-Illsulance the in'.uier iindeitakes to iiulemnifv the as-
sured (employer) against asiv loss aiising thiough fhe fraud
or embe77lement on the jjart of the emplovcc*;.
(c) Liabilitv Insuiance. including motor in^ur,mce. Woikmen's
Compensation Tnsui.uice etc.. wider uhirh ilic insiwer agrees
to compensate the assiucd for iiis 1i<ibilil\ v^hit'i he mav in-.
cur to others in consequence of the t!sc o! bis motor vehicle
or to his emplovees umlei' IV'oikmen's Cotiipcnvalion Act.

CA.SE.S FOR REC \ P I T U L VTIOIV

1. "\V insiued his house against fi'c f-atcr. v.hiic ins.lne. ^V killed
his wife, severely injured his onlv son. set fire to the Iiouse and (lied
in the fire. The son sur\-ived and ^ned rhe insure! s for the fire loss
Held, the son "could lecover on the fire policy, as the in .rrer is not
relieved of his linbilitv on the fire policv for the" insui'ed ctused the fire
when he was insane (K.'uov.' v. The Contiiienl;i lu'.. Co. 57 'W'is. 56).
2. M insured against fire his shoi) containins: ^;ock of meichandise
u-oith Ri: 75.000 foc ft^ 20 000 ouiv' in oulci to p \ a '•ni-iiler amount of
iiieniium. The policv contained ,i condition iiiaf if the pioj)ei(v iiisui-
ed should at (iie l)iea!-.ina; out of arv fire be of gicitcr i IUK that? ilie
s\im ittsnred theieon. the i isured Jionld I'C finsid'^ied .is 'leing his own
'Psuier for the difference and shonlri bca'- T i il.iblc piot'oriion of the los-^
actoidingiv. Tn n fiic the entire s'ock inu fin-'ijr\ue \u)ith Rs 70 000
•\\eie burnt to ashes M ciaimed the whole, ins:ucd .niiount T'le ir.-
suioi pleaded she .•^verag« clause Held, ]\'f can ie(o\<>i 'be w.'1-iok
328 MERCANTILE, LAW
amount of Rs. 70,000. The average clause comes into play only i£ it
is proved that the loss sustained by the assured is less than the sum in-
sured. When the loss is much more>, than the sum insured, the insured
can recover the whole amount in spi'ie of tiie average clause. (General
Ass. Society Ltd^ v. Mohd. Salim, 1965 All. 561V .
3. M was the owner of nearly all the shares and me only substan-
tial creditor of a company carrying on timber business. He insured the
timber against fire in his own name. A fire occurred and all the timber
was de:,troyed. He put in a claim u,ider the policy and the insurer
refused to pay. It was held that M vould not recover the loss as he had
no insurable interest. Lord Wrenbury .said: " . . . . t h e corporation, even
if he holds all the shares, is not the '•orporation, and neither he nor
any creditor of the company has any prcperty, legal or Cduitable, in the
assets of tlie Corporation." . [Macaura v. Northern Assurance Co. (1925^
A.C. 619].
4. A effected an insurance on his goods against loss or damage u)
(irc. Afterwards A and his wife auarrelled and slic set fire to <tnt
destroyed the goods. Held, A was entitled to recover under tlie fire
policy as the wife had set fire to the goods without his connivance. Tin
illegal act was not his but of his wife, and he was covered under tlit'
policy against loss caused bv an illegal act of another [Midland Ins. Ce.
V. Smith (1881) 6 Q.B.D. 561].
5. In a case of fire insurance contract the insure), on receiving
information of the insured property having been lost by liie, repudiated
his liability in toto on the ground that it was a case ot intentional arson.
The assured brought an action against the insurer for the recovery oi
his loss. The insurance policy contained a clause to the effect t>iat in
case of any difference between the insurer and the assured us to the
amount of damage suffered by the loss of pioperty, the same should
be referred to arbitration. The insurer pleaded that the suit was pre-
maturely filed, as the dispute had not been referred to arbitration and
shoidd be dismissed. Held, that the suit was maintainable, as the re-
pudiation of the claim on a ground going to the root of the contract
precluded tlie insurer from pleading the arbitration clause. A party
cannot approbate and reprobate at the sam"5 time. He cannot claim
that the policy is void and yet seek benefit of a condition in that policy
by insisting upon arbitration [Jureidini v. National Br. & Irish Millers
ln.s. Co. (1915) A.C. 499].
In Heyman v. Darwins (1941) A.C, the House of Louis !>eems to
iia\e doubted tlie principle laid down by the House of Louis in Jureidiiii's
case. It is therefore safest for the assured to go to arbitration and sue
on the amount awarded by arbitration.
6. Property worth Rs. 5,000 is insured up to Rs. 1,000. There i--
an 'average clause' in the policy. Property worth Rs. 1,000 is destroy-
ed by fire. The insured can recover the full amount of Rs. 1,000 on
the same principlp as explained in case No. 2.
7. -Vs. goods in a warehouse are insured. B is the insurer. The
good.8 are burnt. A recovers their full value of Rs. 1,000 [lom B. Then
A sues the warehouse-keeper and recovers Rs. 1,000 from him. 15 claims
this amount from A. It was held that B could retovet iliis .iiiiount of
Rs. 1,000 from A, as this amount makes his receipt in excess of the loss
actually sustained by him. He cannot be oliowed to make H piofit of
his loss. As B had made good his loss. .\ musi reliind to B ihe .nnount
of Rs. 1,000 which he recovered from the waieliouse-keepci. This prob-
lem is based oir the cnse Darell v. Tibhiis (1880) 5 Q.U.D'. 5(")().
LIFE INSURANCE 329
8. A ship insured against the penis oi uic sea was lying at anclior
off the shore about to proceed on her voyage. While the boilers were
being filled, a valve remained closed, due to the fault of somebody on
board whose duty it was to see that it remained open. Consequently in
the operation of pumping, water was forced back, split the air-chamber
and disabled the pump. The House of Lords, reversing the judgments
of the Courts below, held that this was not a loss covered by an ordin-
ary marine policy, being neither a peril of the sea nor coming within the
general words "all other perils, losses, etc." T h e underwriters were
held not liable to pay. [Thames and Mersey Marine Insurance Co. Ltd
V. Hamilton, Fraser & Co. (1887) 12 A.C. 4841. As a result of this case,
the Inchmaree clause, named after the Steamer Inchmaree of this case,
was brought into general use, extending the, liabilities of the under-
writer. \
9. A ship was valued at, and insured for 16,000, though her real
value was 9,000. Owing to a collision she was sunk, and' the under-
!vi iters paid a total loss of £6,000. In due course, the assured recovered
•flooi the owners of the wrongdoing vessel a sum of £5,700. The assured
Contetided that they were entitled to retain one-third of this sum (the
s\\ip'5 astyal value being £9,000, and the insured value being £6,000),
but \t vias hel^ tho-t the underwriters were entitled to the whole of this
f5',70(V, £ff,000 b'cing-the -^alue admitted in the policy. (North of Eng-
land Ins. Assccieifcioirt v. Annatroiig).
10. A sftip, which „a:, i.isured under a time policy, wa's/sent to sea
unseaworthy in two respects; her hull was in an unfit state for the voy-
age and her crew was insufficient. T h e assured knew of the insufficiency
of the crew but not of the unfitness of the hull. T h e ship was lost be-
cause of the unfitness of the hull. Held, the insurers were liable. In a
time policy there is no implied warranty that the ship shall be seaworthy
at any stage of the adventure provided the loss is noi attributable to
the unseaworthiness to which the, assured was privy [Thomas v. Tyne and
Wear S. S. Freight Ins. Assn. (1917) 1 K.B. 938],
11. On 15th January, 1968, A assigned his life insurance policy to B
for valuable consideration by a separate deed of assignment. On 15th
February, 1968 A transferred the same policy by endorsement thereon to
C as a gift, and on the same day gave notice of the transfer in favour of
C to the Life Insurance Corporation in the prescribed manner enclosing
therewith the original deed of assignment. Both B and C claim the
amount of tlie policy on maturity. T h e Life Insurance Corporation will
lecognise the claim of C and pay him the policy money. Under Section
38(3) the assignment is complete and effeaual but does not confer upon
the assignee any right to sue on such policy until notice in writing of
the assignment has been given to the corporation and either the endorse-
ment" or the instrument itself or a copy certified to be correct by both
tlie transferor and the transferee have been delivered to the corporation.
The date on which the notice in writing is delivered to the corporation
shall regulate the priority of all claims under a transfer or assignment
as between persons interested in the policy. As notice of assignmcni
in favour ofC was given, C would get the policy mqncv. It makes no
diffcicnce even if both assignments have been made foi v.dii.iWc con-
sideration.
12. A, tlie holder of a policy of life insurance on his own life, no-
miii.ites U as tlie person to wlioin tlie polic) money is to be paid in the
event of his death. Tiicieaftei A seciiics a loan liom the iiisuiei and
330 M E R - C W T I L E J. \ \ V

assign^ his [K)1IC\ to the insuiei in consKlciaiioi, of ilic loan In ilia'

roiirse, the loan js l e p a i d a n d tlie politv is i c .i>.-,i^ne(l to \ \ iheie
after dies Both B a n d the le!»al r e p r e s c n v a t n t s of \ d n m the n w m i i
of the policy B's claim will succeed as ihe iionniiaiion in his l.ivoui
was not afTectfd b \ the assignment to the insmei Mihoiipih Scktion
^')(1) of the I n s u r a n c e \ c t 1038 ])ro\ides th.it a iiansfei or assignment
of a pohc)' m a d e in accordance u i t h the pioMsions of '-et tion '^B of ilu
\ct shall automaiicallv cancel a iiommation the ])ro\iso to it m lUc- ni
i\ce])t!on to this u i l e An a.signment oi a policv to d u iiisuier '\luj
bears the risk on the policy at the time of assignment in consideiatjon
of a loan granted bv that insurer on the secuiitv of ihc polirv v i i l n n
Its surrender value oi its assignment on r e p a ) m c n ! of the loan shall
not cancel the n o m i n a t i o n hut ^hnll affect the ii'^his of the n o n u ' m
o n h to the extent of the instirei's interest in the <)o\u\
13 X. a polic\ holder in an insurance compain nominates ^ i
Ins n o m i n e e Before the inatuiitx of the polic% Y d u s On tlu in i
iinii'. of the j)oIic\ Y's heiis claim ihc ))olicv m o n c \ fiom tlie msui
incc compan-s R\ \ i r t i i e of Section 39(5') of the Insinan(C Act 10'!^
^\hcie the n o m i n e e dies bcfoie the policv matincs foi payment tht
a m o u n t secured bv the poliCN shrill be p a \ a b l e to iht policvholdei oi
his heirs or legal r e p r e s e n n i n e s or the holder of i suncssion reitifK u r
as the case mav be In view of the c \ p u - s pio\isioiis of h w the u i i s
of the n o m i n e e u i l l not h e entitled to the sum i),i\ ibk undei the iiolu^
111 this case.
11 A holdci of a m . i n n e insuiance uolirv obtain- i d i ^ i d agiiii-.i
ilic insurei in respect of a claim aiising out of hiv polirx P m i to
ilu date of t'lis decree a n o t h e r decree had been pissed i g u n t ih< in
siiu'i 111 r suit for i n e a i s of rent fill d b\ ilie 1 m d l o u l nf the l)lel^l^^-
I tiled bv the insuiei U p o n the failuie of the m s m t lo -.itisf' 'he
i!((iecs the decrce-hoKkis seek to e \ c c u ' e then l e ^ i H c i n e deeiees 1)\
III ehing the 'imoimr of the stalulorv deijosit m a d e b\ I'lt i n s r r c i ' M T I
the R e s e n e Bank iiiidei Section 7 of the Ti.sm u u e \ ( ' T h e poliqx
liohUr-. dectet d a m o u n t r m o n h 1)L iM'd oi of t h ' ^ / ' ( ) o s i t iiid the
I m d l o i d cannot get untliiiiL, foi the > t i i r t o n ('t'lo-u i ni be i.iili'-.'l
o n h fo! (he piMiieru of pohc\ nione\ I'uc 'loni IIR H ^Ilu'l md no
oihei claim c m be m e t out of it
1") M is the h o l d e r of a po!ic\ of life nisinaiHi on his O'.M life
and Afis Af is m e n t i o n e d in the text of tlu policv i^ li e person ' ii<>
lio'ild be j)ni(l ihe a m o u n t of ihe jwliev in the ( ent of hi^ dc iih
\ f t e r u a r d s Af nominntes bv iv-ill his b i o t h e r R in i i i u e of M i s M
-.nd sends a notice of the c h i n g e h\ poNt to the T 1 ( T h e If'ttei is
lost in transit I ' p o n the death of M the enipor i n o " ' i i \ s tlu' polirs
nionev to ATis AT R contends the p a \ n i e n t R\ l o i i K i i n o n c^nnot "'old
!iood. as t h e iMittcn notice oF change in n o m i m n o n ' r, not 'dell\eied
to insurer as l e o u i r c d bv the \ct ns it n is lo->' in i i m s i t The ns
ii'ent h\ I i r to Afis Af -i^ is b o n a fide
Ifi \ . the holdei of i polii.\ of H't ii sm iP(< o'l li s u n r hii
is>. ^Mied il I'l his wife B on the coiulitiru I'l ii ihi b nefiis uiu'ei il
Doli'ev aie to i e \ e i t to h.m sl'onld )', <\\r dii iii' hi liii'tniie \ > ai
1 itoi A r ( \ o k e d the assisiuneiil on the L'IOIIIK' ih I' II • i^ (Oiidiii-nd
Thereiflci \ 'bed duiinti ihe lifetime of I', I'xiili B I'ul \'s Ir" 1 ic
pi( M11! i(i\c^ elniiicd till pobes moiie\ Hi-Id t l i ' t the c h m i of B i " '
\iiil(<l \lthoi,<jh i i n d n Section "RfTI eif the I n s m i r u . - \et n Is ix i
nn'ssible (o n-ike i e o ' . d i l i o i n l isslcriniic-ill of life poli<\ ve l ihr- jssii;ii<)i
LIFE INSURANCE 331
cannot revoke or cancel an assignment once validly made. The policy re-
mained assigned to B, and on A's death B -ssas entitled to qet the policx
money (Bai Lakshini v. Jaswantlal T . Das, I ' l n Bom. 369).
17. A took a loan from the A, Bank, Limited, and .issigned his life
policy in its favour. A died and the bank claimed the policy money, but
the insurer declined to pay. In the meantime, R. the legal represen-
tative of A, redeemed the policy by satisfying the bank's debt, and pifi
in a ^laim with the insurer for the polic\ money. The hisuier refused
to pay R on the plea that only the bank, as assignee, was entitled to
receive payment. Held, the insurer must pay R the policv money. The
assignment of the policy in favour of the bank was merely by way of secu
rity for the loan made by the bank. On the satisfaction of the "debt
the assignment terminated, the policy was redeemed and its Ijenefits le-
verted to the estate of the deceased. These facts entitled R. as the leg.i'
representative of A. to sue the insurer and iccover the policy monc^
(Scottish Union and National Ins. Co. Ltd. ^. Roushan Tahan Begum.
'1945 Oudh, 152).
18. A made a proposal to an insurance companv foi an insuiance
on his life for Rs. 50,000. On the proposal form he answered various
questions truthfully and disclosed all relevant facts. A few days latei
but before the proposal was definitely accepted. A \s-as taken ill witli
pneumonia. Later the company,accepted the proposal and the fiist jjre-
mium was paid. Two days later A died of pneumonia and the (om-
pany then learned for the first time of his illness The companv was
held not liable to pav Rs. 50,000. \ contract of irtsniance is a contiact
of utmost good faith, and it is the duty of the propcei to disclose all
material facts. Also, where a mateiial alteration of the risk arises bet
ween the date of the proposal and the issue of the poli<v. notice must
be given to the insmer. otherwise he will be entitled to .IVOKI the con-
tract (Looker v. Law Union and Rock Insuiantc Co. Ltd.). .Since A's ill-
ness is clearly a material fact within the above definition, .nid substantiallv
alters the risk, and since no notice of illness WAS gi\en lo the insurance
CO. before it accepted the proposal, the company can lesrind the ]io
lic\ and thereby avoid the liab)lit\ to pay the Ks -jO.Ono
 Chapter Xi

Law of Negotiable Instruments

PART 11-A
INTRODUCTION

Negotiable instruments are the most common credit devices utilized

in business today. Much of the importance of negotiable instruments
lies in the fact that they a:re more readily transferred than ordinary claims
or contract rights and that the transferee of a negotiable instrument may
acquire greater rights than would an ordinary assignee. Basically, ne-
gotiable instruments are written promises or orders to pay money, sijfch
as promissory notes, bills of exchange and cheques, which, when in pro-
per form, may be transferred from hand to hand as a substitute of
money. For example, when a person pays a debt by cheque, he is using
a negotiable instrument. He might have paid in rash, but for con-
venience and possibly for safety, he used a cheque. Of couise, such pay-
ment is usually conditional upon the instrument being paid.
The law relating to negotiable instruments is to be found in the
Negotiable Instruments Act, 1881. Although the Act directly deals with
Promissory Notes, Bills of Exchange and Cheques, it does not exclude
the possibility of other instruments'like Dividend Warrants, Port Trust
or Improvement Tiuist Debentures, becoming clothed with the character
of negotiability either by mercantile custom or under other statutes like
the "Companies Act.
The Negotiahle Instruments Ace does not affect the piovisions of
the Reserve Bank of India Act, 1934. Section 31 provides that no per-
son in India other than tlie Reserve Rank or the Central Govern-
ment shall draw, accept, make or issue any bill of exchange, hundi, pro-
missory note or engagement for the payment of money payable to bearer
on demand. But ,i cheque payable to bearer on demand can be drawn
on a person's' account with a banker. Section 31 further ' provides that
no one except the Reserve Bank or the Central Government ran make
oi issue a t)iomissoiv note expressed to be payable to tlie bc.uer of the
instrument, whether payable on demand or after a certain time. Sec-
tion 32 makes the issuing of .such bills or notes punishable v.'ith fine
which may extend to the amount of the bill, note or ch<rau;emeiit; and
the bill ov note will be illegal and unenforceable. But a bill or note ran
 LAW OF NEGOTIABLE INSTRUMENTS 333
subsequently become payable to bearer on demand on being endorsed in
blank.
MEANING OF NEGOTIABLE INSTRUMENT
By virtue of Section 13(a) "Negotiable Instrument" means a pro-
missory note, bill of exchange or cheque payable either to order oi to
bearer, whether the words "order" or "bearer" appear on the instrument
or not. 'As the word used is "means" and not "means and includes," any
other instrument can be added to the list provided it satisfies the follow-
ing two conditions of negotiability, viz., (i) that it is by custom of trade
transferable by delivery or by indorsement and delivery; and (ii) that it
is capable of being sued upon by the person holding'it pro tempore (tor
the time being) in his own name.
The definition given in the Act only mentions the names of nego-
tiable instruments and does not explain their nature, judge Willis grves
this definition: "A negotiable instrument is one the property in which
is acquired by every person who takes it bona fide and lor value, notwith-
standing any defect of title in the person from whom he took it." It
follows from this definition that a person taking the instrument bona fide
and for value gets a good title, irrespective of the previous • defects of
title, and takes it free trom ^«y equities, which could be enforced agamst
the original or any intermediate holder.
From the point of view of the use or^ function of the instrument, a
negotiable instrument ,may be defined as a contractual obligation, in
writing and signed by the party executing it, containing an uncondition-
al promise or order to pay a sum certain in money on demand, or at a
fixed or determinable future time, payable to bearer or t o ' tlie order
of a specified person. When another person is ordered to pay (as in the
case of a bill or cheque), sucli person must be named or otherwise in-
dicated in the instrument with reasonable certainty. This definition
V really indicates the requirements of negotiability or the characteristics of
negotiable instruments. Although these are dealt with separately in re-
lation to tlie three negotiable instruments—promissory notes, bills of ex-
change and cheoues—a brief statement about each requirement is given
at this stage.
Requirements of Negotiability or essential elements ol a Negotiable
Instrument.—To be negotiable an instrument must have the following
elements ;—
1. A negotiable instrument must be in writing, which includes typ-
Bg, printing, engraving.
2. The instrument must be signed by the maker or drawer.
3. There must be a promise or order to pay. If the instrument
is a promissory note, it must contain a promise to pay. If the instru-
ment is a bill or cheque, it must contain an unconditional order or
command to pay money.
4. The promise or order must be unconditional. If it is condftfonat
the instrument is non-negotiable.
334 MERCANTILE LAW

5. A negotiable jiiiiiumeni iiiiibi call foi iJaynient u money. I£

the promise or ordei is lot <inydung else, the instrument is not negotiable,
6. The insttument must not only call ioi payment m money but
also foi a certain bum.
7. A negotiable initiument must be payable at a time which is cer-
tain to airive. I£ it is payable "when convenient," the instrument is not
negotiable because the day of payment may never auive. The requue-
meni that theic must be a time ceitam t o . a n i v e does not mean that
(he instrument must specify a fixed date loi pa)nient. J he mstruiiieni
may be payable on demand, ac a fixed lutuic time, oi tit a deteuninable
luture time.
8 A negotiable instrument must be payable to older or bearer.
Without the vvoitis 'oi oidci" oi "or bea'iei ', the nistumient uould not
be negotiable l^ecause, u thcv weie not theie, no one but the pa>ee could
present them for payment. H it is meiely payable to "Ram Cfiander,"
it is not negotiable I h e use ol die phrase lo Ram Chander or oidei"
is important in showing that the peison executing ihc uistiument is indi-
cating that he docs not intend to lestrict payment to Ram Chandei and
thai he does not object to pa\ing to any one to •(\hom Ram Chander
ordeis the instrument to he paid. It is not necessary that the instru-
ment .actually UbC the uoids 'oidei" or ' bearei ' Any othei woids
indicating the same intention aie sufficient "Pay to holder" could be
used in place of 'ordei" or "beaiei." The woids "or ordei" and
"or bearei"" aie called the woids of npgotiation
9. In the case of a bill ol exchange oi cheque,' the diaw'ee must be
named or descubed with icasonal)le ceitaint} 'Ihe purpose of this re
(juuement is to enable the holder of the instrument lo know to ivhom
he must go for payment.
All othei instiumenis aie lechnically non-negotiable, they do not
possess the characteustics mentioned above and aie transferred like or
dinary chattels. Oui Act piovides that an instiument to be negotiable
must be payable in any one of the following foims :-
(i) Pay A: (ii) Pa> \ oi ordei; ,(iii) Pay to ihe oidei of A, (iv) Pay
A and T>, (v) Pa\ .V oi 15, (\i) Pay A oi b t n c i , (vu) Pav bcaiei.
An instrument made pa\able in the followng loims is not negotiable-
(i) Pay A only, (ii) Pay to A and none else, (ni) Pay Dhani (owner)
oi Shah (any lespectable bearer of worth and sulistance in the market).
This last is, however lecognised by custom as negotiable being a
Shahjog hundi, (ivj Promise to pay A oi beaiei, (^) Piomisc to pay bearer
These instrumentsiare not negotiable bui are assignable like ordinai\
chattels. Tlie tiansferee takes such instuunents subject to all equities
and liabilities of the tiansferor.
A negotiable instiument, therefore, diffeis fioni an ordinaiv chat-
tel Ol chose-in-action in the follovWng particulais :—
(a) The property in it passes by miire riemeiy (when payable to
LAW OF NEGOTIABLE INSTRUMfNTS 335
bearer) or by endorsement and delivery (wlien made payable
to order),
^b) i h e holder in due course is noc in any way aEected by an>
dclVci of title of his transferor or any party.
(c) T h e holder m due course can iue on it in his own name with-
out gi\ing notice to tlie debtor of the fact that he has become
holder-
(d) Con.sidevafinii is presumed to have passed, and this presump-
tion cannot be rebutied when tne instrument has passed into
the liands of a holder in due course.

PRESUJMPTIONS AS r O NEGOTLABLE iNSTRUMENTS

••iincc the philosophy uiideilying the hnv of negnriable instruments

is tliat business transactions should be facilitated by making available
evidences of rights to money that will pass freely from hand to hand,
Section 118 of the Act provides that unrii the conlrary is proved, tire fol-
lowing presumptions shall be made :—
(1) thai every negotiable instrument was made or drawn, accept-
ed, cndoricd inul negotiated or iran.slerred lor consideration;'
(2) ui.ii it Dears the date on w;iiich it was made or drawn;
(.8) that every accepted bill was accepted within a reasonable time
aftei i(s date and before its maturity;
(1) that every transfer ol a negotiable insiriMiicnt Avas .nade "be-
fore maturity; ^
(5) that tl)C eiulorseinenis appealing on it were made in the order
in ivliich ihey appear thereon;
(6) wheie an instrument has been lost or destioyed, that it was
duly stamped and the stamp was duly cancelled;
_ (7) that -the holder of the instrument is a holder in due course.

PiVRT II-B
PROMLSSORY NOTES AND BILLS OF FXOHANGE

PROMISSORY NOTES
A pioroisso.ry note is an instrument in 'writing (not being a bank-note
or a currency note) containing an unconditional underraking, signed by
the maker, to pay a certain sum of money to, or to the order of. a cer-
tain person (Section 4). It will be noted that all the vequisites of a ne-
gotiable instrument are present in tliis definition, which are reiterated in
die following paragraphs. An instrument- to be 'a prrmissory note must
po.ssess the following elements :—

, i. Fardhan Purushottam v. Shantilal Purushottam. 1954 Sau. 42;

Abdul Shakur v. Kotwaleshar, 1958 All. 54; State of ftf.P. v. lauhrilal 1969
iVf.P. 348.
336 MERCANTILE LAW

1. It must be in writing.—Mere verbal promise to pay will not do.

The method of writing is unimportant, bui it must be in a medium that
cannot be altered easily.
2. It must contain an express promise or clear undertaking to pay.
—A promise to pay cannot be inferred; it must be express." A mere acknow-
ledgement is not enough.
T h e following are not promissory notes, as there is no promise to
pay:
(a) "Mr. B. I.O.U. (I owe you) Rs. 500."
(b) "I am liable to pay you Rs. 500."
(c) "I have taken from you Rs. 100; whenever you ask for it, 1
have to pay."°
Altliough the promise to pay may be opposed to public policy and
unenforceable, once a promissory note is executed the promise to pay
is performed because a promissory note amounts in law to payment and
what vitiates a promise does not vitiate a payment.
In C. Iyer v. A. Krishna, 1954 T.C. 231, A, the father of a bride ex-
ecuted a promissory note in Eavour of her father-in-law in connection
with the marriage and in respect of jewels agreed to be paid thereon,
it was held that, notwithstanding the original promise being opposed to
public policy, A was Ijable on the pronote.'
3. The promise to pay must be unconditional.—We have seen be-
fore tliat_an instrument, to be negotiable, must contain an unconditional
promise or order. So a promise to pay contained in a note must be Un-
conditional. A conditional undertaking destroys the negotiable character
of an otherwise negotiable instrument. Therefore, the- promise' to pay
must not depend upon the happening of some outside event. It must
be payable absolutely. Although the event upon which the note is pay-
able happens, this fact does not remove the objection; the happening of
the event does not cure ,the defect. The rule is 'onte non-negotiable, al-
ways non-negotiable.'
A promise to pay 'when able,' or 'when convenient,". or 'as soon as
I can,' or 'after my marriage with C,' or 'out of money due to me from
B as soon as B pays it," or 'on A's death provided he leaves me sufficient
funds to pay,' is conditional and not binding as a pro-note. But a pro-
mise, to pay at a particular place or after a specified time or on the hap-
pening of an event which must happen is not'conditional. For example,
'I promise to pay B Rs. 500 seven days after C's death" is not conditional,
for C is certain to die some time or the other.
4. The maker must sign the promissory note.—The person who draws
the instrument and signs it is known as the maker and the person to
whom the promise is made is called the payee. The instrument will be
2. Keshavji Thackershi v. Narshi Ramji, 1954 Sau. 52.
3. Laxmibai v. Ganesh Raghunath (1901) '25 Bom. 373.
4. See also K. Iyer v. Ammal, 1950 T.C. 73; Bherulal v. GhiSulal,
LAW OF NEGOTIABLE INSTRUMENTS 337

complete only when it is signed by the maker even when it is written

by him and his name appears in the body of the instrument. Signature
may be in any part of the instrument, and may be expressed by a thumb-
mark or any other mark, i£ the executant is illiterate. The impression o£
a printed mark is sufficient signature. The signature may be indicated by
a facsimile or by stamping the name.
6. T h e maker must be a certaip person.—The note itself must show
clearly who is the person engaging himself to pay. Where the promisors
are more than one they may bind themselves jointly or jointly and sever-
ally but not in the .alternative. j
6. T h e payee must be certain.—A promissory note must contain a
promise to pay to some person or persons ascertained by name or design-
ation or to their order. A promissory note made payable to tlie maker
himself is nullity, but if such a note is endorsed by him, it becomes
payable to bearer, and is valid,
7. The simi payable must be certain, and jlie amount must not be
capable oi contingent additions or subtractions. Thus, if A promises to
pay Rs. 500 and all other sums which shall become due to him, or to
pay £130 and all fines according to rules, the instrument is not a promis-
sory note. But the payment of interest does not make the sum indefi-
nite, if the rate of interest is stated, if the rate is not stated the ins
trument is not a promissory note. In Raghunath Prasad v. Mangi Lai,
1960 Raj. 20, an entry in the bahi of the plaintiff and signed by the de-
fendant .was as follows: "Balance due after understanding tlie account
Rs. 30,167. M^henever Mangi Lai Ji demands the same I shall pay with
interest. RaRhunath Prasad." Held, that the document was not a pro-
missory note, as the sum payable was no., certain as no rate of interest
was stated. Moreover, a writing on a bahi was not intended to be ne-
gotiable, and it was not a pro-note.
8. Payment must be in legal money of the country.-Thus, an ag-
reement to pay money or grain or to deliver 100 tons of iron is not a pro-
missory note,
9. A Bank note or a currency note is not a promissory note within
the meaning of this section. They are expressly excluded from the defi-
nition, as- they are treated as money and not merely securities for money.
A promissory note or a draft canuot be made payable to bearer, no mat-
ter whethpr it is payable on demand or after a certain time.
10. Other matters of form like number, place, date, etc., are usually
found given in notes, but they are not essential in law.
The date of a note is not material unless tlie «mount is made payable
at a certain time after date But even in this case the absence of date
does not invalidate the note and the date of execution can be indepen-
dently proved. A stamp is, however, necessary under the Indian Stamp
Act.
The following two examples satisfy all the above conditions; -
(a) I promise to Pay B or order Rs. 500.
S38 MERCANTILE l A W

(b) I acknowledge myself to be indebted to' B in Rs. 1,000 to be

paid on demand, for value received.
SJECIMEN OF A PROMISSORY NOTE
Rs. 500 Delhi
January 4, 1970.
On demand [or six months alter date] I promise to pay Ram oi;
order tlie sum of five hundred rupees with interest at 6 per cent per
annum until payment. ^

say.

Gopal is the maker and Ram is tlie payee.

BILL OF EXCHANGE
A bill of exchange is an instrument in -writing containing an un-
conditional order, signed by die maker, directing a certain person to pay
a certain sum of money only tOj or to the order of, a certain person
or to the bearer of the instrument (Section 5). The definition of a bill
is very similar to that of a note, and for most purposes the rules which
apply to notes are in general apjalicable to bills. T h e fundamental re-
quirements and ingredients are the same. The drawer like the maker
must be certain, the order to pay must b"e unconditional, the amount of
the Bill and the payee and drawee must be certain and the contract
must be in writing. The maker of a note corresponds to the acceptor
of a bili, and when a note is endorsed it i, exactly similar to a bill, for
•flien it is an order by the endorser of the note ujjon tlie maker to pay
Ihe endorsee. TJie endorser is, as it were, tlie drawer, the maker,' the
acceptor and the indorsee is the payee. But a bill differs from a note
in some particulars.

DISTINCTION BETWEEN BILL AND NOTE

1. In p; note there are only two parties—the maker (debtor) and tlie
payee (creditor). In a bill there are three parties, namely, drawer,
drawee and payee; though any two out of the tliree capacities may be
filled by one and the same person. In a bill the drawer is the maker
who orders the drawee to pay the bill to a peison called the payee or
to his order. When the drawee accepts the bill he is called the acceptor.
2. A note cannot be made payable to tlie maker himself, while
in a bill tlie drawer and payee or drawee and payee may be the same
person.
3. A note contains an unconditional piomise by the maker to pay
to the payee or his ordei" in a bill there is an unconditional order lo
the drawee to pay according to the drawer's direction's.
4. A note is presented for payment without any prior acceptance
LAW OF NEGOTIABLE* INSTRUMENTS 339
by the maker. A bill payable after sight must be accepted by the drawee
or some one else on his behal£ before it can be presented for payment.
5. The liability of the maker of a note is primary and absolute,
but the liability of the drawer of a bill is secondary and conditional.
6. The maker of die note stands in immediate relation with the
payee, while the maker or drawer of an accepted bill stands in imme-
diate rel-ation with the acceptor and not the payee.
7. Foieign bills must be j>rotested for dishonour when such pro-
test is required to be made by the law of the country where they are
drawn but no such protest is necessary in the case of a note. .
8. When a bill is dishonoured, due notice of dishonour is to be
given by the holder to the drawer and the intermediate indorsers. but
no such notice need be given in the case of a note.

PESCRIPTION AND FORMS OF BILLS OF EXCHANGE

A bill of exchange may be an Inland Bill or a Foreign Bill. It was
originally a means by which a trader in one country paid a debt in an-
other country without the transmission of coin. If A in Bombay owed
money to C in Aden but himself was owed an equal sum of money
by B in Aden, A would order B to pay C, the two debts would be can-
celled and the same efte^-t would have been produced as if A had sent
money to C and B had sent money to A. A's written order to B,
sent to C and acceded to (accepted) by B, was the first form of a bill of
exchange A is the drawer, B the -drawee who, upon consenting to
the arrangement, becomes the acceptor a".d C is the payee. -•

INLAND BILLS
The following i'; a specimen inland trade bill of the simplest type :—
Rs. 1,000.00. Delhi.
January 5, 1970.

Three months affer date pay R. Patel or order the sum of one
thousand rupees only for value received.
To
Seth B. Melta,
101-A, D. Naoroji Road, Shiv Ram.
Bombay.
Here Shiv Ram is the drawer, R. Patel is the payee, and B. Mehta the
draivee who, on testifying iiis willingness to pay by "accepting" the bill,
becomes acceptor.
540 MERCANTILE LAW

The acceptance by B. Mehta will be made across the face of the Bill
as under:—

^»
%^^

We will suppose tliat Shiv Ram is a manufacturer, and that he

owes Patel Rs. 1,000 foi raw materials supplied, while Mehta is a shop-
keeper who has bought manufactured articles from Shiv Ram and owes
him more than that amount. In tliis case* the bill is a , Trade Bill, and
its commercial advantages are quite obvious, for the payment by Mehta
to Patel will discharge two separate trade debts. But diere are other
advantages not quite so obvious. Patel may want money at once for
further trade, purposes and if he does, he can take tlie bill at once to
his banker and ask him to discount it. If the banker knows Shiv Ram
as a man of good credit, he will discount it even before Mehta has
accepted it. Patel must sign his name on the back of tlie bill with or
without a further order to pay the bill to the banker. Patel then be-
comes endorser, and the banker on crediting Patel's account with Rs.
1,000 less discount as agreed, becomes holder for value of the bill; and
if neither Mehta nor Shiv Ram should pay the bill at maturity then
Patel, as indorser, would be liable to pay it. The banker can either
keep the bill and present it for acceptance and payment, or can pass
it on to some other person.

ACCOMMODATION 3 I L L
All bills are not genuine trade bills, as they are often drawn as a
convenient mode of accommodating a friend. Thus -Patel may be in
want of money and approach his friends Shiv Ram and Mehta who, in-
stead of lending the money directly, propose to draw an "Accommodation
Bill" in his favour. Patel promises to leimburse Mehta before the pei-
iod of -three months is up. If the credit of Shiv Ram and Mehta is
good, this device enables Patel to get an advance of Rs. 1,000 from
his banker at the commercial rate of discount. The real debtor in this
case is not Mehta, the acceptor, but Patel the payee who has engaged
to find the money for its ultimate payment, and Patel is here the piin-
ciptal debtor and the others merely sureties. This inversion of liability
affords a convenient definition of an accommodation bill: "If, as bet-
ween die original parties to the bill the one who wwould prima facie be
principakis in fact, tb^ surely, whether he be drawer, acceptor, or in-
dorser, that bill is an accommodation bill." (Lloyds, p. 127).
LAW OF NEGOTIABLE INSTRUMENTS S41

FOREIGN BILLS

London,
7th January, 1970.
Sixty days after sight of the first of Exchange (second and third of
same tenor and date unpaid) pay to the order of Messrs. Bird & Co.,
Bombay, the sum of Rupees Ten Thousand only. Value reviewed.
Rs. 10,000,
Messrs Henry Brown, Bird 8c Co.
Lamington Road,
Bombay.

BILLS IN SETS
The foreign bills are generally dr^wn in sets of three, each of which
is called a "Via" and as soon as any one of them is paid the others be-
come inoperative. These bills are drawn in different parts. They are
drawn in order to avoid their loss or miscarriage during transit. Each
part is sent separately. To minimise the delay the holder can send all
the parts on the same day, each part by separate means of conveyance.
All these parts form one bill and the drawer must sign and deliver all
'of them to the payee. The stamp is affixed on one part only and only one
part of the whole set is required to be accepted, and when this is done and
the accepted parts is paid all the other parts are extinguished. Where, how-
ever, a person accepts or indorses different parts of the bill in favour of
different persons, he and the subsequent indorsers of each part are
liable on such part as if it were a separate bill (Section 1S2). But as
between the holders in due course of different parts of die same set, he
who firs<^ acquired title to his part is entitled to the other parts and
money represented by the bill (Section 133).

RIGHTS T O DUPLICATE BILL

Where a bill of exchange has been lost before it was overdue, the
person who was the holder of it may apply to the drawer, to give him
another bill of the same tenor, giving security to the drawer if required,
to indemnify him against all persons whatever in case the bill alleged
to have been lost shall 'be found again. If the drawer refuses to give
such duplicate bill he may be compelled to do so by means of a suit
(Section 45A). It is only the holder who can ask for a duplicate, and
the right is given to the holder also of notes and cheques. A duplicate
bill may be required even in the case of destroyed bills, and without any
indemnity if destruction is proved.

BANK DRAFT
A demand draft is a bill of exchange drawn by a bank on anotfier
342 MERCANTILE LAW

bank, ov by itself on its own branch, and is a negotiable instrument. Tt

is veiy nearly allied to a cheque, the difference between it and a cheque
cons-sting largely in three facts. Firstly, it can be drawn only by a
bank on another bank, and not by a private individual as in the case
of cheques. Secondly, it cannot so easily he countermanded as a cheque,
either by the person pui chasing it, or by the bank to which it is pre-
sented. Thirdly, it cannot be made payable to bearer." Also, when a bank
issues a draft on its own branch for the sole object of transmitting the
money, a fiduciary relationship may arise between the hank and the pur-
chaser of a demand draft from the "banfe.

PART 11-G
CHEQUES
(n the words of Section 6 of the Act, a cheque is a bill of exchange
drawn on a specified banker, and not expressed to be payable otherwise
than on demand. In simple language a cheque is a bill of exchange
drawn on a bank payable on demand. Thus, a cheque is a bill of ex-
change with two additional qualifications, namely, (i) it is always drawn
on a bank, and (ii) it is always payaljle on demand Conseauently, all
cheques are bills of exchange, but all bills are not cheques. A cheque,
being a species of a bill of exchange, must satisfy all the requirements
of a bill—it must be signed by the drawer and must contain- an uncondi-
tional order on a specified banket to pay a certain sum of money to
or to the order of a certain person or to the bearer of the cheque. It
does not, however, require acceptance
DISTINCTION BETWEEN BILLS AND CHEQUES
As a general rule, the provisions applicable to bills payable on de-
mand apply to cheques, yet theie are few points of difference between the
two, namely—
1. A cheque is always drawn on a banker, while a bill may be drawn
on any one, including a banker.
2. A cheque can only be drawn payable on demand, a bill may be
drawn payable on demand, or-on the cxpiiy of a certain period after
date pr''fight.
3 A bill must be accepted before payment can be demanded, a
ctieque does not require acceptance and is intended for immediate pay-
ment. '
4.' A giace of 3 days is allowed in the case of time bills, while no
grace is given in the case ol a cheque
5 The drawer of a bill is discharged, if it is not piesented for pay-
ment, but the drawer of a cheque is dischaiged only if he suffers any
damage by delay in presentment for payment.
6. Notice of dislionovn of a bill is necessaiy, but not in the case
of a cheque.
5. Suganchand v. Biahmayya (W51) 54 M L W. 842 (D B.), see filso
1944 P.C. 58.
LAW OF NEGOTIABLE INSTRUMENTS 343
7. A cheque being a revocable mandate, the authority may be re-
voked bv countermanding payment, and is determined by notice of the
customer's death or insolvency. Tliis is not so in the case of a dill.
8. A cheque may be crossed, but not a bill.

LIABILITY OF BANKER
"A banker," according to Hart, "is one who in the ordinary course
of his business, honours cheques drawn upon him by persons from and
for whom he receives money on cuiTent accounts." By opening a cur-
rent account of a customer the banker becomes his debtor to the extent
of the amount so received in the said account and undertakes to honour
the cheques drawn by the customer so long as he holds sufficient funds
to customer's credit. If a banker, without justification, fails to obey his
customer's mandate which is issued in the form of a cheque, he will be
liable to compensate the draxver for any loss or damage suffered by him.
Section 31 provides that if the banker (drawee), having sufficient funds of
the customer (drawer) in his hands refuses to honour the cheque," he shall
have to compensate the drawer for any loss or damage caused by such
dishonour. But the payee or holder of the cheque has no cause of ac-
tion against the banker as the obligation to honour cheques is only to-
wards the drawer. The delivery of the cheque is not an assignment of
the money on deposit and does not automatically traftsfer the rights of
tlie depositor against his bank to the holder of the cheque.
The customer may, however, be awarded very heavy damages, if he
proves loss of credit on account of the dishonour; and the rule is the
smaller the cheque dishonoured the larger the amount of the damages.
Furthermore, a bank owes^ a duty to its customer to maintain pro-
per and accurate accounts of credits and debts. If a bank makes wrong
entries of credit without ksiowing the fact at the time the entries were •
made, and intimates to its aistomer the credit entries and the custo-
mer acting upon the intimation of credit entries alters his position to his
prejudice, the bank thereafter will be estopped from contending that the
credit entries were wrongly made and that the amounts covered by them
should be refunded to it by the customer. Such an intimation made to
the customer is obviously a representation made by the bank to the cus-
romer which the customer is at liberty, in fact, is entitled to act^ upon.
Once it is acted upon by the customer, bona fide, of course, it will then
be too late for the bank to resile from the credit entries" it made mis-
takenly and seek to have recompense by means of adjustment in the ac-
counts or recovery of the amounts from the customer. Where, however,
a ^customer is grossly negligent in not carefully scrutinising the weekly
statements, accounts and correspondence with him bv :nc oank, though
the cusomer is under no duty to scrutinise those materials, the cubiomer
must be held to have constructive notjce of the mistake which would
disentitle him to press the d'Xcrine of estoppel agaip&t the bank
(Oakley Bowdeis & Co, v. Jhdmn Bank, 1964 Mad. 202).

In this case the Company h"d an account with the bank. The bapk
b^ mistake ga^^c double entries in 1952. The Company, acting on "the
entries drew cheques in favour of two parties in settlement oF their ac-
344 MERCANTILE LAW
counts. The bank discovered the mistake in 1954 and sued the Com-
pany to recover the amount of the extra entries. The Company pleaded
that the bank was estopped from contending that the entries were dup-
licate entries, since on the faith of the entries communicated by tlie bank
to the Company, the Company had acted upon the same and settled its
accounts. Held, on the facts, the bank was not estopped.
WHEN BANKER MUST REFUSE PAYMENT
In the following cases the authority of the banker is determined and
he must refuse to honour his customer's cheques—
1. When customer countermands payment.—Where a custonjer
issues instructions not to honour a cheque, the banker must not pay it.
The effect of a notice countermanding payment of a cheque is jhe same
as if the cheque had never been drawn. jA stopped cheque is a piece of
waste paper in the hands of payee. Payment made after the counter-
mand is not good against the drawer. The notice to the drawee banker
must, hoXvever, be given in sufficient time.
2. When banker receives notice of customer's death.—Notice of cus-
tomer's death determines the authoiity of b^ker to honour cheques, but
a payment" made before the receipt of notice is valid.
3. When customer has become irjsolvent.—When a customer has been
adjudged an insolvent, the banker must refuse to pay his cheques.
4. When banker receives notice of customer's insanity.—On receipt of
a notice that a customer of his has become insane, the banker must not
pay the cheque drawn by that customer until the customer recovers from
his malady, or an order is made by the Court for payment of the money.
5. When an order of Cocrt prohibits payment.—After receiving a
Garnishee aider or other legal ordeis attaching or otherwise dealing with
customer's money in his custody, the banker should not honour the che-
ques drawn against customer's account. , ,
6. On notice of assignment—The banker should not honour his cus-
tomer's cheques after the customer has given notice of assignment of the
credit balance of his account.
7. When holder's title is defective.—If the banker comes to know of
any defect in the title of the party presenting the cheque, he must not
pay it.
8. Closing of account.—TTie banker sz ouH not. after receiving notice
from the customer closing the account, pay any cheque ot the customer.
WffEN BANKER MAY-REFUSE PAYMENT
In the following cases the duty of the banker is determined and he
may dishonour a customer's cheque :—
1. Where the clieque is post-dated and is presented before the osten-
sible date. The mandate of the customer to the banker is to pay the
cheque on .the date it bears and not before, and the refusal before that
date does not amount to dishonour. Indeed, a banker honouring a post-
dated cheque before due date runs the risk of the cheque being counter-
LAW OF NEGOTIABLE INSTRUMENTS 345

manded before date, or another cheque bearing earlier date being pre-
sented for payment when funds have dwindled on account of the pay-
ment of the post-dated cheque.
2. Where the banker has not suificient funds of the drawer with
him.
3. Where the cheque is of doubtful legality.
4. Where the funds in the hands of the banker are not properly ap-
plicable to the payment of the customer's cheques, e.g., funds are sub-
ject to lien, or are held in tru."!! and the cheque is drawn in breach of
trust.
5. Where a cheque is not duly presented, e.g., presented after bank-
ing hours.
6. Where the cheque is irregular, - ambiguous or otherwise material-
ly altered.
7. When the cheque is presented at a branch where the customer
has no account.
8. Where some persons have joint account and the cheque is not
signed by all jointly or by the survivors of them.
9. Where the cheque has been allowed to become stale, i.e., it has
not been presented within a reasonable time after the date jnentioned
in it. In India six months are reasonable.

P R O T E C T I O N OF PAYING BANKER
T h e paying banker is in a privileged position as regards the pay-
ment of his customer's cheques. Section 85 lays down that where a che-
que payable to order purports to be indorsed by or on behalf of the payee,
the banker is discharged by payment in due course. He can debit the
account of the customer with the amount even though the endorsement
of the payee turns out subsequently to have been forged, or the agent
of the payee without authority indorsed it on behalf of the payee. If
would seem that tlie payee includes indorsers. This protectidn is grant-
ed because a banker cannot be expected to know the signatures of all
persons in the world. He is, however, bound to know the signatures of
his own customers. Therefore, the forgery of drawer's signature will
not ordinarily protect the banker, but even in this case, the banker may
debit the customer's account, if Re can show that the forgery was intimate-
ly connected with the negligence of the customer and was the proximate
cause of the loss.* With regard to bearer cheques the rule is 'Once a bearer
cheque always a bearer cheque.' Therefore, where a cheque is originally
expressed by the drawer himself to be payable to bearer, the banker may
ignore any indorsements on the cheque. He wiU be discharged by pay-
ment in due course. But a cheque which becomes bearer by a subse-
quent indorsement in the blank is not covered by this section.

T h e banker is also protected agai»jst forged or unauthorised indorse-

6. London Joint St. Bank v. Mactnillan (1918) A.C. 777.

346 MERCANTILE LAW

ments on demand drafts drav/n by one brancii of a bark upon another

branch of the same bank (Section 85-A). A banker is disdiarged from
liability on a crossed cheque, if he makei payment in due course (Sec-
tion 128).
PAYMENT IN DUE COURSE
Section 10 provides that in order to constitute a payment of a nego-
tiable instrument as a payment in due course, the foUoxving conditions
must be fulfilled, yiz.,
1. Payment must be in accordance with the apparent tenor of the
instrument* i.e., according to what appears on the face of the instrument
to ,be the intention of the parties. It is necessary that payment should be
made at or after maturity. A payment before maturity is*not payment
in due course so as to discharge the instrument. For example, a bill pay-
able aftei sight m.ust not be paid before tlie' \v.t day of grace.
2. .Payment must be made in good faith nnd without negligence,
and under circmnsianccs which do not afford a reasonable ground for be-
lieving that the pers»3n to whom it 1% made is not entitled to receive tka
amoimt.—When there are .suspicious circumstances and the payer 'fails to
make any enqiu'ry which may bring home the defecis, the payment is not
in due couise. Payment of a cheque bearing forged signature of customer
as drawer without the banker exercising due care is not payment in due
course,' nor is it so where pc^yment is made to a person who the person
paying knows is not entitled to receive payment, although the instrument
is payable to bearer. Payment of a Sbahjog hundi without inquiry about
the shah is not payment in due course.
3. Payment must be made to the person- in possession of the ingtru-
ment.—A, paym.ent cannot be a payment in due course if it is made to a
person not entitled to receive it. A thief is not said to be in possession
of the instrument, as he cannot give a valid discharge.
4. Payment must be made under circumstances which do not afford
a reasonable ground for believing that he :s not entitled to receive pay-
ment of (he amount mentioned therein.—Before making a payment on a
negotiable instrument, the person making such payment should make sure
that the person presenting ii is the person entitled to receive payment
thereon. Theie must be no suspicion either about the payee or the
amount to be paid. Thus, if the diawee of a hundi negligently makes
p.iyment to a wrong person, such payment is not payment in due course.'^
5. Payment must be made in money only.—Money includes Bank
or currency notes The holder is entitled to be paid in money only, and
he cannot be compelled to accept payment in goods or by cheque. He
may, however, agree to accept payment by cheque or another bill, in
which case this mode wll amount to payment in due ccairse.

COLLECTING BANKER
Section 131 afford.s protection to the collecting banker who in- good
7. Abhu Chettiar v. Hvd,-r.ibad Staie Bank (1954) Mad. 1001.
6. Lalta Prasad y. Charles CanipbelJ, 9 C W.N. 841.
L A W - O F NEGOTIABLE INSTRUMENTS 347

faith and' ivitiiout negligence receives payment o£ a crossed cheque for a

customer, even though the customer's title to the cheque proves defective.
In order to '^btain protection, the banker must prove that (i) the cheque
was crossed befofe it reached his hands, (ii) the cheque was presented
by or on behalf of the customer and that he received payment for the
customer, (iii) he acted in good faith and without negligence in collect-
ing the money due on the cheque. Therefore, if he collects an uncross-
ed cheaue, or a crossed cheque for a non-customer, he gets no protection
in ihc event of the cheque having a forged indorsement, and is liable
to the true owner for wrongful conversion of the funds. The explanation
to Section 131 extends protection to a collecting banker where he credits
hi<i customer's account with the amount of the cheque before receiving
payment thereof.

n v ^ R . D U E , STALE, OR OUT-OF-DATE CHEQUES

A cheuqe becomes statute-bajred after three years from its due date
of issue. A holder cannot sue on the cheque after that time. Apart
from this provision the holder of a,cheque is required to present it for
payment within a reasonable time, as a cheque is not meant for indefinite
circulation. A cheque which has been in circulation for an unreasonably
long time, becomes stale and the banker can refuse to pay it. Tlie period
for this purpose differs with particular bankers and may vary with spe-
cial agreement with any paiticular customer. As a rule, in India and
in the Provincial towns in England, the bankers regard a chequi. which
has been ,'n circulation for inore than 6 months as stale. In London,
a cheque may remain in circulation for 12 months without becoming stale.
.Also, if as a result of any delay in presenting a cheque the drawer suffers
any loss, as by the failure of the bank, the drawer is discharged from lia-
bility to the holder to the extent of the damage. In the case of dividend
warrants, the issuing companies usually do not honour them if they are
presented more than three months after issue, unless they are subsequently
revalidated by :he companies concerned. Similarly, the drawee banker
may, after getting the stale cheaue confirmed by the drawer, honour it.

LIABILITY OF ENDORSER
In order to charge an indorser, it is necessary to present the cheqtie
for payment within a reasonable time of its delivery by such indorser. A
indors.es and delivers a cheque to B, and B keeps it for an unreasonable
length of time, and then indorses and delivers it lo C. C presents it for
payment within a reasonable tim.e after its receipt by him, and it is dis-
honoured.. C can enforce payment against B but not against A. as qua A
the cheque has become stale.

RIGHTS OF HOJLDER AGAINST BANKER

W e j i a v e observed that a banker is liable to his customer for wrong-
ful dishonour of h.s cheque and not lo the payee or holder of the che-
que. The holder has no right lo enforce payment from the banker, ex-
cept in two cases, namely, (i) wherp the holder docs not present the che-
que within a reasonable pme after iisue, and vis a result the drawer
348 MERCANTILE LAW

suffers damage by the failure of the bank, and is therefore discharged' then,
the holder can prove his debt against the banker in insolvency proceed
ings. The holder in such case becomes the creditor of the banker m lieu
of the drawer and can recover the amount from him [Section 84(3)]; and
(ii) where a banker pays a crossed cheque by mistake over the counter,
he is liable to the tru^ owner for any loss occasioned by it (Section 129)
If the holder has, through banker's mistake, received payment in respect
of a cheque countermanded by the drawer, the banker is not entitled
to a refund of the amount from the payee, nor can he debit the custo-.
mer's account.

CROSSING OF CHEQUES
So far we have dealt with "open cheques" which" can be presented by
the payee to banker on whom they are drawn and are paid over the coun-
ter. A banker, who pays in due course such cheques whether they are
payable to bearer or to order, is discharged provided that in the case
of an order cheque it purports to be indorsed by or on behalf of the
payee. It is obvious that an open cheque is liable to great risk in the
course of circulation. It may be stolen or lost and tlie finder can get
it cashed, unless the drawer has already countermanded payment. In
order to avoid the losses incurred by open cheques getting into the hands
of wrong parties the custom of grossing was introduced.
A crossing is a direction to the paying banker to pay the money
generally to the banket or a particular banker, as the case may be, and
not to pay to holder across the counter. A bankei paying a crossed
cheque over the counter does so at his own peril if the party re-
ceiving the payment turns out to be not entitled to get payment.
The object of crossing is to secure payment to a banker so that it
could be traced to the person receivi^ig the amount of the cheque.
T h e crossing is made to warn the banker, but not to stop negotiability
of the cheque. T o restrain negotiabilitv addition of words "Not Negot-
iable" or "Account payee only" is necessary. A crossed bearer cheque
can be negotiated by delivery and crossed order cheque by indorsement
and delivery.

MODES OF CROSSING
There are two types of crossing which may be used on a cheque,
namely, (i) General, and (ii) Special. T o those two statutory types, may
be added another mode, i.e., the Restrictive crossing.
A General Crossing is defined in Section 123 thus : where a cheque
bears across its face an addition of
(a) the words "and Company," or any abbreviation thereof bet-
ween two parallel transverse lines, or
(b) -two parallel transverse lines simply, e" her with or without
the words "Not Negotiable";

tliat addition constitutes a crossing and the cheque is crossed generally.

9. Abdul Majld v. M/s. G. Kalooram, 1954, Orissa 124.

LAW OF NEGOTIABLE INSTRUMENTS 349

Specimens of general crossing—

Two transverse lines on the face of the cheque are essential for
general crossing, though not for special crossing. If a cheque is crossed
generally, the paying banker shall pay only to a bahker. '''
A Special Crossing is defined in Section 124 thus : ; j '
Where a cheque bears across its face an addition of the name Of a
banker either with or without the words "not negotiable" tligt addi-
tion constitutes a Crossing and the cheque is crossed specially and to that
banker. Thus, a special crossing requires the name of tlie banker to whom
or to whose collecting agent payment of the cheque should be made to
be written on the face of the clieque. Transverse lines are not compulsory.
Specimens of special crossiRg—

a .
-a fa e .5
a >-^
« .2
•v c
<u S
H C8 O

Restrictive Crossing.—S6me more forms have been adopted by com-

mercial and banking usage irr order to obviate the risk of a thief ob-
taining payment. These forms consist in adding to the general or spe-
cial crossings, the words- "Account payee," "Account payee only" or
"Account John Smith only."
Specimens of restrictive crossing—
350 MERCANTIJLE LAW

Sudi crossings warn the collecting binkcr that the proceeds arc to
be credited only to the account of the payee, or the party named, or his
agent. If the collecting banter allows the piocecds of a cheque so cross- '
ed to be credited to any otlier account he may be held guilty of negli-
gence in tne event of ati action for wrongful conversion of (he funds.
These words are not addition to the crossing but a mere direction to
tlie receiving or collecting banker. T h e y ' d o not affect the paying bank-
er, who is xmdci no duty to ascertain thai the cheque is in fact col-
lected for the account cf the person named as payee. In the case oE
a cheque bearing resttirtive crossing but not .specially crossed lo another
the paying banker need only see that the cheque bears no other en-
dorsement but that of the payee or the party named in the crossing,
and that it is otherwise in order. But ii'heie the cheque is also crossed
specially, the paying banker must pay only to the bank named in flTe
crossing or to an agent bank, and should also see tliat no other endorse-
ment ajjpears, and that no 'misapplication of the funds is apparently tak-
ing place.

W H O MAY CROSS A CHEQUE

Section 125 provides that—
(a) A cheque may be crossed generally or specially by the
ch awer.
(b) V/hcre a cheque is uncrossed, the holder may cross it gene
rally or specially.
(c) "kAHiere a cheque is crossed generally, the holder may cross it
specially.
(d) Vv'here a ciieque is cros,sed generally or specially, the' iiolder
• may add the words "net negotiable."
(e) Where a cheque is crossed specially, the banker to whom it
is crossed may again cross it specially to another banker for
collection.
(i) M'hcie an uncrossed cheijUC or a cheque crossed generally is
sent to a banker for collection, lie may cross it specially, to
himself. But such crossing does not enable the collecting
banker to enjoy statutory protection against being sued for
conversion.

"NOT NEGOTIABLr" CROSSING

If a cheque is made payable to a payee and to him only, it becomes
non-transferable in the strict sense. " No one but the payee can give a
good disrhaige lor its payment, and no one but the payee can bring an
action ou tire instrurnent. Where a cheque bears the "Not' Negotiable"'
crossing it is transferable, but it loses ics special feature of ne-
gotiability. Such a cheque is like any goods-a stolen pen or a watch—
tlie iranbferee of ^which doc, not get a better title than that <?f a thief.
A. cheque crossed with the worib "Not Negoliable" is dc'pr'ved of both
the characteristics of Jie.^otiabilifv namely, transferability free ffom de-
LAW O F NEGOTIABLE INSTRUMENTS ' S51'
£ects, and transferabilit) by endorsement. T h e transferee gets no bet-
ter title than that o[ his -transferor. The object of "not negotiable"
crossing is to afford protection to the drawer or holder ag3inst mis-
carriage or dishonesty in tlie course of transit by making it difficult to
"et the cheque cashed until it reaches its destination. While the woids
"not negotiable" do not stop transferability of a cheque, they perpetuate
the defect in it.

MARKING OF CHEQUES
Cheques being intended for immediate, payiaent are not in die or-
dinary course accepted, although as bills ot exchange they can be ac-
cepted if die paying banker so desires. There is a usage among bankers
in ;ome countries of so accepting, by marking cheques as good by the
banker on whom, they are drawn. Cheques may be marked as good by
the paying l)anker at the instance of (a)- tlie drawer, '(b) tire holder, or
(c) the coUectuig banker.
Marking at drawer's mstance.—A. cheque may be marked as good at
the instance of a customer (drav/er) with the object of showing on tlie
face of it that there are sufTicient funds in the hands of the banker to
meet ft. Where the drawer is not known to the payee, he can request
his banker (the drawee) to "mark" the cheque fot payment: and this is
done, if tiie cheque is in order and the funds are available, by the banker
writing the word "good" across one corner of the cheque,, adding the
bank's stamp and initials of the banker's cashier. The banker may tlicn
"earmark" or set aside sufficient funds on the account to meet the che-
que when presented for payment. The customer or drawer cannot coun-
termand payment and die banker is entitled to dishonour cheques pre-
sented subsequently, should the remainder of the funds be insufficient to
meet them, even though the "marked" checjue has not actually been pre-
sented for payment. A cheque so marked accpiires, in effect, a staius as
good as if it were issued by the drawee banker himself. The credit of
the Ijianker is added to that of the customer which gives the cheque addi-
tional currency by showing that it v/as drawn in good faith on funds suffi-
cient to meet it.
Marking at holder's instance.—There is a common practice in India
to mark cheques as good at the request of the holder, ivliich is rarely done
iii England. The ol:iject of marking is nothing more than the intimation
to the holder that at the time of marking die banker had sufficient funds
of the drawer in his handi. The banker may refuse to pay the cheque
when eventually presented by reason of insufficiency of "funds or pay-
ment being stopped by the drawer.. In a recent case the Privy Council
has held that by merely marking the cheque the banker does not be-
come liable to the holder, if in the meantime the customer has wididiawn
his effects from the bank. A post-dated cheque cannot be marked as
good.'" Further the cheque does not operate as an assignment of so
much of the funds' in die hands of the banker to the p'ayment of fhe
cUetjue.

10 Bank of Batoda Ltd. ••,. Punjab National Ran'K Ltd. (1944) p,G.
5F.
352 MERCANTILE LAW

Marking ,af collecting bankei-'s instance.-Where a cheque is received

by a banker too late for inclusion in the clearing, it is possible tliat the
customer might suffer loss through tire delay in presentation should the
chequfe be held over "ntirely until the next day. T o safeguard the in-
terest of his customer, the collecting banker may present such a cheque
t o r marking by the drawee banker. If the paying banker would have ho-
noured the cheque had it been presented for payment through the clear-
ing on • that day, an ofRcial of the bank will mark it as "goo^d" adding
the date and his initials to show that the cheque was at that time good
for payment. Banking custom demands that such a cheque shall be ho-
noured when presented through the next clearing. The legal position
also seems to be the same, as such a marking is treated as "Constructive
payment."

PART 11-D

INLAND AND FOREIGN INSTRUMENTS

Instruments may be inland or foreign. A promissory note, bill of
exchange or cheque drawn or made in India, and made payable in or
drawn upon any person resident in India, is an inland instrument (Sec-
tion 11). Thus, an inland instrument is one which is (i) drawn and pay-
able in India, or (n) drawn in India upon some person resident therein,
even though it is made payable in a foreign country. But a promissory
note to be Inland must be drawn and payable in India, as it has no
drawee. All instruments which are not inland are deemed to be foreign
(Section 12); and an instrument is presumed to be inland unless the con-
trary appears on the face of it. The distinction between the two is im-
portant inasmuch as foreign instruments (bills) must be protested for
dishonour, if the law of the place of making or drawing them requires
such pi'otest; while inland instruments need not be so protested.
Examples of inland bills.—The following are inland bills :—
1. A bill drawn in Kanpur on a merchant in Delhi payable in
Delhi or in London.
2. A bill drawn in Delhi on a merchant in Paris but made pay-
able or accepted payable in Bombay.
3. A bill drawn in Delhi on a merchant in Bombay and accepted
payable in London.
4. The above bills endorsed in Paris.
Examples of foreign bills.—The following are foreign bills :—
i. A bi'l -drawn in India, on a person resident outside India and
made payable outside India, e.g., a bill drawn in Delhi on
London payable or accepted payable in Paris.
2. A bill drawn outside India on a person resident outside' India.
3. A bill drawn outside India and made payable in India.
4. A bill drawr outside India and made payable outside India.
LAW OF NEGOTIABLE INSTRUMENTS 853
Foreign Bills are usually dra\vn 'in sets' to avoid danger of loss.
Each part is separately numbered and sent separately, but all the parts
constitute one bill.

USANCES
Continental bills are sometimes drawn at usances—one, two, or more
usances. A usance is the time which is fi.'ced by the custom of countries,
for payment of bills drawn in one country and made payable-in another.
The length of a usance varies in different countries. When usance is a
Romh, half usance is always 15 days. The usance has to be proved by
the person who pleads it. In India, according to custom, usance Hundis
are drawn.

AMBIGUOUS INSTRUMENTS
An instrument, which in form is such that it may either be treated
by the holder as a bill or as a note, is an ambiguous instrument (Section
]?). According to Section 5(2) of the English Bills of Exchange Act,
"where in a bill the drawer and the drawee are the same person, or
where the drawee is a fictitious person or a person not having the capa-
city to contract, tlie holder may treat the instrument, at his option, either
as a bill of exchange or as a promissory note. Bills drawn to or to the
order of the drawee or by an agent on his principal, or by one branch
of a bank on another or by the directors of a company on their cashier,
are also ambiguous instruments. A promissory note addressed to a third
person may be treated as a bill by such person by accepting it, while a
bill not addressed to anyone may be treated as a note. But where the
drawer and payee are the fume, e.g., where A draws a bill payable to
A's order, it is not an ambiguous instrument and cannot be treated as
a promissory note. Once an instrument • has been treated either as a
bill or as a note, it cannot be treated differently afterwards. Insuffi-
ciency of stamp on such an instrument will not interfere in its being
treated as admitted.

INCHOATE INSTRUMENTS
When one person signs and delivers to another a paper stamped in
accordance with the law relating to negotiable instruments, then in force
in India, and either wholly blank or having written thereon an incom-
plete negotiable instrument, he thereby gives prima facie authority to
the holder thereof to make or, complete, as the case may be, upon it a
negotiable instrument, for any amount suecified therein, and not ex-
ceeding the amount covered bv the stamp. Such an instrument is called
nn Inchoate Instrument. The person so signing shall be liable upon such
instrument, in the capacitv in v;hich he signed the same, to anv holder
in due course for •^uch amount, provided that no person other than a
holder in due rourse shall recover from the person delivering the ins-
trument anything in excess of the amount intended by him to be paid
thereon (Section 20).

The principle of the rule stated in this section is one of estoppel.

354 MERCANTILE LAW

enabling persons to lend their mercantile credit to otliers by signing their

'names on stamped but blank, or incomplete papers to be afterwards fille4
up- as completed instruments. By such signatures they bind themselves,
as drawers, makers, acceptors, or indorsers. T h e instrument may be
wholly blanliL or incomplete in any particular, e.g., without any mention
of t h e sum or the name of the payee, the holder may make or complete
the instrument as a negotiable instrument. The authority to fill up a
blank or incomplete instrument may be exercised by any "holder," and not
only the first holder to whom the paper is delivered. Delivery of such
paper is essential for the operation of estoppel; for instance, where an
instrument was placed by the Bank Manager in his drawer, and some
one stole it and filled it up for Rs. 500, no estoppel would arise against
him as he never issued the instrument intending it to be used as a
negotiable instrument. The section in terms applies to stamped instru-
ments only, but its principle would apply even to cheques which do not
require stamp in India, if estoppel is pleaded and proved.
T h e person signing and delivering the paper is liable both to a
"holder" and a "holder in due course." But there is a difference in
their respective rights. A holder-can recover only what the signer In-
tended to be paid under the instrument, while a holder in due course can
recover the whole amount made payable by the instrument provided that
it is covered by the stamp, ~even though the amount authorised was
smaller. The power of^ completing the instrument -must be exercised
within a reasonable time, even though it may be exercised after the death
of the acceptor. But where once the payment is made so as to discharge
tlie instrument, a holder cannot claim on it."

INSTRUMENTS PAYABLE ON DEMAND

The following instruments are payable on demand :—
1. A cheque is always payable on demand (Sections 6, 19).
2. A note or bill expressed payable "on demand", or "at sight",
or "on presentment" (Section 21).
3. A note or bill in which no time for payment is specified (Sec-
tion 19).
Although the expressions "at sight" and "on presentment" mean
"on demand", yet they are .distinguishable from tlie expression ' "on
demand." Instruments payable on demand need not be presented be-
fore payment can be demanded, while instruments payabile "at sight" or
"on presentment" must be presented before payment can be demanded
on them. Moreover, in the case of instruments payable on demand or
without specification of time of payment the period of limitation (3 years)
begins to run from the date o'f the execution, while in the case of instru-
menis payable at sight the time of 3 years commences from the date of >
presentment. But where simultaneously with tlie note payable on de-
mand a period for payment is fixed in a separate written "agreement, time

11. A. Ibrahim v. D. Ramadas, 1954 Mad. 532.

 LAW o r NEGOTIABLE INSTRUMENTS 355
begins to run from the expiry of the fixed period. T h e words "on de-
mand" simply mean that note is payable immediately or at sight and do
not imply that a demand must be made. Where ,a note is made at a
certain place and is payable on demand'but no place of payment is men
tioned therein, it can be sued upon at any place.
Instruments which are not payable on demand are expressed to be
payable at a certain period "after sight," or "after happening of An event"
which is certain to happen, though the time of its happening may be un-
certain. Thus a bill or note may be made payable, say, 30 days after
sight, or 60 days after date, or 90 days after the death of X, and payment
'can be demanded on presenting it on its maturity. There is, however, one
difference in bills and notes payable "at sight." The note has simply
to be exhibited to the marker before payment is demanded, while a bill
has to be presented for acceptance to the drawee. If the drawee accepts
the bill, payment can be demanded after the expiry of the specified per-
iod on the maturity of the bill. ' But if the drawee refuses to accept the
bill, payment cannot be demanded until the bill has been noted or
protested for non-acceptance.

MATURITY
Maturity is the date on which the payment of an instrument falls
due. Every instrument payable at a specified period after date or after
sight or after the happening of a certain event is entitled to three Says'
of grace. Such a bill or note matures or falls due on the last day of
grace, and must be presented for payment on that day, and if dis-
honoured, the suit can be filed on the next day after maturity (Section
22). If an instrument is payable by instalments each is entitled' to 3 days
of grace. Instalments payable on demand become payable at once, and
no davs of grace are allewed for them. Therefore no days of grace are
allowed for cheques, which are always payable on demand. The calcu-
lation of time should always be made according to the British calendar,
and the term month means a calendar montii and not a lunar month.
"Where a note or bill is expressed to be payable a stated number of
months after sight, or after date, or after certain event, the oeriod of pay-
ment terminates on the day of the month which corresponds with the
date of the instrument, or with the date of acceptance if the bill be
accepted, or presented for sight, or noted or protested for non-accept-
ance. Where an after-sight bill is accepted for honour the period is to
be reckoned from the date of such acceptance, and not from the date
of 7ioting for non-acceptance, as is the case in England. If thp month
in which the the period would terminate has no corresponding dAy, the
Deiiod shall be held to terminate on the last day of such jjjottli (Sec-
noii 23) In all the above cases the day or the date of the instrument,
or of presentment for acceptance or sight, or on which the event hap-
' pens, is to be excluded (Section 24).

Ulustralions :
(a) A negotiable instrument dated 29t!i January, 1970, is made pay-
356 MERCANTILE LAW

able at one month after date. ' T^e instrument is at maturity on the
third day after 28tli February, 1970 (i.e., on 3rd March, 1970).
(b) , A negotiable instrument, dated 30th August, 1970, is made pay-
able three «nonths after date. The instrument is at maturity on 3id
December, 1970. -^
(c) A promissory note or bill of exchange, dated 31st August, 1970,
is made payable three months after date. The instrilment is at ma-
tjiiity on Srd December, 1970.
If the day of maturity falls on a public lioliday, the instrument is
payable the next preceding business day (Section 25). Thus, if a bill is
at maturity on a Sunday, it will be deemed due on Saturday and not on
Monday. In England, a distinction is made between public holidays
and Bank holidays. If, therefore, the last day of grace is a public holi-
day, the bill is payable on the preceding business day, as in India; but
when the last day of grace is a Bank holiday, the bill is payable on tlie
succeeding business day.

PARTIES T O NEGOTIABLE INSTRUMENTS

PARTIES TO BILL OF EXCHANGE

1. The Drawer: the person who draws the bill.
2. The Drawee: the person on whom the hill is drawn.
3. The Acceptor: one who accepts tlie bill. Generally, the drawee'
is also tlie acceptor, but- as we have seen, a stranger may accept on b'elialt
of the drawee.
4. 'Ihe Payee: one to whom the sum stated in the bill is payable.
Either the drawer or any otlier person may be the payee.
5. The Holder: is either the original payee or any other person to
w/iom the payee has endorsed the bill. In case of the bearer bill, the
beaier is the holder.
fi. T h e indorser: when the holder indorses the bill^ to any one else
he becomes the indorser.
7. The Indorsee; is the person to whom the bill is indorsed.
8. Drawee in case of need.—Besides the above parties, another per-
son called the "drawee in case of need," may be introduced at the option
of the drawer. In English law, he is called "reference in case of need."
The name of such a person may be inserted either by the drawer or by
any indorser in order that resort may be had to him in case of need,
i.e., when the bill is dishonoured bv eitlier non-acceptance or non-pay-
ment. For example, in the case of bills drawn by English firms on their
Indian importers the agent of the drawer's firm in India is often nametj
in the bill as a drawee in ^ase of need. In India a bill must be pre-
sented to tlie drawee in case of need, before it will be deemed to be dis-
honoured. Under the English law, the holder need not resort to the re-
feree in case of need, if the bill is dishonoured by the drawee. T h e fol-
lowing is a specimen bill with a drawee in case of need i—
LA'W OF NEGOTIABLE INSTRUMENTS 357
Rs. 1,000.00 London, 10th January, 1970.
Thiee months after date pay to the order of Shiv Lall the sum of
one thousand rupees, value received.
To Henry Smith,
Connaught Place, John Jones
New Delhi.
In case of need with
The Lloyds Bank Ltd., New Delhi.
9. Acceptor for Honour.—Further, any person may voluntarily be-
come a party to a bill as an acceptor. A person who, on the refusal by
the original dra^vee to accept the bill or to furnish better security when
demanded by the notary, accepts the bill in order to safeguard the ho-
nour of the drawer or any indorser, is called the acceptor for honour.
P.^LRTIES T O A PROMISSORY NOTE
1. T h e Maker: the person who makes or executes the note pro-
mising to pay the amount stated tlierein.
2. T h e Payee: one to whom the note is payable.
3. The Holder: is eitlier the payee or some one to whom he may
have indorsed the note.
4. fe 5. T h e Indorser, and
Indorsee: same as in the case of a bill.

PARTIES T O A CHEQUE
1. The Drawer: the person who jdraws the cheque.
2. The Drawee: is always the drawer's banker on whom the che-
que is drawn,
3. 4, 5 8: 6. The Payee, Holder, Indorser and Indorsee: same as in
the case of a bill or note.
HOLDER
Tlie word holder ii used in respect of negotiable instruments in
three grades of meaning—"holder," "holder for value," and "holder in
due' course." There is a slight difference between the English and the
Indian law on the subject.
In English Law, "holder" means a person in whose legal possession
the instrument is, or the bearer. If the instrument is a bearer instni-
ment or is indorsed in blank, any person who is in possession of it even
though bv theft is a holder. A "holder for value" is the holder of a
bill for which value has at any time been given, but it is not essential
tliat he should have himself given value. His title depends upon the
same grounds as those of a simple holder except that lack of considera-
tion cannot be set up against him save by his immediate transferor, i t
in fact he did not give value. A "holder in due course" is a bolder who
has taken a bill complete and regular on the face of it, before it was
overdue and without notice of its having been previously dishonoured,
and in f-ood faith and for value, and without • notice at the time of ne-
gotiation to him of any defect in title of the person who negotiated jr.
358 MERCANTILE LAW

In Indian Law, it is not every person in possession of an instrument •

who is called a holder. Se^rtion 8 provides that a person, who is entitl-
ed in his own name (i) to the possession of the instrument, and (ii) to
recover or receive its amount from the parties thereto, is a holder. The
person ra'ay or may not be in possession of the instrument. He is re-
quired to be a holder in law (de jure) and not necessarily in fact (de
facio). In order to be entitled to the instrument in his own name, tiie
person must be named therein as the payee, or the indorsee, or he must
be the bearer thereof. He must also be entitled to recover its amount
from the parties thereto. In Indian law, therefore, a person who has
obtained possession of an instrument by theft, or under a forged indorse-
ment, is not a holder, as he is not entitled to recover the amount of the
instrument. The heir of a deceased holder or any other person becom-
ing entitled by operation of law is a holder, but not a transferee,- under
a sale deed. A joint Hindu firm may become the holder of a note if it
is made in the firm's collective or business name, and all ahe adults of
the family may join in a suit to recover the debt. But a coparcener who
becomes entitled by survivorship to the property cannot sue on an
instrument payable to the deceased or Iiig order, as he cannot give n
valid and proper discharge to the maker. A beneficiary of a note is not
a holder.''

HOLDER IN DUF. CX)UR5E

In Indian law, a "holder in due course" is (a) a person who for con-
sideration obtains nossession of a negotiable instrument if payable to
bean-r, or (b) die payee or indorsee thereof, if payable to order, before
its maturity, and vithout having sufRcient cause to believe that any de-
fect existed in the title of the person from whom he derived his title
(Section 9). Before a person can claim to be a "holder in due course"
lie must show that (i) he is a holder, i.e., he is in possession of the ins-
trument, if it is payable to bearer, or he is the payee or indorsee, if it
is payable tO, or in the order of the payee, (ii) he became the holder
before the amount mentioned in tlie instrument became payable, i.e.,
before maturity, (iii) he became the holder for valuable consideration,
and (iv) ne became the holder without having sufficient cause to believe
thai any defect existed in the title of die person from whom he receiv-
ed it, though not of any prior parly." Provision in (iv) makes a little
departure from the English law. Under the latter "a holder for value
in ,good laith without notice" is a iiolder in good faith, i.e., holder hon-
estly, wheiher negligently or not. He may take it even 'blunderinelv or
stupidly." But in India a person who takes these instruments should
not only do so honestly but. should uke them with reasonable caution
and should use reasonable diligence to satisfy himself that thev were free
from defects of title in order to constitute himself a holder in due course.
But this docs not mean that he must make full inquiries in every case.
If, however, there is anything which excites suspicion that there is some-

12. Bacha Pr.isad v. Janki Rai SL- otliers, 1957 Pat. .SfiO.
13. Braja Kishore Dikshit v. Puran Chandra Panda, 1957 Orissa 153.
LAW OF NEGOTIABLE INSTRUMENTS . 359
thing %vrong in the transaction, then omission l o make inquiries will
amount to bad faith.
Negotiable instruments in the course of their currency pas's freely
from hand to hand according to their face value like current coins. A
holder in due course is not only himself protected against all defects of
the persons from whom he received the instrument as current coin, but
also serves as a channel to" protect all subsequent holders. A holder in
due course can recover the amount of the instrument from all previous
parlies, although, as a matter of fact, no consideration was paid by some
of iJie previous parties to the instrument or there was a defect of title
in she party from whom he took it. Once an instrument passes through
the hands of a holder in due course, it is purged of all defects. It is
like current coin. Whosoever takes it can recover the amount from all
parties previous to such holder.

SPECIAL PRIVILEGES OF A HOLDER IN DUE COURSE

A holder in due course enjoys the following privileges under the
Act:-
1. A person, who signed and delivered to another a stamped but
otherwise inchoate instrument, is estopped from asserting, as against a
holder in due course, that the instrument has been filled in accordance
with the authority given by him, the stamp being sufficient to cover the
amount (Section 20).
2. Every prior party to a negotiable instrument, i.e., the maker, or
the drawer, the acceptor, and all the intervening indorsers, continue to
remain liable to the holders in the course until the instrument is duly
satisfied, i.e., the payment is made by the maker or acceptor at or after
maturity (Section SS).
3. Where a bill is drawn payable to drawer's order in fictitious name
and indorsed by the same hand as drawer's signature, the acceptor can-
not allege as against a holder in due course, that such name was ficti-
tious (Section 42).
4. Where an instrument is negotiated to a holder in due course,
the other parties to the instrument cannot escape liability on the ground
that the delivery of the instrument was conditional or for a special pur-
pose only (Sections 46 & 47),
5. Even though as between the immediate parties to an instrument
it was caused by fraud, etc., once the instrument passes through the hands
of a holder in due <ourse, it is purged of all defects, and any person
acquiring it takes it free of all defects, unless he was himself a party to
the fraud (Section 53).
6. The defences on tlie part of a person liable on a negotiable ins-
trument that it has been lost, or obtained from him by means of an
offence or fraud or unlawful consideration, cannot be set up against a
holder in due course (Section 58).
7. The law presumes that every holder is a holder in due course,
although the presumption is rebuttable (Section 118).
8. No maker of a note and no drawer of a bill or cheaue and the
acceptor of a bill for the honour of the drawer is, in a suit* thereon by
360 MERCANTILE LAW

a holder in due course, permitted to deny the validity of the instrument

as originally made or drawn (Section 120).
9. No maker of a note and no acceptor of a bill payable to ortler
is, in a suit thereon by a holder in due course, permitted to deny the
payee's capacity at tlie date of the note or the bill to indorse it (Sec-
tion 121).

Capacity of Parties
Capacity to incur liability as a party to a negotiable instrument is co-
extensive with capacity to contract. Section 26 provides that every person
capable of contracting, according to the law to which he is subject, may
bind himself and be bound by making, drawing, acceptance, indorsement,
delivery and negotiation of a note, bill or clieque.- Negatively minors,
' lunatics, idiots, drunken persons and persons otherwise disqualified by
their personal law, do not incur any liability as parties to negotiable ins-
truments. But the incapacity of one or more of the parties to a ne-
gotiable instrument in no way diminishes the abilities of the competent
parties thereto.
Minors.—A minor is not liable in any way under contracts on nego-
tiable instruments, although the other adult parties are liable. Thus, it
a mmor makes, draws or indorses a bill, note or cheque, the holder would
be entitled to eiiforce the instrument and receive payment on it against
all parties except the minor. Also, where instrument is executed bv a
minor and an adult, the adult cannot escape liability, not even where
the adult is only a surety, for it is only as against the minor that the
contract is void. A minor serves as a channel or conduit pipe to pass
title or liability, though he cannot originate it. A minor is not bound
by a bill or note given by him even for necessaries supplied to him, al-
though the supplier may sue on the original consideration to be re-
imbursed from minor's property for necesnaries supplied. A minor can
be a holder though he cannot negotiate. A minor cannot incur liability
under a negotiable instrument, but he can acquire rights under it. He
can be promisee and, therefore, an instrument -can-be drawn or made in
his favour as payee. He can also become a payee by process of law and
enforce payment of the amount of the instrument.

Lunatics, idiots and drunken persons.—Bills or notes drawn or made

by such persons or any others who for the time being qre incapable of
forming a rational judgment as to the effects of such bills or notes are
not binding on them. Their position is the same as that of minor. A
lunatic or a drunken person may, however, bind himself by a negotiable
instrument executed by him during a lucid interval or when he is sober.
T h e English law is different, and according to it, unsoundness of mind
will not render a contract void, if it was not known to the other party.
Jn order to invalidate a negotiable instrument, it must be shown that
the other party was aware of the insanity or tlie state of "drunkenness of
the first party.
Insolvents.—An insolvent during insolvency cannot accept or indorse
a bill, though if he indorses an instiument of which he is payee to a
holder in due course (he latter can lecover rarom all nartie? excent the
insolvent. An insolvent cannot sue on a negotiable instrument, as his
property vests in the Official Receiver or Assignee; but if the instru-
ment is executed in-his favour after adjudication, he can sue on it unless
the Official Receive? intervenes.
LAW OF NEGOTIABLE INSTRUMENTS 361

Corporations.—The rule that capacity to incur liability on negotiable

instruments is co-extensive witli capacity to contract does not apply to
corporations, for part three of Section 26 reads: "Nothing herein con-
tained snail be deemed to empower a corporation to make, indorse or
accept such instrument except in cases in whicli, under the law for the
time being in force, tliey are so empowered." A corporation being an
artificial creation of Jaw, possesses only tnose lights which the charter of
its creation, the Memorandum o£ Association confers upon it, either ex-
pressly or as incidental to its very existence. A non-trading company
cannot bind itself by negotiable instruments unless expressly authorised
to Jo so by its memorandum. But a trading company has implied power
to bind itself by negotiable instruments.
Agents.—A person who is competent to contract may sign a nego-
tiable instrument either himself or through a duly authorised agent. Tins
may be done in o^e of the two ways: (1) T h e agent may put his principal's
name to the instrument, for it is imfnaterial as to whose hand holds the
pen to put the signature so long as the agent has authority, or (2) the
agent may put his own signature by procuration making it clear on the
face of the instrument that he signs as an agent for a stated principal.
T h e principal's name must be so disclosed on the instrument that his
responsibility is made plaip and can be instantly recognised as the do-
cument passes from hand to hand. Where an agent simply puts his own
signatuarc to an instrument without signifying clearly the capacity in
which he signs it, he renders himself personally liable. An agent will
also be personally liable if he executes an instrument without or in ex-
cess of authority. He can be sued for damages for breach of warranty
or authority. In law every paitner is an agent of a fellow-partner and
of the partnership. Therefore, in a trading firm each partner has prima
facie authority to bind his co-partners by drawing, accepting or indorsing
riegotiable instrument, provided that it is signed by him in the name pf
the firm.
Hindu Joint Family.—The Karta or Manager of a Hindu Joint Fa-
mily represents the family in all dealings with the outside world, and has
implied authority to borro\y money for the family business on a note or
bill, and such note or bill will bind all the memljers of the joint family.
The minor members are equally liable witli adult members to the ex-
tent of their shares. They are not, however, personally liable.
Legal Representative—^A person who represents the estate of the de-
ceased or intermeddles therewith is the legal representative of the deceas-
ed. A person's heir or body of heirs, executors and administrators are
his legal representatives. T h e legal representative is entitled to the ins-
truments after the death of the holder. An heir of a deceased holder
can 'sue on a pro-note to recover the amount on it to the deceased, as
he can give a valid discharge." A legal representative of a deceased per-
son who signs his name to a negotiable instrument is liable personally
thereon unless he expressly limits his liability to the extent of the assets
received by him as such (Section 29) For example," an executor can es-
cape personal liability only by "Sans Recourse" indorsement. The legal
representative of a deceased person cantfot negotiate by mere delivery an
insfrumeiit payable to order and endorsed by the deceased but not deli-
vered. He must re-indorse and deliver it, taking care to exclude his
Dcrconal liabilitv thereon.

14. Padam Prasad v. Lok Nath, 1964 Punj. 497 (F.B.)

362 MERCANTILE LAW

Liabilities of Parties
L I he drawer of a bill or a cheque is bound in case of dishonour
by the drawee or acceptor thereof, to compensate the holder, provided
due notice of dishonour has been given to, or receiveH by, tlie drawer
<Seciion SO).
2 . , The maker of a note, the drawer of a cheque, the drawer of a
bill until' acceptance, and the acceptor are, in the absence of contract
to the contrary, respectively liable on the instrument as principal debtors
(Section 37).
3. The other parties, i.e., the intermediate indorsers, and the drawer
of a bill after acceptance, are liable thereon as sureties tor the maker,
diawer or acceptor (Section 37).
4. As between parties so liable as sureties, each prior party is, in
the absence of a contract to the contrary, also liable thereon as a prin-
cipal debtor in respect of each subsequent party (Section 38).
Illustration.—A draws a bill payable to his own order on B, who ac-
cepts it, A afterwards indorses the bill to C, C to D, D to E. As bet-
ween E and B, B is the principal debtor, and A, C and D are his sure-
ties. As between E and A, A is the principal debtor and C and D are
his sureties. As between E and C, C is the principal debtor and D
is his surety.
5. In the absence of a contract to the contrary, the maker of a note
and the acceptor before maturity of a bill" are bound to pay the amount
at maturity according to the apparent tenor of the note or acceptance res-
pectively, i.e., the payment must be to the holder, as payment to any
other person is not according to tenor (Section 32)."
6. T h e acceptor of a bill at or after maturity must pay the amount
thereof to the holder on demand.
7. T h e drawee of a cheque (paying banker) must pay it when pre-
sented for payment, provided the drawer has sufficient funds to his cre-
dit with the banker. Refusal to pay without justification will render the
banker liable to pay exemplary damages to the diawer (Section 31).
8. The engagement of the indorsers is similar to that of the drawer.
A person who indorses and delivers a negotiable instrument before ma-
turity without excluding or making conditional his liability, is bound
to every subsequent holder, in case of dishonour by the drawee, maker or
acceptor, to compensate sucli holder for any loss or damage caused to
him by such dishonour, provided due notice of dishonour has been gii-en
to, or received by, such indorser (Section 35).
9. Every indorser after dishonour is liable as upon an iijstrument
payable on demand (Section 35).
10. T h e liability of each party to a subsequent holder in due course
continues until the instrument is duly satisfied. Therefore, each niior
Dartv is liable to eacli subsequent party until the liability is extinguished
by final payment (Section 36).
11. An agent who signs or indorses a negotiable instrument without
clearly signifying on it that he is signing only on behalf of his principal
is personally liable on the instrument (Section 28).

15. See Jagjivan Mavji v. R. Meghji, 1954, S.C. 554.

LAW OF NEGOTIABLE INSTRUMENTS 363

12. A legal representative of a deceased person who signs a nego-

tiable instrument is personally liable thereon unless he expressly limits
Iiis liability to the extent of the assets by him as such (Section 29).

PART 11-E
NEGOTIATION
A negotiable instrument may be transferred by negotiation or assign-
•raent. Negotiation is the transfeiring o[ an instiument (a note, bill or
cheque) from one person to another in such a manner as to convey title
and to constitute the transferee the holder thereof.'" \\^hen a negotiable
jnstrument is transferred by a negotiation, the rights of the transferee
may rise higher than those of the transferor depending upon the circums-
tances attending the negotiation. When the transfer is made by assign-
ment, the assignee has only those rights which the assignor possessed and
the assignee is subject to all defences existing against the assignor prior
to notice of the assignment. Therefore, a person wlio receives a ne-
gotiable instrument either by negotiation or assignment is a holder and
is entitled to recover the amount due thereon from parties thereon.
In Narsingh Panda v. N , Narsinha Murty, 1966 Orissa 194, on March
14, 1959, M executed a promissory note for Rs. 1,000 in favour of R, who
in turn sold the pro-note to N under a separate sale deed dated Decem-
ber 12, I960. N sued M for die recovery of the amount of the note. M
pleaded that N could not recover as he was not a holder in dCe course
of the note and that the suit, was not maintainable. Held, it is true
that N is not a holder in due course, but he is a holder under Section
8 as he is in possession of the note and as an assignee entitled to recover
in his own name. A transfer of a pro-note by means of a registered ins-
trument is valid; it is an assignment.
It is clear that, while the Act does not prohibit transfer of negotiable
instruments otherwise than negotiation, transfer by negotiation has mani-
fest advantages, as will be seen from the following:
TRANSFER BY NEGOTIATION AND TRANSFER BY ASSIGN-
MENT DISTINGUISHED
1. "Negotiation" requires meie delivery of a bearer instrument and
endorsement and delivery of an order instrument to effectuate a transfer;
"assignment" requires a written document signed by the transferor.
2. Notice of assignment of debt (actionable claim) must be gi\en
by the assignee to the debtor in order to complete his title; no such notice
rs necessary in a transfer by negotiation.
3. On "assignment" the transferee of an actionable claim" takes it
subject to all the defects in the title of, and subject to all the equities and
defences available against the assignor, even though he took the assign-
ment for value and in good faith. In case o£ "negotiation," the trans-
feree, as holder in due course, takes the instrument free from any defects

16. Section 14 reads: "When a note, bill or cheque is transferred

• to anv person, so as to constitute that person the holder thereof, the ins-
trument" is said to be negotiated."
364 MERCANTILE LAW

in the title of tlie transferor. Tliis feature is the very essence of nego-
tiability. Negotiability eliminates all personal defences between the ori-
ginal parties, thus making negotiable instrument free to pass from per-
son to person as money, fulfilling the purpose for which it was created,
4. Consideration is always presumed in case of negotiable instru-
ments; in case of "assignment," the transferee must prove consideration
lor the transfer.

IMPORTANCE OF DELIVERY IN NEGOTIATION

"Negotiation" is effected either^ by mere delivery or by endorsement
and delivery. This means that "delivery" is a very important point re-
lating to negotiable instruments, and Section 46 emphasises it. It says
that the making, acceptance or indorsement of a negotiable instrument
is not complete until delivery, actual or constructive, of the instrument.
Delivery of the instrument is essential not only for negotiation, but also
;o create rights under it. Mere execution (by writing and signing) of an
instrument does not make it 'operative." Delivery made voluntaTily with
the intention of passing the property in instrument to the person to whom
it is given is essentia!."'
In Bank of Van Diemen's Lanf? v. B.nnk of Victoria (1871) L.R. 3 P.C.
526, D drew a bill on A and transferred it to B. B sent the bill to A
who writes his acceptance on it. Afterwartls A hears that D, the draw-
er, has become bankrupt. A cancels his acceptance and returns the dis-
honoured bill to B. This is no acceptance, as A never delivered the ac-
cepted bill so as to make himself liable on it.
Delivery may be actual or constructive. It may be conditional or for
a special purpose. Actual delivery means change of actual possession. A
person is in constructive possession when the instrument is in the actual
possession of his agent, clerk or servant on his behalf. Where an instru-
ment is delivered conditionally for a special purpose only, the property
m it does not pass to the transferee, even though it is indorsed to him.
T h e plea of conditional delivery or for special purpose is available only
against parties who take the instrument with notice of the condition or
special purpose, but not against a holder in due course who can hold all
prior parties liable on it.
A is the holder of a cheque payable to bearer. He hands it over to
his banker for collection. T h e cheque is delivered for a special purpose
and not to entitle the banker to further negotiate it.
NEGOTIAtlON BY MERE DELIVERY
Section 47 provides that a bill or cheque payable to bearer is nego-
tiated by mere delivery of the instrument. An instrument is payable to
bearer (i) where it is made so payable, or (ii) wheie it is originally made
payable to bearer or to order, but the onlv or the last indorsement is in
!)lank. A cheque, if originally drawn payable to bearer remains bearer,
even though it is.subsequently indorsed in full. T h e rule is once a bearer
cheque always a bearer clieque; or (iii) where the payee is a fictitious or a
17. Thrappa v. Umedmalji. 1924 Bom. 205.
18. Bhogi Ram v. Kishorilal, 1928 All. 289.
LAW OF NEGOTIABLE INSTRUMENTS 365
non-existing person. These instruments do not require signature of the
!ran<;feror. The person who takes them is a holder, and can sue in his
own name on them. Where a hearer negotiates an instrument by mere
deiiviT>, and does not put his signature thereon, he is not liable to any
r-arty to the instrument in case the instrument is dishonoured, as he has
not lent his credit to it. The transaction is mere sale o£ the instrument
and, therefore, the transferee cannot recover against the transferor upon
the instrument, nor can he get back the amount paid by him to the trans-
feror on the failure of consideration, if the transferor delivered in good
faith.
The transferor by mere delivery only makes an oral sale of the ins-
trument to his transferee, and his obligations are those of a seller of
any goods to the buyer only, i.e., towards his immediate transferee and
10 no other holders. Like a seller of goods, he warrants by implication
to his immediate transferee for consideration that—(i) the instrument is
{genuine, unaltered and is what it purports to be on its face. If any sig-
nature turns out to be a forgery, or the amount is altered, the transferee
can recover his loss from the transferor; (ii) the parties to the instrument
•were competent to contract. If any party turns out to be incompetent
the transferor is liable to tlic transferee on a breach of warranty; (iii)
he is entitled to transfer the instrument; (iv) he is not aware of any facts
which make the instrument valueless, e.g., insolvency of a party, or dis-
charge of the instrument or its being void. Thus, the transferor by de-
livery can be compelled to return the purchase money to his immqdia;e
transferee if the instrument turns out to be worthless and the considera-
tion wholly fails, but incurs no liability on tlie instrument.

NEGOTTATIGN BY INDORSEMENT AND DELIVERY

Instruments payable to a specified person or to the order of a speci-
fied person or to a specified person or order are insinunents pay.ible to
order. Such instruments can be negotiated only by indorsement AND
delivery. Unless the holder signs his indorsement on the instrument, ihe
transferee does jiot become a holder. If there are- more p^vees than one.
all must indoise it. Where an instrument payable to order is deli\ered
without indorsement, it is merely assigned and not negotiated, and the
holder thereof is not entitled to the righu of a holder in due course,
and he cannot negotiate it to a third person. If 'an indorsement
7s declared invalid, the property in the instrument again vests in the
payee and he can sue on it without reindorsemcnt from -such indorsee.
An unconditional indorsement followed by an unconditional deliverv
transfers immediately to the indorsee the property in the instrument witli
the right of further negotiati»n.

INDORSEMENT
When the maker or holder of a negotiable instrument signs the
same othenvise than as such maker, for the purpose of negotiation, on
the back or face tiiereof or on a slip of paper annexed thereto, or signs
for the same purpose a stamped p.nper intended to be completed .is a
neeoiiable instrument, he is <;aid to indorse (he same, and is cajjed the in-
dorse) (Section 15). Tlie person to whom tlie instrument is indorsed is
366 MERCANTILE LAW
called the indorsee. An indoisement is the sign<iture by tlie maker or
holder of a. negotiable instrument for the purpose of negotiation. It i
usually on the back of the instrument, although it may be even on the
face thereof, or if no space is left on the instrument, on a slip o£ paper
attached to it, called "ALLONGE."
An indorsement can be made by—
I. the holder of the instrument,
2 the maker signing it otherwise than as such maker,
3. every maker, drawer or indorsee, or all of several joint mak-
ers, drawers, payees or indorsees of the instrument.
4. the payee of an instrument.
A stranger cannot indorse an instrument, and if he does indorse it,
no suit can be brought against him. But he may make himself liable as
,1 surety, if he guarantees payment. When a stranger indorses an ins-
uument he is called the BACKER and although such an indorsement is
void in India and the indorsee cannot sue on the instrument, under
Section 56 of the English Bills of Exchange Act, a Backer is liable as an
indorser to the holder in due course.

CLASSES OF INDORSEMENT
An indorsement may be (a) Blank or General, (b) Special or Full, (c)
Restricti\e, (d) Partial, or (e) Conditional or Qualified.

BLANK OR GENERAL
An indorsement is said to be blank or general where the indorser
merely \vrites his signature on the back of the instrument, and the instru-
!nent so indorsed becomes payable to bearer, even though originally it was
payable to order. Thus where a bdl is payable to "James Brown or
order", and he writes on its back "James Biown", it is an indorsement ia
blank by James Brown, and the pioperty in the bill can pass by mere de-
liveiy, as long as the indorsement continues to be in blank But a holder
of an instrument indorsed in blank mav convert the indorsement in blank
into an indorsement in full, by writing above the irjdorsei's signature a
direction to pay the instrument to another person or his order (Section 49V
T h e advantage of such a course is that the holdei, tliough he transfer,'
the instrument, does not incur the responsibility of an indorser. A is the
holder of a bill indorsed by B, in blank. A wiites over B's signature the
words "Pav to C or orc^r." A is not liable as an indor'ser, but the writ-
ing operates as an indorsement in full from B to C (Illustration to Sec-
tion 49).
An instrument indorsed in blank in the first instance may be fol
lowed by an indorsement in full, in which case it continues to be pay-
iible to bearer and negotiable by mere delivery in connection with all
parties prioi to the indorsement in full, and the indorser in full is only
liable to the person to whom he indorses-^it In full or who derives title
through indoisement by sucla persons'" In this case, the holder of a bill
39 Walker v. Macdonald (1848) 2 Ex. 527.
LAW OF NEGOTIABLE INSTRUMENTS 367
originally indorsed in blank indorsed it specially to Barber, Walker &
Co., who carried on business both as "Baiber, Walker & Co.," and "East-
wood & Co." and who indorsed the bill as "Eastwood & Co." The bill
ivas dishonoured on presentation on the ground that it was not indorsed
by "Barber, Walker & Co." T h e Court held that, as the bill was initially
indorsed in blank, its negotiability could not be restrained by a special
indorsement and the presentment was such as to render the defendant
liablf to the plaintiff. In another case," A, the payee-holder of a bill, in-
doised it in blank ajid delivered it to B. B also indorsed it in blank and
delivered it to C. C indorsed it in full to D or order. D without in-
dorsement delivered the bill to E. E as the bearer against A, B, the draw-
er, and accentor, was entitled to receive payment from them, but he could
not proceed against C or D. D could sue C as he received the bill from
C by indorsement in full. If, however, D instead of passing the bill to
E had passed it by a regular indorsement, E could claim against all prior
parties.

.SPECIAL OR FULL
If the indorser signs his name and adds a direction to pay the amount
mentioned in the instrument to, or to the order of a specified person, the
indorsement is said to be special or in full. A special indorsement speci-
fies tlie person to whom or to whose order the bill is to be payable. A
bill made payable to James Brown, or James Brown or order, and indors-
ed "pay to the order of Henry Smith" would be specially indorsed and
Henry Smith may indorse it. A blank indorsement can be turned into
a special indorsement by the addition of an order making the bill pay-
able to the transferee.

RESTRICTIVE
An indorsement is restrictive which prohibits or restricts the further
negotiation of an instrument, or which expresses that it is a mere autho-
rity to deal with the instrument as thereby directed and not a complete
and unconditional transfer of the ownership thereof. If a bill indorsed
"Pay C only" or "Pay C for my use" or "Pay C on account of B" or
"Pay C or order for collection" or "The within must be credited to C,"
It is restrictively indorsed, and cannot be negotiated.

PARTIAL
An indorsement is partial which purports to transfer to' th? indorsee
a part only of the amount payable on the instrument. A partial indorse-
ment does not operate as a negotiation of the instrument. Section 56 pro-
hibits an instrument being negotiated for a portioi? only of the sum at
the time i^.ue upon it, for a partial indorsement would cause "inconven-
ience to prior parties, subject them to a plurality of action, and interfere
with the free circulation of these instruments." To be valid for the pur-
pose of negotiation, an indorsement must be of the entire instrument, be-
cause a personal contract cannot b? apportioned. A holds a bill for Rs
1,000 and indorses it thus: "Pay B or oider Rs. 500" or "Pay Rs. 500

20. Smith v. Clarke (1794) 1 Peake 295.

368 >rERCANTILE LAW
to B or oulcr, and Rs. 500 to C or order," liie indorsement in either cas-'.
IS partial and invalid. But wliere an instrument has been paid in part,
ihe fact of ilie Dari-naymeni may be indorsed on liie inslrumeni. and it
ma> ilieii be negotiated for ilie residue.' For example, a bill in.i\ be in-
dorsed thus: "Pay A oi order Rs 500 being the unpaid lesidue o[ the
bill." Such an indorsement would be valid.

CONDITIONAL OR QUALIFIED
An indorsement ii; conditional or qualified which limits or negati\es
'.he liability of the indorser. It differs fiom a restiictive indorsement in
iliat the latter places restrictions on the negotiabilitv of an instrument,
v;hile conditional indorsement limits or negatives the liability of the in-
dorser. A drawer of a bill cannot draw it conditionally and a maker of
a note cannot make his liability conditional or exclude it. The acceptor
of a bill can accept it conditionally but cannot exclude his liability by
.ncceptance. An indorser is entitled to insert by express words in the in-
dorsement a stipulation negativing or limiting his own liability to the
holder. This may be done in any of the following ways :—
(a) By 'Sans Recourse' Indorsement.—Where the indorser makes it
clear that he does not incur the liability of an indorser to the indorsee or
subsequent holders and they should not look to him in case of dishonc
of the instrument, it is a Sans Recourse indorsement. Here the indorser
expressly excludes his liability bv adding the words "Sans Recourse" or
"Without recourse." He may indor.'e thus:—"Pay A or order Sans Re-
fouTEc" or "Pay A without recourse to me" or "Pay A or order at his oxvn
i-isk
(b) By making his liability depend upon the happening of a speci-
fied event which may never happen, e.g., the holder of a bill may indorse
;t thus. "Pay A or older on the arrival of S. S. Ravenshaw at Bombay"
or "Pay A or order on his marrying B." In such cases the indorser will not
be liable until the happening of the events, and if the events become im-
poMible and do not happen, his liability is extinguished. The indorsee
gets no title to the bill nor can he sue the indorser. But he can sue the
prior parties before the happening of the event.
(c) By making the right of an indorsee to receive the amount of the
''nstrument depend upon the specified event, wiiich may never happen.
In this case, the indorsee's right being dependant noon the Iianneninir of
j n event, he cannot reco\cr the amount either from the indorser or from
any prior party until the event has happened.
(i\) Bv Facultative Indoisenient.—Where the indorser extends his
own liability by stipulating in the indorsement that he waives present-
ment or notice of dishonour by the holder. An indorsement "Pav A or
order. Notice of dishonour waived" is facultative, and the person who
has signed lemains liable to A even though no .notice of dishonour has
heen given to him.
(i\ Bv "Sans Frais" Indorsement.—Where the indorser does not want
ihe indorsee or anv other holder to incur any expense on his account on
the bill, the indorsement is sans frais.
LAW OF NEGOTIABLE INSTRUMENTS 369
l l i e inseition of a condition in the indorsement does not in any way
aflec th.' ncqotiabiiity of the instiument.

NEf.OTLVTION BACK
AMiLie an nuloibcr ncgotuues an instiumcnt and again becomes its
lioklci tlie in<^(.uiment is said to be "negotiated back" to that indorser,
and none of the intermediate mdorsers are then hable to him. The rule,
ihc object of ishich is to uie\eiit a ciicuity ol action, is an exception to
the gcncial ui!e that the holder in due couise of a negotiable ins-
tiiinient ma\ sue all puoi paities to the instrument Tlieiefore,
^\hen an insiiument is "negotiated back" to a prior party, that
pait. is lemitted to his foimei position and comes within the de-
hnition of a holder" A, tlie holder of a bill indoises it to B B in-
doi'es It to C, C to D D to E and E indorses it again to \. A, Ijeing
a Iioidei in due course of the bill by second indoisement by E can le-
fo\ei tlie amount tiieieof from B C, D or E, and himself being a prior
paitv IS liable to all of them Therefore, A haMng been relegated by
the <-econd mdoisement to his oiiginal position, cannot sue B, C, D and
E, for if V weie allowed to sue E, E could sue D and D could sue
C and C could sue B, and B could sue A, and this circuity of action
the loW piolnbits A can, honever, further negotiate the bill if he can-
cels 01 stiikes off the indorsement of B, C, D and E. Such a transaction
is called Taking up of a Bill. \\'hen the indorsements are stiuck off with-
out llie consent of tlie mdorsers, the right of the subsequent indorsee to
ieco\(.! indemnitv fiom them is destroved and they are dischargtd Vut
clause 2 of Section 52 provides that wheie an indorser excludes his I'abi-
Jity and afteruaids becomes the holder of the instrument, all interme-
diate indoisers aie liable to him So, if A has at the time of fiist indorse-
ment excluded his liabilitv by the'use of the •\\ords "without recouise"
he IS not liable to B, C, D or E and if tlie bill is negotiated bark to A,
then B C D and E are all liable to liim and he can recover the amount
from all oi any of them.

EFFECT OF INDORSEMENT
The effect of indorsement, \\hen Section SO is read subject to Sections
'16 rnd 52, ma\ be stated thus : 'Vn unconditional indorsement of a nego-
tiable instiument followed by its unconditional deliverv transfeis to the
indorsee the property therein, Aesimg in him the title to the instrument
The mdoisee acquiies a right to negotiate the instrument to any one he
likes and to sue all parties whose names appear on it
He cannot sue thiid pait'es on the oiiginal consideration The na-
tuie of the contract which the indorser enteis into witii his indorsee is
Teiv much the same as that of the drawer of the bill Eveiv indorsement
is in the nature of a ne1^ bill issued bv the indorser in favoui of his in-
dorsee Bv indoisement the indorser impliedly represents to his imme-
diate indoisep that the instrument -SM'I, when presented in due couisc,
be accented and subsenuentlv paid when it falls due and if it is not
paid at matuiitv, the indoiscr will indemnify the indorsee, piovided that
due notice has been gi\en or received, by him. The indorser cannot deny
370 MERCANTILE LAW ^

the signature or capacity to contract of any prior party. But where tlie
holder, without the consent of the indorser, destroys or impairs tlie in-
dorser's lemedy against a prior party, the indorser is discharged from lia-
bility to "Jhe holder as if tlie instrument had been paid at maturity (Sec-
tion 40). The effect of an indorsement in blank and delivery of an ins-
trument originally made drawn payable to order is to convert it into one
payable to bearer and transferable by mere delivery. Tlie effect of res-
trictive iridorsement is (i) to prohibit or exclude further negotiation, (ii)
to constitute the indorsee an agent of indorser to indorse the instrument,
or to receive its contents for him or (iii) to constitute the indorsee as
agent to receive its contents for some other specified person.
Joint payees or indorsees must all indorse to complete the negotiation
of tlie instrument (Section 51). Thus, an indorsement made by only one
of the two payees is invalid, even if it is made in favour of the other
payee. But this does not deprive the creditor (holder of the instrument)
of his right to a decree for the amount. He can get the money on tire
ground that the indorsement amounted to an assignment of a chose-in-
action (Srinivasiilu v. Kondappa, I960 A.P. 174). A non-negotiable pro-
missory note may be assigned by indorsement so as to enable the assignee
to sue upon the note in his own name.'"

NEGOTIATION OF LOST INSTRUMENT OBTAINED BY UN-

LAWPUL MEANS OR TOR UNLAWFUL CONSIDERATION
When a negotiable instrument has been lost or has been obtained
from any maker, acceptor or holder thereof by means of an offence or
fraud, or for an unlawful consideration, no possessor or indorser, who
claims through the person who found or obtained the instrument is en-
titled to receive the amount due thereon from such maker, acceptor, or
holder or from any party prior to such holder unless such possessor or
indorsee is, or some person through whom be claims was, a holder thereof
in due course (Section 58). The general rule of law is that a person
cannot pass a better title than he himself possesses. This section embo-
dies the chief difference between the transfer of ordinary goods and ne-
gotiation of negotiable instruments. Two sets of circumstances gre dealt
•with here. Firstly, the legal position of a possessor or an indorsee of a
negotiable instrument which has been lost, or which lias been obtained
from anv maker, acceptor cJr holder by means of an offence, or fraud, or
unlaxvful consideration. Secondly, the position of a holder in due course
under similar circumstances. We shall deal with these conditions se-
parately.

LOST INSTRUMENTS
1. The finder of a lost instrument does not acquire any title to it
as against die rightful owner, nor can be claim payment from '
the acceptor of a bill or maker of note or cheaue. The right-
ful owner has a right to recover the instrument from the finder.
2. An acceptor or maker who makes payment in due course on lost

Mohd. Khumarali v. Ranga Rao (1901) 24 Mad. 654; Muthar

,. LAW OF- NEGOTIABLE INSTRUMENTS 371

bill or note to a finder tiiereof is discharged from all liability

to the rightful owner. But the true owner can recover the
money from the finder.
3. AVhere a bill or note payable to bearer or indorsed in blank is
lost and the finder negotiates it to a bona fide transferee for
value the latter acquires a valid title to it. He can retain tiie
instrument as against the true owner, and also claim payment
from parties liable thereon.
4. \Vhere the finder of a lost bill or note payable to order nego
tiates j t by forging the indorsement of the loser to a 'bona fide
transferee for value, the latter acquires no fitle to it for the
indorser himself had no title which he could trnsfei; loigeiy
can confer no title, and this holder is not a holder in due
course."
5. \Vhere a holder has lost a bill, he should give notice of the
loss to all parties liable on it, and also a jjublic notice by an
advertisement.
G. The holder of a bill, who has lost it, must apply to the drawee
for payment at maturity, and if the payment is- refused, lie
must give notice of dishonour to all the parties liable on it. If
he fails to give notice of dishonour, he will lose his remedy
against the drawer and indorsers.

STOLEN INSTRUMENT
A Dcrso)!, who has stolen a negotiable instrument from the true owner,
cannot claim payment against any party liable tliereon, and the true own-
er can get back the instrument or the money if he has realised it from
the drawee. But if a stolen instrument is negotiated by delivery to a trans-
leree for value witliout notice of the theft the transferee gets a good-
title to it, not only against the thief but also against all the parties prior
.^o him.

INSTRUMENTS OBTAINED BY FRAUD

Traud vitiates all transactions. \\'hcre an instrument is obtained by
fraud or is obtained for the purpose of defrauding any third person, the
person defrauding is not entitled to recover anvthing, as his title is defec-
tive; but if such an instrument passess into the hands of a holder in due
course, he will acquire good title to the instrument and the plea of fraud
will not avail against him. The position is the same wliere an instru^
ment has been obtained by undue influence or coercion.

INSTRUMENT OBTAINED FOR AN UNLAWFUL

CONSIDERATION
The general rule of contiacts thaE^every agreement of which the ob-
ject or consideration is unlawful or immoral is \oid anplies to negotiable
ii?stuiment for unla.wful consideiation, e.g.i^ a note in-favour of a witness
for giving false evidence, or in patt consideration for giving one's daugh-
ter in maniage creates no obligation between the parties thereto But a
liokler m due course, or a person deriving title through him gets a good
title to the instrument.
372 MERCANTILE L A W
FORGED INSTRUMENTS
Forgery is the fraudulent making of alteration of a tvi-iting to die
prejudice of another's right. Forgeiy with the intention of obtaining
title to instrument would include (i) fraudulently writing the name of
an existing person; (ii) signing the name of a fictitious person with the in-
tention that it may pass as that of a real person, or (iii) signing one's
own name with the intention that the signature may pass as the signature
of some other person of the same name. The forged or unauthorised
signature is inoperative, and the pioperty in the instrument remains in
ihe person who was the holder at the time when the forged or unau-
thorised signature was placed on it. Therefore, the holder of a forged
instrument cannot enforce payment tliereon, nor can he- give a valid dis-
charge therefor, and even if he has obtained the payment of the bill, he
cannot retain the money. The forged signature does not give to the for-
ger any title whatever. It is not a case of defect of title. There is fron^
the very beginning a complete 'absence of title and a forged signature is
altogether inoperative. A forged instrument has in laiv no existence
whatever. It is a nullity no matter in whose hands it may be. Even if
it has during the course of circulation passed through the hands of a
holder in due course it is not cured of its defects, because there is no de-
fect of title to cure; there is a complete absence of title.

FORGE13 INDORSEMENTS
The case of a forged irdoisement is slightly different. It an instru-
ment is indorsed in full, it cannot be negotiated except by an indorse-
ment signed by the person to whom or to whose order the instrument
is payable, for the indorsee obtains title only through his indorsement.
Thus, if an instrument be negotiated by means o£ a forged indorsement
"•he indorsee acquires no title even though he be a purchaser for valiijf
and in good faith, for the indorsement is a nullity. But where the ins-
trument is a bearer instrument or has been indorsed in blank, it can be
negotiated by mere delivery, and the holder derives his title independent
of the forged indorsement and can claim the amount from any of the
parties to the instrument. A bill is indorsed : "Pay A or order." ^A in-
dorses it in blank, and it comes into the hands of B, who simply delivers
' it to C. C forges B's indorsement and transfers it to D. Here, D, as the
holder, does not derive his title through the forged indorsement of B,
but through the genuine indorsement of A, and can claim payment frO'H
anv of the parties to the instrument in spife of the intervening forged
indorsenient. , '

NEGOTIATION OF DISHONOURED AND OVERDUE INSTRUMENT

We have seen before'that the I.oldcr for value of a negotiable instru-
ment is not affected by any defect in the title of the transferor. But ^his
peneral rule is subject to two exceptions with respect to instruments ac-
quiied with notice of dishonour and after maturitv. Section 59 lays
down that where a negotiable instrument has been dishonoured or has
'become overdue by the expiry of the day of payment, any person who
takes it with rotice of dishonour or after maturity, takes it subject to any
 LAW OF NEGOTIABLE INSTRUAfENTS 37S
rran^leree is not a holder in due course, and gets no better title than his
J transferor.
I'he case of notes and accommodation bills is different. The proviso
to Section 59 lays, down tliat a Iiolder for consid'eratioi-^ and in good faith
of a note or an accommodation bill after maturity is a holder in due
course in the same way as a holder before maturity, and can recover the
amount from any prior party.
A bill is payable 90 days-after date. It is accepted M" the accommo-
dation of the drawer. After maturity, (i.e. after expiry of 93 days from'
the date of the bill) the drawer indorses it to -A for value. A can recover
the amount of tlie bill from tlie acceptor.
DURATION OF NEGOTIABILITY
A bill or note is negotiable ad infinitum and can circulate by nego-
tiation until it has been finally discharged by payment or' satisfaction by, or
OP behalf of tlie acceptor or maker at or after maturity. A payment be-
fore maturity is not a payment in due course, and does not stop negotia-
bility.
A bill is said to be Retired when it is paid before maturity. The ac-
ceptor or maker who receives the instrument after payment but before
maturity may re-issue it. Negotiability of the instrument stops only when
the party ultimately liable thereon pays it.

SURRENDER TO THE DRAWEE NOT NEGOTIATION

It is customary for a holder, when presenting a cheque to the drawee
banker or other bill of exchange to the drawee" for payment, toMvrite his
name across the back of the instruments Such writing is not an indorse-
ment, and the transfer of the instrument from the holder to the drawee
for payment and discharge is not a negotiation. A negotiable instrument,
\vhen transferred from one person to another by delivery or indorsement
and delivery, is a sale of the instrument, thus enabling it to pass as money.
The passing of an instrument from the holder to the drawee, on the
other hand, is a surrender of the instrument for discharge, and is not a
negotiation. Therefore, no indorsement is necessaiy to entitle the holder
to receive payment. A person signing his name on an instrument before
surrender to the drawee has no liability as an indorser, because the drawee
does not occupy the position of a holder. The drawee, however, becomes
a holder if he purchases the bill before maturity with intention further
to negotiate it. In the absence of this situation, tlie signature upon a
bill or clieque before surrender to the drawee for payment merely acts
as a receipt for money so far as the drawee is concerned.

PART Il-F
ACCEPTANCE •
The drawee, as such, has no liability on any bill addressed to him for
.'icceptance or payment. A refusal to accept or to pay such bill gives the
holder no right against him. A bill of exchange of itself does not operate
as nfi assignment of the funds in the hands of the dra'.vee available fo; 'he
374 MERCANTILE LAW

payment thereof, and the drawee is not liable on the l)ill unless and until
he arcepts the same. The liability of the acceptor is primary.
Tjie acceptance of a bill is the indication by the drawee of liis assent
to the order of the drawer. Thus, when the drawee writes on the bill,
generalh, across the face of the bill the word "accepted" and signs Jiis
name underneath he becomes the acceptor of the bill. The acceptance
may, Jiowever, be made by mere signature of the drawee without the ad-
dition of the word "accepted." But an oral acceptance, or the writing
ff the word "accepted" without the drawee's signature, is not an accept-
ance. The drawee is not liable on the bill unless the bill is presented to
him for acceptance and he actually accepts it and then delivers it over
to tlie Iiolder or gi\ es notice of acceptance to the holder or someone on
Jiis bflialf. .'\nd, wlierc a drawee, h.iving signed liis acceptance, changes
his mind and before deli\ering it to the liolder, o1)literates his acceptance,
lie will not be lialile as an acceptor. AVhere there are more parts of a
bill than one the drawee should sign his acceptance only on one part,
lor ii lie 'igns on more than one part and thcv get into the hands of the
K'vcial holders in due coiu>e, he would he liable to all of them. It is
possible lo accept an ojerdne or a dishonouied bill, an incomi)lete or
blank bill, and e\en before the drawei has signed it or after notice of
drawei's death. An acceptance to l)c valid must be (i) written, (ii^ 'signed
by the diawee or his agent, (iii) on the l)ill, and (iv) completed by deli-
verv to the holder or by notice of acceptance to him or some person on
his behalf.
An acceptance may be either general or qualified.'
General acceptance.—.A general acreptancr is absolute and assents
witliout any qualification to the order of the drawer. It is according to the
apparent teiior pf the bill. \ general acceptance is signified bv the dra-
wee by signing his name on the bill with or withowt the word "accepted",
without adding any condition regarding jjayment. .\s a rule, an accept-
ance must l)e general.
Qualified acceptance.—Where an acceptance is made subject to some '
condition or (jualification, tlieieby var^injr in express terms "the effect of
the bill as drawn, it is a cpuilificd acceptance, 'fhe holder of a Iiill may
citlier rehise to take a qualified acceplance or acquie.>ce in it. Where he
refuses to take it, he can treat the liill as dishonoured by non-acceptance,
and sue the drawer accordingly. But if he accepts the qualified accept-
ance, it binds' him and the acceptor, but not the o'ther parties not consent-
ing thereto.
Section 86 gives instances of qualified acceptance which are stated be-
low with a few prore which may also !)e legarded as such. An accept-
ance is qualified when it is—
1. Conditional.-.-\n acceptance which makes the pavment dependent
on the happening of an event tlictcin stated is conditional. Tims, bills
"accepted payable when in funds" or "accepted payable on gi\ing bills of
lading for Clover per S. S. Amazon" or "accepted when a cargo consigned
to me is sold," are all conditional acceptances. yi
2. Partial.-.An acceptance which tuulertakes to pay only a part of
the amount of the- bill is a partial acceptance, e.g., a bill drawn for Rs
1,000 is "accepted foi Rs. sOO onh." In English law, partial acceptance is
good to that part.
LAW OF NEGOTIABLE INSTRUMENTS 375
3. Qualified as to place.—An acceptance, which undertakes to pay
only at a specified place and not elsewhere, or to pay at a place different
from tlie one mentioned in the bill, and not elsewhere, is qualified as to
the place of payment. "Accepted payable at the Central Bank only" or
"accepted payable at the Central Bank and not elsewhere" is qualified ac-
ceptance. But if a bill is "accepted payable at Central Bank" it is a gene-
ral acceptance, for it is payable at a particular place without stating that
it is payable only there or is not payable elsewhere.''
4. Qualified as to time.—An acceptance •(vhich makes the payment of
the amount of the bill payable at a time different from tliat mentioned in
the order of the .drawer. Where a bill is dra%vn payable 3 months after
date and is "accepted, payable six months after date" or where a bill
in which no time is fixed is ^accepted payable on a particular date is qua-
lified as to time.
5. Acceptance for payment in instalments.-In this case - a bill is ac-
cepted as payable in instalments, e.g., a bill for Rs. 1,000 is 'accepted
payable in monthly instalments oE Rs. 100."
6. Acceptance by some of the drawees only.—Where the drawees are
not partners and only one or some of them accept, the acceptance is
qualified. But if the drawees are partners one or more can accept on
behalf of all the partners and the acceptance will be general.
Who may accept,—A bill of exchange can be accepted only by the
following persons, and no other :—
1. The drawee of the bill, i.e., the person directed to pay.
2. All or some of the several drawees, where the bill is addressed to
more than one drawee. In order that all the drawees b,e liable on the
bill it must be accepted by them all. A bill accepted by some of the
several drawees binds only those who accept it, and not the non-accepting
drawees, and the acceptance is a qualified acceptance. IE the bill is drawn
on a partnership firm, it may be accepted in the firm name or by one part-
ner on behalf of himself, and the other partners provided he has autho-
rity to accept.
3. A drawee in case of need, i.e., a person whose name is mentioned
in the bill as one whom the payee should resort to in case the real drawee
refuses to accept.
4. The agent of any of the persons named above.
5. If no drawee ,is named in a bill and a person accepts it, he will
become acceptor by estoppel.
6. An acceptor for honour, i.e., any person who accepts the bill for
the honour of any party already liable on it.
7. The agent of the acceptor for honour.
ACCEPTANCE FOR H O N O U R
When a 13111 of exchange has been noted or protested for non-accept-
ance or for better security, any person not being a party already liable
thereon may, ivith the consent of the holder, by tvriting on the bill, ac-
cept tlte same for'the honour of any party thereto (Section 108). This
fection provides for acceptance by a stranger to the bill for the honour
of any party to it and.such acceptance is called "acceptance for honour" or
•"acceptance supra protest." The acceptance is allowed when the original
376 MERCANTILE LAW

drawee refuses to accept, or declines to gi\e better security when demand-

ed bv the notary. Acceptance for honour is made with the consent of
the holder who is not bound to accept the acceptance. If tlie bill is jioted
or protested, the holder may treat it as dishonouied. There may be several
acceptois .for the honour of different parties, but there cannot be accep-
tors one after another for the honour of the same person, unless the liist
acceptor for honour has died or become insohent. This acceptance must
be for the whole amount of the bill and must be made before the bill is
overdue.
A person desiring'to accept for honour must, by writing on the bill
undei his hand declare that he accepts imder protest the j^rotested bill for
the honour of tlie drawer or of a particular indorser whom he names, or
generallv for whose honoui (Section 109). ^Vhere the acceptance does not
express for whose honour it is made it .shall be deemed to be made for
the honour of tlie drawer (Section 110).

RIGHTS AND LIABILITIES OF ACCEPTOR FOR HONOUR

An acceptor for honour enjo\s a slightly better position than an or-
dinarv acceptor. His liability is conditional, as an acceptance for honour
is in the nature of a qualified acceptance and amounts to a collateral en-
gagement. He undertakes to pay only when the bill has Iiecn duly pre-
sented at maturity to the drawee for payment and the drawee has refused
to pay and the bill has been noted or protested for non-payment. On
acceptance the acceptor for honour takes exactly the same position as the
party for whose honour he accepts.. His rights and liabiliies are the same.
Thus he is liable to all parties subsequent to tlie partv for whose honour
he accepts to pay in case the drawee fails to pay (Section 111).

PAYMENT FOR H O N O U R
The general rule of law is that no person by voluntarily naving the
debt of another'can make himself his creditor. Section 113 makes an ex-
ception in the case of negotiable instruments. The .section reads:
"When a bill of exchange has been noted or protested for non-payment,
any person may pay the same for the honour of any paitv lilable to pay
the same, provided that the person so paying or his agent in that behalf
has previously declared before a notary public the party for whose ho-
nour he pays, and that such declaration has been recorded bv the notary
public." Thus, any person mav intervene when a bill has been protested
for non-payment after having been duly accepted, and nav supra protest
for the honour of any party liable on the bill, tyhen a bill lias been paid
supra protest it ceases to be negotiable.
A payer for honour, on paying the bill for honour, acauires all the
rights of a holder for whom he pays, and is entitled to all the remedies
of (he holder on the instrument. These remedies are available only
against the party for whose honour he pavs and all parties prior to such
person; and all parties subsequent to such person are discharged.
PRESENTMENT
Presentment or presentation means preseming a ncotiable instru-
ment to the drawee, maker or acceptor thereof for the' purpose of gettjn"
LAW OF NEGOTIABLE INSTRUMENTS 37T
payment. Presentment is made for two purposes: (i) Presentment for ac-
ceptance, and (ii) Prefsentment for payment.

PRESENTMENT FOR ACCEPTANCE

It is only bills of exchange that require presentment for acceptance,
and even these of certain kinds only. Bills payable on demand or on a
fixed date need not be presented. For exaiiiple, a bill payable GO days
after date or on the happening of a certain event may or may not b e
presented for acceptance. But the following bills must be laresented for
acceptance otherwise the parties to the bill will not be liable on i t :
1. A bill payable after sight. Presentment for acceptance is ne-
cessary in order to fix maturity of the bill;
2. A bill in which there is an express stipulation that it should
be presented for acceptance before it is presented for payment.
But even in cases where presentment is optional, it is always desir-
able to get a bill accepted as soon as possible, in order to obtain (i) the
additional security of the acceptor's name on the bill, or (ii) an imme-
diate right of recourse against the drawer and the other parties if the bill
is dishonoured by non-acceptance. Presentment for acceptance also lielps
the drawer, for if acceptance is refused, he may on receiving early notice
of dishonour, be able to get his effects out of the hands of die drawee.
- Presentment for acceptance to whom.—The presentment for accept-
ance must be made—
1. To the drawee or his duly authorised agent.
2. To all the drawees where there are several drawees, unless they
are partners and one has express or implied authority to ac-
cept on behalf of all.
3. If the drawee is dead, to his legal representative. A legal re-
presentative accepting the bill should expressly limit his liabi-
lity to the extent of the assets come to his hands, otherwise he
will be personally liable.
4. If the drawee has been declared an insolvent, to the Official
Receiver or Assigneee.
Time and Place for Presentment.—The following rules may be stat-
ed with regard to time and place of presentment :—
1. All bills must be presented before maturity.
2. Where presentment is obligatory, it must be made within rea-
sonable time or without unreasonable delay.
3. A bill the presentment of which is not necessary may be pre-
sented at any time before payment.
4. Where a period for a presentment is specified in a bi]lf'it must
be presented within that period.
5. A bill payable after siglu must, if no time is specified therein
for presenuition, be presented within a "reasonable time" after
it is drawn.
378 MERCANTILE LAW

6. This presentment must be made on a business day within busi-

ness hours.
7. It should be made at the place o£ business or residence of the
drawee and where a place for presentment is mentioned in the
bill, the presentment must be made' at that place. A bill which
requires presentment at a particular place is called a Domicil-
ed Bill. If the drawee cannot, after reasonable search, be
found, the bill is deemed to be dishonoured.

PROOF OF PRESENTMENT
Presentment is deemed to have been made only when the bill is ex-
hibited to the drawee so that he may see the same and judge whether he
will accept it or not. Mere notice of its exiijtence in the possession of the
holder is not sufficient. The drawee can insist on the production of the
bill and is entitled to 48hoius' time for considering whether or not to ac-
cept it (Section 63). The holder must prove that the bill was properly
presented or a real attempt to present it to the drawee or his agent ii'as
made.

EFFECT OF NON-PRESENTMENT
Where presentment for acceptance is compulsory and the holder fails
to do so, the drawer, and all the indorsers are discharged, from liability to
him. He is not entitled to a decree, nor can he base his claim even on
the original consideration.

PRESENTMENT WHEN EXCUSED

AViiere presentment for acceptance is necessary, it is excused and the
bill may be treated as dishonoured in the following cases :—
1. Where the drawee cannot after reasonable search be found
(Section 61).
2. In English Laiv, where the drawee becomes insolvent, or is
dead. But in Indian Law, the bill must be presented to the
legal .representative of the deceased drawee or to the Official
Receiver of the insolvent drawee (Section 75). '
3. ^Vhere the drawee is a fictitious person or one incapable of con-
tracting (Section 91).
i.Where although the presentment is irregular, acceptance, has
been refused on some other ground.
The fact that the holder has reason to believe that the bill on pre-
sentment will be dishonoured, does not excuse presentment.
Presentment for Payment.—All notes, bills and cheques must be pre-
sented for payment to the maker, acceptor, or drawee thereof respective-
ly by or on behalf of the holder during the usual hours of business, and
if at banker's within banking hours. AVhere tlie maker, acceptor or
drawee has died, presentment may be made to his legal representative or
where he has become insolvent to the Official Receiver or Assignee. On
default.of presentment for payment the parties, other than the maker, ac-
ceptor or drawee thereon are not liable to the holder (Section 64).
A promissory note, payable at a certain period after sight, must be
LAW OF NEGOTIABLE INSTRUMENTS 3'^

presenied to the maker thereof for sight (if he can, after reasonable search,
i)e found) by a person entitled to demand payment, -within a reasonable
time after it is made and in business hours on a bvisiness day. On de-
fault of such presentment no party thereto is .liable thereon to the per-
son making such default (Section 62).
Where a promissory note is payable on demand and is not payable at
a specified place, no'presentment is necessary to charge the maker thereof
(E.scejnion to ^Section 64).
A note or bill made payable at a specified period after date or sight
thereof, must be presented for payment at maturity (Section 66). Thus
bills and notes must be presented for payment on the day they fall due.
End where days of grace are allowed, they must be presented on the last
day of grace. An earlier presentment is premature and ineffective.
A note or bill, made, drawn or accepted payable at a specified place
must, .in order to charge the maker or drawer thereof, be presented lor
])ayment at that place (Section 69). But a note made payable at any par-
ticular town, such as "Poona, Bombay or elsewhere," is not made payable
at a snecificd place, and, therefore, need not be presented for jsayment.
A note, bill or clieque made accepted or drawn payable at "specified
place and not elsewhere"' must, in order to charge any party thereto, be
presented for payment at that place (Section 68), iBut an instrument
made payable at either of two places may be presented at any one place.
A promissory note payal)le by instalments must be presented for pay-
ment on the 3rd day after the date fixed for payment of each instalment
and the note will be deemed to be dishonoured on the non-payment of
any instalment (Section 67).
A note or bill, not made payable at a specified place must be present-
ed for payment at the place of business, if any, or at the usual residence,
cf the maker, drawee or acci;ptor thereof, as the case may be (Sec-
tion 70), But where the maker, drawee or acceptor has no known place
of business or fixed residence and no place is specified in the instrument
for presentment for acceptance or payment, such presentment may be
made to him in person wherever he can be found (Section 71). The hold-
er must exercise due diligence in finding the place of business or resi-
dence, and he can make personal presentmeiit only if he fails to find the
place after due diligence. Mere inquiry at the house is not sufTicient,
In order to charge the drawer, a checiue must be presented at thf
bank upon which it is drawn before the relation between* the drawer and
his hanker has been altered to the prejudice of the drawer (Section 72).
AVhere the holder does not present the cheque within a reasonable time,
and in the meantime the relation between the drawer and the banker is
altered and the drawer suffers a damage due to delay, the drawer will not
Ve liable if the bank fails to cash the cheque (Section 84).
In order to charge any person except the drawer, (i.e., indorsers), a
chef|ne must be presented within a reasonable time after delivery thereof
bv such person (Section 73).
Delay iii presentment for acceptance or payment is cxcuKd, if it is
caused bv circumstances beyond the control of the holder, and not impnt- •
able to his default, misconduct or negligence. ^Vhen the cause of delay
ceases to operate, presentment must be made within a reasonable time (Sec-
tion 75A). Delay may arise because of impracticability of transmitting
the bill to the place of payment or declaration of statutory moratorium.
1^80 >[ERC\NTILE LAW
Also ^^hctc a hundi is lost and the drawer on demand refuses to supply a
duplicate non-))vescntment is excused.
Presentment for payment excused.—Section 75 presides that no pie-
seninicnt is necessaiy and the insiiument may be treated as dishonouied
in the following cases :—
1. Where the maker, diawer or acceptor actively does something so
as to intentionally prevent the iJiesentment of the instrument, eg., dep-
ii\es tlic holder of the instrument and keeps it till after maturity, or mis-
leads the holder, or the drawer refuses to give a duplicate of hundi which
is lost.
2. 'WHieic his business place is closed duiing the usual business hours
on the due date.
3. Wheie theie is'no person to make pa'jmcnt' at the place specified
for payment.
4. Where he cannot after due search be found.
5. ^Vhere theie is a piomise to pay notwithstanding noii-pie^cntnient
eg., wheic the indorsement of the notary public on the instruments was
"endoibcrs state if drawer does not pay we will pay at request of the mana-
ger," it was a sufhcient promise to pay by the indorsers.
6. AVhere the presentment is expressly or impliedly waited hv the
paitv entitled to )>re^entri:icnt. An expics^ waiver may be made m the
instrument, by such woids as "presentment waived," or "notwithstanding
non-piescntment", or other words to that effect. An implied -waiver will be
infencd from the conduct of the drawee or indorsee. T h e waiver may be
made at any time before maturity. An implied waiver may be infoucd
when after maturity of the instrument any party, (i) makes a part-pa\ment
on account of the amount due thereon, or (ii) promises to pav the aniouni
due thcicon in whole or part, or (lii) wahcs his right to take -ad'.antage
of anv default in presentment for payment.
7. 'Where the diawer could not possibly base suffered anv damage by
non-]3resentmcnt.
8. AVhere the drawee is a fictitious peison, or one incompetent to
contract.
i). 'Where the drawer and the drawee are the ^ame person.
10. Where the bill is dishonoured bv non-acceptance.
11. ^Vhere presentment has become impossible, for instance, by the
<lcclaraiion of war between the countries of the holder and the drawee or
by the country wlieie presentment is to be made being oserrun by the
enemy.
DISHONOUR
A bill or hundi may be dishonoured cither In non-acceptance or by
non-payment. ^Vhcle ,u\ instrument is dishonoured, the holder must gise
notice of dishonour to the diawer or his prc\ious holders if he wants to
make them liable. But in ceitain cases, as stated below, notice need not
be given.
DISHONOUR BY NON-ACCEPTANCE
A bill is said to be dishonoured by non-acceptance CSection fll)—
1. ^Vhen the diawee does not accejJt it within 48 hours fiom the
time of presentment for acceptance.
LAW OF NEGOTIABLE INSTRUMENTS 381
2. When presentment for acceptance is excused and the bill re-
mains unaccepted.
3. \Vhen the drawee is incompetent to contract.
4. \\'hen the drawee is s. fictitious person or alter reasonable search
cannot be found.
•5. Wliere the acceptance is a qualified one or'where one or some
of several drawees not being partners make default in acceptance, on be-
ing duly required to acce]it. In this case, the holder may at his own ii?k.
treat die bill as accepted..

DISHONOUR BY NON-PAYMENT
A promissory note, a bill of exchange or cheque is said to be dis-
honoured by non-payment when the maker of tlie note, acceptor of the
bill or dra^vee of the cheque makes default in payment upon being duly
required to pay the same (Section 92). Also, a negotiable instrument is
dishonoured by non-payment when presentment for payment ^s excused
and the instrument when overdue remains unpaid (Section 76).
A drawee in case of need must accept, or pay a bill when present-
ment is made. A bill will be dishonoured if the drawee in case of need
also refuses to accept or pay after acceptance.

EFFECT OF DISHONOUR
The drawer and all the indorsers of the bill are liable to the holder
if the bill is dishonoured, either by non-acceptance or by non-payment,
provided that he gives them notice of such dishonour. The drawee is
liable only when diere is dishonour by non-payment.

NOTICE OF DISHONOUR
Wlien a negotiable instrument is dishonoured either by non-accept-
ance or by non-payment the holder or some party liable thereon must
give notice of dishonour to all other parties whom he seeks to make liable
{Section 93). Each''party receiving notice of dishonour must, in order to
render any prior party liable to himself, give notice of dishonour to such
party within a reasonable time after he has received it (Sec. 95). Notice of
dishonour is so necessary that an omission to give notice 'discharges all par-
ties other than the maker or acceptor. These parties are discharged not only
on the bill or note, but also in respect of the original consideration.
Notice of dishonour must be given by the holder, or by a person
liable on the instrument. When the holder has given notice of dishonour
to any party liable on the bill, and that party has in turn given due
notice of dishonour to all prior parties, the holder may in a suit against
the drawer take advantage of notice given by that party and treat it as a
notice by himself. The agent of any of the above parties may give no-
tice. But a notice by a stranger is a mere nullity for a valid notice can
be given only by a person who is liable on the instrument af the time of
the notice or by his agent.
Notice of dishonour to the acceptor of a bill or to the maker of a
382 MERCANTILE LAW

note 01 the diawee of a cheque is not necess.uy as they are the iDrincipal
debtois and pimicirily liable on the instalment, and they must pay on the
due date and at the proper place It is they who dishonoui the instui-
inent by non acceptance or non-payment, and to give them notice is to tell
tliem sometlimg which they already know Notice of dishonoui must be
given to all paities other than the maker or acceptoi or diawee whom
the holder wants to be made liable Notice may also ^be s;i\en to the
duly authorised agent of the paity. 'Where the diawee oi indorser is-
dead, the notice iTiay he gnen to the legal repiesentative of the deceased.
Likewise, the notice may be gi\en to liie Official Receiver or Assignee
where the partv has been dcclaied an insolvent. In case of two oi more-
joint diawers or indorseis, notice to one of tlieiji will bind all
Notice mav lie oial or in wiiting, but it must be an aci^iai, formal
notification \ letter merely demanding paMiient is not sullicient. It
may be given in person, or through a messengei, or by post. Notice by
post IS more expedient, for if the letter is pioperly addressed and mis-
cauie> or is delayed in transit, the sender is not responsible once he has
)3osted it into the post box.
Notice must be given within a reasonable time of dishonoui. As to-
what is a reasonable time will depend upon tlic nature of the instrument
and the usage of tiadc in regard to similar instruments (Section i05)
Where the holder of the instiument and the party to whom notice JS
given carry on business or live in different places, the notice of dishonoui
must be posted by the next post if there be one on the day oi on the
ne\t day of dishonoui Where the said parties canv on business or li\e
in the same place, it is sufficient if the notice is despatched so that it
reaches Us destination on the-day next after the dav of dishonour (Section
106). Any party receiving notice of dishonour, who seeks to enfoice his
right against a prior party, transmits the notice %vithin a leasonable time
if he transmits it within the same time after its leceipt as he -should have
had to give notice if he had been the holdei (Section 107) Thus each
party '"s entitled to a clear day for giving notice and one cleai <l,iv is to
be allowed for each step in the communication between panics who aie
liable on the instrument. But a holder or indorser, who wants to ^ive
notice to all parties, cannot claim as many days as there aie indoisers He
must give notice to all whom he wants to hold liable within the time in
xvhich he is to give notice to his immediate indorser

NOTICE OF DISHONOUR UNNECESSARY

We have seen above" that in a suit against the drawei or indorsei on
a dishonoured instrument notice of dishonour is a mateiial r>art of the
cause of action But Section 98- enumerates cases in which notice of dis-
honour can be dispensed with.
No notice of dishonour is necessary—
(a) When it is dispensed with or waived by the oaitv entitled thcie-
to, e.s;, where an indoiser writes on the instrument such -nords as "notice
of dishonour waived" or where the drawer of the bill infoims the holder
that the bill be dishonoured on presentment, or where he tells the holder
LAW OF NEGOTIABLE INSTRUMENTS 383
before maturity that he has no fixed residence, and that he will call in a
few days to see if the bill has been paid by the acceptor.
(b) When the drawer has countermanded payment. This is so be-
cause he has made it impossible for the holder to obtain payment.
(c) When the party charged could not suffer damage for ivant of
notice, e.g., if at the time when the instrument is drawn theie were no
funds belonging to the drawer in the hands of the drawee, the diawee
suffers no damage, and is not entitled to notice of dishonour. But the
burden of proving that the drawer could not suffer damage for ivant of
notice is on the person seeking to excuse himself.
(d) When the party entitled to notice cannot after due seaich be
found.
(e) Where the omission to give notice is caused by 'unavoidable cir-
cumstances, e.g., death or dangerous illness of the holder or his agent, or
any other accident.
([) When the acceptor is also a drawer, e.g., where a firm draws on
its branch, or a partner on the partnership. No notice is necessary where
the acceptor is one of the drawers.
(g) Where the promissoiy note is not negotiable. Such a note can-
not be indorsed; and if it is indorsed, the indorsee cannot have any
claim against the maker or indorser. Therefore, no one is prejudiced for
want of notice.
(h) Where tlie party entitled to notice promises to pay uncondition-
ally the amount due under an instrument after dishonour and with full
knowledge of facts.

NOTING
Where a note or bill is dishonoured, the holder is entitled-, after giv-
ing due notice of dishonour, to sue the drawer and the indorsers. Sec-
tion 99 provides a convenient method of authenticating the 'fact of the
dishonour my means of "Noting." Where a note or bill is dishonoured,
the holder may, if he so desires, cause such dishonour to be noted by a
notary public on the instrument, or on a paper attached thereto or partly
on each. The "Noting" or minute must be recorded, by the notary with-
in a reasonable time after dishonour and must contain the fact of dis-
honour, the date of dishonour, tire reason, if any,' assigned for such dis-
honour, or, if the instrument has not been expressly- dishonoured, the
reason why the holder treats it as dishonoured and the notar5''s charges
(Section 99). Noting is not compulsory in the case of an inland bill or
note, but foreign bills must be protested, if so required by the law of
the place where drawn.
I
PROTESTING
T h e protest is the formal notarial certificate attesting the dishonour
of the bill, and based upon the noting which has been effected on the dis-
honour of the bill. After the noting has been made within the specified
or reasonable time, the formal protest may be drawn up by the notary
384 AlEUCAKTILE LAW

at ]iis lei^uie; and when the protest is drawn up it relates back to the
•dale of noting.
A\"heie the accentor of a bill has become insohent, or has suspended
paMiient, or his credit has been publicly impeached, befoie the maturity
•of the 1)111, the holder ma) ha^ e the bill protested for better security. FOT
this purpose, the notary public is employed to demand better security and
on its refusal protest may be made within a reasonable time. This is
called a "Protest for Better Security." It may be observed that the ac-
ceptor is not bound to give such security, nor can the holder sue the
drawer, and the indorsers before maturity of the bill in- spite of the pro-
test. The advantage of protest for better security, in addition to the, fact
being placed on record for the information of the drawer and the in-
dorsers, is that it enables the bill to be accepted for honour.
Foreign bills must Le protested for dishonour when such protest
is required by the law of the place where they are drawn. Foreign pro-
missory notes need not be so protested. Where a bill is required by law
to be protested, then instead of a notice of dishonour, notice of protest
must be given by the notary public.

C O N T E N T S OF PROTEST
A protest to be valid, must contain the particulars given below, and
tire omission of one or more of them will render the protest invalid. T h e
particulars that a protest must contain are :—
1. The instrument itself, or a literal transcript thereof..
2. The names of the parties for and against whom the instrument
° has been protested.
'3. The fact and reasons for dishonour.
4. Place and time of dishonour or refusal to give better security.
5. The signature of the notary public.
<5. In the event of an acceptance for honour or of payment for
honour, the name of the person by whom, or the person for
whom, and the manner in which, such acceptance or payment
was offered or effected.

PART 11-G
DISCHARGE OF PARTIES AND INSTRUMENT
T h e term discharge in relation to negotiable instruments has two
meanings, namely, (i) the discharge of the instrument, and (ii) dischaige
of one or more parties from liability on the instrument.

DISCHARGE OF T H E INSTRUMENT
An instrument is said to be discharged when all rights under it are
extinguished, it ceases to be negotiable and even a holder in due course
does not acquire anv rights under it. Such a discharge of tlie negotiable
instrument would take place when the party who is primarily and ulti-
LAW OF NEGOTIABLE INSTRUMENTS 385
matelv liribln on the instumieni is discharged from liabihtv A negotiable
instiumeiu mav he discharged:—
(1) By pa\nient in due course;
(2) Wlicn the princinal debtor becomes the Iiolder
Ci) Bv an act that •i\ould dischaige a simple contract;
(1) Bv reiumciation; anq&|.
(j'l By cancellation.
1 Bv Pa%meni.—\ negotiable instrument is discharged by payment
made in due coiiise by oi for tlie primaiv paity or by a nerson ivho is
accommodated, in case the instrument uas made or accepted for accommo-
dation I'avment in due course means^ tliat it must be made at or after
the MATURITY of the instrument to the Holder in good fauli or his
agent as agent A payment by one secondanfy liable does not discharge
the instiument The pa\er holds it to enforce it ag.imst prior indorsers
and the principal debtor He may also strike out Ins and subsequent
ind j}'emenis nncl further negotiate the msiiument TJie right of
further negotiation is denied (a) when the drawer pays an instrument
which is pa\ablc to the order of a third person, or (b) when an instru-
ment e\eciued or accepted for accommodation is paid by the party for
whose accommodation the instrument was executed This denial is based
on the theoiy that further negotiation would unfairly continue the liabi-
lity of the payee indorser or of the person who executed or accepted the
instrument for the accommodation of die person making the payment
To complete payment, the principal and interest, if any, must be
paid. The person paying the instrument should demand the surrender
of the instrument ivhen paid Payment is a personal defence and is not
^alid against a holder in due course. Thus, if a maker of a pro note pays
the original pa\ec after the note has been transfeired to a holder in due
course the maker is liable foi pa\mrnt to such a holder The possession
bv the pave) of a receipt for pavment is no substitute for the suirender
of the instiument.
2 Debtor as Holder.—'When the piimary partv lawfully becomes the
holder of the instrument in his own right at or after maturity, the instru-
ment is discharged. The instrument will not be discharged, (i) if the
debtor acquires the instrument before maturity, in which case he may)
negotiate it further in the same wav as anv other holder could, or (ii)
if the holder did not acquire it laivfullv or in his own right, as when he
acquired it by fraud or as an agent for another person.

3 Discharge as Simple Contract —A negotiable instrument in some

instances mav be discharged in the same i\ay as a simple contract for the
pavment of money. Like an ordinary contract the inifument may be
discharged hv agreement of the parties in the form of a no\ation, a con
venant not to sue or by rescision or substitmion of another instrument
or obligation For example -where the holder of a note agreed to accept
a conveyance of a house and certain acts by the maker in paxment of the
note the in'-trument v\as discharged The instrument mav be discharo-ed
386 MERCAi^TILE LAW

by operation oE law in the case o£ insolvenq', in the case of lapse of lime

under the Statute of Limitations. This provision regarding discharge o£
an instrument in the same way as a simple contract applies only to im-
mediate parties. It cannot be laised as a defence against a holder m due
course. In result it will discharge certain paities to the insu-iuneni and
not the instrument itself, unless expressly agreed.
4. By Renuncialion.-A negotiable instrument is discharged when
the holder renounces or gives up his right against all the parties to the
instrument. The renunciation must be in writing unless the instrument
is also surrendered to the party primarily liable.
5. By Cancellation.—The party who is entitled to enforce payment
of an instrument mav surrender it to the party liable thereon with an in-
tent to release him from the obligation. This operates as a discharge of
the instrument and is known as cancellation. Cancellation may also take
place by physical destruction of the instrument itself made with "the inten-
tion to terminate liability, or by crossing out si^atures on the instrument.

DISCHARGE OF A PARTY OR PARTIES

When any particular party or parties are discharged, the instiuraent
continues to be negotiable and the undischaiged parties lemain liable on
it. For example, tite non-presentment of a bill on the due date discharg-
es the indorsers from their liabilitv, but the acceptor remains liable on it.
A pauy may be discharged from liabilitv in tlie following ways :-
1. By Canceljation.—Wliere the holder of a negotiable instrument
cancels the name of any party to it with the intention ol discharging him
from liability, such paity and all other persons between the holder and
such party are discharged from liability. But a cancellati tliade uninten-
tionally or by mistake will not discharge any party. T h e proper and safe
mode of cancellation is to draw a line tlirough tlie name so as to leave-
ii legible.
In an accommodation bill,, where it is dratvn for the accommodation
of the drawer the cancellation of the name of tlie acceptor who is the
accommodating party discharges the indorser, but not the drawer; and
where it is drawn for the accommodation of the payee, the cancellation of
drawer's name does not discharge the payee [Section 82(a)].
2. By Release.—Where the holder releases any party to the instru-
ment by any method 'other than cancellation, the party so released is dis-
charged from liability. Section 63 of the Contract Act permits a pro-
misee to remi. whjpUy or in part the perlbrmance of the contract [Section
32(by.
9. Bjscharge of Secondary Parties (i.e., indorsers).-A person <i£-
cMidarily liable on the instrument is discharged also by the discharge of
a prior party and by a valid tender of payment made by a prior party.
4. By Operation of Law—Discharge from liability takes place b^
operation of law, e.g., by insolvency of the debtor, or by loss of remedy
on expiry of the limitation or by merger of note into the jildgment debr
or of a lesser security into a higher security.
LAW OF NEGOTIABLE INSTRUMENTS '' 387
1

5. By allowing drav/ee more than 48 hours.—J£ the holder of a

bill allows the drawee more than 48 hours, exclusive of public holidays,
lo consider whefher he will accept the same all previous parties not
consenting lo such allowance are discharged from liability to the holder
(Section o^).
Q. By non-presentment of cheque.—Where a cheque is not present-
ed for payment wi:thin a reasonable time of its issue, and the bank fails
and the 'drawer suffers actual damage throiigh the delay, he is dis-
charged from liability to the holder to the extent to which sucii drawer
is' a creditor of the banker, but no more (Section 84).-'
7. Cheque payable to -order.—Where a cheque payable to ordet
purports to be indorsed by or on behalf of the payee, the banker is dis-
charged by payment in due course, even though the indorsement might
turn out to be a forgery. In the case of a cheque originally drawn pay-
* able to bearer, the banker is discharged by paying in due course to the
bearer thereof, even if any indorsement restricts or excludes further ne-
gotiation (Section 85).
8. Drafts by one branch on. another.—AVhere a draft, i.e., an order
to pay money, drawn by one office of a bank upon another office of the
same bank for i sum of money payable to order on demand, purports
to be indorsed by or on behalf of the payee, the bank is discharged by
payment in due course (Section 85-A).
9. By taking qualified acceptance.—If the holder of tf bill takes a
qualified, acceptance, all the previous parties whose consent is not obtain-
ed to such acceptance are discharged from liability, unless on notice be-
ing given, they assent to such acceptance (-Section 86).
10. By Material Alteration.—Any material alteration of a negotiable
instrument renders the same void as against any one. ivho is a party
thereto at the time of the alteration ^nd does not consent there'io, un-
less it was made in order to -carry out the common intention of the ori-
ginal paities. Any alteration made by an indorsee discharges Jiis indor-
ser from all liability to him in respect of tlie consideration thereof
(Section 87). The section, liowever, recognises certain cases in which
alteration may be alWwed. They a r e : (i) the filling in of the blanks
in an inchoate instrument (Section 20), (ii) the convers'ion. of an indorse-
ment in blank into an indorsement in full (Section 49), (iii), the qualify-
ing or limiting of an acceptance (Section 86), and (iv) the crossing of a
cheque after it has been issued. These are not material alterations and
do not render the instrument void.
The rule as to alteration in this section is based unon two grounds,
namely, (a) that no man is permitted to take chance of committing a
fraud without running any risk on its detection, and (b) that by the
•alteration the identity of the instrument is destroyed. In these cases it is
immaterial whetlier the alteration is beneficial or detrimental to the
party charged on the contract, or whether the alteration ultimately in-

23. Abdul Majid v. Mis. G. Kalooram, 1954 Ori5sa'l24.

388 MERCANTILE LAW

volves any change in the rights and liabilities of the parties or n o t * ^

What is necessary to make the instrument void' is that the alteration
must be material.

WHAT IS MATERIAL ALTERATION?

An alteration is material which i n ' any way alters the operation of
the instrument and the liabilities of the parties thereto, whether the
change be beneficial or detrimental. All alteration is matferial which
alters the business effect of the instrument if used for any business.
Therefore, any change-in an instrument %rhich causes it to speak a difler-
•ent language in legal effect from that which it originally spoke, or
which changes the legal identity or ^ character of the instrument either
•jn its terms or the relation of the parties to i t is a material alteration.
There is a, material alteration Avhere it is an alteration (1) of the
date of the instrument, (2) of the sum payable, (3) in the time of pay-<i
ment, (4) of the place o£ payment, (5) of the rate of interest, (6) by ad-
dition of a new party, (7) by tearing An instrument in a materia) part,
(8) in the dates of indorsements, and so o n , . . .
There is n o material alteration so as to vitiate the instrument in the
following cases, namely, (I) correction of a mistake, (2) to carry oiit the
common intention of the parties, (3) an alteration made before die instru
ment is issued, and (4) made with the consent of the parties.
The alteration affects only those persons who have already become
parties et the date of the alteration. Those who take an altered instru-
ment cannot complain. Section 88 lays down that an acceptor or inddr-
ser of a negotiable instrument is bound by his acceptance or-indorsement
notwithstanding any previous alteration of the instrument. Further, the
holder is not affected by a material alteration made by a stranger with-,
out the consent of the holder, and without any fraud or laches on hisV
part. The fact that the change is accidental negatives the possibility
of assent.
] ]. Discharge by payment of altered instmment.^Where-' an instru-
ment has been materially altered but does not appear to have been so
altered, or where a cheque is presented for payment which does not at
the time of presentation appear to be crossed or to have had a cross-
ing which has been obliterated, payment of the amount due on the ins-
trument according to the apparent tenor thereof and in due course dis-
charges the person making the payment (Section 89).
12. Bill in acceptor's hand.—If a bill which has been negotiated is,
at or after maturity, held bv the acceptor in his own right, all rights of
action thereon are extinguished (Sfcction 90). This is the final discharge
of the bill, and the principle applies to notes as well. .

RETIREMENT OF BILLS AND REBATE

An acceptor mav make pavment of a bill before matuntv, and the
bill is then said to be retired, but it is not discharged and must not be

24. Rampadarath v. Hari Narain, 1965, Pat. 224.

LAW OF NEGOTIABLE INSTRUMENTS 389
cancelled except by the acceptor when it comes into his hands. A bill
raccompanied by shipping documents which are to be delivered to the
acceptor only on payment of the bill, is frequently retired by the ac-
ceptor before its maturity in order to be able to get possession of the
goods. It is customary in such a case to make an allowanqe of interest^
on tile money to the acceptor for the remainder of the time -which the'
bill has to run, e.g, where a bill due on 15th ]\Jay'is retired on 5th
May, interest for 10 days on the amount of the bill will be allowed,
T h e interest allowance is known as rebate.

• COMPENSATION
Section 117 lays down rules'for determining the amount of compen-
sation to the holder or an indorser in case the instrument is dishonoured.
Compensation to holder.—The holder is entitled to the amount due
on the instrument, togetlier with the expenses properly incurred in pre-
senting, noting and protesting it.
Compensation to indorser.—The indorser who has paid the amount
due on the instrument is entitled to the amount so paid with interest
at 6 per cent -p^r annum from the date of payment until tender or reali-
sation therepf toeether with all expenses caused by the dishonour and
payment.
Re-exchange.—vVhen the holder or the indorser entitled to claim the
amount resides in a coiffltry different from that in which 'the bill was
drawn or indorsed, the holder or indorsee is entitled to receive fiom the
drawer or prior i-ndorsers the sum at the current rate of exchange bet-
ween countries on itie date of dishonour. Re-exchange is the measure of
damages occasioned by the dishonour of a bill in a country different to
that in which it was drawn or indorsed.
Re-draft.—The party entitled to compensation may draw a bill pay-
able at sight 01 on demand upon the party liable to compensate him for
the amotint due to him together with all expenses properly in-
curred" by him. Such a bill is called a "Re-draft". This re-draft must
be accompanied by the instrument dishonoured and the protest, if any.
The party .who makes payment of a re-draft may draw a similar re-
draft on the parties prior to him. If the re-draft is dishonoured, the
party on whom it is drawn will have to compensate the drawer, as if the
re-draft were an original bill.
, Compensation against banker.—Tliere is no provision in this Act for
determining the compensation payable by a banker who wrongfully dis-
honours "his customer's cheque. In English law, such compensation will
include damages to credit and reputation of the drawer, and the court
would ordinarily award exemplary damages. The same rule would, how-
ever, seem to apply in India.

INTERNATIONAL LAW
In the absence of a contract to the contrary, the liabilitv of the
*maker, or drawer of a foreign note, bill or elieque is regulated in all es-
sential matters by the law of ihe place where he made the instrument,
and the respective liabilities of the acceptor and indorser bv the law of
the place where the instrument is made payable (Section 134). Where
an instrument is made payable in a different place from that in which
3«0 MERCANTILE LAW

it is made or indorsed, iKe law of the place where it is made payable

deiermiaes what constitutes dishorrour and what notice oC dishonour is"'>-
6n(Ucient (Section 135). If a negotiable instrument is made, drawn, ac-
cepted or indorsed out of India, but in accordance with the law of
India, (he circumstance that any agreement evidenced by such instru-
ment is invalid according to the law of the country wherein it was en-
tered into does not invalidate any subsequent acceptance or indorsement
rnade thereon in India (Section 136). The section provides an exception
to the general rule laid above that the lex loci contractus (law of the
place where the contract is made) determines' the form and" essential
validity of the contract. Therefore, where the first contract of making
or drawing is invalidated by want of stamp or some other similar circum-
stance, the subsequent contracts created by acceptance and indorsement
being independent contracts will be valid even though the prior contract
was invalid according to the law of the place where it was made provi-
ded that it is valid according to the law of India. 'Where foreign law is
different from Indian law and a party to a suit relies on foreign law that
party must specifically allege and prove tliis fact like any other fact;
for the court will not take notice of foreign law excepting the English
Bill of Exchange Act. Section 137 provides that the law of any foreign
country regai-ding negotiable instruments shall be presumed to be the
same as that of India unless and until the contrary is proved,

KUNDIS
Hundis are negotiable instruments written, in an oriental language.
They are sometime.? promissory notes, but more often bills of exchange,
and subject to local usages. The hundis were in circulation in India
long before tlie Negotiable Instruments Act, 1881. Traditions as to
tlieir use in ihe court date as far back as 5000 B.C. The v/ord hundi
is derived from the Sanskrit word hund—to collect. It appears that
hundis were originally used for the purpose of collecting debts. Ever
now they are often employed for die same purpose, although now hundis
are used more and more as internal bills of exchange. Hundis are n e j
goti.Tble instrnments under the Act, although they are so independently
rtf tlie provisions of the Act. They are recognised by custom as nego-
tiable, and the Act recognises the custom pertaining to hundis.
There are several varieties of hundis current in (he country, but only
the more important among them are given below:
Darshni hundi.—A darshni hundi is a hundi which is payable at
sight. A darshni hundi payable on demand must be presented for pay-
ment within a reasonable time after its receipt by 'the holder. Any loss'
caused to the drawer by delay in presentment falls on the party at fauh.
Afuddati or Miyadi hundL—A hundi payable after a specified period
of time is called a Muddati or Miyadi hundi—the time bill of exchange.
Shah Jog hundi.—A shah means a rcspectdbJe and resrionsible peiT,on,
a man of worth, and known in the barar. A shall jog hundi is payable
to or through a shah. A hundi pavable to shah is payable on the res-
ponsibility of the shah, and if he or the parties through whom he claims
became the holder of the hundi through offence or fraud, the drawee
can proceed against him for the re-imbursement of the amount. Thus if
the hundi turns out to be false, stolen or forged, the shah is bound to
ftfund^the amount of the hundi witli interest unless he produces the
actual drawer or the person who committed the fraud. The drawee lo
recover money should file a separate suit against the shah.
iAW OF NEGOTIABLE INSTRUMENTS 391

The words shah jog in a hundi lend to it additional^ credit ^nd,

make it o£ the nature of a cheque generally crossed. But it is payable
only to a respectable bearer and only when it is indorsed to the last
indorsee-on the shah presenting the hundi. It is neither a bill nor a
note; but if attested, it can be sued on either as a bond or a promissory
note. A shah jog hundi differs from a bill in two respects, namely, (r) the
acceptance of the drawee is hot generally written across it but the parti-
-culars are entered in the drawer's book, and (ii) it is not usually present-
ed for acceptance before due date. T h e shah jog hundi in its inception
is a hundi' which passes from hand to hand by delivery and requires
-no indorsement, until it reaches the shah who after making inquiries
10 secure himself should present it to the drawee for acceptance or pay-'
ment. Although it passes by delivery, it is not similar lo the beater bill.
The shah's name must always be indorsed on the hundi at the time of
the presentment. It can any time be restricted by being specially indors-
ed and when so restricted, the hundi ceases to be a hundi. If it is dis-
•honoured, notice of dishonour must be given as in the case of a bill.*"
The shah does not guarantee the solvency of the drawer, although
he guarantees the genuineness of the hundi. A drawee will not pay the
hundi unless he has funds in his hands belonging to the drawer, or he
is willing to give credit. And he is not bound to pay unless he is satis-
•fied as to the respectability of the shah presenting the hundi, as he has
to look to the shah in the event of the hundi turning out to be a forged
•one.
A shah jog hundi may be darshni or muddati. It may mention the
name of the depositor or not, but it is payable only to a shah. It differs
from an ordinary hundi inasmuch as (i) it need not be presented for ac-
ceptance and the acceptance of the drawee' is not necessary and need not
"be written across the hundi, and (ii) the holder is relieved from liability
if he produces the forger.
Nam Jog hundi—A narn jog hundi, in contradistinction to shah jog
hundi, is payable to the person whose name is specified in the body of
the hundi. In form both are similar except with tl\e difference that the
nam jo^ has the name of the payee, while the shah jog has the name of
the shah inserted therein. The nam jog hundi is payable to the order
of the payee and can be indorsed like a bill of exchange payable to order.
Dhani Jog hundi.—In the case of a dhani jog hundi, the amount is
payable to a dhani, owner, and the words "dhani jog" are inserted in the
hundi. The amount of the hundi is, therefore, payable to the owner or
bolder or bearer. It is indeed a negotiable instrument payable to bearer;
where it is indorsed in full, it ceases to be a bearer hundi.
Jokhami hundi.—A jokhami hundi is drawn by the consignor of
goods on the consignee against the goods shipped on the ship mentionet'
in the hundi. According to the custom of Hindu merchants the money
of the hundi is payable only when and if the goods arrive. The hundi is
in the nature of a policy of insurance, but with this difference that the
(money is paid beforehand, and is to be recovered if the ship arrives
safely. The jokhami -hundi is drawn with -two-fold object, namely, to
p u t the drawer of the hundi in fundsT'and-at the same time to effect an
insurance on the goods themselves. The hundi is drawn by the consis^nor
on the consignee and negotiated with ^he insurer at a price Vhich is

25. Central Bank of India v. Khuh Rain. 1960 Punj. 157.

392 MERCANTILE LAW

less than the amount ot the hiindi by the amount of the premium of
insurance. If the goods arrive safely the insni-er mav obtain them oi tlieu
value as stated in the hundi.
The hundi is an authority to uic consignee to pav for the goods or
deliver them up to the holder, but the holder has no light of action
against the consignee and holds the hundi on the ciedit of the diawer
or indorser. As the holder is an insurer, he cannot claim payment if
the goods are totally Icfst although he is entitled to be oaid in full in
case of partial loss or damage (particular average loss) If the loss is a
general average loss then a rebate is made to the extent of the loss
Jawabi hundi.—Jawabi hundi is used as a means^ of remittance of
money from one place to another via a banker. The nature of the
'•ansaction known as jawabi hundi is as follows* A person desiious of
-aking a remittance writes to the payee and deliveis the letter to a
i>nker, who either indorses it on to any of the conesnondents near the
payee's place of residence or negotiates its transfer. On its arrival the
letter is forwarded to the payee who attends and gives his leceint in the
form of an answer to the letter which is forwarded by the same channel
to the drawer of the order
Zikri Chit.—The zikri chit is a letter of protection given to tlie hold-
er of a hundi by the drawer or any other prior party when the hundi is
dishonoured by non-acceptance or even when the dishonour is feared It
is addressed to sdme person residing in the town where the hundi is pay-
able, asking him to take up the hundi in .case of its dishonour The
addressee of the letter there accepts the hundi for honour and pa's it at
maturity. According to the custom prevalent among the Marwari shroffs,
the zikri chit enables the person to accept for honour the hundi without
being noted or protested. Zikri chits are used throughout the countiy in
connection with Marwari hundis.
Purja.—It is a request in writing by the borrower to the lender to pay
the amount mentioned therein. It bears a ten paise stamp. The purja is
not a bill of exchange, and is not negotiable. Purjas are commonly used
for temporary loans.
Firman Jog hundi.—It is a hundi which is payable to order, and
Dekhanhar is payable to bearer. When a hundi is lost the holder may
demand from the drawer a duplicate, which is called a Peth. If the dup-
licate is lost the holder may ask for a triplicate and so on. Each of
these subsequent hundis is called a Per Peth. When a hundi has been
paid and cancelled it is called a Khokha.

SUMMARY
A neffotiable instrumeni is one the property in which is acauired by
every person who takes it bona fide and for value notwithstanding any
defect of title ih the person from whom he took it. Thus a person taking
the instrument bona fide and for value gets a good title irrespective of
previous defects.
The Negotiable Instruments Act defines the term t h u s : "A nego-
tiable instrument means a promisso'7' note, bill of exchange or cheque
pavable either to order or to bearer."
A promissory note is an instrument in writing containing an uncon-
ditiqnar undertaking, signed by the maker, to pay a certain sum of money
only to, or the order of, a certain person
LA'W OF NEGOTIABLE JNSTRCMEN'I S 393

A bill of exchange is an instrument in writing containing an uncon-

ditional order, signed by the maker, directing a certain person to p.tv
a certain sum of money only to, or to the order of, a certain person or
CO the bearer of the instrument.
A cheque is a bill of exchange drawn on a specified banker and pay-
able only on demand.
Essentials of notes, bills and cheques.—Each of these instruments-
must be in writing. It must contain a clear and definite promise to pay,
if it is a note; and imperative and rightful order for payment, jf it is a
bill or cheque. Tlie promise or order must be unconditional, and must
be for the payment of money only, and the sum payable must be certain.
It must be signed by the maker or drawer.
T h e chief parts of these instruments are the amount, date, stamp,
time for payment, place of payment, designation of payee, signature of
maker or drawer and name of diawee. ~
The date, though a usual and convenient part of every bill and note,
is not, in general, essential, and if it is omitted the instrument dates fiom
the day on which it was ;made. T h e date of making or diawing is a
material part of^ the instrument where the amount iS' payable a certain
time after date or is an essential factor in the calculation of intprest,
and an unauthorised alteration of it will make the instrument void. Mere
correction of the date or insertion of date in an inchoate instrument is
allowed. A cheque may be drawn on a holiday, or may be ante-dated,
post-dated or even undated, although payment can be refused, if it is
sale, or until the date mentioned therein has aiTived or does not bear a
date.
The amount in words and figures must tally and if they differ the-
amount stated in words shall be taken to be correct.
Stamp.—Bills and notes executed in India must be stamped with re-
venue stamps of adequate amount before or at the time they are signed.
Cheques do not require any stamp duty in India.
T h e time for payment may be either—
(1) t)n demand; or (2) at sight or on presentation; or (3) a certain
time after sight; or (4) a certain time after date; or (5) a certain time-
after some specified certain event. A cheque is always payable on demand.
An instrument expressed to be payable "at sight" or "on present-
ment" means "on demand." If no time is specified then also tJie bill
or note is payable on demand..'
A note or bill expressed to be payable "after sight" must be presented
to 'the maker for sight or to the drawee for acceptance respectively with-
in a reasonable time of its making or drawing.
A note or bill is at maturity on the day on which it falls due. It
matures or falls due on the third day after'the expiry of the period after
it is made payable. These three days are called days of Grace. In
computing such periods public holidays are excluded the months and
days are reckoned according to British calendar, and if the month in
which the period would terminate has no corresponding date the period
shaU be taken to terminate on the last date of such month.
T h e place of payment is not ©rdinarily specified but a drawer may,
if he so desires, fix one and if he~ does so, payment must be made at the
place specified. T h e maker is liable to pay a ''promissory note at the
place specified therein. Presentment for acceptance of a bill is necessary
when it is made payable at a place other than the place of the draivee.
394 MERCANTILE LAW

Presentment for payment of a bill or note payable at a specified place

is necessary at that place in order to charge the maker, drawer or in-
dorser. Bills and notes made payable at a specified place and not else-
where must be'presented at that place to charge any party thereto.
Instruments which are (i) drawn or made in India, and (ii) made
payable in ur drawn upon any person resident in India are inland instru-
ments, while others not so drawn or made so payable aie foreign ins-
truments. An instrument which in form is such that it may either be
treated by the holder as a bill or as a note, is an ambiguous instrument.
Once the instrument has been treated either as a bill or as a note it
cannot be treated differently afterwards.
An inchoate instrument is one where one per>'i>n signs and deli>ci"s
to another a paper stamped according to law of liCgotiable instruments"
and either wholly blank or having written thereon an incomplete nego-
tiable instrument, he thereby gives prima facie authority to the holder
thereof to make or complete, upon it a negotiable instrument for any
amount covered by the stamp. The signor of such an instrument is
liable both to -the holder and holder in due course.
Parties.—Hvery person competent to contract may Dind himself and
be bound by making, dra^ving, acceptance, indorsement and delivery, and
•negotiation of a note, bill or cheque. Negatively, persons incompetent
to contract do not incur any liability as parties to a negotiable instru-
ment. Thus a minor is not liable, but*he can be a holder or payee and
can act as a good channel for passing title from one person to another.
The maker and payee are the two necessai7 parties to a note, while
there must be at least three parties on the face of a bill or cheque—the
drawer, the drawee and ihp payee—although the same person may fill
any two of the positions.
Signature of the maker or drawer is essential to the making or dra%v-
ing of the instrument ihe name may be subscribed bv himself or by
his agent. T h e maker of a jiote and the drawer of a bill until accept-
ance are principally liable on the note or bill. They must pay the
amount on maturity according to the apparent tenor of the instrument
or in default they must compensate any party for any loss and damage
sustained by such default.
Where a bill is accepted before maturity the acceptor takes the place
of the drawer and the drawer becomes surety for the acceptor. Other
parties are liable as sureties' to the maker, drawer or accentor, as the
•case may be, and each party stands as surety to each subseciuent party.
The drawee must be named or otherwise indicated in the bill with
certainty for the holder has to present tlie biU for acceptance to the
drawee.
A bill may be drawn on one or several uiawees or on a company,
association or body of individuals. It --may be addressed to the drawer
liimself though in legal operation it will be a note rather than a bill.
A bill drawn on a fictitious person or one incompetent to contract
•mav be treated as dishonoured and the drawer must compensate the
"holder. T h e holder has no claim upon the drawee until the latter has
arcepted the bill.
If the drawee refuses to accept, tne contract is uroken. The drawee
after^ acceptance is called the acceptor and is then the principal debtor
T h e drawee^pf a cheque is alwavs a banker and he must pav if he has
sufficient funds 'of the drawer in hand properly applicable" to tlip r^^-"
ment of such clieque.
LAW OF NEGOTIABLE INSTRUMENTS 395
FoTcign bills are usually drawn in sets of three, each part containing
a condition that it shall continue payable only so long as the others re-
main unpaid. The method reduces chances of losing. All the parts cons-
titute one bill. Only one part is to be accepted.
The payee must be a certain person. A bill, or a cheque is generally
jnade payablp to—
(1) L^ertain person or persons, (2) the order of a certain person, (3)
a certain person or order^ (4) a certain person or bearer or (5) bearer.
A note cannot be made payable to a person or bearer, or to a bearer.
Drawee in case of need.—Where in a bill or in any indorsement
thereon the name of any person is given to be resorted to in case of
need, such a person is called a drawee in case of need. He may accept
the bill and pay without previous piesentirient. T h e bill is not dis-
honoured unless it is also dishonoured by a drawee in case of need.
Delivery.—The delivery of the note, bill or cheque is necessary in
order to complete the making, acceptance or indorsement thereof and to
transfer the right of suing thereon. Delivery may be actuel or construc-
tive. But it must be made with the intention to pass the property in
the instrument. It may be conditional or for a specified purpose only
and not absolute. Such a delivery makes thp holder a mere bailee, trus-
tee or agent.
Negotiation is such transfer as constitutes the transferee a holder
•with rights of further negotiation. An instrument is negotiated by mere
•delivery when it is payable to bearer, and by indorsement and delivery
when it is ur.yable to order.
An indorsement may be Blank, Full, Restrictive, Partial or Qualified.
An indorsement in blank is one where the .indorser merely writes his
signature on the instruniient, and the instrument becomes "-payable to
bearer, even though it wa« originally payable to order.
A full indorsement is one in which the indorser signs his name and
adds the name of the party to whom or to whose order the instrument
is to be payable.
A restrictive indorsement prohibits or restricts the further negotia-
bility of an instrument.
An indorsement is partial which purports to transfer to the indorsee
a part only of the amount of the instrument. A partial indorsement does
not operate as a negotiation of the instrument.
Alt indorsement is conditional or qualified which limits or negatives
the liability of the indorser.
Signature by way of indorsement must be on the instrument (gene-
rally on tire back) or on a slip of paper attached to it—Allonge.
ft raoist be by maker or holder or drawer or pavee or indorsee, but
•not -by. a, stranger. It must be made for the purpose of n^otiation and
must be completed by delivery. '
The, effect of indorsement is that the indoisee acauirej the title to
the instrument, and can negotiate it to any party he likes; and may, as
holder o£ the instrument, sue any or all of the prior parties. Every
party is liable to all parties subsequent to him. Each prior party is
liable as surety to each subsequent party.
T h e ' indorser's engagement is like that of a maker that the instru-
ment will be paid when it falls due, and if it is dishonoured lit v i l ! com
pensate the holder provided due rrofice of the dishonour is received
396 MERCANTILE LAW
by him. He guarantees to all holders in due course the genuineness of
tlie drawer's signature and all previous indorsements.
Holder.—A person entitled in his own name to the possession of an
instrument (though not necessarily in &Ltual possession of it) and to
receive or recover the amount due tJiereon is a holder.
No person can sue on a negotiable instrument in his own name un-
less his name appears thereon as payee or indorsee oi unless the instru-
ment is made payable to bearer and he is the possessor thereof.
But when an instrument is lost, or destroyed, its holder is the per-
son entitled to the possession of the instrument at the time of such loss
or destruction.
Holder in due course.—A holder in due cours'e is holder who became
such for consideration without having sufficient cause to believe that
any defect existed in the title of the person from whom he derived his
title before maturity. Thus a donee of an instrument may be a holder
biu cannot be a holder in due course. But unless the contiary is pioved
a holder is presumed to be a holder in due course.
The title of a holder in due course is free from the equities and
other defences which could have been raised by prior parties. Once an
instrument passes through the hands of a holder in due course it is
purged of all defects. It is like current coin.
Consideration is presumed in respect of the making, ilrawint;, accept-
ance or indorsement of a negotiable instrument. But this presumption
is rebuttable and it can be shown that as between immediate parties to
an instrument no consideration ever passed. This plea cannot be set u p
between prior parties against a holder in due course or anv subsequent
holder deriving title from him.
Acceptance of bill is the indication by the drawee of his consent to
.the order of the drawer. This is done by writing his name generallv ac-
companied by the word "accepted," across the face of the bill. The ac-
ceptance is complete and binds the drawee only when he delivers the ac-
cepted bill to the holder, or gives him notice of such acceptance.
Only the person to whom the bill "is addressed can accept it imless
he accepts it silpra protest for the honour of a party liable on the bill.
An acceptance may be either general or qualified. A general accept-
ance is absolute and assents without any qualification to the order of tiie
drawer but where, an acceptance is made subject to some condition or
qualifiediion, thereby varying in express terms the effect of the bill as
drawn, it is a qualified acceptance.
T h e holder of a bill may refuse to take a qualified acceptance or he
may acquiesce in it. Where he refuses to take it, the bill is dishonour-
ed by non-acceptance. If he accepts the qualified acceptance, it binds
him and the acceptor, but not other parties not consenting thereto.
It is alwaj/s advisable to present a bill for acceptance, for if atcept-
ance is refused, the parties other than the drawee become immediately
liable though the bill has not yet matured.
Presentment must be made ;—
(i) where a bill or note is payable after sight, or
(ii) where a bill is payable at a place other than the place of the
drawee,
(iii) when it is expressly stipulated that presentment shall be \7iade.
The holder must present a bill payable after sight for acceptance or
LAW OF NEGOTIABLE INSTRUMENTS 397
negotiate it within reasonable time. T h e penalty for non-presentment is
the discharge of the drawer and prior indorsers. T h e drawee is entitled
to 48 hours for deciding whether he will accept or not.
Presentment is excused in the following cases :—
1. Where tlie drawee is dead or is insolvent or is a factitious
person or a person incompetent to contract.
2. Where after reasonable search the drawee cannot be found.
3. When although presentment has been irregular,' acceptance has
been refused on some other ground.
Payment at maturity of the amount due on tlie note, bill or cheque
by or on behalf of die principal party liable to the holder is a dischaige
of the liability of each and every party to pay the amount. Payment may
be made to the holder or his representative.
An instrument payable to bearer whether originally or by indorse-
ment is discharged by payment in due- course.
Any person liable to pay and called upon by the holder to pay is,
before payment, entitled to have the instrument shown to him and is, on
payment, entitled to have it delivered to him and if thq instrument is lost
or cannot be produced, to be indemnified against any further claims
thereon against him.
Presentment for payment is not necessary to charge the principal deb-
tor, but it is essential to charge other parties. But where a place for
payment is specified in a note payable on demand and where an instru-
ment is made payable at a specified place and not elsewhere, pre^isntment
a t that place is necessary to charge even the principal debtor.
Only the holder or his duly authorised agen^ or in case of death or
insolvency, the legal representative or assignee of the holder can make
piesentment.
Where a bill has been lost before it is overdue, the holder thereof can
compel the drawer to give him a duplicate of the lost bill on his under-
taking to furnish security for indemnifying him against all person.s in
case the bill alleged to have been lost is found again.
Dishonour.—A note, bill or cheque is dishonoured bv non-pavment
ivhen the ipaker of the note, acceptor of the bill or drawee of the cheque
nakes default in payment on being duly required to pay the same.
Where presentment for payment is excused the instrument is deemed
to be dishonoured on the due date for presentment, if it remains unpaid.
\Vhere a drawee in case of need is named in the bill, the bill is not
dishonoured until such drawee has also refused payment on proper pre-
sentment.
In case of dishonour by non-payment the holder has a right of action
against (a) the maker of the no'te, (b) the acceptor of the bill, (c) the
drawer of the bill or cheque if due notice of dishonour has been given,
and (d) each of the indors'ers of a note, bill or cheque, if due notice has
been given.
In case of dishonour by non-acceptance of a bill the holder has a
right of action against the drawer and indorsers, if due notice of dis-
honour has been given.
Npt«ce of dishonour hy non-payment or by non-acceptance must be
given by the holder or by some party to the instrument who lemains lia-
ble thereon to all parties to whom he seeks to make severally liable and
some of seieral parties whom he seeks to make jointly liable, except the
maker of the note or acceptor of the bill.
398 MERCANTILE LAW
Any party receiving notice" of dishonour must in order to make any
prior party liable to himself transmit the notice to such party. Notice
must be given within reasonable time -after dishonour and transmitted
within reasonable time after its .receipt. The notice rnay be given in
%vriting or it may be oral.
Notice is dispensed with—
1. Where after reasonable search a party cannot be found or notice
is impossible.
2. Where it is waived by the party entitled to it.
3. As regards drawer, where the drawer and the drawee are the same-
person; the drawer is fictitious or incapable of contracting; the drawer
himself is the person to whom- tlie bill is presented for payment; or
wherp the drawer has countermanded payment.
JNoting and Protest.—In addition to giving notice of dishonour, the
holde. of a dishonoured inland bill, if he so desires, -may cause the bill
to be noted or protested.
Foreign bills must be protested when such protest is required by
the law of the place where they are drawn,-
Noting is the minute recorded by the notary pubh'c on a dishonour
ed bill at the time of dishonour. Noting is a convenient method of au-
thenticating the' act of dishonour.
Notaries Public are appointed by the State Governments and are ofTi-
cers who take note of anything which may 'concern ttie public, attest deeds
or writing to make tliem authentic in another country and. so on.
A bill may be protested not only for non-payment or non-acceptance
but also for better security. When ihe acceptor of a bill has become in-
solvent, or has suspended payment, or his credit has been publicly im-
peached, before the maturity of the bill, the holder rrtay %sithin reason-
able time cause a notary public to demand better security from the ac-
ceptor. If the acceptor recuses to furnish better security the notary shall
nott. the facts or certify them as above. This certificate is called pro-
test for better security.
The acceptor is not bound to give such security, but the bill can b e
accepted For honour.,
Acceptance for honour lixay be made voluntarily by any person to
save the credit of some or aJ' of the parties to a bill. It miist" be made
afte noting or protest and must be made with the consent of the holder
by a person not" liable on the bill by a writing on die bill and for the
whole amount, tor which the bill is drawn and must be made before the-
b'lli is overdue.
Payment for honour may bf ma le by anyone for the honour oE any
party liable on the bill when it has been protested for non-payment,
" Cheques.—A cheque is a bill of exchange drawn on a banker and
payable only on demand.
The Taanker who is tiie drawee must pay the cheque of his customer
as long as he holds sufficient funds to his credit, and if he wrongfully re-
fuses to pay thi cheque, he sha!' have to compensate the drawer for any
loss or damage to his credit. But the payee or holder of the cheque has
no cause of action against the banker.
The paying banker is in a privileged position as regards the payment
of his customer's cheque. Where a cheque payable to order purports to
be indorsed by or on behalf of the payee, the banker is discharged by^
LAW OF NEGOTIABLE INSTRUMENTS 399
payment in due course. He is discharged in respect o£ a bearer cheque
by payment to the bearer or holder without indorsement. He can t\en
ignore any indorsement if the cheque is originally made payable' to bear-
er. The rule is "Once a bearer cheque always a bearer cheque."
The collecting banker is protected if he receives payment in good
faith and without negligence of a crossed cheque for a customer, even
though the customer's title to the cheque proves defective. T h e protection
is given because a crossed cheque can be cashed only- through a banker
and a banker collecting his customer's crossed cheque acts as his agent.
A cheque may be "open" or "crossed." An apen cheque can be pre-
sented'by the payee to the banker acioss the counter for payment.
A crossed cheque can be cashed only through a banker, and not ac-
ross the counter. The object of crossing is to secure payment to' a
banker so that it may be possible to trace the person receiving payment
of the cheque.
T h e crossing is made to warn the banker and not to stop negotiabi-
lity of tlie cheque. T o lestrain negotiability addition of words "Not ne-
gotiable" or "Account payee only" is made.
A cheque may be crossed generally or specially.
Payment of cheques generally crossed may be made through any bank-
er while of one specially crossed only to the banker tq whom the che-
que is crossed or his agent for collection.

CASES F O « RECAPITULATION
1. A lost money playing cards with B. A gave B a promissory rvotc
for 'he amount af the gambling debt. B negotiated the note to W6
Bank Ltd., which received it in good faith and for value. A refusecj
to pay the note, and thd" Bank sued.B as indorser. B defended or the-
ground *hat the r;ote w.as given to pay a wagering debt and was therefore
void. It was held' .ha': the bank was emit ed lo recover from B, the
indorser of the note, because t(ip indorser, warrants that the instrumonr
is a ^'alid obligation. Moreover, as wag held in C. Iyer v. A Krishna,
1954 T.C. 231, even though the promise to pay was opoosed to public
policy and so unenforceable, once a ,pro-note is executed the promise to
•pay is performed because a promissory note amoiints in law to payment
and what vitiates a promise does not •Vitiate a payment.
2. A cheque drawn on the B Bank on ISth- [une, post-dated to 20th
June, was certified by th'; manager 'marked good for pavmenn on 2"0-6-39.'
The P Bank became I'jolders • in due course and on 20th June presented
the cheque for payment which was refused owing to the state of the
drawer's account. The P Bank suecl the B Bank. T h e Privy Council
held t h a t ' s Bank was not liable.. It was stated that the certification was
not an acceptance of the cheque and tlie manager had no authority to
certify a post-date^ cheque [Bank o£ Baroda v. Punjab National Bank
(1944) A.C. 176].
3. A bill drawn on M in favour of A' is accepted by M through the
fraud of F. M is not liable on the bill to A. If the acceptance of the
, bill is procured by fraud, the acceptor is only liable to a holder in due
course and not to other holders [Ayers v. Moore (1940.) 1 K.B. 278],
4. A's wife forged his signature on 40 cheaues on M Bank and cash-
ed them. Upon his discovery of the forgeries, "A did not at once inform
the bank, but some months later when his wife informed him that she
wanted more money for the purpose for v/Iiich the previous cheques had-
400 MERCANTILE LAW

been drawn and cashed by her, he stated his intention to notify the bank, ^
widi the lesult tiiat the same night the wife committed suicide. A brought
an action against the bank, claiming to be credited with the amounts of
the foiged clienues. Held, the action could not be sustained as his con-
tinued silence operated to prevent the bank from taking its remedies
against the wife [Greenwood v. Martin's Bank Ltd. (1933) A.C. 1 H.L.].
5. A, the payee-holder ot a bill, endorsed it in blank and delivered
it to B. B also endorsed it in blank and delivered it to C. C endoised
it in full to D 01 order. D without endorsement delivered tlie lilll to
E. It was iield, in a suit'by E, that E, as the bearer against the drawer,
acceptor, and the indorsers A and B is entitled to receive payment from
them, but he cannot proceed against C or D, as he rccened an ordei
in<;(riimeni from D without endorsement. If, ho\\ever, D, instead of
merely handing over the bill to E, had passed on to him by icnulai
endorsement, E could have claimed payment from all prior parties
[Smith V. Clarke (1794) I Peake 295].
6. A diaws on B a bill payable three months after sight It passes
through several hands before X. becomes its holder. On presentation by
X, B refuses to accept. X can recover from all the prior parties except
B. The drawee is not liable on the bill unless he accepts it and then
delivers it over to the holder. The other parties are liable because they
guarantee payment.
7. X and Y, husband and wife, have a joint account in a bank. The
account can be operated upon by either of them. The deposits in the
account aie usually made by X, the husband, and withdiawals arc usually
made by Y, the wife. The banker comes to know that a garnishee order
attaching X's money in the bank has been issued by the court. X and
Y order the banker to transfer the amount standing in their joint ac-
count to the current account of Y, the wife, in the same bank. T h e
banker is prohibited from transferring the money as ordered by X and
Y after the garnishee order has been sened on him; but he can do so
hefore that order is served.
8. A bill is drawn payable to 'A or order.' A loses the bil'
X. who finds it, forges A's signature and indorses it to B who takes it for
value and in good faith. B acquiies no title to the bill, because there
was no indorsement in favour of the finder, X, he had no title to convey.
The forged indorsement being a nullitv ran convev rjo title, and the
subsequent holder cannot claim to be a holder in due course [IMercantile
Bank 'of India v. Mascavanhas, 1932 P.C. 22].
9. M draws a cheque in favour of N, a minor. N enrlorses it in
fav-our of P, who in turn endorses it in favour of Q. The cheque is dis-
honoured by the bank. N, being a minor, is not liable on the cheque,
50 that P and Q cannot claim, from N. P can claim payment from M,
the drawer and Q can claim against P, the indoiser and M, the drawer
(Section 26).
10. A executes a promissorv note in favour of B for Rs E 500 P
leceives the amount from C and makes an indorsement thus: "Received
amount due under this promissory note from C, and signs it and hands
over the note to C. C cannot maintain a suit on the promissory note as
the vrriting is not an endorsement and "-o the instrument is not neootiat-
ed lo him and he is not a holder in due course. He cannot sue even
under Seciion 8. as there is no assignment of the instrument eitlier (Sec-
tions S and IG).
11. A owes B Rs. 1.000. A makes a promissorv note for the amount
LAW OF NEGOTIABLE INSTRUMENTS 401

payable to B. A dies and the note is afterwards found among his papeib
and delivered to B. B sued on the bill. Held, B's suit does not lie, as
the pronote was never delivered by A to B. Until the instrument is de-
livered after execution it is incomplete and there is no cause of, action
on it. [Bromage v. Lloyd (1847) 1 Exch. 32].
12. A promissory note payable to bearer is stolen and j h e thief deli-
vers it to a transferee for value. T h e transferee gets a good title to it,
against the thief and all parties prior to him. It is, however, important
to remember that the question as worded is not quite correct, as a promis-
sory note payable to bearer cannot be made as provided by Section 31
(2) of the "Reserve Bank of India Act.
13. A cheque is drawn 'payable to B or order.' It is stolen and
B's indorsement is forged. The banker pays tlie cheque in due course.
The banker is discharged and he can debit the account of .the customer
with the amount of the cheque even though the payee's endorsement is
forged. This is so because cheques are a special exception to the general
rule that a forged endorsement is no endorsement. [Charles v. Blackwell
(1877) 2 C.P.D. 151]. But if the drawer's signature is forged the banker
is liable for the amount of the forged cheque, imless the banker
can show he took due care to compare the signature with the specimens
or unless he can show that the conduct of the customer was immediately
connected with the forgery. [Orr v. Union Bank (1854) 1 Macq. H.L.
513].
14. A bill is payable to 'A or order.' It is stolen from A and the
thief forges A's signature and indorses it to B who takes it as a holder
in due course. B acquires no title to the bill and cannot recover on it,
nor can he give a valid discharge for it. He is not a holder in due course.
15. A is the holder of a bill of excha'hge made payable to the order
of B, which contains the following endorsements in blank :—
First endorsement 'B*.
Second endorsement 'Peter Williams.'
Third endorsement 'Wright & Co.'
Fourth endorsement 'John Rozario.'
This bill A puts in suit against John Rozario and strikes out, with-
out John Rozario's consent, the endorsement by Peter Williams and
Wright & Co. Held, A's suit against John Rozario is not mainjiainable.
By striking out endorsement by Peter Williams and Wright & Co., A
has impaired the remedy of John Rpzario against them and so John
Rozario is discharged from liability on the bill^Mayar v. Tudis (1833) IM
& Rob. 2471.
16. A bill of exchange is accepted payable at B & Co., but is subse-
quently altered by the holder by erasing the name of B 8: Co. and substi-
tuting the name of E & Co. T h e way the problem is worded sliows that
the endorsement was forged after acceptance and without the knoivled^e
and consent of the acceptor. As such the acceptor is not liable on the
bill and can plead that endorsement is a forgery. But if the endorsement
had been forged before he accepted the bill, he would be liable imder
Section 41 if he knew or had reason to believe the indorsement to be
forged when he accepted it.
17. A draws a-cheque on the Imperial Bank for Rs. 5,000 in favour
of B. C steals the cheque and forges B's signature on it and makes it
pnvable to D who pays consideration for the same and obtains it bona
fide. D puts the chciiue crossed generally into his account witli the
National Bank who obtain payment of it from the Imperial Bank and
402 MERCANTILE LAW

credit D's account with tlie amount. A clsiims to recover the amount of
the cheque from D, or the Imperial Bank, or the National Bank. C, as
a thief acquired no title to tlie cJieque, nor could he give any. D did
not acquire good title as he received it from a thief. Therefore, A can
recover the amount from D, hut not from the Imperial Bank or the
National Bank. T h e National Bank, 93 a collector ot the crossed cheque
for a custom'er and without negligence is protected under Section 131 oL
the Act. The Imperial Bank is not liable as it has simply made pay-
ment to the otlier banker and at its credit. But if the cheque were un-
crossed, tlre'n both D and die National Bank would be liable to A. The
National Bank would not get the protection of Section 131, as it had
collected an uncrossed cheque.
18. A draws a bill of exchange payable to the order of'B only and
C accepts it payable at D Bank. The bill bears the words 'not neg9-
liable.' B indorses tlie bill to E. The bill being dishonpured on pre-
sentation, E sues C thereon. The words 'not negotiable' make the ins-
trument not negotiable. B could not endorse the bill to E and E could
not as such derive a good title to the bill. E cannot sue G. The bill
was valid between die parties thereto, i.e., A and B only and could not -
be valid between E and C. E's suit will be dismissed [Hibernian Bank v.
Gysin & Hanson (1938) 1 K.B. 483].
19. D, the Payee of a note signed the following endorsement: "IE
the payee of this note does not survive die maker thereof, then this note
is not to be paid, but is to be cancelled and surrendered." This did not
constitute a renunciation which must be absolute and unconditional
p a u g h e r t y v. Preuitt, 113 Okla. 66].
20. A gave R. Co. a promissory note payable "forty-five.... after
• date." Ten months later the holder of the note 611ed in tlie blank space
to read "days." The holder then sued A who pleaded that the note was
not binding because when delivered it was not complete in that it did
not specify whether a payment was to be made forty-five days, :veeks,
mor\ths or years after date. Held, R. Co. as original holders had au-
.thority to complete die instrument by filling in the blanks so as to make
it conform to the true intention of the parties. Although this must be
done within a reasonable time, a ten months' delay is not unreasonable (
between the original parties [Allen v. Rouseville Cooperace Co. 157 Va
355].
21. D drew a bill on G, payable 3 months after date 'to the order
of D only' and crossed it 'not negotiable.' The bill was accepted by G
and endorsed for value by D to H. G refused to pay to H, and H sued
hiip. Held, H is not entitled to recover the amount of the bill from G,
as the bill was not transferable. The bill is payable only to the order
of D and is not negotiable. It is valid between the parties out is not
negotiable [Hibernian Bank v. Gysin (1939) .1 K.B. 483].
22. A by mistake draws a cheque payable to B, who docs not exist.
T h e clieque is negotiated by' C by forged endorsement to D, who takes
it in good faith and for value. D can enforce payment of the clieque,
as he is a bearer of the cheque, and his title does not depend upon die
forged endorsement, under which he would have been unable to acquire
any right to die cheque, \fhere a cheque is drawn payable to a non-
existing person, die cheque may be treated as payable to bearer. Tlie ^
holder of a bearer cheque acquires his title merely from possession of the
cheque.
 Chapter XII

Law of Insolvency

PART 12-A

The Indian insolvency Ian, like the English, xaw o( bankruptcy, is

puiely the cieation of .^laiiues,. At i)ie!)ent two statutes simultaneously
(.over the law of insoheJK:y in India, namely, (1) The Presidency Towns
Iniohency Act, 1909, whim applies to the Piesidency Towns of Bombay,
Calcutta and Madras, (2) The Piovincial Insolvency Act, 1920, which ap-
plies to the lest of India. Most of the piovisions of the two Acts are
smiilai, and therefore, the principles stated below are applicable both to
the Piesidency and mofussil towns. Wherevei theie is a difference on
any point it has been separately dealt with.
In essence, theie are five points of difference between the two Acts.
namely, (1) the constitution of courts, (2) the procedure to be followed
from the date of tlie presentation of the petition to the date of the order
of adjudication, (3) the person in whom the debtor's pioperty is to be^
^ested, (4) the doctrine of relation back, and (5)^the machinery for iri^
\estigating die debtoi's conduct.'
Befoie dealing with the rules of the law of insoKencv in India, ^
mav be obsened that the teims "bankiiipicy" and "bankiupt" as used
in English law, are synonymous with the terms "insolvency" and "insol-
\ent" as thev are .employed in India. In English law, a bankrupt is a
peisoii who has commuted an art of bHni,tupttv and who has been ad-
judged a bankrupt. Such a person in India would be said to have ^com-
mitted an act of insolvency and to have been ad-judged an insolvent.

DEFINITION
The Indian Acts do not define the terms insolvency jind insolvent.
"Bankruptcy," says Blackstone, "is a pioceeding liv ^IM<3I, when a
debtor cannot pay his debts or discharge his liabilities or {{le persons
to %vhom he owes money or has incuried liabilities carrot obtain satis-
faction of their claims, the State, in certain circumstances, takes posses-
sion of his piooeitv bv an officer appointed for the purpose, and sudi
property is realised and distributed in equal proportions among the per-
sons to whom the debtor owes money or has incurred pecuniary liabili-

1. Mulla on Insolvency, p. iii.

404 MERCANTILE LAW

lies." Ar< "iniolvent" may be defined as a person against whom an order

of adjudication has been passed.

OBJECTS OF INSOLVENCY LEGISLATION

Under the survival-o(-the-fittest system society could ignore tiiose
w!iO became insolvent. However, our society is not willing to do so. It
lias accoidingly provided a system by which the honest debtor can. in
substance, pay into court what he has, be relieved of all unpaid debts,
and start economic life anew. This system comprises insolvency la-vs.
Thus, when a person is adjudicated insolvent his assets are taken over by
an officer of the court and distributed ratably among his creditors. After
ilie distribution is complete, she unpaid del)ts (except certain specified
debts) are cancelled and the insolvent is allowed to engage in trade^ or
service without any of his former obligations. The creditors lose a part
of their claims, the debtor gets a fresh start in life. Says Blacksione in
this legard: "The laws of insolvency are made for the benefit of trade
and are founded on the principles of humanity as well as justice: and
to that end thev confer some privileges both on the creditors and the in-
solvent or debtor."
From tlie above it follows that insolvency legislation has a two-fold
objective, namely—(1) Protection of honest debtors, and (2.V Safeguarding
the interests of creditors by means of equitable distribution of the re-
maining properties of the insolvent among all the creditors.
From *he point of view of the sodiety, the insolvent suffers from
certain disqualification?. The insolvent is disqualified fi-om being (i) ap-
pointed a Magistrate, (ii) elected to any office of a local authority, (iii)
elected for sitting or voting as a member of any local authority. These
disqualifications are removed only (a) if the order of adjudication is
annulled, or (b) if he obtains from the Court an order of discharge. In
addition to these disoualifications the Companies .Act, 1956, tjrovides that
an insolvent cannot be a director or manager of a company.

W H O MAY BE ADJUDGED INSOLVENT

In general, any person capable of entering inio a contract may be
adjudged an insolvent. But before he can be adjudged an insolvent,
two conditions must be satisfied : (1) he must be a debtor, and (2) he
must have committed an "Act of Insolvency," as defined in the Acts.
T h e term debtor, as used in the Insolvency -•^cts,^ has a limited mean-
ing and includes persons who are subject to the laws of India. It does
not mean the debtor all the world over. Debtor means a person who
has made himself amenable to adjudication but who has not yet been
adjudicated.

FOREIGNERS
A foreigner cannot be adjudged insolvent in India imless he commits
an act of insolvency in India during his personal residence here. But if
he commits an act of insolvency during his residence in India, he can
be adjudged insolvent, even though he may absent himself at the time
of the letition.
LAW OF INSOLVENCY -505

MINORS
In India, a minor, being absolutely incompetent to contract, is not
'debtof within tlie meaning of the Acts. Therefore, a minor can never
be adjudged insolvent either on his own petition or on the petition of a
creditor, even though the debt was contracted in . the course of a trade
carried on by him, or arose '\n connection with rtecessaries supplied to
him, as a minor is never personally liable in India. If a minor is ad-
judged insolvent the adjudication must be annulled,

LUNATICS
A lunatic cannot commit an act of insolvency imolving intention,
e.g., transfer his property with intent to defeat his creditors, and cannot,
therefore, be adjudged insolvent. But he may, it seems, be adjudged in-
solvent if he contracted the debt 'and committed the act of- insolvency
whilst sane. T h e question is, however, not yet decided in India and
must be regarded as open.

P A R T N E R S : FIRM
A creditor may present a petitfon of insolvency against any one part-
ner of the firm without joining the others, or he may present a joint
petition against two or more of them. A joint petition can be presented
only if each of the partners has jointly or severally committed an act of
insolvency. Under Section 99 of Pre-t. I. Act an adjudication order can
be made against a firm in the firm name, and such an order operates
as if it were an order made against each of the partners. It is concei\'-
ed that a similar power exists under the Pro. I. Act also as regards ad-
judication of firms, as Section 79 (2) (c) of that Act provides for rules
beinsi made by the High Court "for the procedure to be followed where
the debtor is a firm."

JOINT HINDU FAMILY

Tlie members of a joint Hindu family may be adjudged insolvent
on a single petition by a creditor, if they are personally liable on a joint
debt and have committed a joint act of insolvency, such as a joint trans-
fer of family property in favour of a creditor by way of fraudulent pre-
ference. Where the business of'the family is carried on by the Karta or
manager and debts are contracted by him in tlie course of the business,
the other members are not personally liable for the debts and cannot be
adjudged insolvent, nor can they be adjudged insolvent on a decree ob-
tained against them by a creditor for their father's debts. A minor mem-
ber of a joint Hindu family can in no case be adjudged an insolvent
even if he has taken active part in the business.

JOINT DEBTOR
Where a joint debt bv two or more persons is not satisfied, the cre-
ditor may present a single petition against the ioint debtors, provider?
that some act of insolvency has been committed by each of them, or
jointly by all.
406 ^fERCANTILE LA^V

COMPANIES
No insohcncy petition can be presented against any corporation or
association or company registered under any enactment. Tims, a com-
pany rcfjistered under the Companies Act, 1956, cannot be m.ide insol-
vent; it must be wound up under that Act.

CONVICTS
A con\ icted felon can be adjudged bankrupt.

DECE\SED PERSaNS
A dccesacd ))ers<>n cannot lie made insolvent on proceedings institut-
ed .iftcr his death. H^is estate may, however, be administered in insol-
vency. VVhen a debtor dies after the piesentation of the petition the
pioceedings will, tmless the Court otherwise orders, be construed as if
he were alire.

ACTS OF INSOLVENCY

We ha\e seen that a person cannot be ndjudged insolvent unless

lie is a "debtor" wiihm the meaning of the insohency law AND has
committed an act of insohency. An act of insolvency is scimething done
or 5ufcied by a debtor which gives the Court jurisdiction to make an
order of adjudication.
A debtor commits an act of insolvency in each of the following cases,
namely :
(a) If, in India or elsewhere, he makes a tran.sfer of all or snb-
slnntialiv all his property to a third per.son for the benefit of
his creditors generally.
'1 he tiuestion under this clause is not that of intention but of the
irausfcv of the bulk of the propertv, and where the w;holc or sxibstnntiallv
the whole of the debtor's property has been transferred, even though'hon-
<>.sily as for the benefit of creditors, it will amount to an act of insolventv
The transfer becomes void if the debtor is adjudged insolvent within .S
months of transfer.
(b) If, in India or elsewhere, he makes a transfer of his propertv,
or any part thereof with the intent to defraud or delay his
creditors.
This clause relates to transfer of whole or 'any part" of debtor's pro-
tieity made with the intention of defeating or delaving creditors, .nnd
the intention is to be inferred from surrounding circumstances. T h e
trttflsfer becomes void upon the passing of the order of adjudication.
(c) If, in India or elsewhere, he makes anV transfer of his property,
or any part thereof, which would, under this or any other en-
actment for the time bein^ in force, be void^a; a fraudulent
jjreference if he were adjudged an insolvent.
IJie \vord orcfcrcnre means fa\ouring one creditor to the detriment
of oihcis. Jf the transfer is made \o!tmtariiv in order to nrefer one
creditor it is fraudulent preference.
 LA-W OF INSOLVENCY 407
'' (d) If with intent to defeat or delay his ' creditors—
(i) he departs from or remains out of India;
(ii) he departs from his dwelling house or usual place of bu-
siness or otherwise absents himself;
(iii) he secludes himself so as to deprive'' Ms creditors of i the
means of communicating with him.
Under this clause it is an essential feature of an act of insolvency
that the act should be done with the intent to defeat or delay tiie ere-
ditois generally, and not only a particular creditor. The debtor's inten-
tion can be inferred from surrounding circumstances.
(e) Pro. I. .-Vet: If, any of his property has been sold in execution
of the deciee of any Court for the payment of money.
Pre-t. I, Act: If, any of his property has been sold or attached
for a period of not less than 21 days in execution of the decree
of any Court for the payment of money,
(f) If he petitions to be adjudged an insolvent.
(g) If he gives notice to any of his creditors that he has suspend-
ed, or that he is about to suspend, payment of his debt.
The notice conveying a clear impression that the debtor has no in-
tention to pay his debts may be oral or in writing. Mere service of
notice by the Insolvency Court informing the creditors of the date of
hearing of debtor's petition cannot amount to notice of suspension of
payment.
(h) If he is imprisoned in exeaition of the decree ot any Court for
the payment of money.
Explanation.—The act of an ngeni may be the act of the principal
(even though the agent has no special authority to commit the act).
(i) In Maharashtra State only": If, after a creditor has sen'ed an
"insolvency notice" on him in respect of any decree or order for
pavment of money he does not, within the period specified in
the notice, pay the decretal amount or give sufficient security
for the payment of the same.

PROCEDURE
There are four stages in the process by which a debtor becomes in-
solvent and ultimately obtains his disdiarge, namely—
1. presentation of a petition either by the debtor or by the cre-
ditor;
2. appointment of an Interim Receiver (at the Court's discretion)
for the purpose of protecting the property while the debtor's
affairs are inquired into and the creditors as a bodv are gi\'en
opportunity o£ expressing their wishes;
3. adjudication, when the debtor is declared insolvent and he is

'\dded by Bombay Act XV of 1939.

408 MERCANTILE LAW
divested of his property which is realised for distribution
among his creditors; and
disdiarge when the insolvent is released from all liabilities
which could rank against his estate in the insolvency.
PETITION
To Droceed against a person in insolvency it is essential that an ap-
plication by way of petition must be presented to the Insolvency' Comt.
T o avoid frivolous petitions which could not but prejudice the mercan-
tile communitv, it has been provided that the debtor or creditor can
present a petition subject only to specified conditions in respect of juris-
diction of the Court and qualifications of the petitioner.

W H O MAY PRESENT P E T I T I O N '

An insolvency petition may be presented either by the "debtor himself
or by a creditor. The petitioning debtor is the perjson who can be ad-
judged an insolvent.

PETITIONING CREDITOR
A creditor is one who can compel the performance of an obliga-
tion by another person called the debtor. Therefore, any person who
has a right to take legal proceedings for' the recovery of a debt may
present an insolvency petition against the debtor.
SECURED CREDITOR
A secured creditor does not fall within the meaning of the word cre-
ditor as used in the Acts, and as such cannot petition for insolvency. He
stands outside the insolvency. But if he intends to present an insol-
vency petition he must place himself in the position of an unsecured
creditor either by giving up his security for the benefit of the general body
of creditors, or valuing it and deducting its value from his total dues
claiming for the balance as an unsecuted creditor. '
Jurisdiction.—The insolvency petition can be presented only in an
Insolvency Court within the jurisdiction of which the debtor originally
resides or carries on business personally or through an agent or personally
works for gain or if he is arrested or imprisoned in execution of a dec-
ree of Court for non-payment of money where he is in custody. In tlie
case of a petition by or against a partnership firm, the firm should have
carried on business within a year prior to the date of petition within
those limits (Section 11). In the Presidency Towns the insolvency juris-
diction is conferred on the High Courts of Bombay, Calcutta and Mad-
ras. In the rest of India governed by the Provincial Insolvency Act iJie
insolvency jurisdiction is primarily conferred on the District Courts,
but the State Government may by notification in tlie Official Gazette
invest any Court subordinate to a District Court, and such Court in-
cluding Small Causes Court will have insolvency jurisdiction concurrent
with its ordinary jurisdiction. The Court having insolvency jurisdiction
shall have full powers to decide all questions of title and priority of any
nature whatsoever. The' jurisdiction of the Insolvency Court is suffi-
ciently wide to decide all questions that may come before it, and in fact,
it is CO extensive with the Civil Court so that it may make a complete
distribution of the property. But the Insolvency Court has no jurisljic
LAW OF INSOLVENCY 409
tion of realising debts due to the insolvency. T h e Court is managing the
estate of the insolvent. It has power to inquire into claims against th'^
estate, and not into claims by the estate. Thus an Insolvency Court
cannot pass a money decree against a third person.
CONDITION OF CREDITORS' PETITION
The conditions which must be fulfilled before a creditor can pie-
sent an insolvency petitioTi against a debtor are : '
1. the debt owing by the debtor to the creditor, or, if two' or
more creditors join in the petition, the aggregate amount of
debts owing to such creditors, amounts to Rs. 500 or more, and
2. the debt is a liquidated sum payable either immediately or
at some certain future time, and
3. an act of insolvency has been committed by the debtor, and
4. the act of insolvency on which tlie petition is grounded has
occurred within three montlis before the presentation of the
petition.
A creditor can present a petition only if his debt was in existence at
the time of the alleged act of insolvency, and also at the time of the pre-
sentation of the petition. The debt must continue to exist throughout
the hearing of the petition and down to tlie order of adjudication. The
debt must be owing by the debtor personally in his own right, and not
in any other capacity, e.g., as an executor. T h e debt must not be less
than Rs. 500 at the date of the act of insolvency, but this amount mav
be due to one or more petitioning creditors. T h e debt must be a liqui-
dated sum, i.e., a certain and ascertained sum admittedly due, and cer-
tainly payable to the person who presents the petition. For examole,
Rs. 500 with or without interest at a certain rate for a certain time is a
definite sum and is a liquidated sum. But a claim for mesne profits or
for damages based on tort or breach of contract, is not a liquidated sum.
A creditor's petition must allege the specific act of i insolvency on
which it is based, and that act of insolvency must Iiave occurred within
tliree calendar months before the presentation of the petition. The three
months' period is a condition precedent to the filing of a petition and
will not be extended in any case,
A secured creditor cannot present a petition unless he places him-
self in the position of an unsecured creditor, either by giving up his
security for the benefit of his fellow creditors; or by giving an estimate
of the value of his security which m^ay be deducted from his dues and
then claimjng for the balance as an unsecured creditor.

CONDITIONS OF DEBTOR'S P E T I T I O N
A debtor can present an insolvency petition only if he is unable to
pay his debts, AND any of the' three conditions given below is fulfilled—
(a) his debt amounts to Rs. 500;
(b) he is under arrest or is in prison in execution of a monev
decree;
(c) there is subsisting an order of attachment against his property
in execution of such a decree.
410 MERCANTILE LAW
Iii.iijiliiy 10 pay liis debt is a concliiion ])iTteileiit lo tlie presentation
of a (lcl)ior's petition. Tlie clcblov's petition must allege that lie is un-
•IIJIC to p.iy Iiis (lcl)ts and lie must [iiiniih .1 prima lacic "loiincK for his
in.il)ilitv to pay. I lie esi)re'i',ion ••uiial)le to pay his debts" means that
tlie maiV-ct value o[ ihe renVuable asse\s is less than ihc loial amoiini ol
the debts.
An insolvency petition, whether presented by ihc debtor or by a
iicditor, lannol be withdrawn wilhoiil tlie lca\c of the Ciotirt; and the
Coint should not allow a withdrawal without giving notice to other par-
ties and unless it is satisfie;! that it will not i)c deti iiiicntal 10 other par-
lies. l"he Court cannot Mow withdrawal of the petition after the order
of adjiiditation has been made. When two 01 more insolvency jjctiiions
aie picscnted against the same debtor, or ulicre separate petitions are
])resenicd against joint dclnors, the Conn may consolidate them, on
such tcims as it tliinks fit.

EFFECT OF DEBTOR'S DEATH ON IN.SOLVENCY PROCEEDINGS

H a debtor by or against whom an insolvency petition lias been
l)iesenteil dies, the jjioceedings in the matter shall, unless the Court other-
wise orders, be continued as if he were alive, .so far ,->s it niav be necessary
for the realisation anil distiibution of the pioperty of the debtor. As a
result the death of the debtor docs not interfere with the insolvency pro-
ceedings; and where the property lias vested in the OHicial Receiver or
.X^signcc after adjudication, the death of the insolvent does not divest
the Receiver or \ssignee of the propelly. 15nt if an in.solvent dies be-
fore obtaining a discharge, he is auiomaticallv discharged.

PROCEDURE ON ADMISSION OF PETITION

An insolvency petition on its presentation is treated in the 'ame man-
ner as an ordinary plaint in a civil suit. Where the petition is admitted
the Court shall fi\ a date for its hearing, notice whereof must be given
to the other party. There is some difference in the procedure on ad-
mission of the petition l>etwecn the law under the two Indian Acts.
Under the Pre-t. Act, where the Court is satisfied with the pioofs
furnished by the creditors as to the acts of insolvency or as to the debts
due to the petitioning creditors, or as to tlie inability of the debtor to
pay his debts, it will pass an order adjudging the debtor an insolvent.
T h e Court may • appoint an interim Receiver oE the property of
the ticbtor to take possession of it pending the petition and before an
order of adjudication, if it is satisfied that such an appointment is neces-
sary for the protection of the estate.
Under the Pro. I. Act, the Court, when making an order admitting
a creditor's petition may and where the debtor is the netitioner ordin-
arily must, appoint an interim Receiver of the nronerty of the debtor or
any part thereof. The interim Receiver will take immediate nosse.ssion
of the property of the debtor and exercise such nowers as conferred bv
the Court. An interim Receiver does not enjov all the powers of an
Official Receiver appointed after adjudication. The property does not
vest in bim, vmless the Court expressly maVes an order to that effect. T h e
 LAW OF INSOLVENCY 111
'0/rici;il Receiver or Assignee is appointed for (he purpose of realisation
of the estate, -(vhile an interim Receiver is appointed lor the protection
of the estate for the "cneral body of creditors. 'I'he interim Receiver may
i)e aijpointcd by ^tlie Court any time befoie adjndicaiion.

INTERIM ORDER AGAINST DEBTOR

.\t ihe time ol makinp;' an order admittinq- ilic netition or at anv sub-
setiiicnt time l)efore adjiuliciition the Court mav cither of its own motion
or on the application of any crctlitor make one or more of the following
orders, namely—
1. order the debtor to give reasonable security for Ids appearance
nntil final orders are made "upon the petition and direct that, in default
of giving such sectnity, he shall be detained in the civil prison;
2. order the attachment by actual seizure of the whole or any part
j.of the property in the posse.ssion or imder the control of the (lel)ior,
other than .such particulars (not being his books of account) as arc ex-
em])ted by the Civil Procedure Code' or by any other enactment h o m
ii.ibiJJt)' to :iitachment and sale in execution oi a decree;
3. order a warrant to is,sue with or without bail for the arrest of
the debtor, and direct either that he is detained in civil prison imiil the
(h'sposal of the petition, or that he be released on such tcims as to secu-
rity as may be reasonable and necessary:
Proxided that an order under cl. (2) or cl. (3) shall not be made im-
less the Court is satisfied that the debtor with intent to defeat or delay
his creditors or to avoid any process of the court:
(i) has absconded or has departed from the local limits of ihe
jurisdiction of the Court, or is about to ab.scond or to depart
from such limits or is remaining outside them, ar
(ii) has failed to disclose or has concealed, destroyed, transferred
or removed from .such limits, or is about to conceal, destroy,
transfer or remove from such limits, any documents likely to
be of use to his creditors in the course of the hearing or any
part of his property other than such particulars as aforesaid.

DUTIES OF DEBTOR UNDER P.T.A.

Section 22 of the .\ct lays down certain duties which the debtor must
perform before the order of adjudication, and provides that failure on
his part to do so will render him liable to imprisonment which may
extend to one year. The debtor must—
(a) as soon as the -insohency petition is admitted produce all his
books of account;
(b) at any time thereafter give inventories of his property, lists
of his creditors and debtors and of the debts due to and from
him re.spectively;
(c) submit to such examination, in respect of his property or cre-
ditors as may be re(un"red by the Court;
(d) attend before the C:oiirt or Receiver as and when required;
(c) cxecuie •^uch in^uunients and do all such acts and things in
4)2 MERCANTILE LAW
relation to liis property as may be required by the Court
or Receiver.
Tiiese duties are cast upon the debtor -when his petition is admitted.
AVliere a creditor is the pelitioner, the Court must not asVi the debtor to
perform tliese duties until the petitioning creditor or creditor-s have es-
tablished their riglu to piesent tJie petition, as the debtor cannot possi-
bly be awaie of the admission o£ a creditor's petition until notice there-
of has been served on him. Where the debtor is under arrest or deten-
tion in execution of a money decree, the Court may, either at the time
of admitting tlie petition or at any subsequent time before adjudication,
order his release.
HEARING OF T H E P E T I T I O N
At the hearing of the petition tlie Court shall require proof (a) that
tiie creditor is entitled to present the petition, and (b) that the debtor
has )>een served with notice of order admitting the petition. In oider
to be able to present the petition the creditor must prove that (i) there
subsists a relationship of creditor and debtor, (ii) the debtor is unable
10 pay the debt, (iii) the debt is a liquidated sum and amounts to Rs.
500 or more, and (iv) the debtor has committed an act of insolvency with-
in three months of the presentation of the petition. The Court shall
also, examine the debtor, if he is present, as to his conduct, dealings and
property in the presence oL such creditors, as appear at the hearing. IE
the Court is not satisfied with any of the above it shall dismiss the -peti-
tion, and may award compensation up to Rs. 1,000 to the debtor, if the
creditor's petition was frivolous or vexatious. The Court may also dis-
miss the petition if the debtor satisfies it that he is able to pay his debts.
Similar examination of the debtor, called the Public Examination, is
held bv tlie Court after the order of adjudication but befoie discharge
under the Pre-t. Act.
In the case of a petition by a debtor, he has to furnish a prima facie
proof that he is entitled to present the petition. For this purpose the
debtor must show that he is unable to pay his debts, and either (i) his
debts amount to Rs. 500 or (ii) he is under arrest or in prison in execu-
tion of a money decree, or (iii) an order of attachment is subsisting against
his property. If the debtor has no right to present the petition it shall be
dismissed.

ORDER OF ADJUDICATION AND ITS EFFECTS

If the Court is satisfied with the -proofs and does not dismiss the pe-
tition, it shall make an order of adjudication and shall specify in such
order that period within which the debtor must apply for his discharge
The Court may, however, on sufficient cause being shown, extend the
period of the application for discharge. The, Order of Adjudication is
an order whereby the debtor by or against whom an insolvency petition
was presented has been legally found by the Court to be unable to pay
his debts. T h e Effect of this order is that (i) the whole of the insolvent's
property vests in the Court or a Receiver appointed by the Court, or the
Official Assignee (under the. Presidency-towns Act), and becomes divisible
among tlie creditois; (ii) the insolvent is deprived of all power to entei
LAW OF INSOLVENCY 413
into transactions which iWill bind his creditors in respect of his property.
After adjudication only the Receiver or Assignee can deal with the pro-
pel ly, and e\ery transaction by the insolvent is void against the Recei\er
or Assignee: (iii) the insolvent is disqiialiFied from being appointed to or
holding certain offices; (iv) the debtor is released from his liabilities so
that no creditor of his can, pending the insolvency ' proceedings, h a \ e
any remedy against the propeity in respect of any debt provable in in-
solvency or commence any suit or other legal proceedings, except with
leave of the Court, unless the creditor is a secured creditor who intends
to realise his security; (v) the insolvent must help the Receiver or As-
signee in the realisation ot his property and the distribution of the pro-
ceeds amongst his creditors; (vi) any suit pending before a Court may,
on proof that an order of adjudication has been made, be stayed by
the Court (not the Insolvency Court); (vii) the order will relate back to,
and take effect from, the commencement of insolvency. The right of a
secured creditor to realise or otherwise to deal with his security is un-
affected by the order of adjudication; and he can commence a suit to
realise his security vvithout the leave of the Insolvency Court. The Order
of .Adjudication operates as a statutory transfer to the Official Assignee
of all the oronerty of the insolvent in India, whether movable or immov-
able (Official Assignee, Bombay v. Registrar, Small Causes S7 I.A. 86). As
regards foreign property, the better opinion is that movables will vest
in the officer; but immovable property will not so vest, imlesi foreign
law permits it (Yokohama Specie Bank v. Curlenden 8: Co. 43 Cal. L.J.
436).'

DOCTRINE OF RELATION BACK

From the above it is clear that until an order of adjudication is
made there is no insolvency, and the debtor retains the property. In
other words, no vesting takes place until thjs order; but once the order
is made the property vests in the Receiver or Assignee from the dale of
the commencement of the insolvency and not the order of adjudication.
The title of the Receiver or Assignee is by a legal fiction taken to relate
back to the commencement of the insolvency which is always some an-
terior date. The dates of commencement of insolvency, however, differ
imder the two Acts. Under the Provincial Insolvency Act, an order of
adjudication relates back to the date of the presentation of the petition
on which it is made, i.e., the insolvency commences with the presentation
of the DEtition. if the order is made. Section 28 (7^ of the Act reads : "An
order of adjudication shall relate back to, and take effect from, the date
of th'e presentation of the petition on which it is made." The effect of
sub-sections (2) and (7) is that the properties of the insolvents wherever
they may have been and whoever may have been in possession of them,
automatically vest in the Court or the Receiver, if one is appointed by
the Court. Under the Presidency-towns Act, which follows the English
Rankruptcv Act. the order of adjudication relates back to the first avail-
able act of insolvency and it is from that date the insolvency is deemed
to commence. Thus, the title of the Receiver relates back to and com-
menres at the date of the presentation of the insolvency petition, and
tliat of the Assignee at the time of the first available act of insolvency
414 MERCANTILE LAW
commiiicd ^siiliin tliice nioiuhb before the picsentation o[ tlie insolvency
pulilioii The cffccl of the doctrine of ielation back is that any charges,
cieated b\ a decree or otherwis.e or any other transaction in relation to
ilie piopcriy after the date of the commencement of the insolvency is not
binding on the Receiver or Assignee.

PROTECTION ORDER
A Piotection Older means an oidci by the Court prohibiting tlie
auest of an insohcnt debtor in execution of a decree for the payment of
money. A debtor on l)eing adjudged an insolvent may apply to the
Couit foi piotection and the Court may in its discretion, make an order
for piotection of the insolvent fiom arrest or detention. If he is in pri-
son 01 tindei arrest, his release ma) be ordeied. The protection whirli
the Acts extend to an insohent against arrest oi attachment or sale of
his propel ty can be enjoyed by him only in respect of pio\ able debts.
No protection with regard to debts due to the Union of India can be
granted. The Court may order the arrest of an insohent, if it is satis-
tied that he has deliberately absconded with intent to avoid any obliga-
tions imposed on him.

SPECIAL MANAGER
Section 19 of the Presidency-towns Act piovides that if in any case
the Court, having regard to the nature of the debtoi's estate or business
or to the interest of the creditors generally is of the opinion that a
special manager of the estate or business ought to be apjjointed to assist
the Official Assignee, it may appoint a manager thereof accordingly to
act for such time as the Court may auhoiisc, and to ha\e such powers
of the Official Assiprtee as may be entrusted to him by the Official As-
signee or as the Court may direct. The special manager must furnisli
security and keen and tender accounts in such manner as the Court may
direct, and will receive such remuneration as the Court mav determine.

EFFECT OF INSOLVENCY ON ANTECEDENT TRANS.\CTJONS

EXECUTION CREDITOR
Where execution of a decree has been issued against the ])roperty of
a debtoi, no person shall be entitled to the benefit of the execution
against the Official Receiver or Assignee except in respect of assets rea-
lised in the course of execution by sale or otherwise, under the Provin-
cial Insolvency Act, before the date of the admission of the petition, .and
under the Presidency-towns Insolvency Act, ibefore the date of the order
of adjudication and before he had notice of the piesentation of an in-
solvency petition. Any creditor or anyone interested may give notice to
the executing Court of the admission of the insolvency petition or of the
order of adjudication, as the case may be, whereupon the Court riii.st. on
application, direct the property, if in the possession of the Court, to be
delivered to the Official Receiver or Assignee, but the costs of the exc-^
cution will be a first charge on the property so delivered. The Provincial
Insolvencv Act also provides that the costs of the suit in which the dec-\
ree was made are a first charge on the property so delivered. If, hovr-
LAW OF INSOLVENCY '113
ever, the property has been sold in execution of the tlccicc any person
wiro in good faith purchased the property woidd acquire a good title
against the Official Receiver or Assignee. Notliing stated above allects
the rights of secured creditors.

AVOIDANCE O f VOLUNTARY TRANSFER

Every transfer of property whicli is not made, (i) bcfoie and in con-
sideration of a marriage, or (ii) to a purchaser or incumbiancer in good
faith and for valuable consideration, shall be void against the Official Re-
ceiver or Assignee, if the transferor is adjudged insolvent on a petition
presented within two yeais of the date of the transfer, and under the
Presidency-towns Ac;'t, within two years after the date of the transfer.
The effect of this difference in time in the two Acts is that under the
Presidency-towns Act the transfer must ha\e been made within two years
next before the date of the commission of the 'first available act of in-
solvency, and under Provincial Insolvency Act, it mu.<ft have been made
within two years next before the presentation of the insolvency petition.
In the latter case, a voluntary transfer, if made within two years before
the date of the presentation of tlie .insoIvenj:y petition, may be avoided,
even if the transfer was made more than two years before the date of
the order of adjudication. The onus of proving that a particular trans-
action was not entered into in good faitli and for valuable consideration
is on the Official Receiver, unless the transferee knew that the transferor
was in inslovent circumstances at the time of the transfer.'*

AVOIDANCE OF FRAUDULENT PREFERENCE

In order to protect the interests of the whole body of creditors, the
Acts T^rovide for the avoidance of fraudulent preference by the debtor
of some creditors over others. The Acts provide that everv' transfer liv
\ - ' ' '
a debtor of his property, every payment made, every obligation incurred
and ever\' iudicial proceeding affecting his property taken or suffered
by him, is fraudulent and void as against the Official Receiver or Assig-
nee and shall be anmilled by the Court, provided that the following five
conditions are fulfilled, namely—
1.' the debtor was at the time of the transfer or payment unable
to pay from his own money his debts as they became due:
2. the transfer or payment was made in favour of a creditor;
3. the transfer or payment in fact prefers one creditor to anodier;
4. the transfer or payment was made widi a view to giving such
creditor a preference over other creditors; and
5. the debtor has'been adjudged insolvent on a petition present-
ed within three months after. the date of the transfer of pav-
ment.
This rule as to fraudulent preference will not aflfect die rights of
any person who in good faith and for valuable consideration has acquir-
ed a title through or under a creditor of the insolvent.

3. Srikantiah Setty v. A. Basha Saheb & Co., 1958 Mys. 35.

416 MERCANTILE LAW
PROTECTED TRANSACTIONS
Subject to the piovisions of tiie Insolvency Acts. as to executions,
voluntary transfers, and fraudulent preferences, discussed above, nothing
in the Acts invalidates in the case of an insolvency—
(a) any payment of money by an insolvent to a creditor;
(b) any payment of money or delivery of property to the insolvent;
(c) any iransfer by the insolvent lot -valuable consideration; or
(d) any contract or dealing by or with the insolvent for valuable
consideration :
Provided that (i) any such transaction takes place before the date of
the order of adjudication, and (ii) the person who deals with the debtor
has not at the time of any such transaction notice of the presentation
of any insolvency petition by or against the debtor. It is to be noted
that the protection accorded by the Acts extends only to bona fide trans-
actions—transactions which are fair and honest.

INSOLVENT'S SCHEDULE
Under Section 24 of the Presidency-towns Act an insolvent is retjuired
to prepare and submit to the Court a schedule verified by affidavit in
prescribed form within 30 days of the order ,on the petition of the deb-
tor or within 30 days of the service of the order passed on the petition
of a creditor. If the insolvent fails to prepare the schedule on the pre-
scribed form the Official Assignee may prepare it and the insolvent may
be committed to civil prison.
According to Section 33 of the Provincial Insolvency Act the Sche-
dule 6E fcreditors is to be framed by the Court on its satisfying itself as
to the validity of the claim.

DUTIES OF INSOLVENT
Section 3 of the Presidency-towns Insolvency Act enumerates the
duties of the insolvent as follows :—
1. The insolvent must, unless prevented by sickness or other
sufficient cause, attend any meeting of his creditors which the
Official Assignee may require him to attend and must submit
to such examination and give such information as the meeting
may require.
2. The insolvent must— ,
(a) give such inventory of his property, such lists of his cre-
ditors and debtors, and of the debts to and from tliem
respectively;
(b) submit to such examination in respect of his orpperiy or
his creditors;
(c) wait at such times and places on the Official Assignee or
special manager;
(d) execute such powersof-attorney, transfers and instru-
ments; and
 LAW OF INSOLVENCY 417

(e) generally, ao all such acts and things in relation to his

property and the distribution of the proceeds amongst his
creditors, as may be required by the Official Assignee, spe-
cial manager or the Court.
3. The, insolvent must aid, to tlie utmost of his power, in the
realisation of his property, and the distribution of tht pro-
ceeds among his creditors.
4. If the insolvent wilfully fails to perform any of the duties
mentioned above, he is guilty of Contempt of the Court and
liable to be punished, for it.
5. He will be guilty of Contempt of the Court if he 1. L, to deli-
ver possession to the Official Assignee of any pa'-t of his pro-
perty which is divisible among his- creditors, even alter dis-
charge.
Under the Provincial Insolvency Act these duties are provided in two-
sections. T h e duties before adjudication are given in Sectio^i 22 (dis-
cussed on page 411), and those after adjudication in Section 28, as given
below :
1. T h e prime duty of the insolvent is to aid the Receiver in tlie
realisation of his property and the distribution of the pro-
ceeds among the creditors.
2. He must appear for examination though he may reside more
than 200 miles away from the Court-house.
3. He must give all information he can to the Official Receiver
and supply him with lists of' his properties and liabilities, his
creditors and debtors.
4. He must do everything that tlie Official Receiver may reason-
ably require of him or the Court may order him to do in re-
lation to his property.
5. If he wilfully fails to perform any of the duties or fails to deli-
ver up possession of any part of his property which is divisible
among his creditors, he shall be punishable with imprisonment
extending to one year.
PUBLIC EXAMINATION
Under the Presidency^towns Insolvency Act, the Court fixes a date for
holding a public examination of the insolvent. T h e insolvent must, on
the appointed date, attend court and answer all questions put to him by
the Court, the Official Assignee and any creditor. Tlie object of the
examination is to determine the causes which led to insolvency. The
Court may dispense with the holding of the public examination if the
insolvent is a lunatic or a pardanashin woman or if he or she is suffer-
ing from some disease or disablement.
Under the Provincial Insolvency Act the Court must examine the
debtor while the petition for adjudication is being heard by the Court.
During such examination the creditors present may put questions to the
debtor.
ANNULMENT OF ADJUDICATION
There are four cases in which an adjudication may be annulled by
tlie Court, namely—
418 MERCANTILE LAW

A. (i) where in the opinion of the Court a debtor ought not to

have been adjudged insolvent, or
(ii) where it is proved to the satisfaction of the Court tliat die
debts have been paid in full, or
(iii) where an adjudication is made on a debtor's petition, who
did not owe Rs. 500 or more, or
(iv) where an adjudication is made without leave of die Court,
\Aien. such leave >was necessary.
Thus, ^n adjudication order made against a minor, or against a deb-
tor who was deceased at the time of the petition, may be annulled. It
may be annulled where 100 paisfc dn the rupee, together witli inteiesr u p
to the date of payment, have been paid.
C. Where concurrent proceedings are pending in another Coiirt.
A debtor can be adjudged insolvent by two or more Courts, e.g., by
the Court of the place where he resides and by the Court of the place
v/here he carries on business. The power to annul is discretionary and
'ii a debtor is adjudged insolvent by two Courts, either Court may annul
its OWN order of adjudication or stay its proceedings, if the assets can
be moie conveniently administered by the other Court.
C. Where the Court approves the proposal of the insolvent foi a
compromise or a scheme of arrangement.
D. Wheie the insolvent absents himself on the date of the hearing
of his application for discharge, or does not apply for his discharge within
die period specified by t h e ' Court.
Notice of every order annulling-adjudication must be published in
the Official Gazette and in sucli other manner as may be prescribed.
EFFECT OF ANNULMENT
The effect of annulment depends on the terms of the order made by
•Jie Court while annulling the adjudication. The order varies according
to the nature of the case. Where an adjutfication is annulled, all sales
and dispositions of property and payments duly made, and all acts there-
tofore done, by the Court oK'Receiveib or Assignee shall be valid; but sub-
ject as aforesaid, the property of the insolvent shall vest in such persons
as the Court may appoint, or in default of such appointment, shall re-
vert to the debtor to the extent of his right or interest therein on such
conditions (if any) as the Court may by an order in writing declare.
In the case o£ annulment for default to apply for discharge or ap-
pear at the hearing of. the application for discharge, the Court may re-
commit the insolvent to custody where he has been released by the order
of the Court, and all processes against his person in force at the time of
his release shall be deemed to be in force against him.
POMPOSITION AkD SCHEME OF ARRANGElVfENT
A debtor who is unable to pay his debts in full may arrange his
affairs with his creditors without filing a petition for his own adjudica-
tion, Arrangements between debtors and creditors are known as com-
position agreements. A composition has been defined as an agi-eement
between die compounding debtor and all or some of the creditors by
 LAW OF INSOLVENCY 419

which the compounding creditors agree witli the debtor and (exjwessly
or impliedly) with each other to accept from tlie debtor payment of less
tnan uie amounts due to them in lull satisfaction of their claims. But
a aebtor cannot settle witli his creditors out of Court alter he nas.'been
aajudged an insolvent. That can be done only by a composition o r
saieme as provided by tire two Acts. Therefore, an insolvent may at
any time atter the maidtng of an order of adjudication submit proposal
for a composition in satistaction of his debts or a proposal iar a schetae-
of arrangement of his affairs whereupon the Court will hx a date-for. t h e
consideration of the proposal and issue notice to all his creditors -m- zittend
the meeting on the date so fixed. If, the proposal being placed before
the meeting of -creditors a. majority in numoer and three-fourths in value
of the creditors whose debts are proved and who are present in person,
or by pleader under the Provincial Insolvency Act, or by proxy or a
letter addressed to the Official Assignee, under die Presidency-towns Act,
resolve to accept the proposal and the Court approves it, the same' is
deemed to have been duly accepted by all the creditors. The prop6sal
for composition is not absolutely final. It is really a basis of negotiation
with the creditors, and may be amended at the meeting of the creditors
at which it is considered, but it must satisfy the Court as calculated', lbs.
benefit the general body of creditors.

If, in tlie opinion of the Court, the terms of the proposal are not
reasonable or are not calculated to benefit the general body of creditors,
the Court must refuse to accept the proposal. T h e Court in deciding
one way or the other will consider the report of the -Official Receiver or
Assignee and hear any objections which may be made by or on behalf
of any creditor. T h e Court must also refuse to accept the proposal,
if the circumstances surrounding the debtor's insolvency are such that it
^would have no power to grant an unconditional discharge, unless it
* provides reasonable security for payment of not leis than 40 paise in the
rupee on all the unsecured debts against the debtor's estate.' Where tlie
Court approves the proposal, the terms must be emboafaj in die order;
and the order of adjudication must be annulled. Thefeafter- die deb-
tor will have power to deal with his estate by realising it m ordinary
course of business for the purpose of enabling himself to pay the com-
position.

ANNULMENT OF COMPOSITION
If default is biade in the payment of any instalment due" in pur-'
suance of the composition or scheme, or it appears to the Court that the
composition or scheme cannot proceed without injustice or undue delay,
or that the approval of the Court was obtained by fraud, the Court may,
if it diinks fit, re-adjudge the debtor insolvent and annul the composi-
trftm or scheme but without prejudice to the validity of any transfer or
payment duly made or of anything duly done under or in pursuance of
the composition or scheme. After such annulment, the creditors can
prove for their original debts and not simply what would have been
due under the composition. The annulment will also discharge a surety
for composition for liability.
420 MERCANTILE LAW

DEBTS PROVABLE IN INSOLVENCY

Vniini. both Acis: AJl debts and liabilities, present or future, certain
or tkjiiiiriBunt:,- EO whidi the debtor is subject when he is adjudged an
insolvent, ot to winch he may become subject toetore his chucharge by
reason of any obligation incurred before tlie date o£ such adjudication,
are deemed to be delits provable in insolvency. Under tire wide words
oi liit Acts all kinds. o£ debts or liabilities of the insolvent can be proved,
except those enumerated below.
Examples bt provable debts.—The following have been held as debts
provable m insolvency; (a) damages for breach of contract; (b) dainigc
lor, breach of trust; (c) annuities lor life; (d) a lessor can prc)\ e iui loss
ot rent or any otlier liability in respect ot a subsisting lease; (e) an uii
called amount on shares held by the insolvent; (fj the liability of a
member ot a Co-operative Society in the event of its being dissolved is a
debt provable in insolvency; (g) a contingent liability on a contract tr
indemniiy; (h) on tire insolvency of a surety, the creditor can prove fo<
the whole amount due, even if since that date he has received sums ou
account irom the principal debtor, or co-surety provided the creditoi dor;
not receive in all more than 100 paise in tire rupee.

DEBTS N O T PROVABLE
The following debts are not provable under botlx Acts: (i) debts in
capable of being fairly estimated; (ii) demands in the nature of unlitjui
dated damages arising otherwise than by reason of a contract or breact
of trust.
In addition to tliese two debts, according to Section 46(1) of Pre-t.
Act, debts or liabilities contracted by an insolvent from a person having
notice of the presentation of an insolvent petition by or against a deb-
tor are not provable.
Examples of not provable debts: (a) Claims for damages for a tort;
(b) claims for damages in respect of fraud; (c) a debt contracted after
presentation of petition but bpfore order of adjudication or after this or-
der; (d) illegal debts and debts against the policy of insolvency laiv (e.g.,
agreement to pay for not opposing discharge); (e) debts barred at the
commencement of insolvency.

P R 0 O F OF DEBTS
The medvSd of proof, as laid down in Section 49 of the Provincial
Insolvency Act, is that the creditor must deliver, or send by a registered
letter, to the Court, an affidavit verifying the debt. T h e affidavit must
contain particulars of the debt and specify the vouchers, if any, by which .
they can be substantiated. The Court, after hearing the parties and
.ifter considering the leport of the Official Receiver, may admit the proof
or reject it The Court will then frame a schedule of creditors contain-
ing the names of all those creditors who have proved their debts, ,and tne"
amount ot the respective debts. Any creditor may challenge the validity
of a debt set up by another creditor and the Court must decide the ques-
tion. It cannot delegate the' Official Receiver the poAver to frame the
Schedule, unless the High Court has especially empowered it so to db
under Section 80. A creditor who has not proved his debt when the
 LAW OF INSOLVENCY '421

schedule was framed may tender proof at any time before the discharge
' of the insolvent. Also, wheie a creditor is placed on the schedule in
respect of a debt he may prove further debt which he had omitted to
prove. A creditor who has failed to prove a provable debt cannot en-
force his claim against the insolvent after his discharge. Debts and liabi-
lities not provable in insolvency are not affected by the discharge, and
the cieditor can sue the discharged insolvent in respect t)f them.
Under the Presidency-towns Insolvency Act, the proof in the manner
stated above is to be submitted to the Official Assigriee, and not to the
Court. The Official Assignee is given the powers to admit or reject in
writing any proof and claim.

PROOF BY SECURED CREDITORS

A secured creditor has his remedy independently of the Insolvency
Court to realise his security, but he- can, if he so desires, come in the
insolvency proceedings as an unsecured creditor by relinquishing his se-
curity or by deducting the value of the security. If he wishes to parti-
cipate in the benefits of insolvency proceedings he must coftiply with
the requirements of the Acts.
Three courses are open to a secured creditor who wishes to take ad-
vantage of the insolvency proceeding, namely,—
(i) He may enforce and realise his security and then prove for the
balance that may still remain due to him; or
(ii) he may relinquish or surrender the security for the general
body of creditors and prove for the whole debt that may be
due to him; or
(iii,^ he may value his security, state the particulars of his security
in his proof and then receive a dividend for the balance that
may remain due to him after the value so assessed has been
deducted subject to the right of the Court or OiBcial Assignee
to redeem the security on payment to the creditor of the assess-
ed value.
Where a creditor, after having valued his security, subsequently reali-
ses it, i.e., sells the property in order to appropriate the sale" proceeds tbr
wards the payment of his principal, interest and costs, the net amount
realised must be substituted for the amount of any valuation previously
made by the creditor, and must be treated as an amended valuation ra^de
by the creditor. Where a secured creditor does not comply with the
above provisions, he shall be excluded from al) shares in any dividend,
and in that case, he shall have to be content with his security whether
or not it is sufficient for the payment of his debt.

PROOF FOR INTEREST

T h e general rule in insolvency is that the interest ceases from the date
of the order of adjudication, and no proof for interest after that date
. is admitted, tmless the estate is moie than sufficient to pay 109 paise in
'T' the rupee. In the latter case, the creditors can get interest up-to-d^te
and if there is still any surplus, that goes to the insolvent. "Theory in
bankruptcy," says Jamfis, L. J. in Re Savia,* "ij to slop all things at the
4. (3872) L.R. 7 Ch. A.P.P, 760.
 422 MERCANTILE LAW

date of bankruptcy, and to divide the -wTeck of the man's property as it

stood at that date." It is provided that :—
(i) in case of debts where no interest is agreed upon, but there is
a due date, interest not exceeding 6 per cent per annum rnay
be proved from the due date to the date of adjudication;
(ii)
in case of debts where no interest is agreed upon and there is
no due date, interest not exceeding 6 per cent per annum may
be proved from the date of the demand notice to the date of
adjudication;
(iii) in case of debts where no interest is agreed upon, interest not
exceeding 5 per cent per annum may be proved without "pre-
judice to the right of receiving-a higher rate from surplus, if
any.
Where the rate of interest agreed upon is excessive, the Court h a s .
the power under the Usurious Loans Act, 1918, to reduce it. An insol-
vent's solvent debtors are not absolved from the liability to pay interest
on the ground that the insolvent has fixed his, petition in-insolvency.
T h e interest'when collected is distributed among thq creditors.

P A R T 12-B

INSOLVENT'S PROPERTY

T h e Insolvency Acts define "Property" as including property over

which, or over the profits of which, any person has a disposing power
which he may exercise for his own benefit. When the Acts refer to pro-
perty of insolvent, they always mean such of his property as is divisible
amongst his creditors. The property includes not only material objects
but also rights over material objects. Thus, in the case of a Hindu
father it includes his disposing power over his son's undivided interest.
All valuable rights which may be turned into money or whose ivorth can
be assessed in money are property. T h e word property includes im-
movable property, movable property, and actionable claims. Though the
definition of property ,is not exhaustive, yet it is comprehensive enough
to include money, goo,ds, tilings in action, land and every description of
propertv whether real 'or personal, movable or immovable obligations,
easements and every description of estate, interest and profits, or contin-
gent, present or future, arising out of or incidental to propertv and includ-
es any property over which or over the profits of which the insolvent
has a disposing power which he may exercise for his benefit. This pro-
perty vests in the OflScial Receiver or Assignee and is divisible among
the insolvent's creditors

PROPERTY DIVISIBLE AMONGST CREDITORS

Property of the insolvent *hich can be divided among his creditors
comprises the following particulars, namely :—
1. property which may belong to him at the commencement of
the insolvency;
2. property which may be acquired by or devolve on him after
 LAW OF INSOLVENCY 423

the date of the order of adjudication and before his discharge,

(i.e., after-acquired property);
3. the capacity to exercise all such powers in respect of property
as might have been exercised by him for his own benefit at
the commencement of the insolvency or before his discharge;
4. goods in the possession, order or disposition of the insolvent
in his trade or business so that he is the reputed owner thereof.
The following is an enumeration of some of the properties which
constitute the properties of the insolvent and vest in the Official Re-
ceiver ox Assignee: Money in the hands or at the disposal of the in-
solvent, his person,al earnings, and salary, except the amount sufficient
for the maintenance, according to his station in life, of the insolvent
and his family, secret formulas invented by him, I'fe insurance policies,
copy-right, partnership assets in case of firm's insolvency, goodwill, Hindu
joint family property, interest, statutory tenancy, occupancy rights, action-
able claims, equity of redemption, movable and immovable property of the
insolvent, goods in the possession, order or disposition of the insolvent
in his trade or business, goods held by commission agent, property under
bailment, and a right to sue in respect of a tort or a breach of contract
resulting in injury to the estate of the insolvent.

PROPERTY NOT DIVISIBLE AMONG CREDITORS

Property which is not divisible among the creditors of the insolvent
falls into two classes, namely :—
1. Property held by the insolvent on trust for any other person
or in fiduciary capacity; and
2. Tools of trade, necessary wearing apparel and other similar
property.

PROPERTY HELD BY INSOLVENT IN FIDUCIARY CAPACITY

Property held by the insolvent as a tiustee under a trust does not pass
to the Official Receiver or Assignee and is not divisible among his credi-
tors Similarly, property held by him as executor or administrator, or
in any fid"c'ary capacity is not divisible. Thus, property in the hands of
,an insolvent as a bailee, factor, solicitor, broker, auctioneer or cashier
is property held by him in fiduciary capacity, and on his being adjudged
insolvent, it will belong to the principal, and will not pass to the Offi-
cial Receiver or Assignee. T h e position is the same in respect cf money
held by an agent to collect and remit or by a secretary or treasurer of a
society. Also, property in the possession of an insolvent at the time of
his insolvency for a specific purpose, for paying his -pressing creditors
does not Delong to the debtor, and does not vest in the Official Receiver
or Assignee on the debtor being adjudged an insolvent.

TOOLS OF TRADE, WEARING APPAREL, ETC.

Both tne Acts provide that the insolvent is entitled to retain cer-
tain property which cannot be divided afi©Hg»t his CTeditors. Such pro-
 424 MERCANTILE LAW

perty, under the Presidency-towns Insolvency Act, consists of the tools oE

trade and tJie necessary wearing apparel, bedding, cooking vessels, and
furniture of himself, his wife and children, to a value, inclusive of tools
and apparel and other necessaries as aforesaid, not exceeding Rs. 300 in
the -whole.
The Provincial Insolvency Act makes a general provision that pro-
perty (not being books of account) which is exempted by the Code of
Civil Procedure. 1908, or by any other enactment for the time being In
force from liability to attachment and sale in execution of a decree, is
not divisible among the creditors of the insolvent.
Property exempted from attachment and sale under Section 60 of the
Code includes (i) the necessary wearing apparel, cooking vessels, beds,
and bedding of the judgment-debtor, his wife and children, and such
personal ornaments as, in accordance with the religious usage, cannot be
parted with by a woman; (ii) tools of artisans and, where the judgment-
deljtor is an agriculturist, his implements of husbandry, etc.; (iii) houses
and other buildings belonging to an agriculturist and occupied by him
as such for the purpose of agriculture, that is, in order to enable him
to cultivate the land. An agrictilturist here means a person whose sole
means of living is gained by cultivating a small holding.
In addition -to the properties specified in the two Acts as stated above,
there are some- other properties which are not divisible among the in-
solvent's creditors, namely—'
1. Pension; 2. Provident Fund money; 3. Gratuity payable to a
railway servant; 4. Spes successionis, i.e., a bare possibility of succession,
such as the chance of an heir-apparent succeeding to an estate, or the
chance of a person obtaining a legacy on the death of a relative; and
5. Right of action in respect of a tort or a breach of contract resulting
in injuries wholly to the person or feelings of the insolvent.

REPUTED OWNERSHIP
T h e doctrine of reputed ownership applies only in tlie case of traders.
T h e provision is made for the protection of the general creditors of a
trader against the false credit which might be acquired by his being
suffered to have the possession and power of disposition of property as
his own, which does not really belong to him. This nrevents traders from
gaining a delusive credit by a false appearance of substance to mislead
those who deal with them. This provision which is known a s ' the Re-
puted Ownership Clause as contained in the two Acts is similar in effect
except as to the time when the clause takes effect. Under the Presi-
dency-towns Act it is provided that goods which are at the commencement
of the insolvency in the possession, order or disposition of the insolvent,
in his trade or business by the consent and permission of the true owner,
under such circumstances that he is the reputed owner thereof, are di-
visible among his creditors. The Provincial Insolvency Act lavs down the
good5 which are, at the date of the presentation of the petition on which
the order of adjudication is made, in the possession, order or disposition
of (he insolvent in his trad^^or business, by the consent and permission
 LAW OF INSOLVENCY 425
of the true owner thereof, are divisible among his' creditors. It is clear
from these provisions that it is not only the goods of which the insolvent
is the true owner which vest in the Official Assignee or Receiver, but
also the goods which belong to other peopfe of which the insplvent is
the apparent or reputed owner. Thus, if a person buys goods from a
trader and pays for th^ja, but leaves the goods in the possession of the
seller, and the seller becomes insolvent, the goods will, as a general rule,
pass to the Official Assignee or Receiver and will be divisible among his
creditors. The buyer is the true owner of the goods, and the insolvent
is the apparent or reputed owner thereof. The goods are said to be in
the reputed ownership of the insolvent, or in his possession, order or
disposition. T h e is so because the property is held out to the world as
that of the trader and will be treated as his on his insolvency and be
divisible among his creditors. By far the largest number of cases of re-
puted ownership arise in connection with mortgages of goods. The effect
of the reputed ownership clause is to transfer to Official Assignee pro-
perty that does not belong to the insolvent. It is to take one man's pro-
perty to pay another man's debt. Under the Provincial Insolvency Act,
the doctrine" of reputed o<vnership does not apply to goods which have
been mortgaged or hypothecated by the insolvent and this is the subs-
tantial point of difference between the two Acts. Where goods are mort-
gaged or hypothecated, the Receiver takes the goods subject to the mort-
gage or hypothecation.
T h e doctrine of reputed ownership, as stated above, applies only to
goods and choses-in-action are not "goods" in this connection. And it
does not extend to all kinds of goods. It extends only to such goods as
are in the possession, order or disposition of the insolvent in his trade or
business. Gftods not used for "purposes of the insolvent's trade or busi-
nc.s do not pass to the Official Assignee or Receiver. Further, to bring
goods within the reputed -ownership clause, they must be in the Sole pos-
session and Sole reputed ownership of the insolvent. T h e clause does
not extend to cases in which the insolvent and other persons who are not
insolvent are iointly in possession of goods and of which he and those
persons are iointly reputed owners.

AFTER ACQUIRED PROPERTY

It may happen at times that an insolvent acquires property after ad-
judication and before discharge. He may carry on business after insol-
vency, and, in the course of business, he may acquire rights and property.
He may also acquire property by inheritance or by way of gift or under
a settlement or a will. He may have personal earning, salary and income
from other sources. There is a slight difference in law under the two
Acts, and we shall, therefore, deal with it separately.
Under the Presidency-towns Insolvency Act, the propert" acquired by
• the iniiolvent after adjudication and before discharge vests "in the Official
Assignee only when he intervenes on behalf of the insolvent's estate. If
the Official Assignee doe? not intervene, and the insolvent'transfers the
property to another who takes it in good faith and for value, tli^ trans-
feree acouires a good title to it. Further, unless the Official Assignee has
 426 MERCANTILE LAW

intervened, it is competent for the insolvent, His legal representatives and

his assigns, to maintain a suit lor the recovery oE aEter-acquired property
or for any other relief in respect thereof against a stranger, and that
the Official Assignee is not a necessary party to such-suit. The provision
in this Act is based on the English rule of law stated in Cohen v. Mitchell
(1890), Q.B.D. 262 that "until the trustee intervenes, all transactions by
a bankrupt after his bankruptcy with any person dealing with him bona
fide and for value, in respect of his after-acquired property, whether v/ith
or without the knowledge of the bankruptcy, ^are valid against the trustee."
The Legislature in drafting Section 28(4) of the Proiiincial Insolvency
Act has departed from the abov^ rule probably becauss in' places oiit-
sidfi Presidency-towns fraud was more rampant and that, under the guise
of a bona fide transfer for value, after-acquired property would be trans-
ferred benami to the prejudice of insolvent's creditors. The section,
therefore, provides that all property acquired by the insolvent after ad-
judication and before discharge shall forthxvith vest in the Receiver. The
effect of this provision is that all property, whether it is owned by the-
insolvent at the time of the order of adjudication or it is acquired after
such order but before discharge, vests in the Official Receiver as soon as
the adjudication order is made. Unlike the Official Assignee, the Re-
ceiver is riot required to necessarily intervene before the after-acquired
property will vest in him.

PERSONAL EARNINGS
Wages and other money earned by the insolvent by his personal
labour and exertions constitute his "personal earnings" The personal
earnings of an insolvent vest in the Official Assignee or Receiver like
any other property except such p a n of thejn as is necessary for the main-
tenance of the insolvent and his family. Thus, the Assignee or Receiver
can intervene only if they are more than sufficient for the maintenance
of. the insolvent and his family. Similarly, as soon as the amount of a
provident fund reaches the hands of an undischarged insolvent depositor
it becomes the insolvent's property and vests in the Receiver, or the
Assignee can intervene with respect to it. The pension of a retired
insolvent is also property for the benefit of his creditors' as it becomes
payable each month.

DISCXAIMER OF ONEROUS PROPERTY BY OFFICIAL ASSIGNEE

Sections 62-67 of the Presidency-towns Insolvency Act provide for a
disclaimer of oneroi^s property by the Official Assignee. This is neces-
sary to protect him from personal liability in respect of onerous property.
Land burdened with onerous covenants, shares or stocks in companies,
unprofitable contracts, or any other property, which is unsaleable, or not
readily saleable, by reason of its binding the {wssessor thereof to the
performance of any onerous act or to the payment of any sum of money,
are different forms of onerous property, and the Official Assignee may
disclaim, them. He cannot, however, disclaim a contract entered into
by the insolvent for the sale of a lease unless he also disclaims the lease
itself. T h e period for disdaiming is twelve months from the date of
LAW OF INSOLVENCY 427

adjudication or the time when the Official Assignee came to know of

such property after adjudication.

EFFECT OF DISCLAIMER
As regards the insolvent and his property, the disclaimer operates to
determine, as from the date thereof, his rights, interests and liabilities in
or in respect of the property disclaimed. As regards the Official As-
signee peVsonally, his liability in respect of the property is determined
by the disclaimer as from the date when the property is vested in him.
Disclaimer does not affect the rights or liabjlitie? of third parties except
so far as is necessary for the purpose of releasing the insolvent and his
property and the Official Assignee from liability.

T I T L E OF OFFICIAL ASSIGNEE OR RECEIVER

T h e combined effect of the doctrine of reputed ownership and of the
effect of insolvency on antecedent transactions is that the title of the Offi-
cial Assignee or Official Receiver is superior to that of the insolvent.
According to the doctrine of reputed ownership, the Official Assignee or
Receiver may claim the goods belonging to persons other than the in-
solvent lying in the possession of the latter. The result is that as against
the Official Assignee or Receiver even the true owner of the goods can-
not claim them. But the insolvent could not claim such goods as his
own. Sections 53 and 54 of Pro. I. Act and Sections 55 and 56 of the
Pres-t. Act are also illustrations of the superior title of these officials in
respect of the insolvent's property. All property belonging to the insol-
vent vests-in tliem and they alone can deal with it, and not the insolvent.
Further, every voluntary transfer not being a transfer made before and
in consideration of marriage or made in favour of a purchaser in good
faith and for valuable consideration is void against these officials if made
within 2 years next before the presentation of the petition. Similarly,
a fraudulent oreference is-void against them. Moreover, an Official As-
signee can disclaim onerous property, but the insolvent could not dis-
claim it.

REALISATION OF PROPERTY
As to the mode of realisation there is some difference under the two
Acts Therefore, each set of proi'isions will be dealt with separately. The
powers and duties of realisation, however, of the Official Assignee and of
the Receiver are the same, and they will be tieated together.

POSSESSION OF PROPERTY BY OFFICJAL ASSIGNEE

It is the duty of the Official Assignee to take possession as soon as
possible of the deeds, books and documents of the insolvent and of all
other parts of his property capable of manual delivery. If the insolvent
is in possession of any such property, the Official Assignee alone is entitled
to possession thereof. If the insolvent has sold his book debts and deli-
vered liis books of account to the purchaser, ihe Official Assignee cannot
claim the books. T h e Official Assignee is the owner of the property
whicli vests in him", and he has nil the remedies wiif.h are ?vai'able to
an owner. Besides these, he has certain special lemedies cn'>ii '^ -ua..
428 MERCANTILE LAW
POSSESSION OF PROPERTIES BY OFFICIAL RECEIVER
Section 56 (3) of the Provincial Insolvency Act provides tliat where
the Court appoints a Receiver, it may remove any person in whose pos-
session or custody any property of the insolvent is from the possession
or custody thereof, but this does not authorise the Court to remove from
the possession or custody of property any person whom the insolvent has
not a piesent right so to remove. It is to be noted that under this Act
the Court alone has the power to remove; the Receiver has no such power,
although he can make an application for possession.

Section 60 provides that in any area in which a declaration has been

made under Section 68 of the Civil Procedure Code, no sale of the im-
movable property of the insolvent paying revenue: to the Government or
held or let for agricultural purposes can be made. In Punjab even tem-
porary alienation of agricultural land 'cannot be made, whether the
alienee is an agriculturist or otherwise.

POWER OF OFFICIAL ASSIGNEE AND RECEIVER T O RE.\LISE

T h e Acts lay down that the Official Assignee and Receiver must with
all convenient speed realise the property of the insolvent and distribute
dividends among the creditors, and for that purpose may, with the leave
of the Court—
(a) sell all or any part of the property of the insolvent;
(b) give receipts for any money received by him.
He may also, with the leave of the Court, do any of the following
things, namely :—
1. carry on the business of the insolvent so far as may be neces-
sary for beneficial winding up of the same;
2. institute, defend or continue any suit or other legal proceed-
ing relating to the property of the insolvent;
3. employ a legal practitioner or other agent to take any pro-
ceedings or do any business which may be sanctioned by the
Court.
4. accept as the consideration for the sale of any property of the
insolvent a sum of money payable at a future time subject' to
such stipulations as to security and otherwise as the Court
thinks fit'
5. mortgage or pledge any part of the property of the insolvent
for the purpose of raising money for the payment ef his debts;
6. refer any dispute to arbitration and dbmpromise all debts,
claims and liabilities on such terms as may be agreed upon;
7. divide in its existing form amongst the creditors, according
to its estimated value, any property which, from its peculiar
nature or other special circumstances cannot readily or ad-
vantageously be sold.
LAW OF INSOLVENCY 429

DISTRIBUTION OF PROPERTY
Both Uie Acis piovide diai the Olfacial Asiignec oi Receivei, ab the
case may be, must begin the distribution ot div.^-nds with all convenient
speed. Under Uie Presidency-towns Insolvency Act the first dividend
must be distributed within one year after adjudication unless the Otficial
Assignee satisfies the Court that there is. sutticient reason lor postponing
die declaration to a later date, and the suDsequent dividends must be
declared and paid at intervals of not more than six months unless there
IS sufficient reason for further delay. T h e OHi.cial Assignee is also re-
quired to publisli a notice of his intention to declare a dividend and to
notify each creditor mentioned in tlie insolvent's schedule who has not
proved his debt, and when he has declared a dividend, to send to each
creditor who has proved, a notice showing the amount of the dividend
and the time and manner of its payment. No such period is fixed and
no such declaration and notice are req4ired under the Provincial Insol-
vency Act. In the calculation of divideads and dieir distribution the
Official Receiver or Assignee must retain in his hands sufficient assets to
meet the claims ot creditors residing in places so distant that they have
not had sufficient time to tender their proofs and also for claims not yet
determined. He must also maLe provision for any disputed proofs and
claims and for tlie expeJises iicccssary for the administration of the
estate. He is not, however, required to hold any money in his Iiands
to meet the possible claim of a secured creditor who has neither realis-
ed not valued his security, though he may liave notice of the date. A
creditoi who has not proved his debt before the declaration of a parti-
cular diudend does not thereby lose his right in respect thereof. If
there are assets available for distribution of that dividend he is entitled
to be paid what he may have failed to receive out of tliose assets before
ihey are applied to the payment ot any future dividend, but he cannot
disturb the distribution of any dividend already declared before his debt
was proved. T h e Court is not to interfere in case where the creditor
comes in late.
FINAL DIVIDEND
Under the Presidency-towns Insolvency Act the final dividend is to
be declared when the Official Assignee has realised all the property of the
insolvent or so much thereof as can, in his opinion, be realised without
needlessly protracting (he proceeding in insolvency. Under the Provin-
cial Insolvency Act it is to be declared when the Receiver has realised all
the property of the insolvent or so much thereof as can, in the opinion of
the Court, be realised without needlessly protracting the receivership.
The Official Assignee cannot declare a final dividend without the leave
of the Court but the Receiver can do so without leave of Court except
in Madras. Before declaring final dividend the Assignee or Receiver
must give notice to persons whose claims have not been proved that, if
they do not pro^e theii claims to the satisfaction of the Court within the
lime limited by the notice, he will proceed to make a final dividend
witliout regard to their claims.
The insolvent is entitled to any surplus remaining after payment in
full of his creditors with interest. The insolvent may assign the surplus
430 MERCANTILE LAW

or dispose of ii by will to any person even betore ii is known whether

there will b e ' a surplus. Such an assignment is valid against the (Jihcial
Assignee or Receiver in a second insolvency. But the insolvent or his
assignee cannot interfere in the administration of the estate.
COMMITTEE OF INSPECTION
A Committee of Inspection may be appointed from among the cre-
ditors who have proveq or persons holding general powers-of-attorney
from such creditors for the purpose of superintendence and administra-
tion of the insolvent's property by tlie Official Assignee or Receiver.

x*RrORITY OF DEBTS
in the distribution of the property of the insolvent; the following
debts must be paid in priority to all otiier debts, namely ;—
1. all debts due to the Government or any local authority;
2. the salary or wages of any clerk, servant or labourer in respect
of the services rendered to the insolvent during four ipontlis before the
date of the presentation of the petition under the Presidency-towns In-
solvency Act not exceeding Rs. 300 for- each such clerk, and Rs. 100 for
each such servant "or labourer; and under the Provincial Insolvency Act,
the salary or wages not exceeding Rs. 20 in all, of any clerk, servant or
labourer. Under the Presidency-towns Insolvency Act, rent due to a land-
lord from the insolvent, not exceeding one month's rent is also among,
the preferential debts. It is not so under the Provincial Insolvency Act.
The debts mentioned above rank, equally between themselves and
are to be paid in full unless the assets are insufficient to meet them in
which case they abate in equal proportions between themselves. They
must be paid at once, subject only to the retention by the Assignee or
Receiver of sucli sums as may be necessary for the expenses of administra-
tion or otherwise.
After the preferential debts have-been paid in full, all debts entered
in the schedule are to be paid rateably according to the amount of such
debts respectively and without any prejudice. I£ there is any surplus
after payment of all debts mentioned above it must be applied in pay-
ment of interest from the dale of the order of adjudication at the rate
of 6 per cent per annum on the debts. Any surplus after all such pay-
ments must be paid to the insolvent,
ADMINISTRATION OF PARTNERSHIP PROPERTY
In the insolvency of partners, partnership property is applicable in
the first instance to the payment of the partnership debts, and the sepa-
rate estate of each partner is applicable in the first instance to the pay-
ment of his separate debts. If diere is a stirplus from the separate
estates of the partners, it is to be dealt with as part of the partnership
property; and if there is a surplus of the partnership property, it is to
be dealt with as a part of the respective separate estates in proportion
to the interest of eacli partner in the partnership property.
The above rule as to priorities in the case of joint and separate debts
is subject to the following exceptions:—
LAW OF INSOLVENCY 431

L Joint creditors may, prove against tlie separate estates of the

partners in competition with the separate creditors if there is
joint account and no solvent partner.
2. Where a joint creditor is the petitioning creditor in respect
of a joint debt against one partner, he may. prove in competi-
tion widi the separate creditors of that partner, and this is so,
even where that partner owes him a separate debt which was
sufficient to have supported the petition.
3. Where the separate property of a partner has been fraudu-
lently converted by his co-partners to tire use of tlie partner-
ship, the separate estate may prove against the joint estate in
competition with the joint creditors; and where property be-
longing to the partnership has been fraudulently converted
by a partner to his own use, the creditors of the hrm are en-
titled to prove against the separate estate in competition ^ with
the separate creditors.
4. Where a member of a firm carries on a distinct and separate
trade, and a debt becomes due to the firm, in the ordinary
course of business between the member and the firm, the firm
may prove against the estate of such member in competition
with the separate creditors, he may prove against the joint
estate in competition with joint creditors.
As regards proof by a partner against a partner, die general rule is
that neither a partner, nor a retired partner, nor the representative of a
deceased partner, can prove in die insolvency of the continuing or sur-
viving partner in competition witli die joint creditors of die firm of
whicli the partner, or retired or deceased partner was a member. This
rule applies only if there is actually proved in the insolvency some debt
in respect of which the insolvent and the retired or, deceased partner
were jointly liable.

PART 12-C
OFFICIAL ASSIGNEE, RECEIVER AND OFFICIAL RECEIVER
OFFICIAL ASSIGNEE: HIS APPOINTMENT AND REMOVAL
The Chief Justice of the High Courts of Judicature at Calcutta,
Madras and Bombay, may appoint any person as an Official Assignee of
insolvent's estates, and may, with the concurrence of a majority of the
other Judges of the Court, remove him fof any sufficient cause. Every
Official Assignee 'must give sucli security as may be prescribed by the
rules. He can administer oaths for the purpose of affidavits, verify proofs,
petitions or other proceedings in insolvency. His duties have delation
to tlie conduct of the insolvent as well as to the administration of his
estate. In particular it is his duty:—
(a) to investigate the conduct of the insolvent and to report to
Xhe Court upon any application for discliarge, stating ivhether
there is reason to believe that the insolvent has committed any
act which constitutes an offence under the Act or under Sec-
tions 421 to 424 of tlie Indian Penal Code in connection with
his insolvency or which would justify the Court in refusin"-,
suspending or qualifying an order for his discharge; '^'
432 MERCANTILE LAW
(b) tt> make such other report concerning the conduct of tlie in-
solvent as the Court may direct or as may be prescribed; and
(c) to take sucli part and give such assistance in i elation to ilie
prosecution ot any iraudulent insolvent as the Court may
direct or as may be prescribed.
The Official Assignee may sue and be sued by the name of "the Offi-
cial Assignee of the property ot an insolvent," inserting the name of the
insolvent. He may by that name hold property, o£ every description,
make coiUiacts, enter into any engagements binding on himself and his
successors in office, and do all other acts necessary oi expedient to be done
in ttie execution of his ofhce. If an Official Assignee is adjudged an in
solvent, he tliereby \acates his ofiice as such.
In the administration of the propety and its distribution, ht
must have regard to any resolution that may be passed by the creditors
at a meeting. This is to be done subject to the directions of the Court.
He may summon meetings of the creditors to ascertain their wishes; and
it IS his duty to summon meetings at such times as the creditors by re-
solution at any meeting, or the Court, may direct or whenever requested
in writing to do so by one-fourth in value of creditors who Have proved
tfieir claims.

COMMITTEE OF INSPECTION
The Court may, if it thinks fit, authorise tlie creditors who have
pioved their claims to appoint from among tliemselves a committee of
inspection for the purpose of superintending the administration of the
insolvent's property by lire Official Assignee. The committee may meet
as often as necessary but must meet at least once in a month. The
Official Assignee shall in the administration and distribution of the pio-
perty of the insolvent have regard to any direction of the committee. He
must also consult the committee, if there is one, before applying to tlie
Court for leave to perform his duties and to exercise his powers in which
leave is necessary.
If any Official Assignee does not faithfully perform his duties, or
if any complaint is made to the Court by any creditor in regard thereto,
the Court must enquire into the matter and take such action thereon as
may be deemed expedient. He must account to tl\e Court and pay over
all monies and deal with all securities in such manner as may be pre-
scribed by the Rules or as tlie Court directs.

REMUNERATION OF OFFICIAL ASSIGNEE

The Official Assignee is to be paid such remuneration as may be
prescribed by rules, and never more than prescribed. The remuneration
is in the nature of a commission or percentage on the amount realised
by h i m after payment to secured creditors, or on the amount distributed
in dividends, or partly on one and partly on tlie other, as may be pro-
vided by Rules.

OFFICIAL RECEIVER-HIS APPOINTMENT, REMUNERATION

ETC.
Under Section 28 (2) of tlie Provincial Insolvency Act, the property
LAW OF INSOLVENCY 433
of the insolvent vests, on the making of an order of adjudication, in the
Court or in a Receiver appointed by the Court. A Receiver may be
appointed at the time of the order of adjudication or at any time after--^
wards. Whatever -may be tlie date of appointment all property acquired
by and devolving on the insolvent after adjudication vests in him as from
the date of acquisition or devolution. T h e Receiver may be required
to give such security as the Court may think fit to account for what he
shall receive in respect of property. Subjest to such conditions as may
be prescribed by the Rules, the Court may by general or special order
fix the amount to be paid as remuneration for the services of the Re-
ceiver out of the assets of the insolvent. T h e payment is made in the
same manner as to the Official Assignee.
The primary duties of the Receiver are to take the necessary steps
for the discovery of the insolvent's property, to realise the property and
to distribute it amongst the creditors. T h e Receiver may alsc make a'
report on the conduct of the insolvent. Where he fails to submit his ac-^'
counts at such periods and in such form as the Court directs, or fails to
pay-the balance due from him thereon as the Court directs,' or occasions
loss to the property by his wilful default or gross negligence, the Court
may direct his property to be attached and sold, and may apply the pro-
ceeds to make good any balance found to be due from him or any loss
so occasioned by him. T h e Receiver may be removed for just cause.
T h e State Government may appoint the Official Receiver to be the
Recei-\'er ujider the Provincial Insolvency Act with such local limits as
it^may prescribe. In the absence of any exceptional reasons such as per-
sonal disqualifications affecting the Official Receiver he alone shall be
appointed Receiver. The Official Receiver has on his appointment as
Receiver all the powers of an ordinary Receiver. T h e Insolvency Court
cannot delegate any of its powers to an ordinary Receiver. But to an
Official Receiver the Court if so directed by the High Court under Sec-
tion 80 may delegate all or any of the following powers^-namely :—
(i) to frame schedules and to admit or reject proofs of creditors,
(ii) to make interim orders in any case of urgency, and
(iii) to hear and determine any unopposed or ex parte application.
Subject to the appeal to the Court, any order made or act done by the
Official Receiver in the exercise of the said powers will be deemed to
be the order or the act of the Court. The Official Receiver has no power
to adjudicate upon a claim by a third person to property alleged to be-
long to the insolvent and claimed by such person as his own. Such a
claim can only be tried by the Court under Section 4 of the Act.
Where no Receiver is appointed, the Court has all the rights of, and
may exercise all die powers conferred on, a Receiver under the Provin-
cial Insolvency Act.

PART 12-D
DISCHARGE OF INSOLVENT
"The intention of the Legislature is that the debtor, on giving up
the whole of the property, shall be a free man again, able to carji hi:
434 MERCANTILE LAW

livelihood and having the ordinary inducement to industry." An insolvent

who has obtained his discliarge is prima facie freed from uie statutory
restrictions peculiar' to undischarged insolvents. However, an insolvent
does not stand automatically discharged. He must apply to tlie Court
and obtain an order of discharge. T h e Acts provide that a debtor may
at any time after the order of adjudication apply to the Court for an
order of discharge and the Court is required to appoint a day for
the hearing of the application. Such a day, under the Presidency-towns
Insolvency Act, must not be before the public examination of the debtor
has been concluded. ^Under the Provincial Insolvency Act the Court is
required to specify the time within which the debtor must apply for his
discharge. If the insolvent does not apply within the requisite time tlie
adjudication will be annulled by the Court.
Before the application for discharge is heard on the date fixed for
this purpose the Official Assignee or Receiver is required to submit his
report as to the insolvent's conduct and affairs. This report is, for the
purposes of an application for discharge, prima facie evidence of the
statements therein contained, but it is not conclusive and the Court can
look into evidence on which the findings of the report are based. On
the day fixed for tlie liearing, die Court hears the debtor as well as the
creditors, and may also hear die' Official Assignee or Receiver. The
Court will, after "hearing the parties, in its discretion grant or refuse to
grant conditionally the discharge. T h e Court has almost full discretion
to grant or refuse an order of discharge, except insofar as such discretion
is limited by the Act. In the exercise of that discretion the Couit may
either :—
(a) grant an absolute order of discliarge; or
(b) refuse an order of discharge; or
(c) suspend the operation of the order of discharge for a speci-
fied period; or
(d) grant an order of discharge subject to any conditions with res-
pect to any earnings or income which may afterwards become
due to the insolvent or with respect to his after-acquired
property; or
(e) exercise the above powers of suspending and attaching con-
ditions to an insolvent's discharge 'under heads (c) and (d)
concurrently, that is, it may suspend the operation of the order
for ^ specified period and at the same time attach conditions
to tne order for payment out of the future earnings or pro-
perty of the .insolvent.
'I he benefit of freedom from restrictions by means of a- discharge
is intended for an honest debtor who by reason of misfortune incurs loss.
The benefit must not be extended to those traders who fail to keep pro-
per accounts or who deal extravagantly and contract debts recklessly
without any reasonable prospect of being able to pay them. The limi--
tations ulaced on the discretion of th" Cnnrt are two under the Pre-
sidency-toxvns Insolvency Act and one under the Provincial Insolvency Act.
LAW OF INSOLVENCY 435
LIMITATIONS UNDER PRESIDENCY-TOWNS ACT-ABSOLUTE
REFUSAL OF DISCHARGE
Under Section 39 of this Act tlie Court MUST absolutely refuse to
discharge an insolvent in the following cases, namely :—
1. fraudulent concealment of the insolvent's state of affairs by des-
truction of documeiiib, keeping false books or making fake
entries,
2. fraudulently giving under preference or discharging or con-
ceahng aeots or making away with property;
3. frauaulent concealment of property to prevent its distribution
amongst creditors;
4. fraudulently preventing debts from being available for cre-
ditors;
5. fraudulent transfers containing false statements relating to ,the
consideration for the transfers;
6. dishonest or fraudulent removal or concealment of property.
REFUSAL OF IMMEDIATE UNCONDITIONAL DISCHARGE
The Court MUST, under both the Acts, refuse to grant an absolute
discharge to take ettect immediately on proof of any of the facts.
namely—
\
1. that the insolvent's assets are not, under the Presidency-towns
Insolvency Act, of a value equal to ?5 paise in the rupee, and
under the Provmcial Insolvency Act, of a value equal to 50
paise in the rupee, on the amount of his unsecured liabilities.
But if he shows to the Court that such fact is not due to bis
misconduct, but has arisen from circumstances for which he
cannot justly be held responsible, the Court may grant an ab-
solute discharge;
2. that the insolvent has omitted to' keep such books of account
as are usuai and proper in the business carried on by him
and as sufficiently disclose his business transactions and finan-
cial position within tliree years immediately preceding his in-
solvency;
3. that the insolvent has continued to trade after knowing him-
self to be insolvent, i^e., unable to pay his debts in the ordin-
ary course;
4. that the insolvent has contracted any debt without having at
that time any reasonable or provable ground for expecting to
be able to repay it. It is lor the inwlvent lo show that when
he contracted the debt he had reasonable or provable ground
for expecting to be abip to pay it. It is the contracting of debts
which is an offence, and not the obtaining of goods;
5. that the insolvent has failed to account satisfactorily for any
loss of assets or tor any deficiency of assets to meet his liabilities;
6. that the insolvent has 'bTougiit on, or contributed to, his in-
solvency by rasn or hazardous speculation, or by unjustifiable
extravagance in living, or by gambling, or by culpable neglects
of his business affairs;
436 MERCANTILE LAW

7. that the insolvent has, within three months preceding the date
of the presentation of the petition, when unable to pay his
debts as they became due, given an undue preference to any
of his creditors;
8. that the insolvent has on any previous occasion been adjudged
an insolvent or made a composition or arrangement widi his
creditors;
9. that the insolvent has concealed or removed his property or
any part tliereof, or is guilty of any other fraud or fraudulent
breach of trust;
Under the Presidency-towns Insolvency Act, also
10. that the insolvent has put any of his creditors to unnecessary
expense by a frivolous or vexatious defence to any suit pro-
perly brought against him;
11. that the insolvent has within three months preceding the time
of presentation, of the petition incurred unjustifiable expense
by bringing frivolous or vexatious suit.

FAILURE TO APPLY FOR DISCHARGE

An insolvent must apply for the discharge within- the prescribed
time. If an insolvent does not appear on the day fixed for hearing of
his application for discharge or if an insolvent does not apply to the
Court for an order of discharge •within such time as may be prescribed
or fixed under the Presidency-towns Insolvency Act, the Court may an-
nul the adjudication or make such other order as it may think fit, and
under the Provincial Insolvency Act, the Court must annul the order
of adjudication. T h e debtor where he was released from custody on
adjudication may be re-committed to custody and all processes agiiinst
him at the time of release will recommence as if no release was made.
I n ' order to protect the creditors the Court will order that the property
shall vest in a certain person. The creditors cannot pursue their money
under the ordinary civil law. They must recover their dues by divi-
dends to be paid by the person in whom the Court has vested the assets
of the debtor.

EFFECT OF ORDER OF DISCHARGE

An order discharging an insolvent releases him from all debts prov-
able in insolvency except those mentioned below, namely—
(a) any debt due to the Government;
(b) any debt or liability incurred by means of any fraud or frau-
dulent breach of trust to which he v)a5,a party;
(c) any debt or liability in respect of wfrtch-.he has obtained for-
bearance by any fraud to which he was a party;
(d) any liability under an order for maintenance of his wife
made under Section 488 of the Code of Criminal Procedure
1898.
An order of discharge does not affect the rights of a secured credi-
LAW OF INSOLVENCY 437
tor against tlie insolvent. It does not put an end to tlie insolvency pro-
ceedings, and the Court has power to give directions as to the distribution
of the assets amongst the creditors. It releases the insolvent from all tlie
debts due from him at the time of adjudication and which were provable
in his insolvency. The powers of the Official Assignee or Receiver to
deal with the property which vestj in him at the time of the order ot
discharge do not cease with the passing of the order of discliarge. The
discharge protects the insolvent and not the assets in the hands of the
Official Assignee or Receiver. It does not release a co-debtor, nor does
it release tlie surety. If the surety pays the creditor he cannot sue the
debtor after the debtor has obtained his discharge, but he is entitled to
prove for the amount paid. An order of discliarge does not exempt the
insolvent from being proceeded against for any criminal offence, whether
connected with insolvency I or not. An i order of discharge does not ope-
rate outside India so as to prevent recovery of 'the debt there out of the
pioperty which has not been taken by tlie Official Assignee or Receiver.

DUTIES OF INSOLVENT AFTER DISCHARGE UNDER PRESI-

DENCY TOWNS ACT (Section 43)
Under the Presidency-towns Insolvency Act, a discharged insolvent
must, notwitlistanding jiis discharge, give such assistance as ttie Official
Assignee may require in the realisation and distribution of such of his
propperty as is vested in the Official Assignee, and if he fails to do so,
he will be guilty of 'Contempt of Court': 'and tlie Court may also, if it
thinks fit, revoke his discharge, but without prejudice to the validity of
any sale, disposition or payment duly made or thing duly done subsequent-
ly to the discharge, but before its revocation.
If the order of discharge is revoked the result would be the same as
if there had been no discnarge and the debtor Had continued insolvent
throughout; but sales and other disposition of property made by the in-
solvent subsequent to the discharge would remain valid. The^e ^s n o
corresponding section in the Provincial Insolvency Act.

REVOCATION OF ORDER OF DISCHARGE UNDER PRESIDENCY

TO^VNS INSOLVENCY ACT
In the following three cases under the Presidency-towns Insolvency
Aft an order of aischarge may be revoked, namely :—
1. where the insolvent fails to assist the Official Assignee in the
realisation and distribution of his property under Section 47 ^
of the Act;
2. where the insolvent fails to file the statement showing particu-
lars of his after-acquired property in cases in which he is bound
^to do so;
3. where an order of discharge is made conditional upon the insol-
vent consenting to a judgment being entered up against him
in favour of the Official Assignee, and he fails to give his con-
sent within the time prescr bed
^38 MERCANTILE LAW

SMALL INSOLVENCIES
Summary Adininistration.—When a petition is presented by or against
a debtor, if the Court is satisfied by affidavit or otherwise that the property
is not likely to exceed in value, under the Presidency towns Insolvency
Act, Rs. 3,000 or such other less amount as may be prescribed, and under
the Provincial Insolvency Act, Rs. 500, the Court may make an order thai
the insolvent's estate be administered in a smumary manner.
Upon such order being made :—
1. In cases governed by the Provincial Insolvency Act, the provisions
qf the Act will apply subject to the following modifications, namely :—
(a) unless the Court otherwise directs, no notice required by this
Act shall be published in the' Official Gazette;
(b) on the admission of a petition by a debtor, the property of
the debtor shall vest in the Court as a Receiver;
(c) at the hearing of the petition, the Court shall inquire into the
debts and assets of the debtor and determine the same by an
order in -writing, and it shall not be necessary to frame a sche-
dule of creditors;
(d) the property of tlte debtor shall be realised with all reasonable
despatch and thereafter, when practicable, distributed in a
single dividend,;
(e) the debtor shall apply for his discharge within six months from
the date of adjudication; and
(£) such other modifications -as may be prescribed with the view* of
saving expense and simplifying procedure, provided that t h e '
court may at any time direct that the ordinary procedure pro-
vided for in this Act shall be followed in regard to the deb-
tor's estate, and thereafter the Act shall have effect accoidingly.
2. In cases governed by the Presidency-towns Insolvency Act, tlie
provisions of that Act will apply subject to the following modifications,
namely—
(a) no appeal shall lie from any order of the Court, except by
leave of the Court;
(b) ' no examination of the insolvent shall be held except on the
applicatior of a creditoj: or the Official-Assignee;
(c) the estate shall, where practicable, be distributed in a single
dividend;
(d) such other modifications as may be prescribed with the view
of saving expense and simplifying procedure :
Provided that nothing in this section shall permit the modification
of the provisions of this Act relating to the discharge of the insolvent.
The Court may at any time, if it thinks fit, revoke an order for the
summary administration of an insolvent's estate.

PENALTIES
The Acts prescribe penalties for certain offences committed by an in-
solvent as under:—
LAW OF INSOLVENCV 4-39
1. An undischarged insolvent obtaining credit to the extent' of Rs.
50 or upwards from any person without informing such person that he is
an undischarged insolvent shall on conviction by a Magistrate be punish-
able witli imprisonment for a term which may extend to iix months or
with fine, or with both.
2. If a debtor, who is adiudged an )n<;olvent—
(a) -dtraudulently with intent to conceal the state of his affairs or
to defeat the objects of the Acts,—
(i) has destroyed or othenvise wilfully prfvented or purpose-
ly withlield the production of any books, papers *r writing
(documents) relating to such of his affairs as are subject
to investigation under the Act^, or
(ii) has kept or caused to be kept false book-i' or
(nl) Jias made false entries in, or withheld entries from or
willftiUy altered or falsified any document relating to such
of his affaiij as are subject to investigation under the Acts,
or
(h) if he fraudulently •vvith intent to diminish the sum to be di-
vided among his creditors or to give an undue preference
to any of the said creditors—
(i) has discharged or concealeJ any debt due to or from
him, or
(ii) has made away with, charged, mortgaged or concealed
any part of his property of any Kind whatsoever.
he shall be punishable on conviction with imprisonment which may ex-
tend, under the Presidency-towns Insolvency Act, to two years, and under
the Provincial Insolvency Act, to one year.
3. If the debtor or insolvent wilfully fails to perform the duties im
posed upon him by the respective Acts, or to deliver itp possession to th?
Official Assignee or Receiver of any part of his property which is di^'i
sible among his creditors under the Acts, and whidi is for the time being
in his possession or under his control, he shall, under the Presidency-
towns Insolvency Act, be, in addition to any other punishment to which
he may be subject, guilty of Contempt of Court and may be punished
accordingly, and under the Provihcial Insolvency Act, be punishable on
conviction with imprisonment which may extend to one year.

SUMMARY
Insolvency is a proceeding by which, when a debtors CMiftot pay his
debts or discharge his liabilities or the persons fa wnom he owes money
or has incurred liabilities cannot obtain wtistaction of their claims, the
State, in certain circumstances takes possession of his property by an offi-
cer appointed for the purpose, and such property is realised and distri-
buted in equal proportions aiHongst the persons to whom the debtor owes
money or has incurred pecuniary liabilities.
T h e consequences of insolvency are :—
1. the debtor gets protection against legal proceedings by his cre-
ditors (Protection Order^,
2. his properties vest m the Court or an official of the Court on
Adjudication Order,
 440 MERCANTILE LAW
3. pn the completion of the proceedings the insolvent is dis-
charged and is then free to have fresh start in life,
4. on adjudication he loses,his civil rights so that he cannot be
appointed a magistrate, or elected a member o£ any body,
nor can he vote.
Generally any person capable of contracting may be adjudged an in-
solvent; provided tliat he is a "debtor" and has committed an act of in-
solvency.
For Acts of insolvency see pp. 406, 407 ante.
A person is adjudged an insolvent on the presentation of a petition
which may be filed either by the debtor or creditor. A secured creditor
cannot present a petition.
For conditions of creditor's and debtor's petitions see pp. 408 and 409.
The petition may be either dismissed or admitted and in the latter
case the debtor may be adjudged an insolvent by an Adjudication Order.
The Adjudication Order relates back, under the Presidency-towns Act, to
the date of the first available act of insolvency and under the Provin-
cial Insolvency Act to the date of the presentation of the insolvency peti-
v^tion. This is called the Doctrine of Relation Back.
An adjudication may be annulled by the Court :—
1. where the debtor ought not to have been adjudged insolvent,
2. where debts have been paid in full,
3. where debtor had presented a petition without leave and leave
was necessary.
An insolvent may submit a composition in satisfaction of his debts or
a scheme of arrangement of his affairs and if it is accepted by a majoritj'
in number and S/4ths in value of the creditors, the Court will sanction
it. The debtor will have right to deal with his estate as if he had not
been adjudged an insolvent.
If default is made in the fulfilment of any term of the scheme, the
debtor will be re-adjudged insolvent and the composition or scheme an-
nulled.
When a person is adjudged insolvent his property vests in the Offi-
cial Assignee or Receiver, who will realize it and distribute it among the
creditors pari passu on proof of the debt.
For property divisible among creditors, as also for indivisible-property
see pages 422-424.
The insolvent may at any time after the order of adjudication and
must where time for application for discharge is fixed, apply to the
Court for his discharge. The Court may, after hearing the parties,
either—
1. grant an absolute ord^r of discharge, or
2. refuse an order of discharge, or
3. suspenrt. operation of order of discharge, or
4. grant an order of discharge subject to any conditions.
The Acts provide for certain restrictions on the powers of the Court ^
to giant an absolute discharge. See page 435.
CASES FOR RECAPITULATION
1. A buys cotton from B and pays the price to B. The goods are
left ^vith B who pledges them with C. C sells the goods as pawnee and
LAW OF INSOLVENCY 441
tliere remains a surplus in his hands aEter he has paid himself the
amount of the loan made by him to B. Afterwards B is adjudged insol-
vent and the surplus is claimed botli by A, the buyer of the goods, and
the Official Assignee. Held, A, tlie buyer of tlie goods, and not the Offi-
cial Assignee, is entitled to receive the surplus. The doctrine of reputed
ownership does not apply, as the goods were not in possession, order or
disposition oL the insolvent [Greening v. Q a r k (1825) 4 _B &: C 316j.
2. W was adjudicated insolvent. He later earned a salary, out of
which he had saved Rs. 8,525 at the date of his deatli. He Lad also
incurred debts for Rs. 3,525 in the course o£ his employment. T h e sup-
plier of goods claims payment of the full amount of Rs. 3,525 out of the
savings, but the Official Assignee denies tlie supplier's right to recover
his debt. Held, the debts were payable in full out of Rs. 8,525. T h e
Official Assignee, if the insolvent were alive, could not claim anything
more tlian that which was over after the insolvent had provided for what
was reasonably necessary, having regard to his occupation and station
[In re Walter (1929) 1 Ch. 467].
3. An insolvent was granted a conditional discharge. A, a judgment
creditor, filed a petition for the execution of a decree which he had
obtained prior to adjudication, by attacliment and sale of a house belong-
ing to tlie insolvent's wife. Held, A is not entitled to sue. T h e wife is
imder no obligation to pay. Section 44(2) of die Provincial Insolvency
Act, on discharge the debts which the insolvent owed his creditors become
unenforceable. Hence the creditors of an insolvent y/ho has been releas-
ed from all liability are not entitled to enforce payment by sale of a
previous attaclied house belonging to the insolvent's wife when she her-
self is under no personal obligation or liability to pay the debt. She
does not come within any of the categories mentioned in Section 44(3) of
the Act (the categories a r e : Partner, Co-sureties, Surety, Person jointly
bound, [Abdul Kuthus v. Inayathula, 1941 Mad. 620]
4. A and B enter into a partnership for five years on the terms of
A paying a premium of Rs. 1,000 to B, out of which Rs. 500 were to be
paid immediately and the rest by instalments. In the second year of the
term and before tlie whole of the premium was paid, A was adjudicated
insolvent on the petition of B and a Receiver of his estate was appointed
by the Court. B claimed trom the Receiver in insolvency Rs. 500, the
amount unpaid, standing as one of A's creditors, whereas the Receiver
in a counter-action claimed from B a sum of Rs. 300 as money belonging
to the insolvent's assets and unjustly held by B. Held, the Receiver's
claim is tenable and not that of B. Where a partner has paid a premium
on entering into partnership tor a fixed term, and tlie firm is dissolved
before the expiration of that term otherwise than by the death of a
partner, he shall be entitled to return part of the premium in propor-
tion to the unexpired term. In this case the term was 5' years and two
years have passed so that Rs. *!nn for the unexpirect period o'f 3,years in
the hands of B will be. payable by him to the Receiver in insolvency
[Section 51; Akhurst v. Jackson (1818) 1 Wils. Ch. 47].
5. A sells a patent to B in consideration of B paying royalties to A.
At the same time B advances to A a sum of Rs. 1,25,000 as a loan. It
is agreed that B should letain one-h^lf of the royalties as they become
pavahle to A, from time tr> time, towards the satisfaction o[ ihe debt,
provided that if A should become insolvent B sliail h;t\e the rMn to
retain the whole of the royalties in satisfaction of the debt. A becomes
insolvent Ijcfore tlie debt is fully paid. B cannot retain tlie full rovaltics
as per stipulation; but he is entitled to one-half of the royalties as he
442 MERCANTILE LAW

has charge only on one-half and that transaction is protested under the
Insolvency Act^
6. A creditor takes an assignment from the debtor for tlie purpose
of paying himself and otlier creditors named in the list in full, believin j
that tJiey are all the creditors. But the list turns out to be incomplete
The transaction has, however, been entered into honestly by the creditor
concerned. T h e transaction constitutes an act of insolvency and the deb-
tor may be adjudged an insolvent. The assignment is for the benefit of
the debtor's creditois generally and amounts to an acL of in*o)vency, lE
any creditor whose name did not appear or> the list applies within 3
months of the assignment for his insolvency [Re Phillips (1900) 2 Q B.
iJ2y]
7. X, a Frenchman, resl&ing in France, had a place of business in
Bombay. He acquired property and also incurred debts. Later on, he
executed in France R deed transferring tlie whole of his property for the
benefit of his creditors. The Bombay High Court adjudicated him in-
solvent. TKe adjudication older is not valid, for an Indian Court can
pass order of "adjudication on a foreigner only if he commits an act of in-
solvency in India and within tire jurisdiction of the Court.
8. A trader in embarrassed circumstances of his business, which is
his only asset, converts it into a one-man company consisting really of
himself, the consideration oeing sliares which are practically worthless
and an undei taking by the company to pay his debt. The act of con-
verting his business into a company is an act oE insolvency. A tiansfer
by a debtor of whole of his property is an act of insolvency, if the neces-
sary consequence of the transfer will be to defeat or delay his creditois.
The substitution in place of all the assets by worthless shaies in a com
pany which has taken over the debtor's assets and liabilities amounts to an
act of insolvency [In re Simms, (1930) 2 Ch. 22].
9. An insolvent purchased a house and on the same day he mort-
gaged tlie property to pay the purchase money. T h e mortgage is bind-
ing on the Official Assignee, assuming that the transactions took place
before the commencement of insolvency. The mortgage was made to pay
the purcliase price of tlie house, and theie is nothing to suggest in the
case that the mortgage was witliout consideration and taken in good
filth. There is no question of fraudulent preference oi tlelaying oi de-
leating creditors (Section 55 Pres-t. Act).
10. An insolvent had before adjudication assigned chattels to be
acquired by him in future as security for debt. After the dischaige of
tlie insolvent, the creditor claimed the chattels acquiied by him after
discharge. Held, he had no right to the chattels acquired by the insol-
vent after his discharge. The rule is that where the oriler of discharge
is passed before the chattels come into existence, all liability of the insol-
vent under the contract to assign after-acquired property is extinguished
and the insolvent is released from such bability [CoJlyer v Isaccs (1881)
19 Ch D. 343].
11. A has properties, movable and immovable, in Madras, Lahore,
Lon'ion ;ind New York. In case of A"s insolvency, movable property in
all the four places will vest in the Official Receiver or Official Assignee
But immovable property situated only in Madras will vest not in all other
three cities situated in foreign countries [Section 2(I)(d) of Prov Ins
Act].
12. On 1st October solicitors prepared and P executed a deed of
assignment of dH his property for tlie benefit of his creditors. He paid
LAW OF INSOLVENCY 443
the solicitors Rs. 1,000, of which Rs. 400 was as fees for tlie work done
ihat day and die balance as lees in advance for work which they actually
did in the course of the following week. On 1st Dei^mber a netitioic
was presented against P and on 5th December he was adjudicated insol-
-veni. One act of insolvency proved against him was the execution b«
'jliim of the aforesaid assignment deed. The Official Assignee asks for a
refund of the amount of Rs. 1,000 paid to the solicitors. Held, the soli-
citors were entitled to retain Rs. 400 which was paid as fees for tne work
done in connection with the execution of the assignment deed, as it
was a protected transaction. The Ofiiciai Assignee was entitled to get
the balance of Rs. 600 which amount was paid in advance for work done
after tlie execution of the assignment deed. This could nof be treated
as a protected transaction as the payment related to work done or costs
incurred after t h e ' act of insolvency had been coniUiitted, namely, the
execution of the assignment deed which was proved to be an act of in-
solvency IRe PoUit (1893) 1 Q.B. 455].
13. X had two loan-accounts with a bank—Account No. I secured
by title deeds of property and Account No. 2 not so secured. During the
pendency of an insolvency petition against X, X had obtained a loan
from Y, paid off Account No. 1 and handed over to the bank the released
title deeds as security for Account No. 2. T h e bank had no knowledge
of the insolvency petition. T h e Official Assignee claimed the securities.
Held, the bank was protected under Section 55 which provides tliat any
payment by the insolvent to any of his creditors or any transfer by the
insolvent for valuable consideration is protected provided it was made
bona fide, before the order of adjudication was passed and tlie third had
no notice of the presentation of the insolvency petition. Hence, the
Official Assignee will not get the securities [Re Seymour (1937) I Ch.
668].
14. An undischarged insolvent obtained a monev Jecree against X
for personal services rendered by him after the adjudication and he
assigned the decree to K. In a claim by hath K and the Official As-
signee, X should pay the decretal amount to K, the assignee of the money
decree and not to the Official Assignee. Under Presidency-towns Insol-
vency Act, the after-acquired property vests in the Official Assignee only
when he inter\-enes on behalf of the insolvent's estate. Since the Official
Assignee had not intervened when- the insolvent had sued X and obtain-
ed the decree, K, the assignee of the decree, is entitled to get payment.
Under Provincial Insolvency Act, however, all property acquired by the
insolvent after adjudication and before discharge shall forthwith vest in
the Official Receiver. Therefore, if the present case were governed by
the Provincial Insolvency Act, X would have been required to pay the
decretal amount to the Official Receiver.
15. A brother and a sistbr carry on business in partnership in the
brother's name. T h e sister is a dormant partner, and the business is
carried on by the brother ostensibly as his ov/n. T h e brother absconds
and is adjudged in.solvent. T h e Official Assignee wishes to take posses-
sion of the sister's share in the paitnership stock on the ground ,t!i;u the
insolvent brother was the reputed owner of the stock. Held, tlie Official
.Vssignee is not entitled to take possession of the sister's share in the part-
nership stock. The brother was not the apparent or reputed owner of
the partnership stock. He was as much the true o w n e r o f the stock as
the sister was. Also, he was not in sole possession of the partnershio
stock. He was in nossession jointly with his sister [Remolds v Bowlev
0867') L.R.Q.B. 474].
 Chapter XHI

Arbitration

PART I3-A
What is Arbitration.—An arbitration may be defined as the settle-
ment of any matter oi matters in dispute between two or more parties,
by the decision not of regular Court of law but by one or more persons
appointed by the contending parties. Arbitration oi a reference to
Panch or the Panchayat is one of the natural ways of deciding many a.
dispute in India. It is indeed a striking featuie of ordinary Indian iife.*
The law 'elating to arbitration in India is now contained in the Arbitra-
tion Act of 1940.
Arbitration Agreement.—An Arbitration Agreement means a writ-
ten agreement to submit present or future differences to arbitration, whe-
ther an arbitrator is named therein or not [Section 2(a)]. The definitioHi
makes it clear that an arbitration agreement, to be valid and binding,
must be in writing, and must relate to present disputes or future differen-
ces. T h e arbitrator need not be named in the written agreement, nor
need it be signed by the parly or parties,^ so long as it is clear fiom the
document that they agreed to the settlement of disputes by arbitration.
It is not necessary that the agreement should be contained in a formal
document. It may be a clause in a contract, or in bought or sold notes,
or in correspondence between_ parties.
The definition covers what is ordinarily termed as an Arbitration
Clause and also what is commonly called Reference. A reference is made
by appointing a particular arbitrator under the agreement. Of course,
' in the case of an agreement to refer future disputes to arbitration, the
arbitrator's jurisdiction would not arise imtil a dispute has arisen,
W h c e tliere is an arbitration clause in a contract and the contract
romes to an end owing to frustration or is avoided on the ground of
fraud or misrepresentation, the arbitration clause may continue to be
binding."" But if the parties were no*^ ad idem, i.e., there was not con-
tract at all the arbitration clause is not binding.^ Also, if the arbitra-

1. Chambasappa v. Baslingayya, 1927 Bom. 565 (FB.)

2. Goveinment of India v. Jatnunadhar, 1960 Pat. 19.
3. State of Bombay v. Adamjee. 1951 Cal. 147.
4. Tola Ram v. Birla Jute Mills Co., (19481 2 Cal. 171.
ARBITRATION 445

tion agreemem is illegal, and therefore legally non-existent, the arbitra-

tion clause which forms part of the contract is also illegal and unenforce-
able. Any award in sucli a case will be invalid."
Where all the peisons interested in the matter of disnute werf. not
parties, to the arbitration agreement, and when an agreement is not con-
sented to by all, such an agreement is invalid and cannot give arbitrator's
jurisdiction to decide the dispute, and the award given on the stre,ngth
of such void reference is not valid and will not bind even the consenting
parties." In fine, an agreement to refer to arbitration is not valid if it
is vague, lacks the essential elements of a contract and is not in writing.
T h e terms 'arbitration agreement' and 'an arbitration clause' in an
agreement are synonymous with 'submission.' T h e term 'submission' was
used in the Indian Arbitration Act of 1899 and is still used in the corres-
ponding English Act.
Advantages of Arbitration.—A decision by arbitration has the follow-
ing advantages as compared to a law suit :—
1. Arbitration is less costly tlian a suit in a court of law.
2. It is much more expeditious, and saves the parties unnecessary
waste of time and irritation arising from delays in court pro-
ceedings.
3. There is hardly any publicity, which cannot be avoided in- a
law suit.
4. It is much more simple as regards procedure.
5. The award is usually final and no appeals lie from it
The above advantages accrue on the assumption that the arbi-
trator has acted impartially and has performed his duties with
competence.

EFFECT OF ARBITRATION AGREEMENT OR SUBMISSION

When some persons have entered into an agreement to refer all dis-
putes between them, either existing or future, to arbitration, they.can-
not institute any suit in a Court o£ Law relating to tltose matters; other-
wise the very purpose of arbitration will be frustrated. If any of the
parties to the agreement,disregards the agreement and institutes a suit,
the other party to tlie agreement may apply to the Court for staying
the suit. The Court will stay the suit or proceeding, provided the fol-
lowing conditions are satisfied (Section 34):
1. The suit or proceeding relates to the same matter as that covered
by the arbitration agreement. No stay will be granted if the suit relates
to matters outside the scope of the arbitration agreement. If the suit re-
lates paiiially to matters covered by the submission, the Court mav or
may not, at its discretion, stay the proceeding or suit. In such a case, it

5. Suwalal Jain v. Clive Mills Co., 1960 Cal. 90.

6. Deep Narain Singh v. Dhaneshwri, 1960 Pat. 201; Chhabba Lai
Kailu Lai, 1946 P.C. 72.
446 MERCANTILE LAW
is nor right to cut up the litigation into two actions, one to be tried by
the Court arid tlie other by arbitration.
2. It must be shown that the applicant for stay was and is still
ready and willing to proceed with the arbitration and do everythig
necessary for the purpose.
B it must also be shown that there is not sufficient reason why the
matter should not be referred in accordance witlT Jhc arbitration agree-
ment. '^
4. The party asking for staf^raust not have jiiled his written state-
ment by way of defence in- the suit, sought to be stayed, or 'inken any
other steps in the proceedings (e.g., an application for extension bf time
to file the written statement).
5. T h e arbitration agreement must not -have been the result of fraud.
If the Court is satisfied that the matter should be decided by arbitra-
tion and diat there is a valid arbitration agreement, it will stay the suit
or proceeding. The .party opposing the stay shall have to convince the
Court that there are .,trong reasons for continuing the suit; or proceeding
and not granting the stay. The principles as contained in Section 34
and as stated above were reiterated by the Supreme Court in a recent case,
Anderson Wright Ltd. v. Morgan & Co. 1955 S.C. 53, where the Court
stays die suit, it does not dismiss it, for in case the award is remitted or
set aside the stayed suit can be heard without the necessity of filing it all
over again.
Who may Refer'to Arbitration.—An arbitration agreement is a con-
tract. Therefore, the parties to an arbitration agreement or submission
to arbitration must have capacity to enter into a contract. Capacity to
make a submission is co-extensive with capacity to contract. He who
cannot contract, cannot make a submission;' and he who is competent
to make a contract, can submit a dispute to arbitration by agreement
with the other party to the dispute.
' l . The Karta oi Manager of a jpint Hindu family acting"bona fide
for the benefit of the family may make a submission.
2. An agent duly authorised may enter into an arbitration agiee-
ihent and 'bind his principal.
3. An attorney or counsel has implied authority to refer to arbi-
tration a case of his client, unless restricted by express directions (o the
contrary.
4. A trustee may, subject to the instrument of trust, tefer to arbitra-
tion any debt, account, or claim relating to the trust.
5. The Official Assignee or Receiver may, by leave of the Court, refer
any dispute to arbitration, and compromise all debts, Claims and liabili-
ties.

7. Per Mookerjee J. in Soudamini Ghose, v. jGooal C. Chose, 28

I.e. 557.
ARBITRATION 447
b. A natural guardian of a minor or Committee of a lunatic can
submit a'dispute to arbitration.". A certified guardian can do so only
with leave of the Court."
7. A minor or a lunatic catmot refer disputes to arbitration.
8. An insolvent cannot refer to arbitration so as to bind his estate.
9. A partner in a firm cannot submit a dispute to arbitration with-
out special autliority of all the otlier partners, or unless there is a cus-
tom or usage of trade.
10. An executor or administratar cannot refer 'he question of
genuineness or otherwise of a will to arbitration; but an arbitrator can
be asked to construe a will.
What may be referred.—As a rule, disputes of civil nature and quasi-
civil nature, or those which can be decided by a civil suit can also be
decided by arbitration. The following matters may be submitted to ar-
bitration.
1. Any matter affecting the private risrhts of the parties, which can
be subject-matter of a civil suit may be referred to arbitration; e.g., right
to hold the office of a Pujari in a temple.
2. Matters relating to personal rights between .the parties; e.g., a
question of marriage or maintenance which is cognizable by a Civil
Court."
3. Matters like the terms on which husband and wife will separate
can be the subject-matter of a valid reference.
4. Disputes regarding compliment and dienity.
5. T h e parties may refer to arbitration the question whether judg-
ment has been property obtained or it is erroneous or void.
6. A time-barred claim may be referred.
7. jrfoth questions of fact and law can be referred.
8. Disputes betw.een an insolvent and his creditors can bfe tefer^red
to arbitration by the Official Assignee or Receiver, even though hiiolVency
proceedings cannot be so referred.
What cannot be referred.—The following matters cannot be referred
to arbitration, namely,—
1. A suit for divorce or a suit for conjugal right."
2. A dispute arising from and founded on an illegal transaction.
3. Insolvency proceedings, which are matters for tlie Court only.^°

8. Har Narayan v. Sajjan Pal, 67 I.A. fi86 (P.C.)

9. Samad Khan v. Ramzan Khan, 1938 Lah 582.
10. IseriDai v. Pavribai, 1930 Sind 1951.
' 1 . Mst. Kalabati v. Prabh Dayal, 45 I.C. 163; Malka v.' Sardar,
1929 Lah. 394. '
12 Haji Habib v. Bhikam Chand, 1954 Nag*. 305.
448 MERCANTILE l A W

4. Questions relating to Public Charities and Charitable trusts."

'5. Lunacy proceedings in the nature of inquisition are a proper
subject-matter only for a Court of law.
6. Proceedings relating to the appointment of a guardian to a minor.
7. .Testamentary matters relating to the validity of a will or the
issue of a probate of a will can be decided only by the Probate Court and
not by an arbitrator.
8. Execution proceedings.
9. Matters of criminal nature are the concern of the community
and muse be decided by a Court of law.
Modes of Submission.—A submission to arbitration may be made in
any one of the following ways :—
1. By an arbitration agreement without the intervention of the
Court. The Court is, however, approached at the time of
filing the award in order that the Court may pass judgment
and give a decree in terms of the award.
2. With the intervention of the Court where there is no suit
pending.
3. Through the Court where a suit is pending in the Court.

P A R T 13-B
ARBITRATION W I T H O U T INTERVENTION OF A COURT
PROVISIONS IMPLIED IN ARBITRATION AGREEMENT
Section 3 provides that unless a different intention is expressed in an
arbitration agreement, it shall be deemed to include the provisions set out
in the first schedule in so far as they are applicable to the reference. T h e
rules, as provided in the first schedule, are as follows :—
1. Unless .otherwise expressly provided, the reference shall be to a
sole arbitrator.
2. If the reference is to an even number of arbitrators, the arbitra-
tors shall appoint an umpire not later than one month from the latest
date of their respective appointments.
3. The arbitrators shall make their award within four months, after
entering on the reference or after having been called upon to act by
notice in writing from any party to the arbitration agreement or within
such extended time as the Court may allow.
4. If the arbitrators have allowed their time to expire without mak-
ing an award or have delivered to any party to the arbitration agreement
or the umpire a notice in writing stating that they cannot agree, the
umpife shall forthwith enter on the reference in lieu of the arbitrators.
5. The umpire shall make his award within two months of enter-

13. Afohd. V. Ahmed (1910) 3? All. 593.

ARBITRATION 449
ing on the reference or within such extended time as the Court may allow.
6. The parties to the reference and all persons claiming under them
•shall, subject to the provisions of any law for the time being in force,
submit to be exammea by the aibitrators or umpires on oath or afhrraa-
tion m 1 elation to the matters m difference and shall subject as afore-
said, produce before the arbitrators or umpire all-, books, deeds, papers,
accounts, writings and documents witliin their ijossession or power res-
pective!), winch may be required or called for, and do all other things
which, during the proceedings on the reference, the arbitrators or um-
pire may require.
7. The award shall be final and binding on the parties and persons
claiming under them respectively.
8. The costs of the leference and award shall be in the discretion
•of the aibitrators or umpire who may direct to, and by whom, and in
•what manner, such costs or any parts thereof shall be paid, and may tax
•or settle the amount of cost to be so paid or any part thereof and may
.award costs to be i3aid as between legal practitioner and client.

T H E ARBITRATOR
An arbitrator is the person appointed by mutual consent of the
contending parties for the purpose of investigation and settlement of a
diffeience or dispute submitted to him. Where two or any even num-
•ber of arbitrators aie appointed, the matter in dispute must be referred
to the decision of another person called the umpire.. The arbitrator
is an extra-judicial Court of the parties' own choice. They may, there-
fore, appoint whomsoever they please, however incompetent or unfit, to
.arbitrate on their dispute. An infant or a lunatic may be appointed
an arbitrator or an umpire, so may an unincorporated and fluctuating
Tjcdy be validiv appointed aibitiators." ' T h e judge in the cause may be
the' arbitrator, but m such a case the award is not open to appeal." Even
' a party to the contiact may be appointed an arbitrator.'" The authoiity
•of the aibitrator commen'ces from the moment h'. begins with the busi-
ness of lefei'ence and not from the time of appointment.

BTSQUALIFICATIONS
Personal interest of Arbitrator.—Where the interest o f ' t h e arbitrator
lin the subject-matter is known to the parties at or before the time of ap-
pointment, no complaint can be made by a party who has agreed to ap-
•point him with full knowledge of such interest. Thvis, a-^reference to
•one of the parties to the suit would be valid. Where secret interest
or bias of the arbitiator is alleged, the Court would consider all the
material farts of the situation, the position and character of the arbitra-
tor and ihe possibility of his being influenced by reason of iiis conceal-
•cd interert as well as the nature and quantum of the inteiest. No hard

14. Ruthven Parish v. Elgin Pai;^^ (1875^ L.R. 2 H.L. Sec. 535.
15. Savan Rain v. Kalabhi (1899) 23 Bom. 752.
16 Secretary of State v. Saran Bros. 8 Luck. 98.
450 MERCANTILE LAW
and fa^t rule can be laid down for the qualificarion of an arbitrator;
but in cases of arbitration when a person is appointed by the parties.
to exercise judicial duties there should be uberrimae fidei on the part of
all concerned in relation to the selection and appointment of the arbitia-
tor;'' and every disclosure which might in the least affect the minds of
those who are proposing to submit their disputes to the arbitrament of
any particular individual, as regards his selection and fitness for the post,
ought to be made, so that each party may have opportunity of consider-
ing whether the reference to arbitration to that particular individual
should or should not be made.'^ A fraudulent concealment of interest
invalidates the award of the aibitrator. A person is disqualified from
acting as an arbitrator in a dispute in relation to which he is a neces-
sary witness.

REVOCATION OF AUTHORITY
The authority of an appointed arbitrator or umpire is irrevocable
except with the leave of the Court, unless the contrary intention is ex-
piessed in the arbitration agreement. The Court has the discretion to-
grant or refuse leave, but this power is to be exercised in very exception-
al (circumstances and very cautiously. For example, the Court will grant
leave for such revocation if the arbitrator is not acting according to the
rules of natural justice, or if he acts in collusion with a party. There-
is no revocation of authority of an arbitrator by the death of the ap-
pointer. Death of a party does not discharge the arbitration agreement
which shall be* enforceable by or against the legal representatives of the
deceased, unless it was intimately connected with the individuality of the
deceased, e.g., personal office, right to sue in respect of torts not relating
to or affecting property of the deceased.
Where, however, one of the parties to an arbitration agreement be-
comes insolvent and it is provided in such an agreement that any differ-
ence arising shall be referred to arbitration AND if the Receiver in in-
solvency or Official Assignee adopts the agreement, the agreement shall
be enforceable by or against him so far as it relates to any such dif-
ferences. But where a person who has been adjudged an insolvent had,
before the commencement of the insolvency proceedings, become a party
to an arbitration agreement and any master to which the agreement ap-
plies is required to be determined in connection with, or for the purpose
of, the insolvency proceedings, then, if the Receiver does not adopt the
contract containing a term to refer to arbitration, any other paity to
the agreement or the Receiver or Assignee, may apply to the Insolvency
Court for an order directing that the matfer in question shall be refeired
to arbitration in accordance with the agreement and the Court may, if
it is of the opinion that, having regard to all the circumstances of the
case, the matter ought to be determined by arbitration, make an oider
accordingly (Section 7).

17. Per Maclean, C.J. in Kali v. Rajni (1905) 27 Cal. 141.

18. Ghulam Mohd. v. Copal Das (1933) Sind 68.
ARBITRATION 451
POWERS OF A PARTY T O APPOINT A NEW OR SOLE
ARBITRATOR
Section 9 empowers a party to appoint a new or sole arbitrator in
certain circumstances, namely, where an arbitration agreement provides
that a reference shall be to two arbitrators, one to be appointed by each
party, unless a different intention is expressed in the agreement,—
(a) i£ either of the appointed arbitrators neglects or refuses to-
act, or is incapable of acting, or dies, the party who appointed
him may appoint a new arbitrator in his place, or
(b) if one party fails to appoint an arbitrator, either originally,
or by way of substitution as aforesaid, for 15 clear days after
the service by the other party of a notice in writing ^o make
the appointment, such other party having appointed his ar-
bitrator before giving the notice, the party -who has appointed
an arbitrator may appoint that arbitrator to act as sole ar-
bitrator in the reference, and his award" shall be binding on both
parties as if he has been appointed by consent. The Court
may, however, .set aside any appointment as sole arbitrator
and either, on sufficient cause being shown, allow further time
to the defaulting party to appoint an arbitrator or pass such
orders as it thinks fit.
Where an arbitration agreement provides that a reference shall be
to three arbitrators, one to be appointed by each party and the third by
the two appointed arbitrators, the agreement shall have effect as if it pro-
vided for the appointment of an umpire, and not for the appointment
of a third arbitrator, by the two arbitrators appointed by the parties.
Where an arbitration agreement provides that a reference shall be to
three arbitrators to be appointed otherwise than as mentioned above,
the award of the majority shall, unless the arbitration agreement other-
wise provides, prevail. Where an arbitration agreement provides for the
appointment of more arbitrators than three, the award of the majority
or if thf arbitrators are equally divided in their decisions the award of
the umpire shall, unless the arbitration agreement otherwise provides,
prevail (Section 10).

POWER OF COURT T O APPOINT ARBITRATOR OR UMPIRE

Section 8 lays down the procedure for appointment by Court of ar-
bitrators or umpire as follows :—
"8 (1). In any one of the following cases:
(a) Where an arbitration agreement provides that the reference
shall, be to one or more arbitrators to be appointed by con-
sent of the parties, and all the parties do not, after differences
have arisen, concur in the appointment or appointments; or
(b) if any appointed arbitrator or umpire neglects or refuses to
act or is incapable of acting, or dies, and arbitration agree-
ment does not show diat it was intended that the vacancy should
not be supplied and the parties or the arbitrator, as the case
may be, do not supply the vacancy; or
452 MERCANTILE LAW
(c) where the parties or the arbitrators are required to appoint an
umpire and do not appoint him;
any party may serve the other parties or the arbitrator, as the ease may
be, with a" written notice to concur in the appointment or in supplying
the vacancy. •
2. If the appointment is not made within 15 clear days after the
service of tlie notice, the Court may, on .the application of the party who
gave the notice and after giving the other parties an opportunity of
being heard, appoint an arbitrator or arbitrators or umpire, as the case
may be, who shall have like powers tn act in tire reference and to make
an award as if he or they had been appointed by consent of all parties."

REMOVAL OF ARBITRATOR OR UMPIRE BY COURT

The Court may, on the application of any party to a reference,
remove an arbitrator or umpire who fails to use^ all reasonable despatch
in entering on and proceeding with the reference and making an award,
•or where the arbitrator or umpire has misconducted himself or the pro-
ceedings. The arbitrator or umpire so removed shall not be entitled
:to receive any remuneration for service (Section 11).

POWERS AND DUTIES OF ARBITRATORS

POWERS
Section 13 dealing with arbitrators' powers provides as follows:
"13. The arbitrators or umpire shall, unless a different intention is
expressed in the agreement, have power to—
(a) administer .oath to the parties and witness appearing;
(b) state a special case for the opinion o£ the Court on any ques-
tion of law involved, or state the award, wholly or in part,
in the form of a special case of such question for the opinion
of the Court;
(c) make the award conditional or in the alternative;
(d) correct in an award any clerical mistake or error arising from
an accidental slip or omission;
(e) administer to any party to the arbitration interrogatories as
may, in the opinion of the arbitrators or umpire, be necessary."
The arbitrator can also award costs of the reference and award. The
costs of reference include costs incuried in connection with the inquiry
before the arbitrators and costs incurred by the arbitrators with the con^
sent of the parties, like fees paid to accountants for examining accounts,
as well as costs of, and incidental to, any special case submitted by the
arbitrators. 'Cost of the award' covers reasonable costs of counsel or
solicitor employed by the aibitrators in connection with the drawing up
of the award.
DUTIES
1

1. To act judicially.—Arbitration being a method of settling a dis-

pute between the parties, in a quasi-judicial manner, the arbitrator must
act judicially and proceed by appointing a time and place for hearing of
ARBITRATION 453
the reference of which the parties should have due notice. An arbitra-
tor must fix a reasonable time and place for the hearing and grant such
adjournments as may be necessary so that justice may be done. Omis-
sion to give notice to the parties to appear and to represent their case is
legal misconduct and vitiates the award.
2. Duly to observe first principle of justice.—The arbitrators have
judicial functions to perform and, therefore, they must obseri'e the fun-
damental rules of justice, which govern legal proceedings although they
are not bound by mere rules of practice which Courts have adopted for
general convenience. An arbitrator is given tlie latitude to dexiate from
technical rules of procedure at a hearing in Court, provided he does not
disregard the substance of justice. For example, an arbitrator must not
recei\e information from one side wiiich is not disclosed to the other,
or he must not deliberately refuse a hearing or take evidence from one
side behind the back of the other. He should decide according to legal
rights of parties and, it is judicial misconduct to intentionally disregard
the law applicable.
3. Duty to act fairly to both parties.—The arbitrator must act fairly
to both panics and in the proceedings ihrovighoHi the leference, he must
be impartial in all respects. Since he occupies a judicial position, an
arbitrator should scruDulously avoid any course of action which even re-
motely casts a suspicion of partiality. He must not do anything for one
party which he does not do for the other. Practical application of this rule
lies in the proposition that the arbitrator is not to hear one party in the
absence of the othei, or to take evidence from one side without com-
municating it to the other party and giving them an opportunity to meet
the same.
4. Duty not to act as an advocate or agent of a party.—An arbitra-
tor is not to act as an advocate or agent of a panv which appoints him.
He must conduct himself impartially as a judge and refrain from identi-
fving himself with the paitv appointing him. It is no part of his duty
as an arbitrator to further the interests of the person nominating him.
5. Duty to decide all matters referred.—\ part of an auard cannot
be made a rule of Court; therefore, the award should be a final decision
on all matter;, referred to the arbitrator, unless he is empowered to make
several awards. An arbitrator who does not give a partv an opportunity
to put his case before him, and who does not decide all matters in dis-
pute between the parties, acts improperly and his conduct amounts to
legal misconduct.
6. Duty to discharge functions nersonallv.—As a general rule an ar-
bitrator has no power to delegate to anotlier, not even to a co-
arbitrato'", the duties which he has been appointed to discharge. De-
legation is permissible only in the case of ministerial acts. Judicial acts must
be performed by the arbitrator, or if there are more than one arbitrator,
then jointly by all the arbitrators. Ministerial acts may, however, be
done singly by the arbitrators. What is ministerial act as opposed to
iudicial ret is not alwavs easv to ascertairt. but some illustrations mav
he gisen tor guidance. The ministerial acts a i e : mere receipt of a written
statement from a party taking assistance in technical matters, seeking
454 MERCANTILE LAW

legal advice, delegation of the checking of measurements to an engineer,

taxation of cost by taxing officer. It is to be noted that although an
arbitrator is'•permitted to take assistance of experts, yet the decision must
ultimately be his own judgm'ent in the matter.
7. Hot to exceed his authority.—An arbitrator must not exceed the
terms of referepce and an award in excess of jurisdiction and determining
matters outside the scope of the arbitration agreement is liable to be set
aside. The arbitrator is inflexibly limited to a decision of the particular
matteis admitted: he cannot take upon himself an authority which the
arbitration agreement does not confer.
The duties of an umpire are identical with the duticB of an arbitrator.
T H E AWARD
An award is the final judgment.or decision in writing by an .arbitra-
tor or arbitrators or an umpire on all matters referred to arbitration
and as between the parties and the privies; it is entitled to that respect
which is due to the judgment of a Court of last resort.'" The award
must, therefore, be as final and certain as the matters in difference could
bear. If it is vague and indefinite, it will be bad for uncertainty and if
it lea^e5 undecided any cardinal point, it is bad for want of finality.
T h e matter of making and filing of an award is dealt with in Section
14, which provides that where an award has been made by arbitrators
or umpire, they shall sign it and give notice in writing of that fact to
the parties, as also of the amount of fees and charges payable in respect
of the arbitration and award. If recjuested by a party or ope claiming
through him, or if so directed by the Court, they shall cause the award
or a signed copy of it together with any depositions and documents which
may ha\e been taken or proved before them to be filed in Court. But
before doing this they have the right to be paid the fees and charges due
in respect of the arbitration and award, as well as costs and charges for
filing the award. If the arbitrators or umpire choose to state a special
case under Section 13(b), the Court, after notifying the parties and hear-
ing them, shall pronounce its opinion, which shall be ^dded to and form
part of the award.

MODIFICATION AND C O R R I E C T I O N OF AWARD

T h e Court may by order modify or correct an award—
(a) where it appears that a part of the award is iipon a matter
not referred to arbitration and such part^ can be separated
from the other part and does not affect the decision on the
matter referred; or
(b) when the award is imperfect in form, or contains any obvious
error which can be amended without affecting such decision; or
(c) where the award contains a clerical mistake or an error aris-
ing from an accidental slip or omission (Section 15),
T h e powers of the Court to modify and correct awards extend to
awards in all types of arbitrations.

10. Bhoja Hari Saha v. Beharilal Bakos (1911) S3 Cal. 83.

ARBITRATION 455

REMITTANCE OF AWARD
Section 16 empowers the Court to remit the award "or any matter
referred to arbitration to t]ie arbitratoys or umpire for reconsideration on
the following grounds :—
(1) where the award has left undetermined any of the matters
referred to arbitration, or where it determines any matter• not
referred to arbitration and such matter cannot be separated
without affecting the determination of the matters referred; or
(2) where the award is so indefinite as to be incapable of execu-
tion; or
(3) where an objection to the legality of the award is apparent
upon the face of it.
When remitting the award the Court shall fix the time within which_^
the arbitrator or umpire shall submit his decision ta the Court. The
time^may be extended by the Court if necessary. If the arbitrator or
umpire fails to submit the award after reconsi^deration within the fixed
time it shall become void and ineffective. It may be noted in this con-
nection that the award becomes void on the failure by the arbitrator or
umpire to reconsider and submit it within the time fixed only if the
•whole award is remitted for reconsideration. But where instead of
the award, "any matter referred to arbitration is remitted," the failure
on the part of the arbitrator or umpire will not render the award void.
Thus, if only one matter out of several left undecided was remitted, the
awai d remains "in a manner suspended", pending the second reference.
AVhere an award has become void or has been set aside the Court
may bv order supersede the reference and shall thereupon order that
the arbi'ration agreement shall cease to have effect with respect to the
difference referred (Section 19).
INTERIM A"\VARD
.Section 27 of the 1940 Act permits arbitrators to make an interim
award, if thev think fit, subject to a contrary intention expressed in
the arbitvation agreement. Everything relating to an award will also
apply to an interim award.
SETTING ASIDE AN AWARD
Sef'tion 30 provides for the setting aside of the award and lays down
the grounds on which it can be set aside by the Court. The grounds
are:—
(1) that an arbitrator or umpire has misconducted himself or the
proceedings;""
(2) that an award has been madt after the issue of an order by
the Court superseding the arbitration or after arbitration pro-
ceedings have^ become invalid by reason of the commencement
of legal proceedings upon the whole of the subject-matter of
the reference between all the parties to the reference;

20. See Chhaganlal Asaram v. Jevenlal Gangabison. 1954 Nan- 263

but See A.P. Singh v. Brij Narain, 1954 All. 244. - "
456 MERCANTILE LAW
(3) that an award lias been improperly procured or is otherwise
invalid.'^
Failure lo perform the essential duties cast upon the arbitrator cons-,
titutes misconduct of arbitrator and of the proceedings, and is a good
ground for • setting aside the award. Failure to receive evidence properly
tendered amounts to misconduct.- The other ground is "that the award
has been improperly procured." A few examples of improper procuring
of an award may be given : where an arbitrator has been bribed, or has
without the knowledge of a party become personally interested in the
subject-matter of the reference. Also where matters, of which the arbi-
trator ought to have been informed, are fraudulently concealed by a
party, or he is guilty of misleading or deceiving the arbitrator. T h e
other ground for setting aside the award is that it "is otherwise in\alid" :
Where a part of the award covered matters which were the subject of
a pending suit, ii was set aside on this ground.^ Again, under this head
falls the setting aside of awards, on the ground of error or illegality ap-
pearing on the face of the award.

PROCEDURE TO SET ASIDE AWARD

The procedure for setting aside the award is that any party to arr
arbitration agreemen'. or any person claiming under him should apply
to the Court in which the award has been filetl, for all matters relating
to the arbitration can be heard and decided by that Court and no other
Court. The award is filed in any Court, except a Small Causes Court,
having jurisdiction to decide the question forming the subject-matter
of the reference if the same had been subject-matter of a suit. The
first application, therefore, fixes the venue for all future proceedings. T h e
application for setting aside the award may be resisted on the followini?
^rounds :
1. Acquiescence in Irregularities.—The principle imderUing this
has been enunciated by the Privy Council in Chaudhri Martaza Hussain
V. Mst. Bibi Bechunissa.-' The applicant, having a clear knowledge of
the circumstances on which he might have founded an objection to the
arbitrators' proceedings to make their award, did submit to the arbitra-
tion going on: that he allowed the- arbitrators to deal with the case as
it stood before t h e m . . . . ; and it is too late for him, after the award has
been made and filed, to insist on this objection to the filing of the award."
.So where a party having full chance to object, does not do so at the right
moment he is said to have waived his. right to object and to have ac-
quiesced to the irregularities and thus not allowed to move for setting
aside the award.
2. Taking benefit under the Award and performance of the Award.
—^[otion for setting aside an award may be met by showing that the party
moving has accepted benefit imder the award with full knowledge of all

21 Shqh &: Co. v. LS.K. Singh 8: Co. 1954 Cal. 164.

22. Comm. Bangalore Area v. Armii. Naga &.- Co. 1934 Mys. 46.
23. Ram Pratap v. Durga Prasad, 1925 P.C. 239 (Cal.).
21. 3 LA. 209 -at 200.
 ARBITRATION 457
.• relevant circumstances. '^Vhere the parties to an award in a boundary
asked the Settlement Officer to lay pillars along the lines settled by the
arbitrators, it was held that the parties had accepted the award.^ A party
having accepted costs given to him by an award was not permitted to;
have the award set aside by reason of his acquiescence.™
3. That the irregularity complained of has resulted in benefit to
party moving to set aside the Award.—The law relating to this point has
been stated by Mukerjee, J. in Narsingh Narayan Singh v. Ajodhya Pra-
sad Singh,^ thus—"If the arbitrator has exceeded his I'uthority, he has
done so for the benefit of the defendants and they are not entitled to-
assail the award which is really in their f a v o u r . . . . I t is an elementary
principle that only' the party prejudiced by the act of the arbitrator is
entitled to object to the award by reason of it; the party in whose fa-
vour erroneous action of the arbitrator operates cannot be heard to im-
peach the validity of the award on this ground."
4. Limitation.-That the application to set aside the_ awafrd has not
been filed within 30 days from the date of service of the notice of the
filing of the award.
JUDGMENT ON AWARD
Where the Court sees no cause to remit the award or any of the
matters referred to arbitration fit for reconsideration or to set aside the
award, it shall, after the time for making application to set aside the award
has expired, or such application having been made, after refusing it pro-
ceed to announce judgment according to the award, and give a decree in-
terms of the award, which will be final and no appeal shall lie from such
decree (Section 17). The judgment and decree on award' import
the final stage, but the Arbitration Act, 1940, now provides that the
Court may pass interim orders, if a party to the award has taken or is
about to take steps to defeat, delay or obstruct the execution of anv
decree that may be passed upon the award, or where such order becomes
necessary for speedy execution of the award (Section 18).
ARBITRATION W I T H INTERVENTION OF COURT
WHERE NO SUIT IS PENDING
Section 20 provides for arbitration with the intervention of a Court
where there is no suit pending. The Section reads:
"20. (1) Where any persons have entered into an arbitration agree-
ment before the irtstitution of any suit with respect to the subject-matter
of the agreement or any part of it, and where a difference has arisen to-
which agreement applies, they or any of them instead of proceeding un-
der Chapter II," [arbitration without intervention of a Court, wliich
has been discussed in preceding pages] "may apply to a Court having juris-
diction in the matter to which the agreement relates, that the agreement
be filed in Court.
(2) The application shall be in writing and shall be numbered and

25. Ramrunjan v. Bam Prasad, 13 C.L.P.. 26.

2G. Kennard v. Harris (1824) 2 B. & C. 801.
27. (1912) 12 I.e. 118: 16 C.W.N. 256.
458 MERCANTILE LAW

registered as a suit between one or more of tlie parties interested or claim-

ing to be interested as plaintiffs and the remainder as defendant or de-
fendants.
(3) On such application being made, the Court shall direct notice
ihereol to be given to all parties to the agreement other than the appli-
cant, requiring them to show cause within the time specified in the no-
tice why the agreement should not be filed.
(4) Where no sufficient cause is shown the Court shall order the
agreement to be filed, and shall make an order of reference to the ar-
bitrator appointed by the parties, whether in the agreement or other-
wise, or where the parties cannot agree upon an arbitrator, to an arbi-
trator appointed by the Court.
(5) Therefore the arbitration shall' proceed in accordance with, and
shall be governed by the other provisions of this Act [already discussed]
so far as they can be made applicable."

ARBITRATION IN SUITS
Sections 21 to 25 of ^he Act provide for decision by arbitration oE
any suit which is pending in a Civil Court. The parries to a suit may
by mutual consent apnly in writing at any time before judgment to the
Court for an order of reference, whereupon the Court shall appoint an
arbitrator in such manner as may be agreed upon between the parties.
Then the Court shall, by order, refer to the arbitrator the matter in
difference for determination specifying the time for making the award.
After referring the matter to arbitration the Court shall not deal with
such matter, save as allowed by the Arbitration Act. The Act makes
express provision by Section 24 for reference to arbitration by some of
the parties to the suit on the condition only that the matter in differ-
ence between the parties applying for reference can be separated from
the rest of the subject-matter of the suit. On such a reference the suit
shall continue so far as it relates to the parties who have not joined
in the said application and to matters not contained in the said re-
ference.

STATUTORY ARBITRATION
Some statutes provide for arbitration in disputes arising out of mat-
ters covered by them. For example, the Co-operative Societies Act lays
down that certain disputes between a member and a co-operative society
must be settled by arbitration and not by suit. The Industrial Disputes Act,
1917, also permits the parties to an industrial dispute to refer it to ar-
bitration. This type of arbitration is known as Statutory Arbitration.
T h e statute concerned generally provides for the procedure according
to which the arbitration will be conducted.

APPEALS
Section 39, by specifving the appealable orders, has simplified the
matter of appeal. The Section reads :—
".S9. H'l .\n appeal shall lie from the following orders passed under
this Art (AND FROAf NO OTHERS) to the Court authorised by law
to hear appeals from original decrees of the Court passing the order;—
ARBITRATION 459

An order—
(i) superseding an arbitration;
(li) on an award stated in the form of a special case;
(lii) modifying and correcting an award;
(iv) filing or refusing to file an arbitration agreement;
(\) staying or refusing to stay legal proceedings where there is
arbitration agreement;
(\i) setting aside or refusing to set aside an award;
provided that the provisions of this Section shall not apply to any order
passed by a Small Causes Court."
(2) No second appeal shall lie from an order passed in appeal under
this Section, but nothing in this Section shall affect or take away any
Tight to appeal to the Supreme Court."
CASES FOR RECAPITULATION
1. A party to an arbitration agreement challenges the award alleg-
ing that a question of law was wrongly referred to the arbitrator and
further that the arbitrator wrongly 'decided the same thereby vitiating
the award. Held, a mistake of law in making the reference to arbitra-
tion may be invoked to obtain the intervention of the Court, if
it is a mistake with regard to a party's right. A mistake with regard
to the terms of a general statute, e.g., Hindu Women's Right to
Property Act cannot be invoked to obtain interventio.n of the Court
<KaIepaIli Venkata Rao v. Kaleppali Padmavalli Tayaramma, 1944 Mad.
324). Thus, if a question of general law was wrongly referred to the ar-
bitrator, the award cannot be set aside; but if it was a mistake of law
with regard to a party's private right, it may be made a ground for set-
ting aside 'the award.
An arbitrator's award will only be set aside on the ground of error
of law if the mistake appears on the face of the award. If the arbitra-
tor has acted within his authority the award will be upheld. An arbitra-
tor is a judge of both the question of fact and law, and the parties can-
not be allowed to show that his decision was wrong on merits. So long
as the arbitrator is within the scope of his authority, his decision will be
accepted as valid and binding (Gobardhan Das v. Lachhmi Ram, 1954
S.C. 689). Courts of law cannot sit in appeal on an award either with
regard to error of law or error on question of fact.
2. The heirs referred to arbitration a dispute regarding the distri-
bution of property of the deceased. One of the heirs, Mr. M refused
to join in the reference. Despite this, the award allotted him a share
•of the property. A decree in terms of the award was passed with M's
consent. As M was not a party to the arbitration agreement, he was
not bound by the award. A cannot get the benefit of the decree based
on the award, if passed. The decree cannot be made effective in his
favour.
It is important to note that the agreement itself was invalid and so
was the award. For where all the persons interested in the dispute were
not partv to arbitration agreement, and when an agreement was not as-
sented to by <ill, such an agreement would be invalid and would not give
the arbitrator any jurdiction to decide the dispute. Any award given on
the "Strength of. such void reference is not valid. The award passed on
such inyalid reference does not bind even the consenting parties. It fol-
lows that a decree cannot be given on such an invalid award (Deep
Narain Singh v. Dhaneshwjiri, 1960 Pat. 201).
 Chapter XIV

Carriers and Carriage of Goods

PART 14-A

NATURE AND CLASSIFICATION OF CARRIERS

Trarsport is the most important single device utilised in the field of

inatV.eung. T h e \Tist s'ysiem of coUeciion o£ ta'w maieTiah and iUs«ibvi-
tion of finished prochicts depends for its successful operation on the i-ari-
ous forms of transport—trains, trucks, ships, barges and aeroplanes. The
persons who are engaged in the transportation or carriage of goods are
called carriers and the contract under -which the goods are carried from
one place to another is called the contract of carriage. A contract of
carriage is really a branch of the law of bailment and falls under the
head bailment for reward. Thus, where goods are handed over to a
bailee for conveyance from one place to another for a remuneration,
there is a contract of carriage and the person who undertakes to con-
vey the goods is a carrier. Tlfe person who delivers the goods to the
carrier for shipment is the consignor or shipper. The person to whom
the goods are addressed and to whom the carrier should deliver the con-
signment is called the consignee.
Classification of Carriers.—Historically, carriers were divided into
two classes, namely, common carriers and private carriers. In modern
times, another class has been added, namely, contract carriers. Another
class, go.ernraent carriers, does not form part of our subject.
Private carriers are persons who undertake to carry goods in a par-
ticular instance only, not making it their vocation, nor holding them-
selves out to the public readv for all who desire their sen ices. Todav,
many of the larger industrial and commercial concerns transport their
merchandise by means of their own vans or trucks. Thev are private
(farriers. Where a private carrier carries goods or passengers lujder in-
dividual contracts, he is calle^ contract carrier. There is a common
practice in Delhi for bus owners to engage themselves on contract basis
^ to carry students to and from schools.
Common Carriers.—A common carrier is one who imdertakes to
carr)' from place to place the goods of all persons who think fit to em-
ploy him for hire. The obligation to carry for all without discrimina-
CARRIERS AND CARRIAGE OF GOODS 461
tion is r.ot founded on contract, but on the exercise o£ public employ-
-ment f c reward. To be a common carrier, therefore, one must hold
himself out as being willing to serve the public. In addition to non-
discriminatory service to the public, a common carrier must require com-
pensation for his services. If the service is performed gratuitously, the
carrier is not acting as a common carrier; he is merely an ordinary bailee
dn a bailment for the sole benefit of the bailor.
It follows that a common carrier is boun^ (i) to carry for all indis-
criminately—that is the force of the term common; (ii) to carry safely, with
the exceptions given below. Although he is bound to carry for all, yet
he need carry only those goods which he professes to carry and carry them
lay his ordinary route and to his accustomed destination. He need not
carry goods involving him in extraordinary risk. He is bound to carry
in his customary manner without unnecessary delay and deviation, but
•not necessarily by the shortest route. He cannot be compelled to accept
•goods for carriage, if there is no room, e.g., the carriage is already full.
On the completion of the transit, he is required to deliver the goods to
the consignee according to instructions, and before actual delivery, keep
them, in a safe place, e.g., a warehouse or a godown. At this stage he
becomes an ordinary bailee.
If the consignee refuses to take delivery of the goods,' when tendered,
the carrier may deal with the goods as he may think reasonable and pru-
dent under the circumstances. He may also recover reasonable expen-
•ses incurred by him as a result of the consignee's refusal to take delivery.
After giving notice to the consignee he may even sell perishable goods.
Under Common Law, a common carrier is an insurer of goods hand-
ed over to him. But there are some exceptions to this general rule :
1. He is not liable for any loss or damage arising from an act of
God. which means an unforeseen accident occasioned by the elementary
forces of nature beyond the control of man. If the vehi<;ie is struck by
lightning, it is an act of God, but ordinary rain does not rank as such.
T h e carvier can and should provide a rain-proof cover.
2. He is not liable for any injury caused by the "enemies of the
State," i.e., foreign enemies with whom India is at war, but not rioters
•or strikers.
3. He is not liable for loss arising from inherent vice or natural
deterioration of the goods. Examples of this are : fright in nervous
•animals, deterioration of fruit, evaporation of liquids and spontaneous
combustiort.
4. He ir not liable for loss of goods through neglect on the part of
the consignor- e.g., defective packing. Glassware or chinaware needs
•special care, and if the consignor fails to disclose the fact, the carrier is
not liable.
Dangerous Goods.—Where dangerous goods, such as explosives, acids
•or poisons, are consigned, it is the duty of the consignor to warn the
carrier; otherwise he will be answerable for the probable consequences
•of his omission.
462 MERCANTILE LA\\"

In Bamfield v. Goolc and Sheffield Transjiort Co. Ltd. (1922) 2 K.B.

742, the consignor delivered "ferro-silicon" in casks, to a common carrier,
without informing the carrier -that the casks contained the poisonous
article. During transit the ferro-silicon gave off poison gases which caus-
ed the death of the carrier. Held, the consignor was liable in damages
for causing the death of the carrier.
In India the liabilities of common carriers of goods are laid down
in the Common Carrieti. Act of 1865. This Act divides goods into two
categories : Scheduled and Non-Scheduled. Scheduled goods are goods of
great value, such as gold and silver coins,j bullion, ornaments, precious
stones and pearls, time-pieces of all descriptions, trinkets, bills and hundis,
currency and bank notes, stamps and stamp papers, maps, prints and
works of art, writings, title-deeds, gold or silver plate or plated articles,
glass, china, silk, shawls, lace, cloth and tissue embroidered with precious
metals or of which such metals form part, articles of ivory, ebony or
sandalwood and musical and scientific instruments.
For scheduled articles exceeding Rs. 100 in value, the carrier is liable
for loss and damage only—
(i) if the value and the description of the goods are disclosed by
the consiffnor to the carrier; or
(ii) if the loss or damage is due to a criminal act of the carrier,
his agent or servant.
The carrier can charge extra for carrying scheduled 'articles, but he
cannot limit his statutory liability by any special agreement.
As legards non-scheduled articles, a common carrier can limit his
liability by special agreement with the consignor. But even in this case
he will be liable for loss or damage caused by negligence or criminal
acts done by himself, his agents or servants.

PART 14-B
RAILWAYS AS CARRIERS
The duties and liabilities of the Railwav Administration in India are
laid down in the Indian Railways Act, 1890.
Duties.—By virtue of Section 42A, the railway administration is
bound (like a common carrier discussed above) to carry goods of every
person who is ready and willing to pay the freight and observes the re
gulations regarding packing, etc. Similarly, railways are bound to carry
every passenger who pays the necessary fare. Hence, the railways, as re-
gards duties, are conlmon carriers.
Liabilities.-As regards liabilities, railways were, before 1961, ordin-
ary bailees. But since the amendment of the Act in 1961, the railways
have become common carriers as regards liabilities, too. Consequently,
railways in India, both as^ regards duties and liabilities, are now co,ii
mon carriers.
While delivering goods or animals to the railway for carriage, the
CARRIERS AND CARRIAGE OF GOODS 463-
consignor is required to execute a forwarding note in the prescribed
ilorm indicating the nature of the goods and condition of packing and
whether the goods are to be carried at railway risk or owner's risk.
Section 73 orovides that the Railways shall be liable for loss, des-
truction, damage or deterioration or non-delivery in transit of animals.
or goods entrusted to it for carriage arising from any cause except the
following :—
(a) an act of God;
(b) act of war;
(c) act of public enemies;
(d) arrest, restraint or seizure under legal process;
(e) orders or restrictions imposed by the Central or a State Gov-
ernment;
' (f^ act or omission or negligence of the consignor or the agent or
servant of either;
(g) natural deterioration or wastage due to inherent defect,
quality or vice of the goods;
(h) latent defects;
(i) fire, explosion, or any unforeseen risk.
Even where such loss, destruction, damage, deterioration or non-
delivery has arisen from any one or more of the aforesaid causes, the rail-
way administration shall be liable unless the administration further
proves that it has used reasonable foresight and care in the carriage o£
the animals or goods.
Note, this section makes- the Indian Railways as common carriers.
Railway risk or owner's risk rales.—Animals or goods may be carried
by the railway either at railway risk rate (ordinary rate) or at owner's risk
rate (reduced rate). The animals and goods will be deemed to be car-
ried at owner's risk rate unless the consignor elects in writing to pay
the railway risk (i.e., higher) rate, in wJiich.case he will be given a certifi-
cate to ihat effect.
Wheie the consignment is carried at owner's risk rate the railway
administration will be liable only if the loss, destruction, damage, deterio-
ration or non-delivery was due to the negligence or misconduct on the
part of, the railway administration or any of its servants.
The difference between the two rates is only in relation to burden
of proof. Thus, where animals or goods are carried at railway risk rate,
the railway administration is responsible for any loss, etc., unless it posi-
tively proves that it has taken due care and that it or any of its servants
has not been negligent or guilty of misconduct. Where, on the other
hand, animals or goods are carried at owner's risk rate, the onus is on
the consignor to prove that the loss, "etc., was due to -the negligence or
misconduct of the railway administration or its servants (Section 74).
464 MERCANTILE LAW
In Juggal Kishore v. Union of India, 1965 Pat. 196, goods were con-
signed at owner's risk rate. Part of tlie consignment was lost in a run-
ning train theft. Though the train was running in the night no proper
watch and ward were provided, and the guard did not check the wagon
at the scheduled stoppages nor did he check the seal at the real checking
stations. Held, (he railway administration was liable on the grounds of
negligence and misconduct on the p a n of its ser\ants.
Passenger's Personal Luggage.—Tlie railway is not lesnonsible for a
pa''scngei"s personal luggage, unless a lailway senant has booked it ind
given a leceint therefoi. \Vhere the luggage is carried by the passenger
in his own coninartment, the raihsav will be liable only if the loss etc.
ivas due to the negligence or misconduct on liie part of the railway ad-
•miiiistiaiion or anv of its sen ants (Section 75).
Delav or detention in iiansit.—A railway administration shaU be res-
ponsible for loss etc. of animals oi goods if tlie owner proves that such
loss, destiuction, damage or deierioi.ition was caused by delay or deten-
tion in transit. It can, however, escape liability by pro\ing that ihe
delay or detention arose without negligence or misconduct on its part
•or on the part of its servants (Section 76).
Deviation of route.—Section 76.A. provides that where, due lo a cause
beyond the control of a railway administration or due to congestion in
the yard or other operational reasons, animals or goods are carried o\er
a route other than the route bv which they are booked or the usual or
customary route, the railway administration shall not be deemed to have
committed a breach of contract of carriage.
Wrong delivery.—Where a lailway administration delivers the ani-
•mals or goods in good faith to a person who produces the original rail-
way receint, it shall not be resoonsible on the ground that such person
is not legally entitled thereto or the indorsement on the railway receipt
is forged or otheiwise defective. But if the animals or goods are deli-
TCred to a wrong peison nithout the production of a railway receipt
ihe railway administration shall be responsible to the rightful person.
In Union of India v. Ramii Lai, 1965 All. 184, R sent 10 harmoniums
from Aligarh to Howrah for A. The lailwav receiot was consigned to
'Self but bote an endorsement bv R the consignor, in favour of A The
harmoniums were deli\ered at Howrah to one J without anv endorse-
ment by A in favour of J or any one else T wrote on the back of the
R / R the following words: 'A S: Co. J Pioprietor.' A denied taking de-
liven,' of the consignment; either himself or through an agent. R sued
for damages. Held, he was entitled Co recover the loss, as the railway
had not acted in good faith.
Exoneration from resoonsibilitv.—Bv viitue of Section 78, a raihvav
administration is not responsible for anv indirect or consequential da-
mage, or for loss of particular market. It shall not be lesnoubible for
•any loss, destruction, damage, deterioration or non-deli\'ery of-
(a) any goods in respect of whicli false description \-Tas given.
(b) animals or goods if a fraud has been nernetrated bv the roii-
signor or the consignee or an agent of either;
CARRIERS AND CARRIAGE OF GOODS 465
(c) animals or goods proved by the railway administration to have
been caused by or to have arisen from-^
(i) improper loading and unloading by the consignor or the
consignee or an agent o£ "iither, or
(ii) riot, civil commotion, strike, lock-out, stoppage or restraint
of labour from whatever cause, whether partial or
general.
Railways are liable to pay damages for injury to passengers or death
when it is due to the negligence of the railway servants. The liability
for the death of a passenger would not exceed Rs. 50,000 per passenger.
There is no liability if the passenger is guilty of contributory negligence.
Section 76C says that in the case of goods to be delivered by a rail-
way administration at a siding not belonging to the administration, the
railway administration shall not be responsible for loss, destruction, da-
mage, deterioration or non-delivery of such goods, from whatever
cause arising after the wagon containing the goods has been placed at
the Doint of interchange of wagons between the railway administration
and the owner of the siding and the owner of the siding has been in-
formed in writing that the wagon has been so placed.
Carriage over two or more railway systems.—Section 76D provides
that where any animals or goods delivered to a railway administration
to be carried by railway have been booked through over the, railways of
two or more railway administrations or over one or more railway ad-
ministrations and one or more transport systems not belonging to any
railway administration, the person tendering the animals or goods to the
railway- administration shall be deemed to have contracted with each one
of the railway administrations or the owners of the transport systems
concerned, as the case may be, and each one of the railway administra-
tions or the transport systems shall be liable in the same manner as pro-
vicied for the single railway administration.
Section 76E provides that in the case of through booking of con-
signments over an Indian Railway and a Foreign. Railway, the respon-
sibility of the Indian Railway as a common carrier would extend only
over that portion of the carriage whidi is over the Indian Railway.
Section 76F lays down that notwithstanding anything contained in
Section 74—(a) where the whole of a consignment of goods; or the whole
of any package forming part of a consignment; carried at owner's risk
rate is not delivered to the consignee and such -.non-delivery is not prov-
ed by the railway administration to have been due to fire or to any ac-
cident to the train, or (b) where in respect of any consignment of goods
or of any package which had been so covered or protected that the
covering or protection was not readily removable by hand, it is pointed
to the railway administration on or before delivery that anv part of
such consignment or package had been pilfered in transit, the railway
administration shall be bound to disclose to the consienov how the con-
signment or the package was dealt with throughout the time it was ir.
its possession or control; but if negligence or misconduct on the part of
466 MERCANTILE LA.W

the railway administration or any o£ its servants cannot be fairly in-

ferred from such disclosure the burden of proving such negligence or
misconduct shall be on the consignor.
Section 77 says that the railway administration shall be responsible
as a bailee under Sections 151, 152 and 161 of the Indian Contract Act
for the loss, destruction, damage, deterioration or non-delivery of goods
carried by railway within a period of 30 days after termination of tran-
sit; provided thiit where the goods are carried at owner's risk rate, the
railway administration shall not be responsible except on proof of negli-
gence or misconduct on the part of the railway administration or of
any of its sen'ants. But after the expiiy of the 30 days, the railway adminis-
tration is not responsible in any case. Transit terminates on the expiry
of the free time allowed (after the arrival of the consignment) for its un-
loading from the railway wagon without payment of demurrage.
Section 77A lays down the amounts beyond which the railways will
not be liable for loss or damage to animals as follows:
Elephants—Rs. 1,500 per head; horses—Rs. 750 per head; mules, horned
cattle, and camels—Rs. 200 per head; and in all other cases, including
I)iids—Rs. 30 per head. The railway may, however, accept a higher .lia-
bility if the consignor pays a higher chargfe and declares the highei- value
in the forwarding note. The railway is not at all responsible if the loss
or damage arises fiom the restiveness or fright of the animal.
Bv virtue of Section 77B, parcels or package containing articles of
special value will be carried at railway risk rate without payment of any
additional charge when the value of such articles does not exceed Rs. 500.
Section 77C provides that when any goods tendered to a railway
administration to be caiTied by railway (a) are in defective condition
as a I consequence of which they are liable to damage, deterioration, leak-
age or wastage, or (b) are either defectively packed or packed in a
manner not in accordance with the general or special order, if any, issued
imder Section 14, and the defect has been recorded bv the sender or
his agent in the fonvarding note, then the railway administration shall
not be responsible for damage, deterioration, leakage or wastage except
on proof of negligence or misconduct of the railway administration or
any of its servants.

PART "l4-C
CARRIAGE OF GOODS BY SEA
Contract of Affreightment.—The common law took substantially the
same view of sea carriage as of land carriage, that is to say, the ship,
owner has to carry the goods safely, under the contract of carriage. The'
contract of carriage of goods by sea is called a contract of Affreightment,
It may be defined as a contract by which the shipowner undertakes to
carry the goods of another (called the shipper) by water, or to furnish
a ship for the purpose of so carrying the goods to the destination in
return for a price called "freight." A contract of affreightment may take
 CARRIERS AND CARRIAGE OF GOODS , 467
either of the two forms, namely,—
(i) A contract by charter-party, or
(ii) A contract for the carriage of goods in a Giineral Ship when
the contract is evidenced by a Bill oC Lading.

CHARTER-PARTY
Wlien goods are consigned in large quantities it is usual for the con-
signor to hire or charter the whole of a vessel or a substantial part of
it, and tlie document'by which he does this is known as a Cliarter-Party.
The term is also used to denote the contract by which an agreement
is made. A charter-party may be defined as a contract iri writing under
which the shipowner agrees to place an entire ship, or a part or it, at
the disposal of a shipper for the conveyance of goods on a particular
voyage to a specified place or places, or for a specified time, in considc-
^ration of a sum of money called the freight. The charter-party may be
-tinder seal but must be stamped.
A charter-party may operate as a- demise or lease of the ship. This
form amounts to a letting of the ship by the shipowner so ns to put
the vessel and its crew out of his control. T h e charterer becomes tem-
porary owner of the ship and is responsiljle to third parties for the
acts of the master and crew, e.g., in tort for damage done to other ships
by negligent navigation, or in contract on bills of exchange signed by
the master. The charterer's re<:ponsibilitv for the act of the master and
the crew arises from the fact that for all intents and purposes the mas-
ter and crew become his servants during the time the charter lasts. This
kind of charter-party does not really involve a contract of carriage, but
rather a hiring of the means of carriage.
If, however, the charterer only requires the use of the fidl carrying
capacity of the ship, as is usually the case these days, he can obtain this
wi another wav without taking possession of the ship and control of
the master and crew, and without incurring the above-mentioned liabili-
ties. Thus, under this form the .ship remains in the possession and
under the control of the shipowner, and charterer merely acquires the
right to put his goods on the vessel, and to have them carried to the
agreed destination. The charterer can fill the entire ship with his own
goods, or he may use the ship as a general ship, carrying poods of third
parties undei" bills of lading. A charter-party is either a Time charter-
party, where it is entered into for a definite period of time, or a Voyage
tharter-party, where it is only for a definite voyage.
When the goods are delivered on board the ship, a bill of lading
signed by the owner or master of the ship h given to the shipper as an
acknowledftment of the receipt of the goods. It is to be noted that the
bill of lading issued in the' case of a cliarter-party is only a receipt of the
gfflods, and is quite diftinct from tlie bill of lading issued in the case
of a general sh'p. The contract of affreightment is made up of the two
documents—the charter-party containing the terms and conditions on
which the goods are to be carried, and the bill of lading acknowledging
the receipt of goods on board ship.
468 MERCANTILE LAW
IMPLIED WARRANTIES
I/i aJl contracts of carriage by sea the following terms are iinpiied:-
(1) Seaworthiness o£ the ship—already discussed in connection
with Maiine Insurance.
(2) The sliijj shall be leady to commence the voyage and shall
tarry out the same with all leasonable dispatch or diligence.
(3) The ship sliali not deviate—dealt with in Marine Insurance.
(4) The shipper sliall not ship dangerous goods.

FORM OF CHARTER-PARTY
The forms of charter-parties vary considerably according to the cus-
toms of the trades, but the main stipulations are now almost uniform in
all charter-parties by the custom of the shipping trade. The following
is the most commonly used form :—
"It is this day mutually agreed between Messrs. King & Co., owners
of the good ship called S.S. Peerless Al and newly coppered of etc. of the
Inirden of 2,000 tons registered measurement or thereabouts whereby John
IJlanden is Master now at Port Said and Messrs. Blank & Co. of London
meichants, that the said ship being tight, staunch and strong, and in
e\ery way fitted for the voyage, shall with all convenient speed proceed
to Liverpool and there load in the usual and customary manner a full
and complete cargo of lawful merchandise say 500 tons in weight and
theiewith proceed to Bombay as ordered before sailing, or so near there-
unto as she may safely get and there deliver the same in the usual man-
ner agreeably to bills of lading; after which she shall load there, or if
retjuired proceed to one other safe port in India and there load always
afloat in the usual and customary manner from the agents of the said
charterers a full and complete cargo of jute or other lawful merchandise,
not exceeding what she can reasonably stow and carry over and above
her tackle, apparel, provisions and furniture, the cargoes being brougI||'
to and taken from alongside the vessel at the charterer's risk and expense,
whirh the «aid merchants bind themselves to ship, and being so loaded
shall therewith proceed to Glasgow as ordered on signing bills of lad-
ing abroad, or so near thereto as she may safely pet, and there deliver
ilie same in the usual and customary manner to the said charterers or
their assigns, they paying freight for same at the rate of £5 per ton of .5Cc.
feet for jute delivered, for the round out and home; a detluction of 3s.
])er ton to be made if shit) be discharged and loaded at Colombo, other
goods, if shipped, to pay in customary proportion; in consideration
whereof the outward cargo to be carried freight free; payment thereof to
become due and be made as follows; ihen follow the t e r m s . . . . Ship is
to have liberty to put on board 100 tons of hides, or other dead weights
and to retain it on board during the voyage. Thirty running davs (Sun-
days and holidays excepted) are to be allowed to the said merchant if
the ship is not saoner despatched for loading in Glasgow, and 45 like davs
lor all purposes abroad, and ten days on demurrage over and above the
said lav days and the time therein stated at £6 per day, paying day by d/iy
as the "same, shall become due. T h e time occupied in changing nartv not
to rount as lay days.'^Charterers' liability under this charier-pnny to
cease on the ciirgo being loaded, the masters and ownqr havin? a' lien on
cargo for fteight and demurrage. T h e master to sign bills of lading at
 CARRIERS AND CARRIAGE OF GOODS 469

^•rates of freight as may be required by tlie agents of the charterers witli-

•'Toiit prejudice to charter-party.
"The Act of God, King's enemies, restraint of Princes and Rulers,
fire, and all and every other dangers and accidents of the seas, rivers, and
navigation, of what nature and kind soever/ throughout the voyage, be-
ing excepted.
"The vessel to be consigned to charterers' agent abroad free of com-
missions. On the return of the ship to London, she shall be addiessed
to While & Co., brokers or their agents at any other port of discharge.
Penalty for non-performance of this agreement, the estimated amount of
freight."
Clauses of Charter-Party. The following are the clauses of the Char-
ter-Party:—
1. The names and descriptions of the owner and charterer, and
the fact of their agreement.
. 2. The name of the ship and its rating in Lloyd's register, e.g., Al.
The correctness of its rating is a condition precedent to the charterers'
liability.
3. The measurement of the ship as indicated by its registered ton-
nage. A registered ton equals 100 cubic feet o£ space, and has no refe-
rence to weight. It 'is a conventional way of indicating the cubic mea-
surement of the ship.
4. The position of the ship at the date of the signing of the char-
ter-party, e.g., now at Port Said, or that she will be in a particular port
by a stated date. The truth of tliis statement is another condition pre-
cedent.
5. T h e shipowners' obligation to provide a ship which is seaworthy
and fit for the contemplated voyage (the said ship being tight, staunch
and strong). This only extends to seaworthiness and fitness at the com-
mencement of the voyage. This obligation will be implied, if it is not
stated, as will the other two similar matters, viz., (a) that the voyage will
be commenced and carried without delay, and (b) that there shall be no
unnecessary deviation.
6. The port of loading—The shipowner must bring the ship to the
agreed or usual place of loading at the port, and give notice to the char-
terer that tiie ship is ready to load. The charterer must then bring his
goods alongside the ship, and deliver them to the servants of the shipowner,
wlio is in general responsible for proper stowage.
7. T h e duty of the charterer to furnish a full and complete cargo.—
This is an absolute duty, which in practice means that the charterer must
pay freight on the full carrying capacity of the ship whether he utilises
it or not. The custom of the port of loading determines tfee "full and
complete cargo." Sometimes some guidance is given as to what a ful!
and complete cargo is. Where a charterer undertakes to load a "full and
complete cargo" on a ship which is chartered as of a certain capacity,
he is bound to load as much cargo as the ship will safely' carry.' But
where the clause as to cargo provides that a certain number of tons is
to be lodged, the charterers' liability will be to load that number and
not the actual of the vessel.'

1. Cuthbert v. Gumming (1856) II Ex. 405.

2. Morris v. Levison (1876) 1 C.U.O. 155.
470 iMERCANTILE LAW

8. Delivery of the goods in the usual manner.—At the port o£ dis-

charge it is the duty of the master to proceed to the place of dischaigc
mentioned in the contract, and get the goods out of the ship's hold and
put them on the ship's deck or alongside. But the consignee or charterer
must provide proper appliances for taking delivery after the shipowner
has put the cargo on the rail of the ship, or in such a position that the
consignee can take it.
9. T h e obligation o£ the charterer or consignee to pay freight.—This
is generally expressed at so much per ton. It is not payable until the
voyage has been completed and the goods delivered, unless non-delivery
is due to the consignor's fault, or to the excepted perils. By express
agreement freight may be payable in advance.
10. Lay days and denjurrage.—Lay days are a certain number of
days allowed by the charter-party to the charterer for tlte purpose of load-
ing and imloading the cargo. T h e lay days begin to run from the time
that the charterer has received notice of the ship's arrival at the stated
port and her readiness to load and unload. These days may be either
"Running Days," in which case they are counted from midnight to mid-
night including any intervening holidays, or "Working Days," which
are the days on which the work is normally done, i.e., excluding holidays.
It is essential that the work of loading and unloading must be complei
ed within the stipulated lay days, and where no time is fixed then work
must be completed within a reasonable time, regard being had to the
existing circumstances and the custom of the port.'' This condition fixes
the maximum period, and if the ship is loaded in a shorter time, the
cJiarterer must allow the ship to depart, and cannot insist on her lying
idle at the port of loading until all the lay days have run out.*
Positively stated, a charterer may detain a ship for extra days beyond
ihe agreed lay days on payment of a stated sum, known as "Demurrage."
Negatively, where the cnarterer details a ship for a period longer than
what he is allowed as lay days, he becomes liable to pay to the owner
damages called "Deniurrage." T h a t is the strict meaning of the term,
which miy be defined thus: Demurrage is a charge agreed to be paid by
(he charterer to the shipowner as liquidated damages for detaining the
ship beyond a stipulated or a reasonable time for loading or unloading.
But the term is sometimes loosely used to cover "unliquidated damaees
for undue detention not specially provided for in the charter-party." No
demurrage is payable if the ship has been detained through the owner's
fault.
11. T h e duration of charterers^ liability.—For the recovery of freight
and expenses the shipowner has a lien on the goods, but for other claims,
such as demurrage and "dead freight" for not loading a full and com-
j)Iete cargo, he has no such lien, unless an express agreement is made.
It is ubiiai to insert a clause called the "Cesser Clause" in the charter-party,
under which the charterers' liability ceases on the cargo, being loaded, and
in return the shipowner receives a lien on the cargo for freight, demur-
rage, including dead weight. T h e charterers' exemption from liability is
coextensive with the lien conferred on the shipowner. So that where no
lien on the cargo has been granted, to the shipowner, the Courts refuse

3. Postewaite v. Freeland (1880) 5 A.C. 599.

•1. Notsment v. Bunge (1917) 1 K.B. 160.
CARRIERS AND CARRIAGE OF GOODS 471
to relieve the charterer from liability arising either before or after ship-
ment of cargo.*
12. T h e right o£ the charterer to take other peoples' goods on board
under bills o£ lading.—This may be a desirable right for the charterer,
and tliere will be no hardship on the shipowner, so long as tiie bills of
lading are without prejudice to the charter-party.
13. Expected perils and negygence claljse.—Charter-parties contain
a clause exonerating the shipowner from liability for loss caused by cer-
tain perils such as "Act of God, the King's enemies, restraints of princes
and rulers, fire and all and every other dangers and accidents of die seas,
rivers, and navigation, of what nature and kind soever." This clause
will protect the shipowner only if the. said peril could not have been
avoided by the exercise of reasonable care and diligence on the part n
the shipowner or his servants. If the ship is unseaworthy at the com-
mencement of the voyage and damage results, this clause will not ex-
onerate the shipowner from responsibilities for damage," Deviation
without excuse cancels the expected perils clause.''

BILL OF LADING
Particular goods or isolated parcels are despatched Irom one port to
another in a General Ship and the document used for their consignment
is called a Bill of Lading. A general ship is a ship wliicli is owned by a
person or body of persons who ply it on a particular 'line' and offer to
carry the goods of all comers to places where she will call. The owner
of a general ship acts as a common carrier.
A bill of lading has been judicially described as a document by the
shipowner or by the master or other agent on his behalf which states that
certain goods have been shipped on 'a particular ship and which purports
to set out the terms on which sucli goods have been delivered to, and
received by the ship.' A bill of lading is in the first instance an acknow-
ledgment of the receipt of the goods specified therein. It is also a sym-
bol of the right of property in the goods; and its transfer being a symboli-
cal delivery of the goods has by mercantile usage the same effect as ac-
tual delivery. Thirdly, it is, die record of the t*;rms of the contract on
which the goods are carried. Therefore where goods are sent in a gene-
ral ship the bill of lading operates at once as a receipt of goods, a do-
cument of title, and contract of carriage.

FORM OF BILL OF L.^DING

"Shipped in good order and condition by' William Blake in and
upon the good shio called the Daulat-i-Sagar whereof Ram Nath is mas-
ter for this present voyage, and now in port of Calcutta, and bound foi-
Hong Kong, with liberty to call at any ports on the way for coaling;- or
other necessary purposes, 500 (five hundred') bales of raw cotton hehis;
marked and numbered as per margin and to be delivered in the like

5. Clink v. Rattford (1891) 1 Q.B. 625.

6. Gilroy v. Price (1893) A.C. 56.
7. Morrison v. Shak (1916) 2 K.B. 783.
B. Sewell v. Burdick (1884-85) 10 A.C. 74 (105).
472 MERCANTILE LAW

good order and condition at die aforesaid port of Hong Kong, tlie Act
of God, tlie King's enemies, fire, barratry of the master and crew, and
all and every other dangers and accidents of the seas, rivers and naviga-
tion of whatever kind and nature soever excepted, unto Metro & Co., or
to his assign, he or they paying freight for the said goods Rs per ton
delivered with primage AND average accustomed. IN WITNESS
\VHEREOF, the master of the said ship hath affirmed to (threej bills of
jading all of this tenor and date, one of which bills being accomplished,
the others to stand void.
Dated '
Weight, value "and contents unknown."
CLEAN BILL OF LADING
It will be noted that the bill of lading begins with the words "ship-
ped in good order and condition" and the last words are "weight, value
and contents unknown." Eitlier of these statements are retained by the
master according to the circumstances of each case. Where the master
states that the goods are "shipped in good order and condition," he is
bound to deliver the goods in the same good condition as they were at
the time of loading, ordinary depreciation on the voyage being except-
ed. The document in this case is called a Clean Bill of Lading. In the
case of a clean bill of lading the siiipowner will be estopped from prov-
ing that the goods were not in good order and condition at the time
they were delivered on board. The retention of the expression "%veight,
value and contents unknown" qualifies the liability of the shipowner, as
there is no admission that the goods have been "deli\'e/'ed in good order
and condition."

T H R O U G H BILL OF LADING
A through bill of' lading is' for tlie carriage of goods partly in the
ship of the shipowner and by land or in the ship of another shipo\.':ter
for an inclusive freight. Unless the bill states contrary, the contract is
regarded as made with the shipowner who issues it.

RECEIVED FOR SHIPMENT BILL OF LADING

This is not a proper bill of lading and operates only as receipt of
goods received for shipment. We have seen above that it is only afcer
the goods are loaded that the proper bill of lading, sometimes called
"shipped bill of . lading," is issued, and if "received for shipment bill"
is held by the shipper, he must surrender it and obtain the "shipped bill
of lading," or if he likes have the name of the ship and the date of ship-
ment of goods noted on it, when it will become a "shipped bill of
lading,"

MATE'S RECEIPT
A mate's receipt is an acknowledgment of receipt of goods given for
goods delivered on board a ship, by the person in charge at the time
and is taken back when the bill of lading is given. Possession of the
mate's receipt is nvima facie evidence of ownership and entitles the hold-
er to receive a bill of lading.
CARRIJERS AND CARRIAGE OF GOODS 475
PRIMAGE
Primage means a small payment o£ the nature of a tip made to tlie
ihip's master. It is not usual now, as the freight will cover all services,
and the master will prefer an inclusive salary.

AVERAGE
Average in dais context means certain dues paid by the ship for bea-
conage, etc., and shared rateably by ship and cargo, and must be dis-
tinguished from general and particular average dealt with in connection
with maiine insurance.

MASTER'S AUTHORITY T O SIGN BELL OF LADING

A bill of lading is usually made out in a set of three parts and sign-
ed by the master on behalf of the shipowner. One is retained by the
master of the ship and the other two are given to the shipper in ex-
change for the mate's receipt, or without one if the goods are on board
the ship. The shipper retains one with himself and despatches the other
to the consignee of the goods. Where the goods are carried in a gene-
ral ship the master acting as the agent of the shipowner, has power
to sign the bills of lading on such terms as he may think fit. Wheie
the shiu is under cliarter, but it is used as a general ship by the charterer,
the master can issue bills of lading to the various shippers as the agent
of the charteier. Neither the shipowner nor the charterer for whom the
master may be signing the bill of lading is responsible for tlie shipment
of goods which were never received on board the ship. The bill of
lading, Iiowever, creates a presumption in favour of the holder that the
goods therein mentioned are properly shipped and whoever pleads that
the goods were not shipped must prove the fact.'
The Bill of Lading Act, 1856, Section 3, however, provides that every
bill of lading in the hands of a consignee or indorsee for valuable con-
sideration representing goods to have been shipped on board a vessel
shall be conclusive evidence of such shipment as against the master or
other person signing the same, even though the goods or some part of
them may not have been so shipped, unless tlie holder of the bill of
lading at the time of receiving it had actual notice of non-shipment, ;he
misrepiesentation was witolly due to the fraud of the shipper, or the
holder, or some person under whom the holder claims.

TRANSFER OF BELL OF LADING

Bill of Lading a Document of Title.-As observed before, the pecu-
liarity of the bill of lading is that it is (i) a document containing the
terms of the contract of carriage, and (ii) a document of title to the
goods themselves, and remains so till the goods have come into the hands
of a person entitled under the bill of lading to the possession of them."
The consignee of the goods mav sell them while they are still at sea
but he cannot obviously giw physical delivery of the same. In such a

0. Grant v. Norway (1851) 10 C.B. 115.

10. Barber v. Meyerstein (1870) L.R. 4. H.I. 317.
474 MERCANTILE LAW

case the endorsement and delivery of the bill of lading operates as de-
livery of the cargo, for during the period of transit the bill of lading by
the law merchant is universally recognised as its symbol. It has been
oljserved in Hendeison v. Comptoir de Escompte de Paris," that a
bill of lading is a key which in the hands of the rightful owner is intend-
ed to unlock the door of the warehouse, floating or fixed, in which the
goods may chance to be.

BILL OF LADING N O T A NEGOTIABLE INSTRUMENT

Goods shipped under a bill of lading may be made deliverable to
a particular person "or to order" or "assigns," in which cases he may
transfer such goods to any one he pleases by indorsement and delivery of
the bill of haling. Again, the goods shipped under a bill of lading may
be made deliverable to a name left blank or "to bearer" in which case
the holder is at liberty to fill in the blank and then the bill of lading
can change hrfnds by mere delivery. This similarity of Uie bill of lading
to a negotiable instrument has led to the confusion of treating it as a
negotiable instrument, which it is not at all. On accoimt of some points
•of resemblance between the two kinds of instruments, a bill of lading
is also described as "quasi negotiable" or "as good as negotiable." But
in the strict sense of the term a bill of lading is not a negotiable ins-
trument. Unlike the holder of a negotiable instrument, the transferee
of a bill of lading takes it subject to any defects of the tiansferor's title.
In other words, the transferee of a bill of lading even though bona fide
and for value does not get a better title than his transferor, while the
holder in due course of a negotiable instrument does get a better title
thati that of his transferor. A bill of lading is negotiable in the sense
that it is transferable, but it is not a negotiable instrument. Where,
therefore, a bill of lading has been transferred by indorsement and de-
livery or by delivery, the transferee acquires by the trausfer all tlie riglits
to the goods shipped, and is subject to all the liabilities in resnect of
them.'- Sometimes, a bill of lading is said to be negotiable in the tech-
nical sense, and not in the real sense. At any rate, it is not a nego-
tiable instrument at all.
Section 1 of the Bill of Lading Act, 1856, provides:
"Every consignee of goods named in a bill of lading and every in-
dorsee of bill of lading to whom the property in the goods therein men-
tioned shall pass upon or by reason of such consignment or indoue-
inent shall have transferred to and vested in him all rights of .md be
subject to the same liabilities in respect o£ such goods as if the contract
contained in the bill of lading had been made with himself."
T H E R I G H T OF STOPPAGE IN TRANSIT
T h e right of stoppage in transit and a right to claim freight against
the original shipper is not affected by the Bill of Lading Act, 1856, and
Section 53 of the Indian Sale of Goods Act is applicable. .Accordingly,
if a bill of lading has been lawfully transferred to any person as buyer

11. (1873) L.R. 5 P.C. 25S.

12. Sewell v. Bardjck (1885) 10 A.C. 74.
CARRIERS AND CARRIAGE OF GOODS 475
or owner of the goods, and that person transfers the document by way
of sale to one who takes it in good faith and for valuable consideration
the right of lien and stoppage in transit is defeated. But if the transfer
be merely by way of pledge, tiie consignor has a right to stop the goods
in transit, subject to the payment or tender lo the pledge ol the amount
of the advance.

DELIVERY OF GOODS
Upon payment of the proper freight, the master is imder an obli-
gation to deliver the goods to, tlie holtler of the I)ill of lading. \Vhere
bills of lading are drawn in a set, and different parts arc handed over
to different persons, the first transferee for \alue is entitled to the goods.
But if the master acting bona fide deli\eis the goods to the person first
jjresenting the bill of lading forming the set, he will not be liable if it
should subsequently transpire that such person was not the first- trans-
feree.

DIFFERENCE BETWEEN CHARTER-PARTY AND BILL OF

LADING
(1) A liiil of lading is an atknowledgment of the receipt oC goods
on board the ship: a chai ter-party is not. (2) A bill of lading is a docu-
ment of title to the goods snecified therein; a charter-party is not such
a document. (3) A charter-party may amount to a demise, i.e., a lease
of the ship or a part thereof: a ))ill of lading conveys no such implication.
T h e documents, however, resemble each other as they both contain t'le
terms and conditions of the contract of affreightment.

SHIPOWNER'S LIEN
As a carrier, the sliipowncr has a lien on the goods carried for the
freight and other charges. T h e lien can be enforced by not parting with
the goods until his dues are paid. There is no lien when the freight
has been paid in atlvance or when freight has been agreed to be paid
after delivery of the goods. This is a possessory lien.

MARITIME LIEN
A maritime licp is a right which specifically binds a ship, 'ncludiim'
its machinery, furniture, cargo and freight, for the payment of a claim
based upon maritime law. It is possessed by the following persons : sea-
men for their wages; the holder of a bottomry bond for his dues; clai-
mants for damages in cases of collision with the ship concerned; persons
•who rescue ships or property from the sea. It is not a possessory lien.
In cases of maritime lien the nsle is that last in time ranks- first in pay-
ment.

PART H-D
CARRIAGE BY AIR
T h e law relating to the carriage by air is contained in the Car-
riage bv Air Act, 10S4, whicii gives effect in India to the rules contained
in the First Schedule to the Comcntion signed on 12th Octohor, 1929,
476 MERCANTILE LAW

at Warsaw. This Convention provides for the unification of certain rules

relating to international carriage by air. In India these rules are appli-
caljle to international carriage of goods and passengers by air. Al-
though they can be made applicable by notification by the Government
they have not so far been made applicable to internal air carriage m
India. Therefore, the liability of internal carrier by airways is go\cin-
ed by the English Common Law since adopted in India and not by the
Contract Act. T h e liability thus is not that of bailee only but that of
insurer of goods as a common carrier. But common ^aw allows a com-
mon carrier to limit his liability to any extent by contract with the con-
signor. The terms .of the contract may eve;i provide for exemption from
liability for any loss caused by the negligence or misconduct of its ser-
vants piukmanand v. Airways (India) Ltd., 1960 Assam 71]."
T h e term "High Contracting Party" in the Convention means all the
parties originally signatories to the Convention, together with those who
adhere thereto subsequently, as and when they adhere. T h e expression
"international Carriage" means any carriage in which according to the
contract between the parties the place of departure and the place of des-
tination, whether or not there be any break in the carriage or tranship-
ment, are situated either within the territories of two High Contracting
Parties, or within the territory of a single High Contracting Party, if
there is an agreed stopping place within a territory subject to the sove-
reignty, suzerainty, mandate or authority of another Power, even though
that Power is not a party to the Convention [Rule 1 (3)]. The prima
facie meaning of the expression appears to be "the place at which the
contractual carriage begins (place of departure) and the place at which
the contractual carriage ends (place of destination)." An intermediate
place at which the carriage may be broken is not a "place of destina-
tion."" A carriage to Ire performed by several successive carriers is deem-
ed to be imdivided carriage if it has been regarded by the parties as a
single operation.

DOCUMENTS OF CARRIAGE BY AIR

PASSENGER TICKET
For the c a r r i ^ e of passengers a carrier must deliver a passenger tic-
ket which must contain the following particulars : (1) the place and date
of issue; (2) the place of departure and of destination; (3) the agreed stop-
ping places; (4) the name and address of the carrier or carriers; (5) die
statement that the carriage is subject to the liability mentioned herein-
after.
T h e absence, irregularity or loss of the passenger ticket does not
affect the existence or -validity of the contract of carriage. But if a

13. Indian Airlines Corp. v. Jothaji, 1959 Mad. 285; Asian v. Im-
perial Airways Ltd. (1933) 149 L.T. 249; Luddith v. Ginger Coote Air-
ways, 1947 A.C. 233.
14. Per Greene, L.J. Grein v. Imperial Airways Ltd. (193G) 2 A E R
12.58. ' V / • •
CARRIERS AND CARRIAGE OF GOODS 477
carrier accepts a passenger without a passenger ticket, he cannot enjoy
the benefit of limiting his liability granted under the Convention.
LUGGAGE TICKET
For the carriage of luggage, other than small personal objects of
\sliich a passenger takes charge himself, the carrier must deliver a lug-
gage ticket. The luggage ticket must be made out in duplicate, one pait
for the passenger, and the other part for the carrier. T h e luggage ticket
must contain the following particulars: (1) the place and date of receipt;
(2) the place of departure, and of destination; (3) the name and address
of the carrier or carriers; '(4) the number of the passenger ticket; (5) a
statement that delivery of the luggage will be made to the bearer of the
luggage ticket; (6) the number and weight of the packages; (7) the amount
of the value declared in accordance with Rule 22 (2) of the Warsaw
Convention; (8) a statement that tlie carriage is subject to the rules re-
lating to liability stated hereinafter.
The absence, irregularity or loss of the luggage ticket does not affect
the existence or tlie validity of the contract of carriage; but if a carrier
accepts luggage without a luggage ticket having been delivered, or if
the luggage ticket does not contain the particulars set out at (4), (6) and
^8) above, the carrier shall not be entitled to the benefit of rules limit-
ing liability.
AIR CONSIGNMENT N O T E
T h e carrier of goods has the right to demand from the consignor a
document called the "Air Consignment Note," and the consignor is en-
titled to require the carrier to accept his document. Nevertheless, the
absence, irregularity or loss of this document does not affect the existen-
ce or the validity of the contract of carriage. The air consignment note
to be handed over ivitli the goods must be made out by the consignor
in three original parts. T h e first part must be marked for the "carrier,"
and must be signed by the consignor. T h e second part must be marked
"for the consignee," and must be signed by the consignor and by the car-
rier and must accompany the goods. The third part must be signed
bv the carrier and handed by him to the consignor after the goods have
been accepted. T h e carrier must sign an acceptance of the goods; his
signature mav be stflmped and that of the consignor may be orinted or
stamped. If, at the request of the consignor, the carrier makes out the
air consignment note, he shall be deemed, subject to proof to the con-
trary, to have done so on behalf of the consignor. T h e carrier of goods
has the right to require the consignor to make out separate consignment
notes when there are more than one packages.
The air consignment note must contain the following particulars:
(I) the place and date of its'execution; (2) the place of departure and
of destination; (3) the agreed stopping places; (4^ the name and nddrpsi
of tile consignor: (5^ the name and address of the first carrier: (S) the
name and address of the consignee: (7) the nature of the goods: (8) the
number of the packages, the method of nacking. and the particular rnarks
or numbers on the packages: (9) the u-eight, the quantity and the volume
478 MERCANTILE LAW

or dimensions of ihc goods; (10) the apparent condition of the goods, and
of the packing; (II) the fieiglu, if it has been agreed upon, the date and
place of payment, and the person who is to pay it; (12) if the goods are
sent for payment on delivery, the price of the goods; (13) the amount of
the value declared; (H) the number of parts of the consignment note
(15) the documents handed to the carrier to accompany the note; (16)
the time fixed for the completion of the carriage, and a biief noie of
the route to be followed; (17) a statement that the carriage is subject
to the rules regarding liability.
If the carrier accepts goods without an air consignment note ha\ing
been made out, or if the air consignment note does not contain the
^particulars set in (1) to (8) inclusive and (17), the carrier shall not be
entitled to the benefit of limiting his liability. The consignor is res-
ponsible for the correctness of the particulars and statements relating
to the goods which he inserts in the air consignment note. The consignor
will be liable for all damage suffered by the carrier or an\ other jierson
by reason of the irregularity, incorrectness or incompleteness of the said
particulars and statements. The air consignment note is prima facie evi-
dence of the conclusion of the contract, of the receipt of the goods and
of the conditions of carriage, as well as the statements relating to the
weight, dimensions, packing of the goods, and number of packages. -

LIMITATION o r LIABILITY OF T H E CARRIER

The carrier is liable for damage sustained in the event of the
death or wounding ol a passenger or any other bodily injury suffered by
a passenger, if the accident which caused the damage so sustained took
place on board the airciaft or in course of any of the operations of
embarking or disembarking. He is also liable for loss of oi damage to
any registered luggage or any goods. In the carriage of passengers, the
liability of the carrier for each passenger is, in the absence of a contract
for a higher amount, limited to 2,50,000 gold francs. As regards the articles
of whicli the passenger takes charge himself, the liability of the carrier
is limited to 5,000 francs per passenger. Any i^rovision in any contract
seeking to relieve the carrier from liability or to further limit liability
is void and of no effect.- Rule 22 (2) provides that in the carriage of
luggage and goods,-the liability of the carrier shall be limited to a sum
of 250 francs per kilogram, unless the consignor has made, when the
package was delivered to the carrier, a special declaration of ,the place
and time of delivery and has also paid a supplementary or further sum
if the case so required. In tliat case, the carrier is liable to pay a sum
not exceeding the declared sum, unless that sum is proved by the car-
rier to be higher vAlue than the real or actual value at the time and place
of delivery.

In the case of damage, the person entitled to delivery must com-

plain to the carrier forthwith after the discovery of the damage, and,
at the latest, within three days from date of the receipt of the lug-
gage or within seven days from tlie receipt of the goods. In the case of
CARRIERS AND CARRIAGE OF GOODS ^79
delay in delivery of the goods the complaint must be made within H
days from the date on which the luggage or the goods have been actually
delivered or placed at the disposal of the consignee.
Rule 33 oermits the carrier either to refuse' to enter into any con-
tract of carriage or to make any regulations which do not conflict with
the provisions of the Convention. In Luddiih v. Ginger Coote Amvay&
Ltd. 1947 P.C. 151, Lord Wright held that a carrier by air of passengers
may refuse to carry anyone save at the passenger's own risk. He can
by a special contract exempt himself from liability even for negligence
of his servants provided that there are no statutory conditions limiting
his right, and sucli a contract cannot be pronounced unreasonable, in-
valid or illegal by a Court of Justice.
T h e Warsaw Convention does not apply to internal carriage by
air, nor is there any statute which prevents or limits the scope or con-
tent of any clause in die Air Ticket exempting the carrier from liabi-
lity, even for negligence.
In Indian Airlines Corporation v. Madhuri Chowdhri, 1965 Cal. 252,
S, who was travelling by a Dakota plane of Indian Airlines Corp., was
killed when the plane crashed. The Air Ticket contained conditions and
terms exempting "the Airlines Corp. from liability whatsoever to passenger,
his/her heirs, etc., for deatli, injury or delay to the passenger or loss,
damage, detention or delay to his luggage or personal property arising
out of the carriage or any other services or operations of the carrier whe-
ther or not caused or occasioned by the act, neglect, or negligence or
default of tlie carrier, or otherwise howsoever and the carrier .shall be
held indemnified against all claims, suits, etc. These conditions were
duly brought to the norice of the passenger. Held, the carrier was not
liable to pay any damages or compensation in view of the exemption
clause. T h e exemption clause was valid and. it legally excluded all lia-
sility for negligence.
But in respect ot domestic carriage, the liability for each passenger who
is killed is Rs. 1,00,000 and in case o£ a person below the age ol 12 years
it is Rs. 50,000.
CASES FOR RECAPITULATION
1. A reputed race-horse was entrusted by B to the railway for car-
riage from Bombay to Calcutta. As the result of loose-shunting in tran-
sit, the horse fell and broke one of his legs, and it becamp necessary to
shoot him. B claims Rs. 3,000 as damages for the loss of his horse. The
railway administration is liable to pay damage as the loss of the horse
resulted from the negligence and misconduct of tlie railway servants in
loose-shunting. But the amount will depend upon whether the consignor
had declared tire value of the horse at the time of booking and paid the
higher charge. If he had done so, he •w^ill be entitled to get Rs, 3,000,
and if not, then only Rs. 750, which is the amount provided in the Act
for the loss of a horse.
2. A railway company accepts goods to be carried to a place oti
the system of another company. The receiving company makes a contract
with the consignor to carry the goods all the way to the destination.
The goods are lost while in transit oti the line of tlie second "company.
The receiving company is liable to pay for the los.s. Under Section 76 D
of the Railways Act, the second company (administration) will be liable
to nav damages if it is an Indian company or railway administration.
If the second railway were a foreign railway, then the responsibilitv of
the Indian railway as common carrier would extend over that portion
of the carriage which is over the Indian railway.
480 MERCANTILE LAW
3. The risk note of a railway company provides that in considera-
lion of the company carrying the goods at a specially reduced rate, the
sender shall be precluded from holding the railway liable for loss or
damages to the goods from any cause whatever. Due to the negligence
of the railway servants the goods are damaged. Under Section 74 the
lailway .idministration shall be liable to pay damages as the damage was
caused to the goods through the negligence of the railway servants, the ex-
emption clause will be ineffective.
4. A tiger is entrusted by X to the railway for carriage. The cage
breaks by the jolts received during the journey and the tiger escapes.
It kills a bullock belonging to Y but is almost immediately crushed by
the engine. Under Section 73 the consignor is bound to supply a strong
cage; and in the instant case, the cage evidently is not strong enough to
bear the jolts which are a normal accompaniment of motion of a train.
X would be liable to Y on the basis of tort. If the tiger had escaped
because of the wilful neglect of the railway, it would be responsible to
X and also to Y in tort.
5. A ship was chartered for a voyage between A port gnd B port.
The ship was not seaworthy and did not sail on the date specified in the
charter-pnrty. The charterer or shipper may avoid the contract if he
finds the ship unseaworthy before the commencement of the voyage and
the defect cannot be set right within a reasonable time. If the voyage
has started and he suffers any loss, he can recover it from the shipowner.
If the ship does not sail on the stipulated date and the delay is such as
to go to the root of the contract and makes the marine adventure differ-
ent from what it originally was, the charterer can avoid the contract, or
ireat the contract as broken and claim damages.
6. Cement was shipped under a bill of lading which stipulated for
payment of freight within three days after the ship's arrival. On arrival
a fire broke out on board and the ship had to be scuttled. When the
ship was raised it was found that the cement was useless. The shipowner
was not guilty of any negligence, the fire being accidental and falls within
the excepted perils. Consequently, he is entitled to receive the freight
although goods could not be delivered. The charterer can, of course,
recover the loss from the underwriters under marine Insurance.
7. A ship on which dates had been loaded was sunk during the
voyage and subsequently raised. The dates still retained their aopear-
ance and were of value for distillation into spirits but were no longer
merchantable as dates. T h e policy-holder can recover for the total loss
of dates, as they are so damaged as to cease to be the thing of the kind
insured; they no longer answer the denomination under which they were
insured, nor can they be utilised as the thing insured.
8. r was a passenger on a train from Delhi to Bombay. He carried
two suitcases in his first class compartment under his berth. At an inter-
mediate nation the train stopped for 15 minutes. P left the compart-
ment and returned to it 10 minutes later. One of his suitcases was then
missing. He sued the railway administration for the Iocs nf the tu't-
raje and its contents which he valued at Rs. 5,000. Held, the railway's
common carrier liability as insurer of ^oods does not extend to passen-
c;er's higgage carried by him in his own compartment.
0. S had bought a ticket at the Kanour railway station and wa<iy
ruMiinE on the olatfnrm to ratch a train when he sli'nned on n han?na'
«kin and got injured and missed the train. The railway administration
i= pot liihlc to nay anv damages lo S.
 Chapter XV

Securities

P A R T 15-A
In this chapter we deal with different riglits a person acquires in the
property of anotlier, by way of security, for the liability that other person
has contracted. Such rights are generally designated as "Securities." T h e
following are the principal securities :
1. Pledge or Pawn;
2. Mortgage;
3. Charge;
4. Hypothecation;
5. Lien.
Pawn or Pledge.—In a pledge, the possession ot the goods is deliver-
ed to the creditor (the Pledgee or Pawnee), as security for die loan, but
the ownership remains with the Debtor (the Pledgor or Pawnor). We
have already dealt with this subject in Chapter III—Bailment and Pledge.

MORTGAGE
" The law relating to mortgages of immovable jDrojjerty and .charges is
dealt with in Sections 58 to 104 of the Transfer ot Property Act, 1882.
Definition and Nature of Mortgage.—The word mortgage lias come
to us via England from the French language and it means "Dead Pledge."
A Mortgage is the transfer of interest in specific immovable property for
the purpose of securing the payment of money advanced or to be advanc-
ed by way of loan, an existing or future debt, or the performance of an
engagement which may give rise to pecuniary liability. The' mortgagor as
an owner of the property is possessed of all the interests in it, and when
he mortgages the property to secure a loan, he only parts with an interest
in that property in favour of the mortgagee. After mortgage the interest
of the mortgagor is reduced by tlie interest which has been transferred to
the mortgagee. His ownership has become less for the time being by tl
interest which he has parted with in favour of the mortgagee. It the
mortgagor transfers tliis property, (he transferee gets it subject to th"
right of the mortgagee to recover from it what is due to him.
482 ' MERCANTILE LAW
There are three outstanding characteristics of a mortgage: (1) the
termination of the mortgagee's interest upon ilie performance of the obli-
gation secured by the mortgage; (2) tlie right of the mortgagee to enforce
ilie mortgage by foreclosure upon the mortgagor's failure to perform; and
(3) the mortgagor's right to redeem or regain the property. It should be
noted that a mortgage is not a mere contract but it is the conveyance of
interest in the mortgaged property, and as soon as the mortgage deed is
registered, and interest in the property vests in die mortgagee.
Form of a Mortgage Contract.—Where the principal money secured
is Rs. 100 or upwards, a mortgage, other than a mortgage by the deposit
ot title-deeds' can be effected only by a registered instrument signed by
the mortgagor and attested by two witnesses. A mortgage which se-
cures less than Rs. 100 may be made either by a registered instrument or
by delivery ~of property. In Punjab and Delhi a mortgage can be created
orally, and even when it is in writing it ijeed not be attested. This is so
because the Transfer of Property Act does not appiy there.
Kinds of 'MOrlgages.—There are in all six kinds of mortgages on im-
movable pr9perty, namely,—(i) Simple Mortgage: (ii) Mortgage by condi-
tional sale; (iii) Usutrurtuary Mortgage: (iv) English Mortgage; (v) Mort
gage by deposit of title-deeds; (vi) Anomalous Mortgage
Simple Mortgage.—In a simple mortgage tlie mortgagor undertakes
personal liability, and agrees that in the event of his failure to pay the
mortgage money, the mortgagee shall have a right to cause the property
to bf applied so far as may be necessary by means ot a decree for tlie
sale of the property.
Mortgage by Conditional Sale.—Where the mortgagor ostensibly
selli the mortgaged property—
(a) on condition that in default of payment of the mortgage
money on a certain date, the sale shall become absolute, or
(b) on condition that on such_ payment being made the sale shall
become void, or
(c) on condition that "on such payment being made the buyer shall
transfer the property to the seller,
the transaction is called mortgage by conditional sale and the mortgagee
a mortgagee by conditional sale. In this mortgage, the ostensible sale
ripens into absolute proprietorship on default by the mortgagor to repay
die- amount, in which case the mortgagee can sue for foreclosure but not
for sale. Registration is compulsory only if the consideration is Rs. 100
or more.
Usufructuary Mortgage.-Where tlie mortgagor delivers or expressly
or by implication binds himself to deliver possession of the mortgaged pro-
perty to the mortgagee, and authorises him to retain such possession until
payment of the mortgage money, and to receive the rents and prolits ac-
ciuing from the property or any part of such rents and profits, and to
appropriate the same in lieu of interest, or in payment of the mortgage '
money, or partly in lieu of interest and partly in payment of the mort-
 SECURITIES 483

gage money, the transaction is called a usufructuary mortgage or mort-

gage with possession. Registration of diis kind of mortgage is necessary
if the mortgage money is Rs. 100 or more.
English Mortgage.—Where the mortgagor binds himseil to repay tne
mortgage money on a certain date and transfers the mortgaged property
absolutely to the mortgagee but subject to a proviso that he will re-
transfer it to t!\e mortgagor upon payment of the mortgage money as
agreed, the transaction is called an English jMortgage. An English mort-
gage lepresents two distinct tiansactions, that it involves a conveyanceoi
transfer of ownership and also the creation of personal liability of the
mortgagor to repay by a certain date. Registration is compulsory where
the amount secuied is Rs. 100 or more.
Mortgage by Deposit of Title Deeds or Equitable Mortgage—Where
a person delivers to a creditor documents of title to immovable pioperty,
(i.e, sale-deeds by which the nroperty liad been acquired) with interest
to create a security tliereon, the tiansaction is called a mortgage by de-
posit of title-deeds or an Equitable Mortgage. The terms on which the
deposit of title-deeds is made need not be ieduced to writing. The usual
practice is that the mortgagor delivers the title-deeds to the mortgagee
and also passes a promissory note in his favour against which the mort-
gagee advances the money. In case of non-payment, the mortgagee ran
sue for sale, but he cannot foreclose the mortgaged-property.
Anomalous Mortgage.—.-\, mortgage which is not of any of the kinds
stated above is called an anomalous mortgage. Anomalous mortgages
are of many kinds, and may arise by the combination of two or more of
the above kinds or by usage in particular localities. Thus Lekha Mukhi
mortgage prevails in Punjab. In this mortgage the land is transferred
to the creditor for management who in addition to interest charges for
ilie management. Irt Waldi mortgage the mortgagee gets possession of the
property but pays one-tenth of the produce to the mortgagor as the land-
lord's dues.
Sub-Mortgage.—Where the mortgagee transfers by mortgage his in-
terest in the mortged property, er creates a mortgage of a mortgage, the
fransaction is known as a sub-mortgage. For example, where A mort-
gages his house to B for Rs, 10,000, and B mortgages his mortgagee
rights to C for Rs. 8,000, B creates a sub-mortgage.
Puisne Mortgage.—Where a mortgagor, having mortgaged his' pro-
perty to secure a loan of smaller amount than^tlie value of the property,
mortgages it to another person to secure another loan, the second mort-
gage is called a Puisne Mortgage. For example, A mortgages his house
worth Rs. 50,000 to B for Rs. 20,000, he creates a raortgapre. ?ndifhemort-
aages tlie house to C for a further sum of Rs. 20,000 and tiuis creates a
Second mortgage, C wolild be tlie puisne mougagee. The puisne mort '
gagee can recover subject to the right of the first mortgagee to recover.
RIGHTS AND LIABILITIES OF MORTGAGOR
Right of Redemption.—By mortgaging the property tire mortgagor
/Ojii^f transfers an interest in the propert) and does not cpa<:p %
f/ N- ••-
484 MERCANTILE LAW

owner, and, therefore, he can redeem the mortgage piopeity by paying

the mortgage plus any interest due on it, at any time after the stipulated
date tor repayment, but before the right is extinguished by the .ict of par-
ties oi by a deciee ol Couii, or bcfoie it is bailed by the Limitation Act
The mortgagor is not entitled to redeem before tfie moitgage mone) be-
comes due on the date fixed for repayment of the loan.
Right of Redemption qr Equity of Redemption, as the term is called
in English law. is the essen^^- of a mortgage, and any pro\ision inserted in
the mortgage deed to pre\ent, e\ade or hampei redemption is -"oid The
lule of equity that once a mortgage alwa)s a moitgage, pi_hil)iis a "clog"
on the right of ledemption In other words, once a tiansaction is found
to be a mortgage tiie Court would not peimit any condition in a mort-
gage deed which would i5re\ent or impede redemption or repayment ol
tiie loan for which the secuiitv was given, for if allowed, such a condition
would h:i\e the effect of clogging oi fettering the equitVN oi liqiit of re-
demption A "clog" on the canity or right of ledemption arises A\heie
an obligation continues during tlie term of the mortgage and beyond,
thus rendering the property mortgaged less available in the hands of
Its ownei apart from the realisation of the moitgage debt Tlius the
light of redemotion cannot be controlled by anv agieement made as a
part of the tiansaction But after the execution of the mortgage tiie
parties are at liberty by a fair bargain to extinguish the right of redemp-
tion by an agreement which may be independent of the oiiginal Iwigain'
A stipulation postponing redemption for a period of 40 years with a con-
dition that 'n default of redemption on a paiticuiar day the mortgage
would be reneived foi anothei period of 40 years would be a clog on re
demption, as he pioMsion ga\e a right of redemption for one dav only
in 80 yenri! md uns designed to make a Tedcmption almost impossible "

Regardihg the manner of redemption, it is provided that the moit-

gagor must pai, or offer to pay to the mortgagee the moitgage moncv at a
proper time m d place and if the mortgagee accepts the tender the debt
is disrhaiged and redemption effected, oi a suit for redemption should
be Tiled On redemption, the moitgagee must return the mortgage deed
and all othei documents relating to tlie mortgaged property. "Wlieie
tjie mortgage is with possession of the piopeny the mortgagee must deliver
to' i;hp mortgago! the possession of the property 'W'lieie dieie is aiiv
incre^se of property after usiifructuarv' mortpaee and before redemption,
the iDOTtgagor is entitled to get back the increased property.
Partial Redemption.—A mortgage, as a rule, being one and indwi
sible security for tht debt and e\erv pait of it, the mortgagor cannot re-
deem piecemeal, he must redeem the whole property. Similarly, >\here
there are more than one mortgaeor. a co mortgagoi cannot redeem his
portion of the mortgaged oroperties But a mortgagor of an tindivided
share can alwavs redeem the %vhole moii?age Thus, the oK77er of a part
of the equity of redemption can redeem the entiie mortgage but not

1. Afohd Sher Khan \ Raia Seth Swami Dayal, 1992 P C . 17

2 Sarbdawan Sineh v Biiai Sin^h HQH^ sifi All Ksi
SECURITIES 485
any part of it.' A mortgagor who has executed two or more mortgages
can redeem any one or more of the mortgages, unless there is a conf-act
to the contrary, stipulating consolidation (Section 61).,
Implied Contract by Mortgagor.—The parties are free to enter into
any terms they like; where, however, the contract does not contam all
tJie terms. Section 65 provides for implied terms, as follows :—
In the absence of a contract to the contrary, the mortgaeor sliall
be deemed to have contracted with the mortgagee-
(a) tUat the mortgagor is entitled, to transfer the interest (cove-
nant for title);
(b) that tlie mortgagor will assist the mortgagee to enjoy the
quiet possession;
(c) that the mortgagor will pay all public^ charges in respect of
die property
(d) that tlie mortgagor covenants as the payment of the rent due
on lease, where the mortgaged property is a lease;
(e) that the mortgagor covenants as to payment of interest and
principal on prior encumbranceSj where the mortgage is a
second or subsequent encumbrance on the property.
Mortgagor's Power to Lease.—Section 65A permits a mortgagor in
possession to lease the property and the mortgagee will be bound by the
lease if—
(a) the lost rent is reserved;
(b) no premium is paid or promised;
(c) no rent is promised to be paid w advance;
(d) there is no covenant for renewal of lease;
(e) the taking effect of the lease has not been postponed beyond
6 months;
(f) in a lease of building—(i) the duration of the lease does not
• exceed 3 years, and (ii) there i s ' a right of re-entry on non-
payment of the rent reserved.

RIGHTS AND LIABILITIES QF MORTGAGEE

]f tlie moitgagor does not pay the mortgage money, the mortgagee
may proceed to recover from the mortgaged property or sue for recoxcry
from the mortgagor personally. The remediifs of the mortgagee against
the property are :—
(1) Right to bring property to sale.
(2) Right to foreclose.
(S'l Right to the possession of the property.

Bijai Singh v. Randhir Singh. 1925 All. CIS,

486 MERCANTILE LAW

Remedy by Sale.—In die case of a simple mortgage or. a mortgage

by deposit of title-deeds (equitable mortgage), or an Englisli mortgage,
sale is the only remedy available to the moitgagee. He has to file a
suit for sale of the mortgaged property and if the Court is satisfied, it
would give 6 months' time to the mortgagor to pay the decretal amount.
If he fails to pay, tiie mortgage will get a final decree under which he
can have tlte property sold. If the proceeds are more than the' decrital
amount, the balance, after payment to the mortgagee, will be paid to the
mortgagor, and if the proceeds fall short, then a persoiiial decree for the ba-
lance will be given against the mortgagor.
Foreclosure.—The second remeay is foreclosure, by means of a suit
to get a decree that the mortgagor shall be absolutely debarred of his
right to redeem the property, if the mortgagor does not pay within tlie
period directed by the Court. After a foreclosure decree is passed the
mortgagee becomes the owner of the property. This remedy is available
only in case of a mortgage by conditional sale, or in any anomalous mort-
gage.
Possession.—A usufructuary mortgagee" has a right to file a suit for
possession and by use of the property he can. repay himself of the debt
diie to him. He can retain possession until his debt is discharged out
of the income of the pioperty. Hence where possession is not given by
the mortgagor, the mortgagee sues for jjossession.
Right to Sue for Mortgage Money—Tiie mortgagee has a right to
sue for the mortgage-money in the following cases and no other :—
(a; where the mortgagor binds himself to repay the same.
(b) where, by any cause other than the wrongful act or default
of the mortgagor or mortgagee, the mortgage property is des-
troyed or the security is rendered insufficient.
(c) where die mortgagee is deprived of the whole or oart of his
security by or in consequence of the wrong act or default of
the moi tgagor.
^d) where the mortgagee, being entitled to the possession of tiie
property (usufructuary mortgage), is not put in possession of
itr or where having been r>ut into possession, is dispossessed
by the mortgagor or any other person claiming under a super-
ior title, e.g., a buyer by a registered deed.
Right of Private Sale.—By virtue of Section 69, a mortgagee can sell
the property privately, witliout the intervention of the Court, if the loan
is not paid on a certain date in the following three cases :—
(a) wheie the mortgage is an Englisli mortgage and neither the
mortgagor nor the inortsagee is a Hindu, Mohammedan or
Buddhist; or
(B) where the mortgagee is die Government and the mor:gage
deed confers an express power of sale; or*
(c) where the mortsjage property was "on the date of the cxccu-
SECURITIES 487
tion o£ the mortgage situated within the towns o[ Bombay,
Calcutta and Madras.
The sale proceeds under a private sale o£ the property must be uti-
lised, first, in discharging prior encumbrances, if any; secondly, in pay-
ment o£ ail costs, chaiges and expenses of the sale; and thirdly, the sur-
plus to be paid to the person entitled to the mortgaged property. A mort-
gagee having right privately to sell the property can appoint a receiver
out of the income of the mortgaged property.
Liabilities^ of Mortgagee in Possession.—A mortgagee in possession is
bound—
(a) to manage the property as a person of ordinary prudence
would manage his own;
(b) to use his best endeavoui to collect the rents and profits
thereof;
(c) to pay out of the income all GovernmeiU Revenue or other
^ charges of a public nature;
(d) not to commit any act which is destructive to the property;
(e) to keep full and accurate accounts of all income and expen-
diture;
(f) when mortgagor tenders or deposits the mortgage money, to
account for his receipts from the property from he date of
tender or deposit.

PRIORITY
The general rule of priority ot different mortgagees on the same-
{rroperty is that the successive mortgagee is paid after the prior mortgagee
has been satisfied. Thus, if two successive mortgages are created by the
mortgagor on the same property, and both cannot be satisfied out of the
mortgaged property, the prior mortgagee will have the first right to
satisfy his whole debt and the balance, if any, will go to the subsequent
mortgagee.

MARSHALLING AND DISTRIBUTION

Marshalling.-By section 81, if the owner of two or more properties
mortgages tliem to one person and tlien mortgages more than one of
those properties to another person, the subsequent mortgagee is, in the
absence of a contract to the contrary, entitled to have the prior mort-
gage debt satisfied out of the properties not mortgaged to him, so far
as same will extend, but not so as to prejudice the rights of the prior
mortgagee or of any other person who has for consideration acquired an
interest in any of the properties.
T h e rule of marshalling applies only where—
(a) the debtor is the same and contracts different debts in the
same capacity;
488 MERCANTILE LAW

(b) there is no contract to tne contrary;

(c) the properties are separate and not fractional share of the -
same property;
(d) prior mortgagee's fights or ot any other person who has for
consideration acquire^ an interest ''n any of the properties is
not prejudiced. ,
An illustration will make the rule of marshalling clear. A mort-
gages properties X and Y to B. Then he mortgages property Y to C.
Suppose B oDtains decree on his mortgage for sale of properties X and
Y which form security for his mortgage. Suppose further that B applies
in execution to the Court for sale of property Y which is also mortgaged
to C, C would be entitled to have the prior debt of B satisfied out of
property X, which is not mortgaged to C, and if the whole of B's debt
is not satisfied out of property X then and flr^n alone,' the property Y
should be proceeded against.
Contribution (Section 82).—In marshalling we determine the differ-
ent rights of the competing mortgagees, while in contribution we have
to determine the rights of the mortgagors inter se with respect to the
properties mortgaged by them. The mortgagors inter se are liable to
contribute in proportion to the value of their property which has been
included in the joint mortgage.' A joint mortgage to secure one debt may
either arise where several owners of distinct properties contract a single
mortgage debt, or where a single mortgagor mortgages different pro-
perties of his to secure a single debt, and on his death, the different pro-
perties by partition are inherited by his heirs, or where a single mort-
gagor after having created a single mortgage on two of his .propertie-,
sells the equity of redemption in any one or more to a third person.
In all these three cases, there is competition between the owners of
several prpperties mortgaged, and where any one of them has be^n' madf
to pay the whole debt of the mortgage, the owner of that property can
claim contribution from his co-mortgagors in proportion to', the value
of their respective properties. For example, where three properties, X
worth Rs. 4,000, Y worth Rs. 2,000, and Z worth Rs. 2,000 belong to A,
B and C respectively and are mor(;gaged to M for a debt of Rs 4,000
and A, the owner of X propertv, pays off the entire mortgage, he will
be entitled to a contribution of -Rs. 1^000 each from B and C, the owners
of Y and Z respectively.
Subroga'tion.—Subrogation, we know, is the right to step into the
shoes of another and thus acquire all rights and to enforce them in his
own name. Section 92 provides that a person who is interested in the
discharge ot a mortgage shall, on his discharging it, be entitled to all
the righis and remedies which the person paid off was entitled to. In
order to enjoy the right of subrogation, he should have a riglii to re-
deem his mortgage and -i-edeem it. T h e common ca.se is that of a sub-
sequent- mortgagee paying-off a prior mortgage. Altlwugli a subsequent
m6vt!*agee on paying off a prior mortgage steps into tlie shoes of the

4 -Tai Narain v. Rashik Bchari Lnl, 1031 All. 516.

 SECURITIES 489
• first mortgagee, he cannot "Tack" his original security to the hrst so as
^ 10 get a priority over the intermediary mortgagee. "Tacking" is thus pro
hibited by Section 93. Suppose A creates successn'e mortgages on his
property in fav.our of B, C and D. If D redeems the mortgage in
favour of B, he is subrogated to the rights of B and will have priority
in respect of the mortgage in favour of B over the mortgagee C; but
he will not be entitled to any priority with respect of his own mortgage
which was third in point of time. If tacking were permitted then C
would be squeezed out and could redeem only by paymg off the first
and third mortgages.
Mergers.—Whether merger will take place or not will depend upon
different circumstances. Where a third party purchases the equity oE
redemption from die mortgagor and then redeems the mortgage on the
property, merger would take place unless the intention is to keep alive
tire mortgag;;.' Where, however, the mortgagee or chargeholder pur-
chases the equity of ^redemption no merger takes place of his mortgage
rights irrespective of the fact that the purchasing mortgagee has express-
ly or impliedly shown an intention to keep it alive as a shield against in-
termediate mortgages. Suppose A mortgages his house, worth Rs. 2,000
to B for Rs. 500 (first mortgage), to C for Rs. 600 (second mortgage) and
to D for Rs. 700 (third mortgage), thereby parting with his interest in
the house to the extent of Rs. 1,800 in favour.of the three mortgagees,.!
and retaining with himself his interest in the property (technically known
as equity of redemption) amounting to Rs. 200. If he reaeems the first mort-
gage in favour of B, the interest in the property whicJi he liad parted
with in favour of B Teverts to him, resulting in a merger o f B's interest
in the ownership of A. ' In this way, A's interest -will be enlarged by
Rs. 500, so that the value of his equity of redemption will go up to
Rs. 700. Now suppose A owes a simple debt to M who obtains a decree
against A and in execution sells the interest of A in the property winch
is purchased by N. N has purchased the equity of redemption and thus
steps into the shoes of the mortgagor A and then redeems the mortgage
in favour of B. Here merger.of the interest of N and of the mortgagee
interest of B will take place unless it is shown that iiis object in redeem-
ing B's mortgage is to keep it alive." If in -this illustration, C, the second
mortgagee, were to purchase the equity of redemption from A, no me'r
ger would take place of the interest of C as second mortgagee of the
property and of his interest as owner thereof. This is so because C
is not a stranger and has already an interest of a mortgagee in the pro
perty, and there being a subsequent mortgagee D, C's mortgage would
be kept alive.
Mortgage of Movable Property.—A mortgage of movables may be
defined as a transfer, by way of security, of the general ownership of tlie'
chattel, subject to the equity of'redemption of the mortgagor. No deli-
very of possession is necessary to comnlete a mortgage in En,?lish Law,
except in exceptional circumstances. In England, mortgages of movables
are regulated by the Bills of Sale Act. which require registration in 'eVder

5. Gokal Chand v. Puran Mull (1833)-10 Cal. 1035 P.C.

490 MEPXANTILE LAW
to render such mongages valid. In India, the mortgage of moveables
can be made by mere parole and without transfer of possession. A mort-
gage of future goods, such as a crop that may be grown on a certain plot
or land, is a valid transaction in India." The rule is based on ihe ma-
xim : Equity considers tliat as done which ought to be done. However,
tlie equitable title arising in a transaction of this kind will not avail
against a subsequent transleree of the property with possession, without
notice of, the previous title. Note, although the term mortgage is used
in connection with movable property, yet, strictly speaking, it can be ap-
plied to immovable property. Therefore, t o ' be more correct, where a
mortgage is created by delivery of possession of the g»ods, the transaction
is a Pledge, and where no possession is 'given to the lender, but only a
right to recover the debt against the specific goods, the transaction is a
. Hypothecation.

PART IS-B
CHARGE
Where immovable property of one person is by the act of parties or
operation of law made security for payment of money to another, and the
transaction does not amount to mortgage, the latter person is said to have
a charge on the property; and all the provisions Hereinbefore contained
\vhich apply to a simple mortgage shall, so far as may be, apply to such
a charge (Section 100).
It %vill be seen that a charge can be created either l3y the acts of
parties or by the operation of law, and although the property is made a
security for the payment of the loan, yet the transaction does not amount
to a mortgage. We may with profit distinguish between a charge and a
mortgage.
Distinction between Charge and Mortgagee—
(1) A mortgage is a transfer of an interest in the property made
by mortgage a.s a security for the loan, while the charge is not
the transfer of interest in the property though it is security
for the payment of an amount.
(2) A charge may be created by act of parties or by operation of
laV. A mortgage can only be created bv the act of parties.
(3) Section 59, Tra!nsfer of Property Act, requires a mortgage
deed to be attested by two witnesses, while a charge need not
be made in writing, and if reduced to writing, it need not be
attested.
(4) In certain mortgages, (i.e., mortgages by conditional sale, and
anomalous mortgages) the mortgagor can foreclose the mort-
gaged property, but in a charge the charge-holder cannot {ore-
close though he can get the propeity sold as in a simple mort-
gage.
(5) From the very nature of it, a charge, as a general rule, can-

6. Misri' Lai v. Marliar (1816) 13 Cal. 262; The law on the subject
was stated by Beaman, J. in Tehbiram v. Longin D"MeIIo, (1916) 18
B.L.R. 587.
i'ECUKITIES 491

not be enforced against a iransteree for consiaeration without

notice. But in a mortgage, tlie transferee of the mortgaged
property from tlie mortgagor can only acquire the remaining
interest of the mortgagor, and is, therefore, bound by the
mortgagor.^
(6) In a charge created by act of parties the specification of the
particular fund or property negatives a personal liability and
tlie remedy of the charge-holder is 3gainst the property charg-
ed only. When there is, in addition, a personal covenant
and tlie security will become collateral to the personal cove-
nant and the security will in that case appear to become a trans-
fer of right of sale to support the personal covenant and as the,
right of sale is a right in rem the transaction would be a
mortgage. For this reason the absence of a personal liability
' is the principal test that distinguishes.a cliarge from a simple
mortgage.^
Charge how Created.—A charge can be created either by acts of par-
ties or by operation of law.
By Act of Parties.—When in a transaction for value both parties (debtor
and creditor) intend that the property existing or future shall be made
available as security for the payment of a debt and that creditor shall
have a present right to have it made available, there is a charge. The
charge is always created to take effect immediately and not at some future
time, although the present. legal right can only .be enforced at some fu-
ture date. It will be noted that the creditor gets no legal right of pro-
perty, either absolute or special or any. legal right to. possession but onl)^
gets a right to have the seciu-ity-made available by-.-an order o.f the Court.
In a suit by A against B on the basis of a promissory note,' the -parties,
made a compromise which was. embodied in the-decree. It was provii!-
ed that the derretal amount would be paid by easy instalments and rhat
B would not dispose of, in any way, his share- in the-Premier Aerated
Co., at Hazrat Gan], until-the satisfaction of the decretal amount. Held,
.that a charge was created on B's share in the property and A was en-
titled to have the amount from the property even though B had sol-l
his share i,o a third person. Where M has executed a promissory note
in favour of P and on the same date a Beechik was sent by M to P. in
wliich it was stipulated that the amount due under the promissory note
should come out of the deodar timber of the jungle, held, that P was
entitled to a charge on M's timber in the jungle." A document described
as Zamanatnama and containing a condition restricting the executant
from certain property was ex-ecuted to secure repayment of a loan. It was,
however, not on a proper stamp for a mortgage. Held, that the instru-
ment amounts to create a charge and not a mortgage.''

By Operation of Law.—Charges created by operation of law are those

which arise on account of some statutory provisions. Thev are not creat-
ed by a voluntary action of the parties but arise as the result of some le.gal
obligation. An unpaid vendor has a charge on the property sold. A co-
mortgagor redeeming the mortgage is entitled to claim contribution and

1. Vir Bhan v. Salig Ram. 1937 Lah. 35; see also 1938 Bom. 189.
2. Benares Bank Ltd. v, Harparshad, 1936 Lah. 482.
3. ATangat Ram v. Piyare Lai, Sunder Lai, 1920 Lah. 27-!.
4. Virbhan v. Salig Ram, 19.87 Lah. 35.
492 MERCANTILE LAW
acquires a charge in respect thereof. Also, where several properties have
been nioi-tgaged by several owners to secure one debt and the propeny*"
of one of the owners has contributed more than his proportionate bhare
of the mortgage debt, that owner is entitled to a charge on lite remain-
ing properties which have not discharged tlieir own share of the debt to
contribute rateably towards the debt.'^
Instances where no charge Created.
(1) Where the parties do not intend that there should be a pre-
sent right to have the security made available, but only that
there should be a right in the future by agreement such as a
licence to seize goodSj there will be no charge.
(2) A convenant that the obligee can recover from, the "person
and property" of the debtor is too vague to create a charge on'
any of his properties.
(3) Where at the foot of a hundi a note was added in the words:
'Hamari Delhi wa Ludhiana iii jaidad is qarza ki /.omewar hogi'
(our properties at Delhi and Ludhiana will be responsible for
this debt), it was held that these words did not create a
charge."

BILLS OF SALE
Bills of sale are securijties under the English Law and are governed
by the Bills of Sale Act, 1878, as amended up to date. A brief descrip-
tion of these is given below for the benefit of students who have to study
them.
A bill of sale has been defined as a document whereby the propeny
in chattels is transferred to a grantee, either absolutely or conditionally
by way of mortgage, but possession of the property remains witli the gran-
tor.- The term "bill of Sale" includes (1) bill- of sale proper; (2) assign-
ment; (3) transfer; (4) declaration of .trust without transfer, (5) inventory
of goods with receipt thereto attached; (6) receipt for purchase money of
goods; (7) powers of attorney, authorities or licences to take jjobscssion'
of personal chattels as security for any debt; (8) any agreement by which
a right in equity to any persenal chattels, or to any cliargc or security
thereon, shall be conferred.
Tlie following classes of instruments do not fall within the definition
of a bill of sale, namely, (1) assignments for the benefit of the grantor's
creditors; (2) marriage settlements; (3) transfers or assignment.'; of any
ship or any share lliereof; (4) iran.sfers of goods in tlie ordinary course of
business; (5) bills of sale of goods in foreign ports or at sea; (6) bills of
lading, India Warrants, ware-house-keeper's certificates, delivery orders
used in the ordinary course of business.
The bills of sale are governed by the Bills of Sale Act, 1878, as
amended up to date. The primary aims of the Act are to protect boili
tlie grantor and the grantee wliere chattels remaining in tlic possession
of the grantor form the security for a loan made I)y the grantee:" iint
third parties must also be protected, as they may he inducctl to cnur/"
into financial relations with the possessor of the chattels oja ihi: .strengthl
of such possession.. Man7 arrangements other than bills of .sale strictly

5. Mohd. Mian v. Bharat Singh, H>30 Oudh. 260.

6. Turan Chand v. Purari Chand, Official Receiver '1923, Lah- 6.25.
 SECURITIES 40S
"^^o named, may involve die retention ot the goods after a chaige has been
created; hence the provision tliat a bill of sale must be registered so that
it should act as constructive notice to third parties.
T h e term "personal cliattels" under the BiUs TSI' Sale Act means goods,
rurniture, and other articles capable of complete transfer by delivery,
and (when, separately assigned or charged) hxtures of growing crops.
Trade machinery is also generally so regarded. But a bill of sale cannot
be given in respect of any chose-in-action (actionable claim of tlie In-
<lian law). .
A bill of sale may be either (i) Absolute, or (ii) Conditional.
Absolute Bill of Sale.—An absolute bill of sale is the document ex-
ecuted for the purpose of serving as evidence of the transfer of title; It
selves as a protection to the buyer, especially if the goods are io remain
tempoiarily in possession of the seller. An absolute bill of sale need not
be in any specified form, but it must show the consideration for the tians-
action, and must be explained to the grantor by a solicitor, and wit-
nessed by a solicitor. The grantee may insert any conditions ])e pleases
."us to when he shall be entitled to take possession. Sometimes the posses-
sor of property may be required to submit evidence of ownership, and
a bill of sale sei-ves the purpose. For example, it is generally required
that before an automobile can be registered by a new oivner a bill of
sale must be submitted.

Specimen copy of an absolute Bill of Sale

KNOW ALL MEN BY THESE PRESENTS:
That I, John Smith of Birmingham (England) in consideration of
ilie sum of Five Hundred Pound Sterling, to me paid by James Brown
of Birmingham, the leceipt %vhereof is heieby acknowledged, na\'e bar-
gained, sold, granted, and conveyed, and by these presents do l:)aigain,
sell, grant, and convey unto the said James Brown, his executois, and ad-
ministrators, and assigns one Tordson Tractor, Model H. iNo. 06.543. 'Io
• have and to hold tlie same unto the said James Brown, his executors, ad-
ministrators, and assigns for ever. And I for myself and for my heiis
executors, and administrators, do hereby covenant with the said James
Brown, his executors, administrator?, and assigns, that I am die tiue and
lawful owner of said described goods thereby sold and have full powei
10 sell and convey tlie same; that the title so conveyed, is clear, fiee, and
inicncumbered; and further, that 1 do warrant and will defend the same
.igainsl all claim or claims of all persons whomsoever.
IN WITNESS WHEREOF, I have hereunto set my hand diis four-
teenth day of March, 1965. >
SIGNED AND DELIVERED IN T H E PRESENCE O F :
(Signed^ William Bragg. (Signed) John Smith.
(Signed) Harry Hilton.
Condiuonal Bill of Sale.—A conditional bill of sale is one given as
secuiity for the paymcia of money, the grantor having tlie right to have
the chattels leconveyed to him upon fulfilling the condition. Such bilU
of sale are governed by the Bills of Sale Act (1878) Amendment Act, 1882.
A conditional bill ot sale need not -be explained by a solicitor, or witness-
ed by a solicitor, but it must be witnessed by fit least one ciedible wit-
ness. It must be in the exact form given in (he Schedule to the Act,
and must show die consideration, which must not be less than £30, also
494 • MERCANTILE LAW
nie rate of interest, tlie ttHte' of 'repayment, and any condition on fulfil-
ment of which the bill is to be void. An inventory of tiie personal chat-
teh comprised in the bill must be attached. The giantee can only seize
the goods comprised in the bill of sale lor one of the following conditions,
mentioned in tlie Act, namely: (1) failing, to peifonn the covenant; (2)
bahkiuptcy, or allowing distraint to issue for rent, rates or taxcb; (3)
fraudulently removing tlie goods; (4) failure without leasonable excuse to
produce the last receipt for rent, rates or taxes alter written demand-
(5) allowing execution to issue. It should, however, be lemembered
that even after seizure the goods cannot, without consent of the giantor,
be removed from the premises or sold for 5 days, and within such b days-
the grantor may apply to the Court for relief if by payment or otiiciwise
the cause of seizure no longer exists.
Registration of Bills of Sale.—Eveiy bill of sale, %vhether absolute or
conditional, must be registered within 7 days of execution; and re-regis-
tered every 6ve years. If executed out of England, registration must be
effected within 7 days after the time in which it would, in the ordinary
course of post, arrive in England, if posted immediately after execution
'There must be produced to the Registrar the original bill, wah a true
Copy of it and eveiy schedule oi inventoiy att.iched to it, auil affidavit,
of due execution, stating tlie time it was given, and a description of the
residence and occupation of the grantor and all other attesting witnesses.
A conditional bill of sale must have attached a schedule specifically enu-
merating the cliattels comprised in it, and chattels afteiwards acquired
cannot be included, except by way of substitution. If the omission to
register arises from accident or inadvertence the judge may '^lake an
order extending the time for registration.
Specimen copy ot a conditional bill of sale
T H I S INDENTURE made tne day of One
thousand nine hundred and sixty-five BETWEEN '..of of
the one part and," of of the other p a n WITNESSETH
that in consideration of the sum ot the receipt of which the
said ...hereby acknowledges. He the said...- both
hereby assign unto his executors, administrators and assigns. All
and singulaF the several chattels and things specifically described in the
schedule hereunto annexed by way of security for the payment of the
sum of Pounds .and interest thereon al the rate ot per cent.
per annum. And the said doth further agree and declare that
he will duly pay to the said the principal sum aforesaid to-
gether with the interest then due by equal payments of on
t h e . . . . . . . . i n each and every And the s a i d . . . . . ' ' . . . . .doth also
agree with the said that he will (Insert here terms as to insurance,
payment of rent or otherwise which the parties may agree to for the main-
tenance or defeasance of the security); provided always 'hat the chattels
hereby assigned shall not be liable to seizure or to be taken possession of
by the said for any cause other than those specified in Section
7 of the Bills of Sale Act (1878) and the Amendment Act, 1882. IN W I T -
NESS whereof the parties to these presents have hereunto set their hands
and seals the day and year first above written.
Signed and sealed by the said
^n the presence of me (Add witness's name, address and description)
The Schedule above referred to
(Insert here the chattels and tilings comprised in the bill).'
I. Adapted from Rankingr Spicei & Pegler's Mercantile Law
SECURITIES 495
It should be remembered tliat the florm must be strictly foUoived,
lOtlieiwise the conveyance would be void.j T h e bill will be void i£ the
name, address, and description of the gjantor, grantee or witness are
omitted; or if the receipt clause is absent, or if the-copy filed discloses
even a trifling error. A term intioduced to enable the grantee to retain
a bill of sale after payment of the debt will also avoid the bill of sale,
and so also will any term which has tlie effect of introducing covenants
not contained in die statutory form, such as, for instance, incorporating
terms by reference to anodrer document.

HYPOTHECATION
T h e mortgage of movable property is called hypothecation. Neither
the Indian Contract Act nor tlie Transfer of Property Act deals with the
probl,em of hypothecation, but it is well settled that the mortgage of mov-
able property, although unaccompanied by delivery of possession, is called
hypothecation [Deans v. Richardson (1871) 3 N.W.P. 54]. Hypothecation
may be described as a transaction whereby money is borrowed by the deb-
tor (owner of the goods) on the security of die movable property without
parting with tlie possession of the movable property. The owner of the
hypothecated goods is called the Hypothecator, and the person to whom
the goods are hypothecated is called the Hypodrecatee.
T h e rights of the hypodiecatee depend on the terms of the contract
between die parties. For instance, he may be given, by the terms of the
contract, the right to sell the goods himself, on default of payment by
the hypothecator on due date, and to realise his dues from the sale pi'o-
ceeds. He can always file a suit to realise his dues by sale of the goods
hypothecated.
The hypothecatee may lose his rights over the goods hypothecated
under the following circumstances :
1. If the hypothecator, in possession of tlie, goods, sells them to a
bona fide purchaser—for value without notice of the hypothecation—the
purchaser gets a good-title to the goods and the hypothecatee. cannot pro-
ceed against diem (Sreeram v. Bammired'li. 42 Mad. 59 : 35 M.L.J. 450).
' 2. If the hypothecator, in possession of the goods makes a valid
pledge of the goods and the pledgee has no notice of the hypothecation,
the claim of the hypothecatee will be postponed to that of the pledgee
(Co-operative Hindusthan Bank v. Surendra, 1932 Cal. 524).
Hypothecation differs from a mortgage in two respects:
(i) Mortgage relates to immovable property and hypothecation re-
lates to movable property; (ii) In a mortgage there is a transfer of some
interest in the property to the creditor, but in hypotliecation there is
only an obligation to repay monejy, and there is no transfer of any inteiest.
A pledge comes nearest to hypothecation. Both deal with movable
property. But even between those two there are points of distinction. In
a pledge there must be delivery of possession of die goods to tiie pledge,
but in hypothecation die goods need not be delivered to the liypoihc-
catee. A hypothecatee cannot sell die goods without decree of the Court;
but a pledgee can sell die goods after giving reasonable notice to the
pledgor.
LIEN
Lien is the right of retaining goods belonging to another until a debt
496 MERCANTILE LAW
due to the person retaining the goods is satisfied. -Lien is of three kinds:
(i) PosscsbOiy Lien, (ii) Maritime Lien, and (iii) Equitable Lien. Possessory
Lien is again ot two Kinds, \'u., (a) Particular Lien and (b) General Lien.
Possessory Lien.—A possessory lien is one which can be exercised only
by a person in possession of goods. A particular lien is a right to retain
goods until some claim concerning those goods is paid. General lien is a
light to retain all tlie goods of another in the possession of a person until
all the claims of the possessor are satisfied. General lien may be confer-
red by an agreement to that effect or by custom and usage or by the
pro\isions of any statute. General lien exists in the case of solicitois,
bankers, factois, stock-brokers, warehousekeepers, wharfingers, and insur-
ance brokers. (For detailed discussion, refer to pp. 139 and 140).
An unpaid seller has also a lien over the goods in his possession and
pioperty to which it has passed to the buyer until- the price of the goods
has been paid to him. This is also a possessory lien, as it depends on the
unpaid seller's possession of the goods and not on title, and unless there
is possession diere is no lien.
A possessory lien can be enforced by retaining possession. The lien-
holder cannot sell the property except under certain special circumstances.
For example, an unpaid seller may sell the goods in his possession for non-
payment of price to him after giving reasonable notice to the buyer.
A possessory lien is extinguished in the following cases : (i) when pos-
session is lost, (ii) when the money due is paid, (iii) when the claimant
lakes some other security and thereby, by implication, abandons the right
of lien, and (iv) when the right of lien is waived.
Maritime Lien.—A maritime lien is a right specifically binding a
ship, her furniture, machinery, cargo and freight for the payment of a
claim based upop the maritime law. The-persons who have a mariiimc
lien are : seamen for their wages; the master for wages and disbusemeiu;
the holder of a bottomry bond for his dues; claimants for damages in
cases of collision with the ship concerned; salvors, i.e., persons who
salvage or rescue ship or property from the sea. A maritime lien is not
a possessory lien. It is exercised by arresting tlie ship in the Admiralty,
Court. It comes to an end by payment, release, waiver and by 'he destruc-
tion of the subject matter of the lien.
Equitable Lien. An equitable lien is an equitable right conferred by
law upon one man to a charge upon the movable or immovable property
of another ^until certain specific claims have been satisfied. Thus, an un-
paid vendor of immovable property has an equitable lien on the property
for the -tvhole or part of the purchase money until actual payment. An
equitable lien is binding on all persons who take the property with notice
of the lien. It is enforced by a suit for the sale of the property. It is
extinguished by payment of the claim and by transfer of the property to
a bona fide purchaser for value without notice.
A lien differs from all the other securities in that a lien is the crea-
tion of law under certain circumstances whereas the other securities are
the creation of agreement between the parties. A lien is only a defensive
right and cannot be enforced by a suit or by the sale of the property
over which the lien is claimed. The only right that a holder of a lien
enjoys is to retain the goods until his dues are satisfied.
 Chapter XVI

Company Law

P A R T 16-A
NATURE AND CLASSIFICATION
Legal Persons.—Law regulates the rights and obligations of persons,
and divides them into two classes—(i). natural persons, or (ii) artificial
persons. Natural persons are human beings of different degrees of capa-
city v/ith whom we have been dealing so far. Artificial persons are such
as are created and devised By human laws'' for the purposes 6i society
and government, which are called Corporations or Companies. We shall,
in the present Chapter, deal with this legal person—the Corporation or
Company.
Corporation.—A Corporation is an artificial person, with a distinc-
tive name, a common seal, and created by law tor the purpose of preserv-
ing in perpetual succession rights which would fail if vested in a natural
person. Corporations aie either "Corporations Sole" or "Corporations
Aggregate."
A Corporation Sole consists of one corporator or member only at any.
given time, who enjoys corporate personality in virtue of his capacity
as occupant of some public office for the time being. Examples are found
in the perpetual offices buch as the Crown, the Presidentsiiip or a Bishop-
ric. The office is constant, only the occupant of the office changes.
A Corporation Aggiegate consists of a number of individuals con-
temporaneously associated so that in the eye of tlie law they form a single
person, e g., a ISIunicipal Corporation such as the Municipal Corporation
of Delhi or Bombay or Calcutta, or a company, whicli is formed mainly
for the^ purposes of trade and comnlerce
Company and its Meaning.—In tiie ordinary common pai lance, a
company means a gioup of persons associated to achieve some common ob-
jective. Our object is to deal with a company which is formed for carry-
ing on some business and jwoviding for limited liability of its members.
Keeping this tvpe in mind we may define a company as a voluntary
association for profit with capital divisible into transferable shares with
limited liability, having a corporate body and common seal. The com-
pany is an artificial legal person created by law and endowed with cei-
 4yS MERCANTILE LAW

lain powers, li exiiis in die eycb or conteraplaiiou ol law as tlioiigli il

weie a n;imral person, separate and distinct Irom the persons who art
Jii members. M liie company is cicateil by law and is not itself a human
being, niid so has no physical existence, it is called artihcial; and since it
IS clothed with man) of the riglus ol a leal person, it, is called a person
it IS accordingly an artihcial, legal person.
'Ihis concept of the company as being a separate, legal peison is fun-
damental in understanding lue rights ana duties that arise in connection
with com[xinies. it means tliat property of the company is not owned
by the membets who own shares bul by the company.' Debts of com-
p;iny aic debts of this artificial legal peisou and not of the people run-
iinig the company or owning shaies in it. The company has a right to
sue and can be sued, can own property and have banking account in its
own name, own money and be a creditor but you cannot shake i' by the
hand, or knock it .down in a fit of temper.
In consequence ol the company being an entity separate and distinct
from its shareholders," the life ol a company is not measured by the liie
of any member. Accordingly, a company has independent life in tlic
sense that it continues to exist witliout regard to the death of the indivi-
duals involved in its corporate affairs or the transfer by them of tlreir
interests ip the company; even the deatli of all its members does not end
the company. On account of this separatencss between the company, and
its members, a shareholder can be its creditor, too. Also, a shareholder
cannot be held liable for the acts of the company, even though he holds
virtually 'lie entire share capital, as may happen in what is known as a
"One-man Company." Similarly, the shareholders cannot bind the com-
pany by tiieir acts; they aie not its agents. These points are brought out
by the House of Lords in the celel)rated case of Salomon v. Salomon &
Company Limited (1897) A.C. 22.
In this case, one Saloman, who carried on a prosperous leather busi- -
ness. sold it in solvent condition for the sum of £30,000 to a company
which he formed consisting of himself, his wife and a daughter and his
lour sons as shareholders. His wife, daughter and four sons took one
£1 share each. Salomon took. 20,000 £1 shares and debentures of the
amount, of £10,000 secured by a floating charge on the company's assets
as the price of the business transferred to the company. The company
ran into difficulties and had to be wound up. The total assets amounted
£6.050; its liabilities were the £10,000 secured debentures and £8,000 owing
to unsecured creditors who claimed the entire assets of £6,050, on the
ground that die company and Salomon were one and the same person and
that (he company was mere "alias" or agent for Salomon, and hence
tliey sliould bfe paid in priority to Salomon.- The House of Loids re-
jected this contention of the creditor and belcl that as soon as the ccfm-
p.my was duly incorporated, it became in the eyes of the law a separate
and distinct, as well as independelit peison from Salomon and was not
liis agent or trustee for iiim. Salomon, though holding almost ail the

1. R.F. Perumal v. H. John, I960 Mad. '13.

2. Tunstall v. Steigman (1962) 2 All. E.R. 417; Dhulia etc Tians-
poix. Co. \ . Roychand. 1962 Bom. 337.
 COMPANY LAW 499
shares in the company, was also a secured creditor, and so must be paid
his debt out of tlie assets of the company in priority to unsecured
creditors.
This case established the legaliry of what were formerly well known
as "One-man" Companies. Once a company is validly termed with 7
members holding at least one share each, it became a separate entity fiom
the members even ff one of them held almost all the shares, as did SDIO-
mon in this case. Although Salomon continued to be all in all even
after ^ the incorporation of the company, die business ceased to be his
personal business and belonged to die company, and Salomon was its
agent and not tlie company the agent ot Salomon. Lord Macnaghton.
added : ' The company is at law a different peison altogether from the
subscribers... .and, though it may be that after incorporation the busi-
ness is precisely the same as it was before, and the same persons are ma-
nagers, and the same hands receive the profits, the company is not in
law the agent of the subscribers or trustee for them. Nor are the subscri-
bers, as members, liable in any shape or form, except to the extent and in
the manner prov-ided by tlie Act."
The legal personality and limited liability are the two important
features of a company. A person by buying shares, becomes entitled to
participate in the profits when the company decides to divide them,' and
is. at liberty to dispose of them whenever he likes; and if anything goes
wrong with the company, his liability is limited by the nominal amount
of the shares held by him. As a natural consequence of incorporation
and tranb'ferability of shares, the company has perpetual succession. This
means the life of the company is independent of tlie lives of its members,
, giving immortality to the company. Hence members mav come and ihem-
bers may go, but the company goes on (until dissolved).
To sum up, the principal characteristics of a company may be stated
as follows:
1. A company has a separate and distinct personality from its mem-
bers which constitute it.
2. In consequence of incorporation, it is an artificial legal person
enjoying similar rights and owing similar obligations as a natural person,
3. As a corporate person the company is entitled to own and hold
property as distinct from its members.
4. As a juristic person distinct from its members it has perpetual
succession,
5. The shares in the share capital of the company are generally
freely transferable. This makes the life of the company mdependent of
the U\ es of its members.
6. The liability of its shareholders is limited to the unoaid value of
the shares held by tnem.
7. A company, though a person having nationality and a domicile
3. Bacha F. Giazdar v. Com. Income-tax, Bombay 1955 SC 74-
Short v. Treasury Commr. (1948) I K.B. 116.
500 I^IERCANTILE LAW

is iHtit a citizen. It caniioi tlieretoie exercise the right oi iranchisc, nor

can U be punished, m us own peison, by imprisonment for ciiminal
offences, artnougn u can be finect fer tiie contravention ot ibp provisions
ol the Companies Act.
3. As the company is not a citizen and can act only through natural
perso-jis. it has no iundamental rights under tlie Constitution.
Lilting or Piercing the Corporate Veil.-The advantages ot incorpo-
ration, us explained ui tlie previous section, particularly the concept o£
separate ana distinct entity, are allowed lo be enjoyed only by those
wno do not make a fraudulent and dishonest use of the company—tiie
drtihcial legal person. For instance, the Court may not recognise the
separate existence ot a company where the only purpose for-which it ap-
pears to have been formed is the evasion of taxes."
Tlie Court may also fand it just to break, through tlie corporate sliell
and apply the principle of what is known as,lifting or piercing the cor-
poiate veil, where it may become necessary in public interest to examine
the character of persons m real control of the corporate aftairs. In Daim-
ler & Co. Ltd. v.. Continent Tyre & Rubber Co. (1916) 2 A.C. 307, the
company was registered in England, but on the declaration ot war bet-
ween England and Germany, tlie persons in control of the company and
resident 'in Germany became alien enemies. The Court disregarded the
corporate fiction of separate entity of the company -and declared it an
enemy company.
Ify vi"rtue of Section 45, it the number of members falls below the
statutory minimum, and the company carries on business for mo">\ey an
6 months,' while tlie number is so reduced, every shareholder who is
aware of tliese facts shall be directly and severally, liable to the creditors
lor the debts of the company contracted during that time, ^ the creditors
being permitted tb lool behind the company to the owners of the shares
for their satisfaction. Thus, the privilege of limited liability is lost by tlie
shareholder.
Under Section 542, the legal personality of the company may also be
disregarded if in the course of winding up it appears that the machinery
of incorporation has been used for some fraudulent purpose, or for de-
frauding creditors of the company. Any persons %vho were knowingly
parties to the carrying on of the business in that manner will be held
peisonally liable to the full extent for all debts, etc., of the company.
B was carrying on a jewellery business. He formed and registered
a company with Jiimself and his wife as members. The company took
over nothing, but a banking account was opened in its name with £160
which B put in. B went on trading exactly as he did before for the one-
man company, as its managing and sole director. The company had
practically no assets. On a claim to recover £875, being the value of

4. State Trading Corporation of India Ltd. v. C.T.O., 1963 S C T

605. ' ' ••'•
5. Tata E. & L. Co. Ltd. v. State of Bihar, 1965 S.C. 40.
6. In re Sir Dinshaw Maneckjee Petit, 1927 Bom. 371.
 COMPANY LAW ^Q^
jewellery entrusted to him, it was contended <»n his" behalf that the gooSk
were delivered to him and the contract "made with him as managing
director of the limited company, and that he was not pei son ally liable.
Held it was a good case to lift or pierce the corporate veil and hold B
personally liable [Hurwitz v. Berman (The Times, Oct. 29, 1932)].
Classes of Companies.—Companies are of different varieties. They
may be—
1. Chartered Companies, such as the East India Company, whirh
are created by Charter granted by the King or QueQi in- exercise of an
ancient prerogative vested in the Crown. A chartered" company is regu-
Tated by its charter and the Company Act does not apply to it. Such
companies have no place in India since Independence.
2. Statutory Companies, like the Reserve Bank of India or the State
Bank of India, which are created by Special Acts of Parliament or State
Legislature. A statutory sompany is governed by the provisions of the
special Act creating it. The Companies Act does not apply to such com-
panies.
3. Registered Companies, which are incorporated under the Com-
panies Act, 1956, or were registered under the jjrevious Companies Acts
therein consolidated and recognised.
A registered company may be an unlimited company, in which case
the liability of its members-would be unlimited so that they can be-called
upon to pay to the full extent of their fortunes in order to meet the
obligations of the company. Such companies are now almost extinct, as
a vast majority of them have registered themselves as limited companies.
Another class of a registered conipany is a Guarantee Company, with
its capital limited by guarantee so that each member undertakes to be
liable to pay the debts, of tlie company up to a certain amount in case
of winding up. Clubs, trade associations and societies for promoting
social objects are examples of this type; and in the case of these com-
panies there is no intention to make profit. "
The laigest in number and most important in function are Limited
Liability Companies registered with a share capital divided into shares
held by shareholders whose liability is limited to the face value of the
shares held by them. This class of company will be almost exclusively
dealt with by us.
Functionally, a registered company with limited liability may be
either Private or Public, or an Association not for Profit.
Private Company—A private company is defined by Section 3 (1) (iii)
as a company which by its articles of association, (i) restricts the right to
transfer its shares, (ii) limits the number of its members (excluding em-
ployees who are members or ex-employees who were and continue to be
members^ to 50, and (iii) prohibits any invitation to the public to sub-
• scribe for any of its shares and debentuies. If two or more persons hoid
one or more shares jointly, they shall be tieated as a single meml»er.' T h e

7. Jarnail Singh v. Bakshi Singh, I960 Punj. 555,

602 MERCANTILE LAW

name of every private company must end with the words "Private Limit-
ed." Since the membership ot private company is confined more or less
to friends and relatives, it enjoys certain special privileges and sxemp-
tions.
Privileges of Private Company.—A private company enjoys the fol-
lowing privileges and exemptions :-
1. Only two signatories to the memorandum are sufficient to form
a private company.
2. I-t can commence allotment of shares before the minimum sub-
scription is subscribed or paid.
3. It is not required to file a statement in lieu of prospectus as it
is not allowed to issue a prospectus to the public.
4. Ii need not offer further shares first to the existing shareholdefB
under Section 81.
5. A private company may commence business immediately after
incorporation.
6. It is not required to hold the statutory meeting and file tlie sta-
tutory report.
7. It may issue ^any kinds of shares and allow disproportionate vbtf-
ing right.
8. A private company need have only 2 directors
9. Its director can vote on a contract in which he is interested.
10. Provisions relating to loans made to directors, duration of ap-
pointments, etc., of managing agents in a public company etc., do not
apply to a private company.
Loss ot Privileges.—A private company will lose its privileges and will
he treated as a public company, if it fails to comply with the essential
requirements of a private company, viz., restrictions on transfer of shares;
limitation of its members to fifty; and prohibition of invitation to the
public to buy its shares or debentures (Section 43). The Court may,
however, relieve the company from the consequences of non-compliance
with the aforesaid regulations, if it is of opinion that the non-compliance
was accidental or inadvertent.

CIRCUMSTANCES IN W H I C H PRIVATE COMPANY BECOMES

PUBLIC COMPANY
By virtue of Section- 43A, a private company which employs public
money to an appreciable extent will be subject to the same restrictions
as apply to a public company even if its articles continue to contain the
restrictions required by Section 3(1) (iii).
Where not less than 25 per cent of the paid up share capital of a
private company is held by one or more bodies corporate, the private
company sh?!! automatically become a public company fiom the date ihe
capital is so held. Withm 3 months from the date on which a private
company becomes a pul)lic company, it must inform the Registrar that
COMPANY LAW 503
it has become a public company and the Registrar will then delete die
word "Private" from its name. Failure to inform the Registrat will ren-
der the company and every officer thereof who is in default liable t o ' a
fine up to Rs. 500 for every day during which the default continues.
Section 43A' does not apply to private companies in certain circums-
tances and so the following private companies will not become public com-
panies :
(1) a private company the entire paid up share capital is held by '
another single private company or by one or more foreign companies;
(2) a private company in which shares are held by one or more
foreign companies, if the constitution of such company or companies is
such that it could be treated as a private company under the Indian
Companies Act, provided the Central Government by order grants ex-
emption;
(3) any other private company if, but only if each of the following
conditions is satisfied :—
(iv) that the body corporate, or each of the bodies corporate hold-
V ing shares in the private company is itself a private company,
(ii) that no body corporate is the holder of any shares in any
such shareholding company,
(iii) that the total number of shareholders of tlie shareholdiiT-
companies together with individual shareholders of the pri-
vate company does not exceed fifty.
Conversion of public compaay into private company.—A public com-
pany having share capital, and a membership within the limits imposed
upon private companies by Section 3(1) (iii) ma/ become a private com-
pany by passing a special resolution altering the articles to include the
necessary restrictions, limitations, and prohibitions, and to delete any pro-
visions inconsistent with the restrictions, e.g., a power to issue share war-
rants to bearer. T h e proviso to Section 31 now requires that approval
of the Central Government must be obtained to the conversion of a pubhc
company to a private company. T h e name of the company must now
end with the words "Private Limited."
Conversion of private compa&y into public company.—Section 44 lays
down the procedure as follows: The company must pass a special resolu-
tion altering its articles of association in such a manner that they no
longer include the provisions of Section 3(1) (iii)' whidi are requited to
be included in the articles of a private company. On the date of the
resolution the company ceases to be a private- company and becomes
public company. If the number of members is below 7, steps shcJuld
be taken to raise it to at least seven, and the number of directors should
be increased to three, if it is less than three. It must within 30 days file
a prospectus or statement in lieu of prospectus with the Registrar. The
company will also alter those regulations contained in the articlei which
are inconsistent with the public company.
Public Company.—A public company is one which is not a private
594 MERCANTILE LAW

company, and whose membership is open to die public under the provi-
sions of its articles. The minimum number required to form such a
company is seven, but there is no limitation to the maximum number of
members. It can offer shares and debentures to the public by advertising
such offer in a prospectus. Almost all the provisions of the Act apply
to it.
Distinction between Public and Bjrivate Companies..—The two types
of companies differ in the following respect:
l.~ T h e minimum number with which a public company can be for-
med, is seven and in the case of a private company it is only two.
2. There is no limitation to the maximum number of members in
a public company. In the case of a private company, the number of
members must not exceed fifty.
3. A public company is required to have at least three directors,
but a piivate company may have only two directors.
4. The directors of a public company have to file with the Registfar
consent to act as directors, but those of a private company need not do so.
5. A public • company may, and usjally does, invite by the issue of
prospectus the general public to subscribe to its share capital or buy its
debentures, but a private company cannot do so; it must make private
arrangement to raise capital.
6. The -shares in a public company, as a rule, are freejy transferable.
In a private company, the transfer of shares can be made subject" to cer-
tain restn'ctions as provided in its articles.
7. Total managerial remuneratio^i in a public company cannot e%
ceed 11 per cent of the net profits, but a private company which is not A
subsidiary of a public company may pay any remuneration.
8. A public company can issue only two kinds of shares—prelerence
and equity, but a private company may issue any kinds of shares and
even with disproportionate voting rights.
Holding and Subsidiary Companies.—Section 4 defines the terms
holding company and 'subsidiary' by explaining the circumstances in
which a company shall be deemed |to tbe the subsidiary of another. If
these circumstances of subsidiary relationship are found to apply then the
other company is deemed to be a holding company. The section, by
defining a subsidiary, brings out the meaning of a holding company.
A company is a subsidiary company of another it,—
(a) that other, (i.e., the holding or^ controlling company) • con-
trols tlie composition of its Boaid of Directors; or
(b) that other (the holding or controlling company)—
(i) exercises or controls more than half of the total voting
power of the existing subsidiary company in wliicli the
liolders of pieference shaics issued before April 1, 1956,
iMtue the sairre vqtmg riglits as equity shareholders;
COMPANY LAW 505

(ii) holds more than half in nominal value of the equity share
capital of a subsidiary which is the holding company of
another; or
(c) the subsidiary is a subsidiary of any company which is that
other company's subsidiary.
If company B is a subsidiary of company A, and company C is a
subsidiary of company B, then company C is a subsidiary of company A
If D is the subsidiary of C, then D will be the subsidiary of B and also
of A.
Shares held (or power exercisable) in fiduciary capacity are not to be
counted and do not make the .latter a holding conlpany; but shares held
by a nominee are to be counted. An Investment Company, that is to
say, a company whose principal business is the acquisition and holding of
shares, stock, debentures or other securities is not a holdmg company
merely because part of its assets consists in 50 per cent or more ^f the
shares in anotlier company. ^

Foreign Companies.—A company incorporated in a country outside

India and under the law of that other country' is a foreign company.
Every foreign company having a place of business in India is required
lo file which the Registrar at New Delhi and also the Registrar of the
State in which such place of business is situated a certified copy of its
charter, statute or memorandum and articles defining the constitution
of the company in English language, the full address of the registered
or principal office of the company and a list of its directors and its sec
rctary, as well as the address of the principal place of business in India.
Every foreign company must conspicuously exhibit on the outside of
every office or place of business in India the name of the company, in-
dicating whether Private Limited or Public Limited or iinlimited, and
where incorporated.

The provisions regarding books of accounts are the same as per the
Indian companies, as also regarding reglstratipn of charges The provi-
sions regarding prospectus are also almost the same as for an Indian com-
pany. A foreign company, which has been carrying on business in India
and stops its business here, may be wound up as an unregistered com-
pany, even if it lias been dissolved or has ceased to exist under the laws
of count:y in which it was incorporated.
Government Company.—(Section fil7). A Governtnent company
means any company in which not less than 51 per cent of the paid up
share capital is held by the Central Government, or by any State Govern-
ment or Governments, or paitly by the Central Government and partly
by one or more State Governments and includes a companv which is a
subsidiarv of a Government company. Government compauics ate aho
iubject to the provisions of the Companies Act as any other company,
€\ccpt if ihe Cential Government by notification exem^sts any Govern-
ment com])any fiom the application of any of tl) provKions of the Act
s.u'e Sections fiI8, fiI9 and filf)A specially denl-i-hg with Govcinment com-
506 MERCANTILE LAW

panics. Section 618 prohibits a Government company from having ma-

naging agent.
Section 619 provides for a special procedure for audit of Govern-
ment companies and lays down that the auditor of a Government com-
pany shall be appointed or re-appointed by the Central Government on the
advice of fne Comptroller and Auditor General of India T h e C. & A. G.
can direct the manner in which the accounts are to be audited, and
may even conduct a supplementary audit. His report, if any, must be
placed before the annual general meeting along with the auditor's report.
In addition to the annual report on the working of the company, the
Central Government must place before both Houses of Parliament an
annual report on the working and affairs of each Government company,
together with the audit report and any comments o£ C. Sc A. G. of India.
Associations not for profit.—Section 25 permits the registration, un-
der a licence granted by the Certtral Government, of associations not for
profit with limited liability without using the word "limited" or words
"priyate limited" to their names. An a.ssociation not for profit is a com-
pany formed for promoting commerce, art, science, religion, charity, or
any other useful object, and which does not intend to pay aQy dividend
to its members, but to apply its profits or other income in promoting its
objects. It is registered without paying any stamp duty on its memo-
randum and articles. On registration, the association enjoys all the pri-
vileges of a limited company, and is subject to all its ©"bligations except
those in re.si3ect of which exemption is granted by the Central Govern-
ment. T h e Central Government may at any time revoke the Jicence
whereupon the company loses all exemptions and privileges and must
publish its name with "limited" or "Private limited." This type of com-
pany cannot alter its object clause without the previous approval in work
ing of the Central Government.
Prohibition of large partnerships—Illegal Associations.—Section 11
provides that no company, association or partnership consisting of more
than 20 members (10 in the case of banking business) be formed to caiTy
on any business for gain unless it is registered as a comoany under the
Companies Act or is formed in pursuance of some otiier Indian Law,
or is a joint Hindu family carrying on business as such. An association,
or partnership contravening the above requirements is an illegal associa-
tion, in the sense that as a body, it has no legal existence, and cannot be
wound, up under the Act, not even as an unregistered company." It fol-
lows that an association which falls within the terms of Section II, and
is not registered, has no legal existence; it is a phantom. T h e law does
not recognise it," and consequently, it is an illegal association.
As an illegal association, it—
(a) cannot enter into any contract:
(b) cannot Sue any member or outsider,'" not even if the com-
pany is subsequently registered-

8. Raghubar Dayal v. Sarafa Chamber, 1954 All. 555

9 ISfadan Gopal v. Sheo Das, 1934 Lah 882.
10. Union of India v. Commercial Association, 1959, Punj 104.
COMPANY LAW 507

(c) cannot be sued by a member," or any outsider, for it cannot,

contract any debts;
(d) cannot be wound up by order of the Court. In fact, the
Court should not entertain a petition for its winding up,, for
if it did, it would be indirectly according recognition to the
illegal association.
The position of its members is an unenviable one, for every
one of them is individually liable in respect of all acts or contracts which
he purports to do or make on behalf of the association, they cannot,
either individually or collectively, bring an action to enforce any con-
tract, so made, or to recover any debt due to the association." Thus,
every member of an illegal association is (i) personally liable for all
liabilities incurred in the carrying on of the business of or by the illegal
association, and (ii) is punishable with fine up to Rs. 1,000
Companies Tribunal.—Under the Companies (Amendment) Act, 1963,
lOA to lOD Sections were inserted and by virtue of those a Companies
Tribunal was set up. But it was found of little utility and was abolish-
ed in 1967, all its powers again reverting to High Courts.
Company Law Board (Section lOE).—The Company Law Board has
been constituted, as required by Section lOE of the Act and consists of
not more than 5 members, one of whom is nominated by the Central Gov-
ernment as Chairman. It ensures a better and more convenient adminis-
tration of the Companies Act.- As an Administrative Board, its primary
function is the execution of the economic policies of tne Government in
so far as they arise out of the administration of the Companies Act. Al-
most all the powers of the Central Government have been delegated
to this Board.

P A R T 16-B

FORMATION OF COMPANY

The promoters (persons wishing to form a company) must file

with the Registrar of the State in which the registered office of the com-
pany is to be situate—
1. The Memorandum of Association;
2. The Articles of Association;
3. A statement of nominal capital, and where it exceeds 25 lakhs, a
certificate from the Central Government peunitting the issue of capital;
(the Controller of Capital Issues grants this certificate);
4. The agreement, if any, which the company proposes to enter
into with the proposed managing agent or Secretaries and Treasurers;
5. A statutory declaration by an advocate or an attorney or a char-

11. Badri Prasad v. Nagarmal (1959) 29 Com. Cas. 229 (S.C).

12. Wilkin.wn v. Levison (1925) 'J2 T.L. R. 97.
£08 MERCANTILE LAW

teied accountant, engaged in the formation of the company, or by a

director or any other officer of the company that all requirements of the
Act and Rules thereunder in respect of registration have been complied
with.
The above documents are all that a private company has to file. A
public company, having a share capital, must file, in addition to the
above, the following documents :—
6. A list of persons who have consented to be directors of the com-
pany;
7. A written consent duly signed to act iis directops;
8. An undertaking in writing signed by each such director to take
and pay for their qualification shares, if any.
Ordinarily, both the private and public companies will file the notice
of their addresses of the Registered Office; (or it may be given within 30
days after the date of incorporation).
When the necessary stamp duty and the registration fee have been
paid and the Registrar Is satisfied that everything is in order, he will
enter the name of the company in the register of companies maintained
by him and issue a Certificate of Incorporation which gives the company a
legal existence from the date given on it. This certificate is a conclu
sive evidence that everything is in order as regards registration and that
the company has come into being, with rights and obligations of a na-
tural person, competent to enter into contracts."

PRELIMINARY CONTRACTS
Very often a company is formed for the purpose of buying an exist-
ing business or property. The promoters of the company would natural-
ly like to have a bindingi contract from the owner of the business or pro-
perty, but under the Companies Act, the company can make a binding
contract only after its incorporation. Consequently, according to the
Companies Act, a contract made before, the incorporation of the com-
pany by some person professing to act on its behalf is not binding on the
company nor can the contract be ratified by the company after incorpora-
tion, for obviously a person cannot act as an agent for another who is not
' yet, in existence." Also the company cannot sue the vendor if he fails
to carry out the contract. The persons pm-porting to enter into contract
on behalf of the company remain personally liable on the contract. Be-
cause of these difficulties it ha.s become customary for promoters to agree
to the form of draft contract to be entered into by the vendor and the
Company after incorporation. But Sections 23 and 27 of the Specific Re-
lief Act have considerably alleviated the difficulty. Section 23 provides
that when a contract is made "for the purpose of the company and such
contract is warranted by the terms of incorporation" specific performance
thereof may be enforced by the company though the contract is mad

13. Jubilee Cotton Mills Ltd. v. Lewis (192'1) A.C. 958.

14. Re. English and Colonial Prodiicc Co. (lOOfi) 2 Ch. 435,.
COMPANY LAW 50:3

betore its incorporation. Section 27 o£ the same Act provides that when
the promoters ol a public company before its incorporation enter into a
contract, specific perlormance thereof may be enforced against the com-
pany, "provided uiat the company has ratified and adopted tlie contract
and the contract is warranted by the terms of incorporation." Tliese
sections are, however, inapplicable to contracts to take shares, nor will
the specific performance ot contracts of personal service be ordered by
ilie Court.

PROMOTER
I h e "promotion" of a company is a comprehensive term denoting
that process by which a company is "incorporated" or brought into ex-
istence as a corporate body, and 'floated,' or established financially as a
going concern, by the issue of a jjrospectus. Anyone who assumes' pri-
mary responsibility with regard to matters relating to promotion, or any
ot them, may be held to be a "promoter." "The term 'promoter,' " said
Boden L. J., "is a term not of lav/ bu"K of business, usually summing up
in a single word a number of business operations familiar to tlie com-
mercial world by which a company is generally brought into existence."'^
T h e word, promoter is used in common parlance to denote any indivi-
dual, syndicate, association, partnership, or company, which takes all
necessary steps to create and mould a company and set it going.
A promoter stands-in a fiduciary relation to the company it promotes
and to those persons whom he induces to become sliareholders in it."
Although a promoter is not an agent or trustee of the company before
its formation, yet the responsibility of an agent ,aud trustee is placed upon
him. to account for all moneys secretly obtained by him. Consequently, a
promoter must act honestly, and must not make, directly or indirectly,
any profit at the expense of the company he is promoting, although he
may receive some remuneration for his work. The usual ways of receiv-
ing remuneration by the promoter are: (1) by- selling to the company at a
profit sonie property purchased by the promoter before he became one;
(2) by taking a commission on the shares sold; (3) by taking a grant of
some shares of the company; (4) by taking a grant of a lump sum of
money from tlie company.
Commencement of Business.—A private company may commence bu-
.siness immediately .after obtaining the certificate of incorporation.
A public coippany must obtain a 'certificate to commence business'
from tlie Registrar before it can commence business. The Registrar will
grant this certificate only when—
(a) the T\Iinimum subscription has been allotted;
(b) the directors have taken up and paid for their qualification
shares;

15. Whaley Bridge Printing, Co. v. Green (1880) 5 Q.B.D. IW.

If). Lagunas Nitrate Co. v. Lagimas Syndicate (1899) 2 CIi. 392
Omnium Electric Palaces Ltd. v. Baines (1914) 1 Ch. 3S2.
510 MERCANTILE LAW

(c) the stalutory declaration and the piospectus or statement in

lieu of prospectus have been filed.
Any new business (as mentioned under other objects in the memo-
randum) can be started only after obtaining approval of the shareholders
by a special resolution, and after a declaration has been' filed with the
Registrar, verified by one of the directors or the secretary that the ap-'-
proval by special resolution has been given by the company in general
meeting.
All contracts entered into between tlie date of incorporation and
the date of the commencement of business are provisional and would bind
the company only after it is entitled to commence business. If the com-
pany does not commence business within one year of its incorporation
the Court may order it to be wound up.

MEMORANDUM OF ASSOCIATION
The Memorandum of Association of a company is of supreme im-
portance in determining its powers and, in this respect, it is the charter
(3f the company, which contains the fundamental conditions upon which
alone the company can be incorporated. It defines as well as confines
the powers of the company, so that it not only shows the object of its
formation, ^ but also the utmost scope of its operation beyond which its
action cannot go. It, in a way, regulates the external affairs of the com-
pany in relation to outsiders. Its purpose is to enable .shareholders,
creditors and all those who deal with the company to know what its
powers are and what is the range of its activities or enterprise.
The Memorandum must be printed, divided into paragraphs num-
bered consecutively and signed by seven subscribers (two in the case of
a private company), in the presence of a witness who shall attest the
signature of each subscriber. Each subscriber must add his address, des-
cription and opcupation, and the number of shares taken.
Contents of Memorandum.—Pursuant to Section 13, the memorandum
of a company limited by shares must state the following;—
(L) The name of die company, with "limited" or "private limit-
ed" as the last words;
(2) The State in which the registered office of the company is
to be situate;
(3) The objects of the company;
(4) The fact that the liability of the members is limited;
^5) The proposed amount of the capital, and its division into
shares of a fixed amount; and
(6) The declaration of association.
Name of the Company.-Section 20 (1) provides that no company'
must be registered by a name which, in the opinion of the Central Gov-
ernment, is undesirable. This enables the Government to reject a name
without giving any reason. The Registrar will continue, as before, to
 COMPANY LAW ^^^
refuse names identicai with, oi too closely resemoiing^names already on
the register as undesirable names." The company muft not give an im-
prebsion that die company is carrying on die business of some other tVell
established company. Under die Emblem -and Names (Prevention o£ Im-
proper UsGj Act, 1950, die Governmeni may declare what names and
^emblems are not to be used by companies in trade marks and patents.
T h e use of the following has been prohibited under the above Act, viz.
name and emblem of the U.N.O. and die W.H.O., the Indian National
Flag, the Official Seal and Emblems of the Central and State Govern-
ments. Subject to the above restrictions a company may adopt any name
it likes. If by inadvertence a name is selected which is similar to tliat
of an existing company, it must be changed.
Once the name is registered, it must be painted or aihxed on die out-
side of every office or place of business, in a conspicuous position in
letteib easily legible in the language in general use m the locality. It
must be engraved on the seal, and mentioned in all notices, advertise-
ments, other official publications, negotiable instruments and orders for
money or goods (Section 147).
Registered Otiice.—E\'ery company must have a registered office as
from die date on which it commences business or the SOtli day after in-
' corporation date whichever is earlier, to which notices and all other com-
munications can be sent.
Objects Clause.—The objects clause indicates the extent of company's
powers and sphere of its activities. It defines and confines the scope of
company's poweis, and once registered, it can only be altered as provided
by the Act. The puipose of the memorandum is two-fold: One, to in-
lorm the members in what kind of business their capital may be used;
secondly, to inform persons dealing with the companv what its powers are."
A company cannot do anything beyond its powers, and any act beyond such
powers is ultra vires and void and cannot be ratified even by the assent
of the whole body of shareholders. The objects should, therefore, be
clearly set forth in the memorandum. Ambiguous and general provisions
will not be of any use. Although expiess powers are necessary a- com-
pany may do anything which is incidental to and consequential upon
the poweib specified, and the act will not be ultra vires.'"' Thus a trading
company has an implied power to bonow, draw and accept bills in the
ordinary form, but a railway company cannot issue bills, although it may
borrow money.
As the procedure laid down in Section 17 for the alteration of die
objects clause when some new venture is contemplated is rather cum-
bersome and the sanction of the Court is essential, die promoters o£
companies have been making the objects and purposes as wide as pos-
sible. This practice often enabled directors to participate in activities

17. Madame Tussand & Sons v. Tussaud (1890) 44 Ch. D. 673.

18. Cotman v. Broughman ^1918) A.C. 504.
lO Attorney General v. G.E. Rly. Co. (1880) 5 A.C 47S- Evan v
Bruner (19.21) 1 Ch. 359. ' '
512 MERCANTILE LAW

which were neither the main activities nor were tliey ancillary thereto,
but were remote in character and far removed from the main purpose.
Very often, the members of the company knew nothing, or where they
did know, they could not do anything. In order to enable the share-
holders to have a say in the matter, and also to let the doctrine of
ultra vires have some play. Section 13 of the Act was amended on 1965 so
as to make it compulsory in future for the promoters to specify in clear
terms the Main and Subsidiary objects of the company.™
Section 13, as amended, provides in clauses (c) and (d) as follows :—
(c) in the case of a company in existence immediately before' Oc-
tober 15, 1965, tlie memorandum shall state the objects of the
company;
(d) in the case of a company formed after October 14, 1965, the
memorandum must state—
(i) the main objects of the company to be pursued by the com-
pany on its incorporation and objects incidental and ancillary
to the attainment of the main objects;
(ii)' 'other objects of the company not included in subclause (i)
An amendment to Section 149 piohibifs a company from commencing
any new business (as stated under other objects) without obtaining the
prior approval of the shareholders by a special resolution passed in a
general meeting. In some special cases the Central Government may al-
low new business to be commenced even if it is ai^proved by an ordinary
resolution.

L I M I T A T I O N OF LIABILITY
A declaration that the liability of the members of the company is
limited to the amounts unpaid on their shares, must be made in the
memorandum. If a shareholder lias paid Rs. 50 on a Rs.- 100 share, he
can be called upon to pay the balance of Rs. 50, and if another has paid
Rs. 100, he holds a full-paid share and cannot be called upon to pay
anything. But there is one exception to this rule, viz., that if a company
continties to carry on business for more than 6 months after the member-
ship has fallen below 7 in the case of -a public com"paiiy, and 2 in the
case of a private company, then all members aware of the fact are fully
and severally liable for all debts contracted after the 6 months, i.e., theii
liability becomes unlimited.
Capital Clause.—The capital clause in the memorandum of a com
pany, having a share capital, statds the amount of capital with which it
is registered, divided into shares of a certain amount. This capital is
called the "registeied," "nominal" or "authorised" capital. The effect ojE
this clause is that the company cannot issue more shares than are an-

20. The Vivian Bose Commission, while examining the case of Dal-
mia Jain Aiiways Ltd., had recommended the mention in the memoran-
dum the main and other objects separately.
COMPANY LAW ' 513
thoiised by the memorandum for the time being. A public company
can issue only two kinds of shares—Preference and Equity; and the shares
must not give disproportionate voting rights. A private company may.
however, issue any kinds o£ shaies and with disproportional voting rights
(Sections 85, 88, 90).
Declaration of Association or the Association Clause.—At the end of
the memorandum of every company there is a -declaration of association
or an association clause which reads something like this:^ "We, the seve-
ral persons whose names and addresses and occupations are subscribed,
are desiious ol being formed into a company in pursuance of this memo-
randum ot association and resf)ectively agree to take the number of shares
in the capital of the company set opposite our lespective names." Then
follow the names, addresses, occupations, the number of shares e¥ch per-
son has taken and his signature attested by a witness. Each .ubscriber
lias to take- at least one share in share capital of the company. At least
7 subscribers must sign the memorandum in the case of a public company
although 2 are sufficient in the case of a private comisany.

DOCTRINE OF "ULTRA VIRES"

"^Ve, have observed, while dealing with the "objects clause," that com-
pany exists only fori the purposes which are stated in its memorandum
of association or which are incidental to or consequential upon these spe-
cified poweis, and any act done outside the expressed or implied powers is
ultra viies, and therefore null" and void.^ An ultra vires act is improper
because it is a violation of the law and diversion of the assets of the com-
pany to a purpose not contemplated by the members and creditors of
the company. An ultra vires act is not binding upon the company and can-
not be ratified. The company can be lestrained from employing its
funds for purposes other than those stated in the memorandum. Thus «
•company formed to carry on one trade cannot carry on another trade.-
\Vhere a company by its Memorandum. waS" incorporated with the object
of making and selling railway carriages, it was held that the purchase of
^ concession for erecting a railway in a foreign country was ultra vires
the company."' So also an authority to a County Council to run trams
does not empower it to run omnibuses. In India, by virtue of the Com-
panies (Donations to National Fijnds) Act, 1951, a company by special
resolution may use its fimds for making donations to the Gandhi National
Memorial Fund, Sardar Vallabhbhai National Memorial Fund or any
other Fi.nd for charitable purposes which have been approved by the
Central Government.

As a result, however, of the rigour of the doctrine of ultra vires, me

moranda are now very widely drawn, and frequently snecify various trad-
es and businesses which have apparently very little if any connection with
the main business of the company. It is then possible for the company
to extend its operations at any time without taking steps to alter thp
2r. Ashhiu-y Rail etc. Co. Ltd. v. Riche (1875) 7 H L. 688.
22. Egyptian Salt Co. v. Port Said Salt Ass. (1931) A.C. 677.
23. Ashburv Rail Case.
514 MERCANTILE LAW

objects of the company, It is because of this that the Bhaba Commission

on Company Law remarked: "As Memoranda of Association are drafted,
the doctrine of ultra vires was an illusory protection for shareholders or
pitfall for third parties dealing with the company." Now, in the case o£
a company formed after the commencement of -the 1965 Amendment Act,
the 'main' objects and 'other' objects must be separately stated; and thus,
the doctrine of ultra vires remains very much in the picture, adthougli
alteration 6i the objects clause can be made to include new purposes m
the memorandum.
The doctrine of ultra vires is, however, subject to the following ex-
ceptions : (1) If an act is ultra vires the powers of the directois only, e.g.,
their borrowing powers, the shafehoiders can ratify it. (2) If it is ultra
vires the articles of tlie company, the articles c<ui be altered and tlie error
rectified. -(3) If an a.,t is within the powders, of the company^ but is irre-
gularly done, consent ol all the shareholders will validate the act. (4)
The company's rights over property will be protected, even , though the
property has been acquired by ultra vires expenditure. (5) Though the
act is ultra vires^ rights arising independently thereout are not affected
thereby." (6) A person borrowing money from the company under a con-
tract which is ultra vires can be sued by the company- (1) Where tliere is
an ultra vires borrowing by the company, or it obtains deli\ery of pro-
perty from a third party u n d e r ' a n ultra vires contract, that third party
has no claim against the company on 'he basis of the loan, but he has
a right to follow his money nj property if it exists in specie, and obtain
an injunction restraining the dompany from parting with it, provided lie
intervenes before the money is spent. or the identity of the property is
lost [Sinclair v. Brougham (1914) A.C. 398]. (8) The lender o£ money to
a company under a contract which is ultra vires, has a right to make the
directors personally liable, on the ground of implied warranty of autho-
rity, if their act amounts to an implied misrepresentation of fact. {9}
It a director of a company makes payment of a certain sum of money,
which is ultra vires the company, he can be compelled by the company
to refund it but the director in his turn may claim indemnity from ihe
person who received it knowing that it is ultra vires.

ALTERATION OF MEMORANDUM
For the purposes of alteraion, the provisions contained in the me-
morandum are classified into two heads. Conditions and other provi-
sions. The "conditions" are those provisions which are compulsory clau-
ses, namely, the name, the place of registered office (situation), objects,
limited liability and share capital. The conditions can be altered only
as expressly provided by Sections 17, 21, 94, 99, 100 and 106.
The other provisions, such as the terms of appointment of managin"-
director or manager contained in the memorandum can be altered by a
special -esolution with the approval of the Central Government, or a

24. Gerrad v. James (1925) Ch. 616.

COMPANY LAW "Jl^
clause in -the memorandum fixing limit of dividends to be paid on a
particular class of shares can be altered by a special resolution,^

ALTERATION OF CONDITIONS
Change of name.—The name of the company can be changed any
time by a special resolution and with the written approval of the Central
Government. If the change merely involves the addition or deletion
of the word "Private" on .the conversion of a public company into a pri-
vate company or "vice versa, no approval of the Central Governinent is
necessary. The change must be communicated to the Registrar by filing
a printed or type-written copy of the special resolution within 30 days
of the passing thereof. The Registrar will then issue a fresh certificate
of incorporation, and the change of name will be effective only there-
after. T h e changed name shoiild be noted in each copy of the memoi
randum and articles.
Change of Registered Office.—The registered office may be changed
any time from one place to another ^vithin the local limits of the city,,
town or village where it is situated, and a notice of the change be given
to the Registrar within 30 days of such change.
If the office is to be removed from one city, town or village to another
city, town or village within the same State, a special resolution should be
passed, and a printed or type-written copy thereof filed within 30 days.
Then within 30 days of the removal of the office, a notice to tlie Regist-
rar should be given of the location of tlie new office.
Change of Registered Office from one State to another or change of
objects.—The Registered office from one State to another State, or the
objects of the company, can be changed by special resolution, confirmed
by the Court, if the alteration is rendered necessary—
(a) to carry on its business more economically or more efficiently;
(b) to attain its main purpose by new or improved means;
(c) to enlarge of change the location of its operations;
(d) to carry on some business which under existing circumstances
may be conveniently or advantageously combined with the
business of the company,
(e) to restrict or abandon any of the objects specified in the me-
morandum;
(f) to sell or dispose of the whole, or any part, of the undertak-
ing; or
(g) to amalgamate with any other company or body of persons.
The Coilrt being satisfied that the notice of the resolution was given
to all persons whose interests are likely to be affected by the alteration,
including the Registrar, and having heard him and the creditors' objec-
tions, if any, may confirm the alteration wholly or in part.- A certified

25. In "re Rampuria Cotton Mills Ltd., 1959 Cal. 253.

.SI6 MERCANTILE LAW
copy of the Court's order together with a- printed copy o£ the altered
mefihorandum must be filed within 3 months of the date of the orcer with
tl|e Registrar, who will register them and issue a certificate which will be
cSlfldiisive evidence that everything has been done properjy (Sections 17-
19), The alteration of the objects clause must leave the btisiness of the
company substantially wlu't it ivas before with only -such changes in the
mode of condu'^ting it as would enable it to be carried on more economi-
cally or more efficiently.^ \
Where the alteration invoh es a .transfer of the registered office from
one State to 'another, the certified copy of the Couit's order confirming
the change must be filed with the Registrars of both the States who
will register the same. All the records of the company will dien be trans-
ferred to the Registrar of the State to which the registered office of the
company has been transferred.
Alteration of Capital.—Section 94 provides that a limited company
having J share rapital may, if so authorised by its articles, alter the con-
ditions ot its memorandum relating to capital by ordinary resolution in
genetal meeting, so as :—
(a) to increase it by the issue of new shares of suca amount as it
thinks expedient;
(b) to consolidate and divide all or any ot its sh^re capital into
shares of larger amount than its existing shares;
(c) to convert all or any of its fully paid up shares into stock and
reconvert that stock into fully paid « o shares of any deno-
mination;
(d) to sub-divide its shares or any of them, into shares of smaller-'
amount than is fixed by the memorandum. But in the sub-
division the proportion between the amount paid and the
amount, if any. unpaid on each reduced share shall be the
same as it was in the case of the share from whjch tire reduced
share is derived;
(e) to cancel shares which "have not been taken or promised to be
taken at the time of tlie resolution and such cancellation will
not be deemed to be reduction of share capital. The company
shall give the notice of tlie above alterations to the Registrar
within 30 days after doing so (Sections 95 and 97).

F U R T H E R ISSUE OF CAPITAL
Section 81 has been amended to make it clear that where the Board
of Directors decides to increase the subscribed capital of a company by
allotment of further shares, the further shares /should ordinarily be of-
fered to existing holders ot equity shares pro rata; but these further shares
mav also be offered to any persons in any manner irrespective of the
existing eauity suareholders if a special resolution is passed by the com-
pany in geneial meeting or. although no such special resolution is
passed in that general meeting, if the proposal has been carried out by

26. Re Cyclists Touring Club (1907) 1 Ch. 269.

COMPANY LAW "1?
a majority of votes and the Central Government is satisfied on the appli-
cation of the Board of Directors that the proposal is most beneficial to
the company. The provisions of this section will apply when the Board
proposes to increase the subscribed capital by allotment of further shares
after the expiry of 2 vears from the formation of the company or after
the expiry of one year from the first allotnient of shares whichever is earlier.
However, the provisions of Section 81 will not appiy to a private
company nor in relation to convertible loans or ' debentures, .i.e., in re-
lation to die increased subscribed capital caused by the conversion of
debentures or loans into shares of the company, if tlie following two
conditions are satisfied :—
(a) that tlie terms of issue of such debentures or loans include a
term of such option and such term has been approved by the
company by a special resolution; and also
(b) has been tipproved by the Central Government before such
issue, or such terms are in conformity with the rules made by
the Central Government. '
But an amendment to Section 81 (3) made in 1963 does away with
the requirement of the approval by a special resolution in relation to
the conversion, into shares or debentures issued to or loansV raised from
Government, in this behalf. T h e effect of this change is that the finan-
cial institutions, such as the L.I.C., I.F.C., N.I.D.C, may, with the prior
approval of the Central Government, ask for the conversion of loans
granted by them or debentures held by them into shares of the company
The conversion will be' made on fair and equitable terms. Such conver-
sion may sometimes have" to be made on grounds of public policy, but
a right of appeal to the High Court is given to the company if the terms
of conversion proposed by the Government are not acceptable to the
company.
Reductfon of Share Capital (Sections 100-105). If the articles pro-
vide for reduction of capital, a company may, by a special resolution and
o). its confirmation by the Court on petition, reduce its share capital by
(a)- reducing or extinguishing tlie liability of members for urlcalled capi-
tal; or (b) by writing off or cancelling any paid-up, capital which is lost,
or unrepresented by available assets; or (c) by paying off capital which
is in excess of the wants of the company; or (d) in any other way approv.
cd by the Court. Reduction under (b) and (c) may be inade either' in
addition to or without extinguishing or reducing the liability of members
for uncalled^capital (Section 100). Where, however, the reduction of.
share capital involves diminution of liability for unpaid capital or return
to any shareholder of any paid-up share capital all creditors are entit-
led to object to the reduction. For this purpose the Court shall settle
a list of creditors and hear their objections, if any and on being sati.s.
fied tliat either the creditors consent to the reduction or that their debts
have beep discharged or secured by the company, may confirm the reduc-
tion on any tei-ms it thinks fit. The Court may direct the company to
add the words "and reduced" to its name for a fixed period and "to puij.
lish the leasons for reduction for (iie information of tire public (Sections
518 MERCANTILE LAW

101, 102). Pursuant to the reduction of the capital necessary alterations

must be made in the memorandum. The resolution as confirmed by the
Court will be effective only after the order of the Court and minutes as
approved by the Court have been filed with the Registrar who will re-
gister them and issue a certificate of registration which will be conclu-
sive evidence that everything was in order (Section 103).

LIABILITY OF MEMBERS IN RESPECT OF REDUCED SHARES

Section 104 provides that, upon a reduction of share capital, a past
or present member of the company shall not be liable, in respect of any
share, to any call or contribution exceeding in amount the difference,
if any, between the amount paid on the share, or the reduced amount,-
if any, which is deemed to have been paid thereon, as tha case may be,
and the amount of the share as fixed by the minute of reduction. If,
however, any creditor entitled to object to the reduction of share capital
is not entered on the list of creditors, by reason of his ignorance of the
proceedings for reduction or of their nature and effect with respect to
his debt or claim, and the company is unable to pay his debt or claim,
then :—
(a) every person who was a member of the company at the date
of the registration of the oider for reduction and minute,
shall be liable to contribute for the payment of that debt or
claim an amount not exceeding the amount which he would
have been liable to contribute if the company had commenced
to be \«,ound up on the day immediately before such date ol
registration;- and
(b) if the company is wound up, the Court, on the application
of such creditor and proof of his ignorance as aforesaid,
may accordingly settle a list of persons so liable to contribute,
and make and enforce calls and orders on the contributories
settled on the list, as if they were ordinary contributories in
a winding up. This section, however, does not affect the
rights of contributories among themselves.
Section 105 provides for puiiishraent w'fh imprisonment extending
to one year or with fine or both, if any officer of the company knowingly
conceals the name of any creditor entitled to object to the reduction or
misrepresents the nature or amount of claim or debt or abets such con-
cealment or misrepresentation.

VARIATION OF SHAREHOLDERS' RIGHTS (SECTION 106)

^Vhere the share capital of a company is divided into different
classes of shares, the rights attached to the shares of any class may be
varied with the consent in writing of the holders of not less than three-
fourths of the issued shares of that class. This can be done by circulat-
ing the resolution among all the shareholders of that class and obtainino-
the j ^ n s e n t in writing of the hcildeis of at least three-fourtlis of the
issued shaies The consent can also he obtained ' a t a meeting' of the
heJders of shares of that class by getting the consent bv three-fomfhe
 COMPANY LAW 519
majority. The variation by either procedure is possible only i£ provision
for such variation is contained in the memorandum or articles o£ the
company, or even without such provision, provided the variation is not
prohibited by the terms of issue of the shares of that class.
Section 107 empowers dissentient shareholders to apply to the Court •
for the cancellation of the variation. Therefore, if the holders of 10
per cent of the issued shares of that class who had not assented to the
variation apply to the Court withm 21 days of the date of the consent
or the passing of the resolution, the Court may, after hearing the interest-
ed partifes, either confirm or cancel variation." T h e company must,
within 15 days of the service of the Court's order, forward a copy of the
order to the Registrar.

CONVERSION OF SHARES INTO STOCK '

Fully paid-up shares may, if authorised by the articles, be turned
into stocks by the company in general meeting, and a noticS be filed
within one mentis of the conversion. Default •would mean a fine u p to
Rs. 50 per day during defaXilt, The register of members and the list ijjust
show the amount of stock held by each mejmber instead of the number of
shares held (Section 96), T h e shares must be issued first ahd fully paid
up and then converted into stock. No original issue of stock is allowed.
I t should be noted that stock is simply a set of shares put together, and
is transferable in sums of any amount, -while a share is transferable as a
whole,

ARTICLES OF ASSOCIATION
A public company limited by shares may register articles of associa-
tion signed by the subscribers to the memorandum, and it may adopt any
or all regulations contained in Table A of First Schedule, If articles are
not registered. Table A applies. An unlimited company, or a company
limited by guarantee, or a private company limited by shares, must re-
gister articles, though it may adopt any of the regulations of Table A
(Sections 26, 28V T h e articles must be printed, divided into paragraphs,
with consecutive numbers, stamped with requisite stamps and filed with
the memorandum (Section 30). Articles of association are the regula-
tions or bye-laws which govern the internal organisation and conduct of
the company. They are subordinate to and controlled by the memoran-
dum. The general functions of articles were clearly stated in Ashbury
•Carriage Co. v, Riche°* where Lord Cairns said that the articles "play a
• part subsidiary to the memorandum, of association. They accept the memo-
randum of association as the charter of incorporation of the company and
so accepting it the articles proceed to define the duties, the rights and
the powers of the governing body as between themselves and die com-
•pany at large, and the mode and form in Which the business of the com-

27. Hind'istan Commercial Bank Ltd v. Hindustan General Electri-

cal Corp. Ltd. I960 Cal. 637.
28." (1875) L.R. 6 H.L. 653
520 MERCANTILE LAW

panv IS to be carried on, and the mode and form in •ivhicli changes in
the miernal regulations of the company may from time to time be made
Tlic memorandum la^s down the scope or powers of the company, and
the articles go\ern the way in which the objects of tlie company are to
be cairied out and can be framed and altered b\ tlie members But in
flaming or altering tJie articles care must be taken to see that its regii-
Ijtions do nor exceed the powers of the company gi\en by the memoran-
dum nor are iherc any provisions contrary to the statute For, neither
the articles themsehes nor the po%ver of altering them can alter the cons-
titution of the company as defined by the memorandum nor gi\e \iliditv
to an) provision which is inconsistent with the Companies Act Lor ex-
ample taking powers in articles to appoint managing agents for more
than 15 yeais, or without the written consent of the Central Govern-
ment, or to buv its own shares is \oid Section 9 of the Act expresslv
provides that the provisions of the Act w'lll o^eiiide nn\ihing contiarv
to It contained in the memorandum, articles, agieement, resolutions whe-
ther registered or executed, and wliether before oi on or after April 1,
1956 and that any pro\ision repugnant to the \ct will become-or be
\oid
I

ALTERATION OF ARTICLES
The right to alter its articles at any time is inheient in e\ery re-
gistered company Section 31 pro\idcs that subject to tlie pioMsions of
the Act and to the conditions contained in its niemoraiiduni a com])aiiv
mav, b) sj)ecial resolution, alter oi add to us .ntides This right is so
impoitant that a company \ cannot in any mannei d c p i n e itself of the
power to alter iis articles^ The alteration must howcvci, be made bona
fide and in the best interests of the company If the alteiation is unfaii
or inequitable bet\\cen the members of the company, it will not l)c al-
lowed Tor example, an alteration will not be pcimittcd if it consti'u-
tes Tn oppression oi fiaiul on the minoiit), oi incieascs the Inbilii) of
the membcis, oi is made for committing bieach of contiacts No alteia-
tion in the articles can be made so as to convert a public company
into a private company without the approval of tlie Cciuial Government

EFFECT OF MEMORANDUM AND ARTICLES

Tlic memoiandum and articles, when registered, bind the company
anil Its members as if they had been signed by the company and each
member and contained covenants by the company and each member
to observe and be bound by all provisiohs thereof (Section "56) The
meml)crs are thus bound to the company and the company to the mem-
bers as meinbeis. In Bradford Ranking Co. \ Briggs,'" the articles pro-
•vided that the company shall have a first and paiamount hen unon each
share for debts due to the coni])an) by the sharpliolders One of (he share
holders deposited Ins shares with a bank <o sccuie an overdiaft and ihe
bank gave notice of the deposit to the company It v\as held that shares
deposited vvuh the bank vsere bound by the auiclcs, and the lien ihar

29 Andrews v Gi5, ^retc^ Co (1807) 1 C'l 361

30 (1886) 12 ^ G 29
COMPANY LAW 5-"-!
the company had under them precluded the bank from getting priority
m respect o£ debts incurred by. the shareholder before the notice was
given. But the company in its turn will have no right to priority in res-
pect ot money becoming due to it after it has received notice of the de-
posu."^ T h e new Act (Section 36) clearly says that the n^emorandum and
articles shall Isind die company to its members and the members to the
company as if both had covenanted to observe all the provisions of the
memorandum and articles. T o the rule of member's liability to the com
pany as per the articles, there is an exception as provided by Section
yS that an alteration of either the .articles or memor.indum increasing
the liability of members to contribute to the sliare capital of the com-
pany is not binding upon any member unless he gives his consent in
writing.
As between the members inter se, each member is bound by the ar-
ticles to the other members, but that does not mean that the memo-
randum and articles create an express contract between the members of
the company. Thus, a member of a company has no right to bring a
suit in his own name against any other member or members. It is the
company -alone which can bring a suit against the offender so as to
protect the aggrieved member. It was laid down in Burland v. Earle,'-
that in order to redress a wrong done to the company, or to leceivc
money alleged to be due to the company, the action should prima facie be
brought by the 'company. T h e only exception to this rule is where the
persons against •whom relief is sought control the majority of shares or
voting power and will not allow an action, to be brought in the name
of the company. In that event, the complaining shareholders may sue in
their oivn names, provided they are able to show that the acts complained
of are either fraudulent or ultra vires.
As between outsiders and the company, neither the memorandum nor
the articles give any contractual rights to outsiders against the company
even though.their names be mentioned in these documents in connection
Vv-ith the Arrangements that the company might have contemplated for
carrying on its business.''^ In Elcy's case, the articles provided that Elcy
sliould be solicitor to the company and should not be removed from
office except for misconduct. Eley acted as solicitor to the company for
some time, but later the company- ceased to employ him. He sued tlie
company for damages for breach of contract. It was held that he had
no cause of action because the articles did not constitute any contract
between the company and liimself. T h e party suing the company must
prove a contract with the company outside and independently of the arti-
cles."' Krishna Rao who had been appointed a secretary by the articles, was
later removed from this post, whereupon he filed a suit for declaration
that he was still the secretary under the articles and that the Board

31. jSfatheran Steam Tramway Co. v. Lang (1931) 33 Bom. L.R. tSI
32. (1902) A.C. 83. .
33. Eley v. Positive Life Ins. Co. (I87G) I E\. Div 88; Ramkuma)
V. Sholapm- Spg. & ^Vvg. Co. Ltd. (1934) 36 Bom. L.R. 907.
34. Krishna Rao v. Anianevulu, 19S4 ^Ind i n
522 MERCANTILE LAW

of Directors had no power to remove him. It was held that his ap-
pointment must be regarded as 'de hors' the articles and he. must prove
a contract outside and independently of the articles.
With regard to outsiders the position is that the memorandum and
urticles, when registered in accordance with Section 33 with the Regist-
rar, become public documents, to which all persons have access. Every
person who contemplates entering into a contract with a company has
the meaiis of ascertaining, and consequently is presumed to know, not
only the exact powers of the company, but also the extent to which those
powers have been delegated to the directors, and of any limitations placed
upon the exercise of these powers. Consequently, if he enters into a
contract which is beyond the powers of the company, as defined in the
memorandum, or outside the limits set upon the authority of the direc-
tors, he cannot, as i general rule, acquire any rights under the contract
against the company. The principle is somewhat modified by the further
rule that persons dealing with a company, having satisfied themselves that
the proposed transaction is not in its nature inconsistent with the me-
morandum and articles, are not bound to enquire into the regularity ol
any internal proceedings. In other words, persons contracting with the
company are presumed to have knowledge of the articles, but they are
entitled to assume that the provisions of the articles have been observed.
This limitation is called the Doctrine of "Indoor Management" or the
RULE IN ROYAL BRITISH BANK v. TURQUAND."' In that case,
the directors of a banking company were authorised to borrow on bond
such sums of money as should from time to time, by a resolution of the
company in general meeting, be authorised to be borrowed. They gave
a bond to Turquand without the authority of any such resolution. It
was held that Turquand could sue the company on the bond, as he was
entitled to assume that the necessary resolution had been passed. The
Rule, however, does not protect anv one who has actual or constructive
notice that the' person acting on behalf of the company has no authority
to enter into the transaction in question. The Rule aoes not apply to
cases of forgery, or to transactions which are void or illegal ab initio, nor
does it I ind the company to officers of the company or other persons
who should know whether the regulations in the articles have been ob-
served.

PART 16-C
rr.osPECTUs
Section 2 (36)- defines a prospectus as "any document described or
issued as a prospectus and includes notice, circular, advertisement or other
document inviting oKers irom the public for the subscription or purchase
of any shares in, or debentures of, a body corporate," In order to be a
prospectus, a document must be an invitation to make an offer to at-
least one member of the .public to subscribe for shares or debenturs. Ac-
cording to Section 67, an offer or invitation to any section of the public.
 COMPANY LAW 523
whether selected as members or debenture-holders of the company, or as
clients o£ the person making the invitation, will be deemed to be an in-
vitation to the public. But a public company may or may not make a
public issue; but if it does, it will be required to publish a prospectus.
J o r invitation to the public is an essential' element of a prospectus. A
prospectus issued by or on behalf of a company, or in relation to an
intended company, must be dated, and that date .shall, unless contrary is
proved, be taken' as the date of the publication of the prospectus (Sec-
tion 55). Section 58 prohibits the issue of prospectus which includes a
statement purporting to be made by an expert, unless he has given, and
has not withdrawn, his consent to the issue of the prospectus with tlie
statement in the form and context in which it is included; and a state-
ment that he has given and has not withdrawn such consent appears in
the prospectus. Any contravention of the foregoing provisions regarding
an expert and his statements renders the company and every person who
is knowingly a party to the issue of prospectus, liable to a fine up to
Rs. 5,000 [Section 59 (1)].
Section 60 requires the delivery^of a copy of, the prospectus to, the
Registrar before its publication, duly signed by every director or proposed
director, or by his agent auth»rised in writing, and having endorsed there-
on or attached thereto the following documents: the consent of any
expert; and if the prospectus is issued generally (i.e., to persons other
than existing members or debenture-holders) (i) a copy of every contract,
or a memorandum giving full particulars of a contract not reduced to
writing; and (ii) if in any auditor's and accountant's. report adjustments
of the figures have been made, then a written statement signed by the
persons making the report. Every prospectus on its face must state that
•a copy has been delivered for registration. ' T h e Regisarar will not re-
gister a prospectus unless all the above things are done. Then within 90
days of the filing of the copy with the Registrar, the prospectus should
be issued bv newsoaper advertisement or other\vise. All forms of appli-
cation for shares offered to the public niust be accompanied by prospectus.
Any contravention of this .section renders the company and every other
person pariy to the issue of the prospectus liable to afine up to Rs. 5,000.

CONTENTS OF PROSPECTUS
Section 56 provides that a prospectus must contain the matters speci-
fied in Part 1 of Schedule II and set. out the Reports specified in Part II
of the Schedule, namely :—
1. The main objects of the company, with the names, bccupations
and addresses of the signatories of the memorandum and the numjber of
sliares subscribed by them, as also the number and classes of shares, if
; any, and the nature of interest of the holders in the property and profits
of the company, together with the number of redeemable preference
shares with the date and method of redemption.
2. The numbpr of .shares, if any. fixed by ihe articles as rhc Qualifi-
cation of a director, and the rertmneration of directors for their services.
3. The names, occupations and adilresse-; of directors, nKuiriniiig
524 MERCANTILE LAW
ther with any provisions in the articles or a contract regarding their ap- ;
pointment, remuneration, or compensation for loss o£ ofhcc.
- 4. Subscribed capital of a body corporate which manages tlie com-
pany as managing agents or secretaries and treasurers.
5. The minimum subscription • on %vliich the directors may proceed
to allot shares, the time of the opening of the subscription lists and the
amount payable on application and allotment on each share, and in the
case of a second or iubsequent offer of shares, the amount offered for
subscription on each previo,us allotment made within the two preceding
years, the amount actually allotted, and the amount, if any, paid on the
shares so allotted.
6. The substance of any contract or arrangement giving to any per-
son any option or j^refcrential right to subscribe for any shares in, or
debentures of, a company, together with the amounts payable and the
peiiods during which option is to be exercised by such persons, whose
names, occupations and addresses must also be given.
7. Tlie number, description, 'and amount of shares and debentures
which within the two ^jreceding years have been agreed to be issued or
otherwise than in cash, togedier with the consideration. Also, the pro-
posed date of issue; and wliere some shares of the same ciass are to be
issued at different premiums or some at discount, and others at premium,
the reasons for the difference.
8. T h e names, occupations and addresses of vendors of any pro-
perty acquired by the company and the amount paid or payable in cash,
shares or debentures to the vendor and, where there are more vendois
than one, or the company is a sub-buyer, the amount paid or payable
to each vendor. T h e nature of the title or interests in such propeity,
wall short particulars.
9. T h e name, description, address and occupation of each promoter
or officer of the company to whom any amount as commission for subs-
cribing-or agreeing to .subscribe for any shares or debentures or for im-
denvriting them is paid within the 2 preceding years together with the
amount paid and the rate of underwriting commission. Anv benefit paid
or payable to promoter or officer.
10. The amount or estimated amotint of preliminary expenses and
the persons by whom any of these expenses have been paid or are pay-
able.
11. The dates of, parties to, and general nature of every contract
appointing or fixing tiie remuneration of a managing director, managing
agents, secretaries and treasurers, or manager whenever entered into, and
also every other material contract, and the time and place when such con-
tract be inspected.
12. Full particulars of the nature and extent of the interest if any,
of every director or promoter (i) in the promotion of the company, or
(ii) in any property acquire.'l by the company within two years of the
issue of the prospectus. '
LS. The right of voting at meetings of the company conferred by,
and the rights in respect of capital anji dividends attached to, the seve-
ral classes of shares respectively, together with restrictions, if any, im-
posed by the.articles on members, regarding attendance, voting or
speaking at meetings, on right of transfer of shares, as 'well as, on the
t]irrrtnv<i in resDCCt of their powers of management.
COMPANY LAW 5?5
14. If the company has been carrying on business, the length of
time of such business, and if it proposes to acquire a business, the length
of time such business has been carried on.
15. If any reser\es of nrofit of the company oi any of its subsi-
diaries have been capitalised, particulars of such capitalisation, and par-
ticulars of surplus arising from any levaluafion af the assets of the com-
pany or any of its subsidiaries during the two years preceding the date
of the piospectus and the manner in which such surplus has been dealt
with.
16. The names and addresses of the auditors of the company and
the report of the auditors in case the company had been in business re-
garding profits and losses and assets and liabilities together with the
rate of dividends paid for eadi of the five financial years immediately
preceding the issue of the prospectus, giving particulars of each class
of sliares on which such dividends have been paid and particulars of the
cases in which no dividends have been paid in respect o£ ^ny class of
shares for any of those years.
17. The report must deal with the profits and losses o£ the company
for each year of the five financial years immediately preceding the issue
of the prospectus and with the assets and liabilities at the last date to
•^vhich the accoiuits of the company were made up. If the company
has subsidiaries, itie report shall deal with tlie above separately in case
of each subsidiary.
18. If the proceeds, or any part of the proceeds, of the issue of
the shares or debentures are or is to be applied directly or indirectly,
(i) in the purcliase of any business, or (ii) in the purchase of an interest
in any business, which \n[l entitle the company to an interest in the
capital or proHts and losses or both hi such business exceeding 50 ,per
cent thereof, the report shall state the profits or losses of the business
lor each of the five financial years immediately preceding the issue, of
the prospectus.
19. A statement that a copy of the prospectus has been filed with
the Registrar, together with the consent of tlie expert to file the pros-
pectus, as well as a copy of "every contract appointing or fixing the re-
muneration of a managing director, managing agent, secretaries and
treasurers, or manager. Also a statement that the consent of the Cen-
tral Government has been obtained as required under the Control of Capi-
tal Issue Act, 1947.
Reportj from experts must not be included in a prospectus ^unless
such experts are unconnected with the formation or management of the
company and unless they gave the consent. There must be reasonable
ground for believing that the professed expert who made the statement,
report or valuation was competent to make. • He will be liable for
wrong statement, report or valuation made by him and contaiiied in
the prospectus.
There must be stated at a prominent- place in every prospectus
issued by a company and also in every application form that it is an
offence punishable with imprisonment up to 5 ^e?rs to make an applica-
tion for shares in a fictitious name, or other\vise induce the company to
allot or register any transfer of any shares to him 'or any other per-
son in a fictitious name.
526 MERCANTILE LAW
In addition to :hese compulsory particulars, any oUier information,
may be, and usually is, volunteered. This information may relate to
the terms of the issue of shares, application to deal in the shares of the
company on the Stock Exchange. The intending purchaser of shares
is entitled to all true disclosures in the prospectus. Everything stated
therein must be correct and cvcrytiung material must not be i;cpt back.
Mis-statements or non-disclosures are both fatal to the contract, for a
person who jjuys shares on the faith of a prospectus containing untrue
statements or failing to disclose what ought to have been disclosed, may
rescind die contract within a reasonable time and before die winding
up of the company. The effect of such rescision would be tliat as-
against the company the person would give UD the shares and get back
his money with interest. In addition, there is a right of compensation
from any director, promoter and any other person who authorised the
issue of the prospectus.
The defences of a director or promoter are that—
(1) he had withdrawn liis consent to become a director before
tlie issut of the prosnectus, and it was issued without h'S
authority or consent;
(2) the issue was made without his knowledge or consent;
(3) his consent was ^vithdrawn after the issue of the prospectus
and before allotment, and public notice' was given;
(4) he had reasonable ground to believe that the statements were
true and he believed them to be true; or
(5) the statement "was a correct and fair summary or conv of an
expert's report, or a statement made by an offic-ial or in an
official document.
Apart from their civil liability to allottees, directors and other Jjer-
sons are criminally liable for untrue statements. Section 63 provides that
where a prospectus contains an untrue statement, every person respon-
sible for its issue is liable to imprisonment up to 2 years, or fine up to-
Rs. 5,000, or both, unless he proves that the statement was immaterial
or that he believed it to be true and had reasonable' ground for n'oing
so. The expert is exempt from criminal liability.

STATEMENT IN LIEU OF PROSPECTUS

A public company having privately arranged for the capital sub-
scription may not issue a. prospectus; but in that event a STATEMENT
IN LIEU OF PROSPECTUS must be filed with the Registrar 3 days be-
fore any allotment of any shares or debentures can be made. It should
be signed by every director or proposed director and should contain
similar particulars as are required in the case of a prospectus, and should
fulfil similar conditions. Contravention of this provision will render the
company and every director liable to a fine up to Rs. 1,000.
COMPANY LAW 527
PARI 16-D
MEMBERSHIP
MEMBERS
The "members" o£ a registered company are the corporator or persons
who for the time being constitute the company as corporate entity. Sec-
tion 41 defines the term "member" by indicating the modes in which a
person may acquire that character. The effect o£ that section is that a
person may become a member, either (1) by subscribing the memforan-
dum, or (2) by agreeing in wntmg to become a member, and ha^mg
his name entered in the company's legister o£ membeis.
B) subscribing the memorandum.—A subscriber to the memoran-
dum, who mvist take di\ectly tiom the company the agreed number of
shares, becomes a membei the moment the registration of tlie company
takes place, without being placed on the legister of members. Allotment
of a signatory's shares, is unneces^ary, a» he is bound by virtue of his SUIJ-
scriptian to take and pay for them. He cannot refuse to take shares
even on the ground of misrepresentation oi on the ground that his
name did not appear on the register of members. By section 266, a
person who, being named in the articles or prospectus as a director oi
proposed director, signs ^ and files an undertaking to take his qualifica-
tion shared is, as regards those shares, in the same position as if he had
subscribed the memorandum for them.
Agreement and Registration.—Apart from the subscribers of the me-
morandum, "every odier person who agrees in writing to become a mem-
ber, and •(vhose name is entered in its register of members, shall be a
member of the company." Registration of the name of a person as a
member of a company may result from one or other of the following :—
(a.) By application and allotment.—A person who applies for a
certain numlser o£ shares becomes a member when shares are
allotted to him, a notice of allotment is given, and his name
is entered in tTie register of members. The application for
shares may be absolute or conditional. If it is absolute, an
Sllotment and its notice is sufKcient acceptance. If it is con-
ditional, the allotment must be made according to the terms
o£ the application, otherwise no contract will result. In
Raman Bhai's case, R applied for shares to be allotted to him
on the condition that he was first appointed a branch mana-
ger of the companv. Shares were allotted to R, but he wa?
not appointed the branch manager. Held, he could repudiate
. the contract, and was not liable as contributory on winding
up o£ the companv.
(b) By transfer of shares.—A person can become a member I)v
buying shares from an existing member and bv having the
transfer registeired and getting his name placed on the regis-
ter of members.
(c) Transmission of shares.—A person may become a member bv
registration if he succeeds to the estate of a deceased member
598 MERCANTILE LA^\'

7 lie OfTicial Recencr or Assignee is, likewise, entitled to be

a member in the place of a shaieliolder ulio is .idjiidged .la
iiisohent.
(d) By acquiescence or estoppel.—A peison is deemed to be a
member if he allows his name, apart from any agiecment to
become a member, to be on the register ot members, or other-
wise holds himself out or allows himself to be held out as a
meiiil)cr" In sucli c.ises lie is estopped from denying that he
IS legistered with his consent.

TERMINATION OF iMEMBERSHIP
A ijcison ceases to be a membet when his name is remo\ed from the
le^istei of members for sufficient leason or proper cause Tins m.iv
occur when (1) he transfers all his shares; (2) his shares are forfeited,
I'i) lie makes a ^alid surrender of his shares; (4) his shares are sold by
the company to enforce a lien; (5) he dies; (6) redeemable preference
shares are ledeemed; (7) his contract to take shares is rescinded; (S) lie
becomes insolvent and Official Assignee or Receuer disclaims the shares
or transfers them; (9) share warrants in^ exchange of sliaies aie issued:
(10) ihe sha\es are held by the liquidator who disclaims ihem,

LIABILITY OF MEMBERS
In the absence of an express agreement to the contrary, a share
holder must pay the whole nominal value of his shares in cash. 'Cash'
includes property, goods, services, release of debt or the surrender ot a
debenture, provided it is worth the money due on the shares But a
cheque until honoured is not cash If before the full amount is naid np
the company goes into liquidation, the shareholder becomes liable as con-
tributory to pay tlie balance when called upon to pay (Section 429) If
a person has ceased to be a member within one year prior to the wind
ing un of the company, he is liable to be included in the 'B' list (a list
of past members) and pav on the shares which he held to the extent
of the amount iinpaid thereon, if (i) on the winding up, debts exist
which were incurred while he was a member; and (ii) the members of
the 'A' list (a list of present members) cannot satisfy the contribution
required from them in respect of their sh?res (Section 426). A person
is liable as member even in spite of a ^alid transfer of shares bv him,
if the name of the transferee is not placed on the register of members
in place of transferor's name Tf a person applies for shares in the name
of a fictitious person or a person not in existence or shares aie allotted
in that name he will be liable to be nunished with imnrisonment un to
5 years CSection 68A). T h e liabilitv of members becomes unlimited and
several e^en in the case of a limited companv, if the number of its mem-
bers falls below 7 in the case of a public comnanv and 2 in the case
of a nrivate comoanv and the comnanv continutes to do business for
more than 6 months afier the fall of nuTibei below the afoiesaid figures

REGISTER OF IMEMBERS
S'iciion 150 enjoins upon every comnanv to 'neep a register of iis
COMPANY LAW »5'>9

members at iis registered office. Tfie register must contain tlie name,
address and occupation of eacii member, the amount and number of his
sliares, the date of entry on tlie register, the amount paid on his shares
and the date on which lie ceased to be a member. In case of default
the company and eveiy officer peraiitting such default, are severally liable
10 fine up to Rs. 50 for every day of default. The register is a prima
lacie evidence of all its contents (Section 164). Unless the register of
members is in such form as to constitute in itself an index, evei^ company,
having more than 50 members must keep an index of the names of its -
members, and must within 14 days note in the index any change made
in the register of members. Default results in fine up to Rs. 50 (Sec-
tion 151). A company's register is a public document and is open to
inspection by any person on certain conditions. A member can inspect
it gratis daily for 2 hours during business hours, and other person' on
payment of Re. 1. The register can, however, be closed at any time on
giving 7 days' previous notice by advertisement in a newspaper circulat-
ing in the district in which the registered office of the company is situated,
•provided that the aggregate number of days for which it is closed do
not exceed 45 days in a year and 30 days at a time (Section 154). Con-
travention of -this provision will render the company and every officer
at fault liable to fine uj to Rs. 500 for every cfay during which the re-
gister is so closed.
f •"

RECTIFICATION OF REGISTER
Section 155 gives wide powers to the Court to rectify, on the appli-
cation of any person—member, transferor, transferee, the company—the
register, as well as to determine conflicting rights. The Court would
order rectification of register where, for instance, (a) an applicant's name
was entered improperly in the register and then struck off on a forfeiture
of shares, (b) the applicant was included to buy shares by misrepresenta-
tion, (c) the company neglected or improperly refused to register a trans-
fer, (d) the shares were improperly foifeited or tlie register was altered
improperly, (e) the applicant was registered as shareholder of irregularly
allotted shares, (f) the ajjplication for shares was conditional and the
condition precedent was not fulfilled, (g) the real owner's name was re-
moved by the company acting on a forged transfer, (h) a director, de-
liberately prevented tlie passing of a resolution for transfer, (i) the name
of a member is improperly omitted from the register, or delay is made
entering or removing the .name. Section 467 empowers the Court to
rectify tlie register on the winding up of a company. The Court may
also award damages, if a person suffers any loss by the wrongful removal
of his name from the register. The rectification will date back to the
date on which the mistake or default or delay was made which is being
rectified.'" The notice of rectification must be filed within 14 days of
I the ordei.

NOTICE OF TRUSTS
Section 153, though short, is of very great importance. It lays

36. Panna Lai Sood v. Jagatjii Distilling 1952 Pepsu 2.

 530 MERC \N TILL LAW

ilo^Mi : • Moiicf ol mi) uust, C\JJIUS!I, iinplicil oi coiisiiuciivc, bli.iU be

eiiiL-icil on ilic iLgiiici ol III(.'IIIIJCI;> OI ol itebciiiuio-liolilcis, oi be iccci\-
dble by llic RcgistLii." J lui pio\ibiuu is m.idc lo lelievc llie LOinjj.iii)
lioiii i;ikiiig uny nonce ol eiiini.ible niieicsti m iluioi, ;incl lo jjiecludc
^jeLsoub ibmning iinilci e(]uii.ible lules liom Lonveiting ilie Loni[).ni) iuio
<i luislee for llicni. Vin cs.nnple, 11 a bli.iieliolcler aiei, leaving .i \M11
<ij}poiiiling A Ui e^e<.lltol .iml beijucailiing sliarci to IJ, wlio ii ,a niinoi,
A will hold Llie ^luies loi Ji uniil he jLunib hi!> m.ijoiii). In iiu!> c.ibe
a "iiiiii" is inipoicd on A, and lie ii said lo be a "uiiiiee," wiiile ]i h iuid
10 be a cestui que trust or "benelieiaiy." A's name is eiiieied on ilie re-
gijlci ol ilicnibeis as liolilei ol llie ilures, and accoidingl) lie is llic legal
owiiLi of the sliaies. all di\itleiids aie paid to liini b) the company and
he iS entitled to eseicise iltc rigln ol \oiiiig and other pinileges attach-
nig to ihc holding ol the -Jiaies. Hiil the C([niiable interest in llie shares
belongs to L5. and tlieielore all di\ iclenils, etc., paiil to A must lie held
b) him ill II list loi IS, 01 paid lo linii. Hut the company does not lake
nonce ol this lelaiionship between A and B. A, as legistcied lioklei ot
the siiaics, is personallj liable to the company for calls made on liie
shares; .15 ib subject to no liability whatever lo the compaii). II, there-
fore, the trustee of the shaies niisappiopiiates diMtlcnds oi liie pioceeds
ol s.ile of sliares, the company will not lie iindei .iii) li.ibilny lo the be-
iieiiciai). Even il the company had consinictivc nonce ol the liiist in
lespect ol such sliaies, it woulil not in .my way'make the company liable.
'1 he title elfeci of the provisions of Scciion 153 is that a siiare in.iy be
legisicrcd in the coinp.niy's legisiev in a n.imc other ih.m iliai ol its true
owiiei. 1 his can cn.ible ilie ipeisons wlio aic really In conirol of ihe
fompanv to (once.il iheii posiiion fiom ilie sh.llelloI(lel^ ,in<l [lom ihe
jiiiblic and to ]>iaciise li.nid in legaid lo the nian.igcmenl of the com
pany. l o check such .'i pi.icticc. Section L'17 anil 2-18 lespctiively cm-
powei life Ccnii.il Government to ajipoint an insjicclor to .re]>ort on
the inenibeishij) of ? conip.inv ,iiid, wlieie it ajipcarsjo the ( entral Gov
cinineni ih.ii there is a good rc.ison to investigate ihe owneislni) ol shaic-.
ov debentures'of a coiiip.inv oi a iJody corjiointc wliicli acts or has acted
as the managing agent or secretaries and trcasiireis of .i conip.my, to
tctpiiie iiifoniiaiion for ihni piiriiosc fiom persons interested in such
shares or debentures.
PUBLIC TRUSTEE
The safeguards pro\iiled by .Sectioni 217 and 2IS do not seem to have
checked the pi.uiice of indiictt (ontrol of companies iiy moneyed and
vetted iniere<is iliroiigh nominees. To prcveni the use of voiing righis
attached lo shares held bv tiiisis for ilie adv.iiiccnient of person-
al iniciesis of ilic donors, it was coiisideied iiecess.iiy to regulate the
exercise of such rights in suii.ible cases. To meet this need, tluee new
sections 15,nA, 153B and l.^^C weir adiied in IPfiH The Ceiiii.il Gov-
irnmeni has been emjiowcn-d to a|)polnt a I'liblic Trustee to exercise
voting rights in respect of cases wiiere—
(a) a iiiisi is creaicd by insiiiiment in wiiting:'
(b1 trust moncv invested in sliaics in oi debentures ofca company
amouHH 'O at least Rs. one l.ikh or where it excccik Rs. one
COMPANY LAW 531
lakh and amounts to S.s 5 lakhs oi 25 pei cent of the paid
up capital whichever is less
Wiitie a Public Trustee has been appointed the trustee must inform
die I'ublic Trustee by means of a dcclaiation that he is holding the shares
or debentiuts as a trustee Failure to do so will render him liable to a
fine up to Rs 5,000 and for a continued default for a fuither hne of
Rs 100 per day during default If a trustee makes a false declaiation,
Jic IS liable to be imprisoned for a term extending to 2 years and also
u n h hue After the declaiation by the trustee, he will cease to exercise
voting light and the Public Irustee will become entitlea to vote at all
meetings as a niembei or debentuitholder. He will also be entitled to
lecene papeis, etc, as if he were a membei or a debenturehokler
I h c intention of the new provision is not to interfere with the free
dom of the tiustees to administer ti usts or to dispose of trust funds 1»
IS onl) to check the economic powei of the donois Public interest is to be
the mam consuleiaiion m the exercise ot this power and iuch interest may
not be iiHohcd to anv appieciable extent where the trust has not been
created h\ an mstiumcnt in writing, or the value of the shares or deben-
tures held in trust does not exceed Rs one lakh or 25 per cent of the
paid up capital.

ANNUAL RETURN
Section I J ' I tctjuires that every company, having share capital, must
picpaic and file, uithm 60 days from the day on which each of the
annual general meetings is held, or, if no annual general^meeting is
held fiom the date when the meeting ought to have been held, with the
llegisiiai, a return containing the following paiticulars, as they stood on
tlie da) —(i) the address of tlie legistered ofhce of the company, (u)
the name ot tlie State outside India where any part of the re»;ister of
mcmbeis may be kept, (in) a summary, distinguishing wherever possible
lutween shaies issued foi cash bonus shares and shares other than in cash
and speciallv m lespect of each class of shaies the amount of nominal
tapit.d and jiumber ot shares into which it is divided, the number of
sliaics lakcn fiom the commencement ot the company up to the date of
last retiiin, the amount called up, the total amount of calls received up-
to date, and calls remaining unpaid, total amount of commissions paid,
discount allowed on any shares oi debentures, shares forfeited, share-war-
laiits issued and siirrendcied, indebtedness of the company. A list of
all nicmbc'is, and those who have ceased to be members sine? the date of
ihe last iriuin m since the incorporation if it is the fiist list, must be
(dod I Ins list muse contain full particulars of the past and piesent mem-
bcri<i togetiiei with the numbei of shaies held i)y each eMsting member
\\x the time of the leturn and details of transfeis, if any. But, if any of
the two pievious letuins have given the full paiticulais, then very
slioit retuin is to be filed

37 See St ite of Bombay v Bhandhan Ram, 1961 SC 186 The an

null icturn must lie filed whethei or not the annutl genera! mppuno- ,.
held
532 MERCANTILE LAW

PART 16-E
SHARES
section 2(16) defines ii sluiie as "a share in the shaie capital
of a comparvy, and incliuies stock except wliere a distinction Ijclwcen
stock and shares is cxpre%ed or implied." Farwell J. has dehned a
share as "the interest o[ a sliarcliolder in the company measuted
by a sum of money, [i.e., • the nominal amount], for the purpose of
liability in the first place, and of interest in the second, but also
clonsisting -ol a series ot mutual covenants eiuered into by all t!)o
shareholders inter se." Shares represent equal portions into wJiidi the
capital is divided, each shareholder being entitled to a portion ol the com-
pany's profits corresponding to the number of shares he holds. By Sec-
lion 82, the shares or other interest of any. member in the company is
movable property, translerablc in the manner provided by the arLicles
of the company; and accordiJig to the Sale o£ Goods .\ct, 1930, shares are
goods. Siiares are of various classes, and the most common varieties are :
Preference, Equity, Deferred or Fouritlers, A private company may issue
all or any of these classes. But a public company can now issue only two
kinds of shares; Preference and Equity (Section 86).

PREFERENCE SHARES
By virtue of Section 85, preference share is that part of the share
capital of the company which fulfils both the following requirements,
namely, that it carries preferential right in respect of dividenils and also
tliat it carries preferential right in regard to repayment of capital. Pre-
lerencc ihares participating in .stn"p!iis profits, or participating in surplus
assets on a winding up are also allowed. With regard to the payment
of dividends a j>refciencc share may be cumulative or non-cumulative.
T h e non-cumufative.or simple preference gives light to a fixed percentage
as dividend out of the profits of each year. In case -no profits are avail-
able in a year the holders get nothing, nor can they claim unpaid divi-
dend in subse(iuent years. The cumulative preference, however, gives a
right lo demand the impaid dividend in any year, during the subsequent
year or years wlien tlic profits are ample. .Section 80 permits a company
to issue redeemable preference shares. These shares can be redeemad
cnlv if they are fully paid up, and out of the profits which would be
available for dividend or out of the proceeds of the issue of new shares
made witli tiic object of redemption. Those siiarcs cannot be redeemed
out of the sale ])roceeds of any property of the company. For the pur-
jjose of redemption out of profits, Oqjital Redemption Reserve Fund
must be created by transferring to it any amount out of profits equal
to the nominal value of the .shares to be redeemed.

EQUITY SHARES
By Section 85 (2) equity i shares mean all siiarcs which afe not pre-
ference sliares. Equity shares leceive dividends 6ut oi profits as determin-
ed bv ll'ic directors and declared by the members in the annual general
meeting, after (hie allowance for dejireciation and reserve, etc.. has been
made. It there are preference shares, the dividend is paid after the pay-
COArPANY LAW 53?

mem of dividends on pic[evence siiaies as per lights given by the artielci

of ilic coniij:in\. and in ilic case of a [jiivate comp.inv, before the pay-
niLiu of ili\idcn(K on dcfeiied ihaics, if any. To jjui a clieck on the
jssuc of sharC)-wiih bmall dcnoniinalion canyinj; dispropoilionatc voling
rights. Section 87 ])rovides tliat every 'nember of a publfc limited com
])any, -holding cipiity shaie capita], shal) liavc votes in proportion to Iiis
.•"lure of tiic paid-up c<|iiiiy capital of ilie company. Preference share-
holdcis will, ordinarily, vote only on ni.itters relating to preference capi-
tal. .Section 88 expressly prohibits u public company from issuing any
sliarci (not Ijcing preference sliarc) which carry voting riglits, or rights
in the company as to dividcniii coP''"'' or othcruise which arc dispropor-
tionate to ilic rights attaching-to the holders of other sliarcs (not Deing
prefeience sliarcs). Section 89 provides that all existing companies hav-
ing such disproportionate rights must remove these rights befoic April
1, 1957.

ALLOTMENT OF SHARES
An allotment of shares is an appropriation by tlie Board of Directors
of a certain number of shares in response to an application. It is in
elTect an acceptance by tlie company of the offers to take shares. The
Act requires certain conditions to be fulfilled before a company can pro-
ceed to allot shares. Firstly, a public company must file a prospectus, or
statement in lieu of prospectus, before making the- first allotment.
Secondly, it must have received in cash the amount payable on applica-
tion which shall not be less than 5 per cent of the nominal amount of
the share, and deposited the amount so received in a Scheduled Bank
before making any allotment. Thirdly, the "minimum subscription" as
provided in the prospectus must Iiave been subscribed or applied for be-
ore the fint allotment can be made (Section 69, 70). Section 72 nov/ pio-
vides that no allotment shall be made of shares applied for in pursuance
of the prospectus until the beginning of the 5th day after that on which
the prospectus is issued (or such later time as specified in the prospec-
tus itself). Similarly, an applicant cannot withdraw his application until
after the expiration of that 5th day. These are called opening and clos-
ing days of the subscription lists. It is also provided that the day on
wiiifh the subscription lists are closed must be announced and that the
allotment must be made and notice of allotment given not later than
the 10th day after such closing day.

If the prospectus says that application will be made to the Stock

Exchange for permission for those shares to be deal', with on the Siock
Exchange, then the permission must be applied for before the lOth day
after the issue of the prospectus, failing which the allotment made would
be void. It is further provided that if the application is refused by the
Stock Exchange before the expiry of 4 weeks from the date, of the clos-
ing of the subscription list or such longer period not exceeding 7 weeks
as may, within the said 4 weeks, be notified to the applicant, the allot-
ment would be void. In either of these events, i.e., where the applica-
tion has not been made or where the permission has not beci. granted,
the company has to repay, forthwith, the moneys without interest to the
534 MERCANTILE L'UV

applicants, and if any such money is not repaid within 8 days after the
company becomes liable to repay, the directors of the company shall be
jointly and severally liable to repay the money with interest at the rate
o£ 5 pir cent per annum from the expiiy of the 8th day (Section 73).

MINIMUM SUBSCRIPTION
Minimtim subscription is the minimum amount which, in the opinion
of the "directors or of the signatories of the memorandum arrived at after
due inquiry, must be raised by the issue of shares to provide in respect of
eacli of the following heads and distinguishing the amount required un-
der each head: (i) the purchase price of any property bought or to be
bought is to be defrayed in whole or in part of the proceeds of the issue;
(ii) preliminary expenses including any commission, underwriting or other-
wise for subscription of shares, payable by the company, (iii) the repayment
of sums bof-rov,^ed to provide for the foregoing; (iv) the working capital,
and (v) any other expenditure, stating the nature and purpose thereof and
.the estimated amount in each case. The company must also specify the
amounts to be provided in respect of tlie matters aforesaid otherwise than
out of the proceeds of the issue and the sources out of which those
amounts are to be provided [Section 69 (1) and Sch. II (5)]. Section 69
(2) further provides that shares allotted for consideration other than caSh
are not to be included in the minimum subscription.

CONSEQUENCES OF NON FULFILMENT OF T H E ABOVE

CONDITIONS
If the company for want of minimum subscription, or for the non-
fulfilment of any of the aforesaid conditions, has been unable to allot
any shares within 120 days after the first issue of the prospectus, it must
forthwith refund without inj;erest all moneys received from the applicants.
If the money is not repaid within 130 'days of the issue of the piospec-
tus, the directors of the company shall be jointly and severally liable to
repay that money with interest at the rate of 6 per cent per annum from
the expiration of the 130th day. But a director who can prove that the
default in the repayment was not due to any misconduct or jiegligence
on his part may escape liability [Section 69 (5)]. '

IK.REGULAR ALLOTMENT
If a company, without complying with any of the above conditions
makes an allotment, the applicant may, if h^ so desires, avoid the allot-'
ment within 2 months after the statutory meeting, but not later than
that. If a company is not required to hold a statutory meeting or if the
allotment is made after such meeting, then he must avoid the transaction
within 2 months oC the allotment, ;He can claim the refund bf the
money within the period even if the company is being wound up. Notice
of avoidance followed by prompt legal proceedings aftei the two mondis'
would be sufficient. Furthermore, the directors are liable to compensate
the company or the allottee for any loss, damages and costs suffered by
either through such irregular allotment, provided that the proceedings
COMPANY LAW 535
to recover such loss, damag". or costs are commenced beEore the expiia-
t)on of 2 )eari £iom the date of the aljotment (Section 71)
Penahy for fiaudulemly inducing a person to invest monc).—
By \irtiic of .Section ()8, any p e r ^ n who fraudulently, either by wrong
st,\ienicnt or dishonest concealment of material f.icls,' induces oi attempts
to induce .nioiher person to enter into, or to offer to enter into—
(a) an agieement to buy or dispose of shares oi debentuies or
to underwiite them; or
(1)) an agi cement tiie put pose of wliich is to secuie a profit to
any of the parties fiom the yield of shares or debentures;
shall be punisliable with imprisonment for a terra up to 5 years, or with
Imc lip to Rs. 10,000, or with botli.
Issue and allotment of shares in fictitious name prohibited—The new
Section RSA seeks to eradicate the practice of allotting shares in fictitious
name or to non-existing persons. The section makes it an offence punisli-
able with imprisonment up to 5 years to make an application for shares
in a fictitious name or otherwise induce a company to allot or register
a transfer of any sliares to him or any other in a fictitious name. The
penal pio\ision must be inserted at a prominent place in every prospectus
issued by a company and in e\ ery application form.
Return of Allotment.—A return of allotment, even if it is a single
share, must be filed with the Registrar within 30 days tliereafter, giving
complete details of the number and nominal amount of the shares, and
the names, addresses and occupations of tlje allottees, amount paid or due
on each share, copies of written contracts in respect of shares allotted
for consideration other than cash, by services rendered to the ''company
or business or property sold to it, number and nominal amount of shares
so allotted, extent to which paid and the consideration. If in the return
of allotment it is shown that shares have been allotted for cash when cash
has not been actually received in respect of such allotment (and mere
book adjustments have been made), every officer and everv oromoter of
the company who is guilty of this shall be punishable with fine up to
Rs 5,000 No return of allotment need be filed in respect of shares re-
issued after forfeitnre.'" Where a contract in respect of shares allotted
for consideration other than cash, is not reduced to writing, the companv
must, within 30 days after the allotment, file with the Registrar the pres-
cribed particulars of the contract duly stamped with the requisite stamp
duty Default to file the return of allotment as required by Sec-
tion 75 will render every officer of the company liable to a fine up to
Rs 500 for everv dav the default continues.
Commission.-A company may pay out of capital commission, includ-
ing underwriting commission, to any person who subscribes or agrees to
subscribe, procedures or agrees to procure, subscription for any shares,
or debentures of a company if the articles authorise such pay
ment. The rate of commission must not exceed 5 per cent of the price

38. In re Calcutta Stock Exchange Ass. Ltd., 1957 Cal. 438.

336 MERCANTILE LAW

at which the shares are issued or the rate authorised by, the articles
whichever is less, and in the case of debentures, 2|- per cent of the price
of th(^ debentures or the rate authorised by the articles whichever is less.
The rate must be disclosed in the piospectiis; and if no prospectus is
issued, in tlie statement in lieu of prospectus. The number of shares
or debentures which persons have agreed for a commission to sub-
scribe .must also be disclosed [Section 76(1)]. A copy of tlic contract for/
payment of commission must be delivered to the Registrar along with
the prospectus or the statement in lieu of prospectus.
The Act'prohibits the payment of any commission, discount or
allowance under any other circumstances. But if a company has hitlier-
to paid any "brokerage" it may continue to do so. The Act also prohibits
the payment of underwriting commission on shares or debentures which
have not been offered to the public but directly allotted or privately
subscribed. The effect of this new provision is that underwriting com-
mission cannot be paid to any person in respect of shares or debentures
actually subscribed for at the time ofjfiling the company's prospectus or
statement in lieu of prospectus.

Underwriting commission and brokerage should- be distinguished, as

brokerage is not "commission" under Section 76(3). The broker under-
takes to "place" shares in consideration of an agreed brokerage, and if
he fails to dispgse of certain shares he i s ' n o t personally liable to take
them, nor is he entitled to any brokerage in respect of shares not placed.
The underwriter is bound to itake over the shares which the public has
not taken and is entitled to the whole of the agreed commission;- he is aii
insurer against under-subscription.
ls.we of Shares at Premium.—Section 78 empowers a company to
issue shares at a premium subject tp- certain restrictions. Where a com-
pany issues shares at a premium, a sum representing the total amount or
value of the premiums on sudi shares must be transferred to an account
known as the. "Share Premium Account." The amount so transferred
can be applied by the company only for :—
(a) paying up shares" of the company to be issued to members
of the company as fully paid bonus shares; or
(b) writing off the preliminary expenses of the company; or
(c) writing- off the expenses or commission paid or discount al-
lowed on any issue ,o£ shares or debentures; or
(d) in providing for the premium payable on the redemption of
any redeemable preference shares or of any debentures of
the company.
Issue of Shares at a Discount.-Section 79 permits a company to issue
shares at a discouni only on the following conditions : (i) the issue must
be of a class of shares already issued; (ii) it must be authorised by a reso-
lution passed in general meeting and sanctioned by the Court; (iii) the
maximum late of discount must not exceed iO per cent or such higher
rate as the Central Government may permit in any special case; (iv) not
COMPANY LA^IV 537

less than one ye<'r lias at the date of issue elapsed since the date of which
the company was entitled to commence business: and (v) the shaies must
be issued within 2 months of the sanciion by the Court or within such
extended time as the Court may allow. E\ery prospectus at the date of
its issue must mention particulars of the discount allowed on the issue
of the shaies or the exact amount of the discount as has not been writ-
ten off. Fine for default is Rs. 50. '

RESTRICTIONS ON SHARE ISSUE (SECTION 77)

No company can buy its own shares, unless the consequent reduction
of share capita! is effected and sanctioned by the Court m pursuance of
Sections 100 to 104 or of Section 402. Furthermore, a public company
01 its subsidiaiy must not finance die purchase by any pcison of its own
shares or those of its holding companj'. A company may, however, re-
deem its redeemable preference shares. A banking company may lend
money in the ordinary course of its business. A nrovision may be made
by any company to enable its employees, including a salaried director,
to buy fully paid shares. It may also lend an amount to an employee
(excluding directors, managing agent, secretaries and treasurers or mana-
ger) equal to his six months' salary or wages. Confaventioii renders the
company and every officer at fault to a fine up to Rs. 1,000.

SHARE CERTIFICATE
By Section 113, where shares have been allotted to an applicant,
or where a valid transfer of shares had been lodged, the company (un-
less the conditions of issue of the shares otherwise provide) must have
ready for deliver/, within 3 montlis after allotment and within 2 months
after application for registration of transfer, a certificate or certificates
evidencing the title of the allottee or transferee to the shares allotted or
transferred. Default makes the company and every officer in default
liable to a jine up to Rs. 500 for every day of default. To be a valid
certificate, it must have the common seal of the company affixed to it,
and must also be stamped. One or more directors must sign it. It
should state die name, address and occupation of the holder, number of
shares and their distinctive numbers and amounts paid (Section 83). It
is a prima facie evidence of the title of the member to such shares. The
amended Section 84 empowers a company to issue a duplicate of a certi-
ficaf if such certificate is proved to have been lost or destroyed, or
having been defaced or mutilated or torn, is surrendered to the com-
pany. If a company with intent to defraud renews a certificate or issues
a duplicate thereof, the company shall be punishable with fine up to Rs.
10,000 and every officer of the company who is in default with imprison-
ment up to six months or fine up to Rs. 10,000 or with both.

SHARE WARRANT
By Section 114, a public (not private) company limited by shares,
if authorised by its artlicles, may. in respect of fully paid shares, issue
under its common .seal, and with the previous approval of the Central
Government, a share warrant stating that the bearer thereof is entitled to
538 MERCANTILE LAW

sli.iic ilieiciii spctified. It is a negoiiable instuimciu and mere deli\ery

ir.insfuis 0\e owuoisliii) ol the iliaic:, '1 lie di^idciuK iiia> l)c paid I)y
coupons or oiliciwise lo the Jioldei of tlie ivaiianl. Section 115 pro-
\idcb that on the issue of a sliare warrant, the conijiany must strike out
of its ic^istei of members the name of the mcnil)cr and must enter the
iollowin}^ paiiiculais (i) the fact of the issue of the vvartant; (ii) a state-
ment of the bhaies included in the -wairaui, distinguishing each siiare by
its number; and (iii) the date of the issue of the wan ant. If the articles
so allov; the hoklei of tlic shaie wanant may suncndcr it for cancella-
tion, whereupon his name will be enteied on the register, and a share
certificate will be issued in his name. The holder of a wanant cannot
ciualily himself as a diiector. If the ai tides so pro\ ide, the bearer of a
share warrant may be deemed to be a member of the company.

PERSONATION OF SHAREHOLDER (SECTION 116)

If any person deceitfully personates an owner of any <harc or in-
terest in a company, or of any share wairant or coupon issued in pur-
suance of the Act, and thereby obtains or attempts to obtain any such
share or interest or any such share warrant or coupon, or receives or
attempts to receive! any money due to such owner, he shall be pmiish-
able witli imprisonment for a term extending to 3 )ears and shall also
be liable to fine.

TRAN.SFER OF SHARES
One of the most impor'ant characteristics of shares is theii tiansfcr-
abiliiy. Section 82 empowers every shareholder to transfer his shares in
the manner prescribed by the articles of the company. The aiiicles of
a public comjjany may and those of a private company must restrict
rights to transfer. The articles may give power to the directors to re-
fuse transfer without assigninj^ any reasons as long as the icfusal is
bona fide.™ The refusal must be by a resolution of the Board of Direc-
tors In case of refusal, it is now provided that the company must
send a notice to the transferee and the transferor within 2 months from
the date on which the instrument of transfer was delivered to the com-
pany. Default renders the company and e\ery officer at fault liable to
p fine up to Rs. 50 for every day of default. Any person dissatisfied
with the refusal may apply to the Court for rectification of the register
of members under Section 155, and also appeal to the Central Go\ein-
ment, which .shall, after hearing all the parties, order the icgistration
of the transfei or reject the appeal according to the circumstances of the
case. The Central Government may compel the company to disclose
the reasons for refusal to register a transfer (Section 111)

Where the articles do not restrict the right to transfer, a shareholder

may transfer his shaies to any one sui juris, even to a paupei, an insol-
vent, or even to escape liability on them, and at the last moment before
winding up, provided that the transfer is real and bona fide, without re-

39. B. Choulkhani v. Western India Theatres Ltd. 1957 Cal. 709;

See also Jagdish Mills Ltd., 1955 Bom. 79.
co^rPA\v LA\\' 539
taining by the transferor any interest in the shares.'" The mode o£ tians-
fer is "provided in Sections 108 to 110 and 114 (3) ol the Act. Y,y \irme
of .Section 114 (3), when a share warrant to bearer lias been isbued in
respect of fully paid .shares, the ownersliip of the shares is trunsfeired by
simple delivery of the share wairant, which is a negoliable instrument.
On the other hand, in the case of shares in respect of which-a share ceiti-
ficate, made out in the name of a shareholder whose name is entered
on the company's register of members, has been issued, a transfer of
shares is effected by a written instrument of transfer executetl by the
transferor and the transferee and duly stamped, specifying tiie name, ad-
dress and occupation of transferee, "wiiich is delivered to the company
for registration along with the share certificate, and if no such certificate
is in existence along with the letter of allotment of the shares.
By virtue of Section 108, as amended by the addition of Sujj-Sections
(lA), (IB) and (IC) in 1965 and later amended by the Companies (Se-
cond Amendment) Act, 1966, eveiy instrument of transfer shall be in the
prescribed form and shall be presented to the prescribed authority (Re-
gistrar) before it is signed by or on belialf of the transferor and before
any entry is made therein, and the prescribed authority shall stamp or
otherwise enoorse thereon the date on which it is so presented. There,
after the transferor and the transferee shall execute this instrument of
transfer and complete ii in all other respects, and then deliver to the com-
~ pany for registration :—
(i) in the case of shares dealt in or quoted on a recogni'^ed stock,
exchange at any time before the date on which the register
of members is closed in accordance with law for the first time
after the date of such presentation or witliin two months
from the date of such presentation, whichever is later;
(ii) in any ether case, within two months fiom the date of such
presentation.
An instrument which is not in confoimity with these provisions shall
not be accepted by the company.
Unless the directors have power to refuse to register, the transfer
must be registered at the earliest moment of lime,and the name of the
transferee suljstituied on the register of members for that of the trans-
feror. The application for the registration of transfer may by made either
by the transferor or the transferee. Where it is made by the transferor and
relates to partly paid shares, the company must give notice of applica-
tion by prepaid registered post to the transferee. If the transferee does
not object to the transfer within 2 weeks from the receipt of the notice,
then his name should be entered on' the register of members. With re-
gard to an application by the transferee or by the transferor relating to
fully paid shares, no notice is required. It should be noted that the
transfer is complete and the transferee becomes liable to Day as member
calls on partly paid shares only when the instrument • of transfer is re-

40, Linder's Case (1910) 1 Cli, S12.

540 MERC\XTILE I.\W

gistered and liii name eniered on ilie legister of members and not befoie."
J5iit .I'- i)e(vcon tlie tiansfeioi and the tiansfciec mimcdi.iielv aftci ilie
tiaiislei IS made, ihc iransfcice bctonics ibe sole beneficial ownci ol the
transfeiicd 'Iiaies A lelation of trustee and «.estiii que trust is thereby
established •))ctwcen them. The tran^ferot is imdei oblis^ation to comply
wiili all icasonaijlc directions lof the tiansferee. The transfeiec sliould,
howe^er, take active and prompt steps to get his name registeied as a
niembei on the legister of the company."

CERTIFICATION OF TRANSFER
When a shaieholder sells part only of the sliaies mentioned in the
share ceiiificaic, he does not deliver tiie share certificate to the buyer,
but produces it along with the transfer instiument to an officer of the
company, who "Certifies" ilie transfer by writing in its niaigin tlie
woids "Ceitificate lodged" and mentions the number of siiares for which
it is lodged. This is called "Certification" and is taken by the buyer as
tantamount to deliveiy to himself of the share certificate; and he can
make a good title to the shares in the "Certified transfer." In due course
the company will register the tiansferee as the holder of shares sold to
him, cancel the oid certificate and prepare two certificates: one for the
shaies sold which will be given to the transferee and the othei foi the
unsold shares which will be handed over to the transferor,

FORGED TRANSFER
A forged transfer even if registered by the company, is void and
the alleged transferee gets no title to the shares. The company, how-
ever, does not incur any liability by putting the transferee's name on the
register, unless it issues a certificate and a person suffers damage on the
faith of it. The company can claim damages from the person who pio-
cures registration by forged transfer. Transfers made during winding up
are void, unless sanctioned by the Court or the liquidator.

Blank Transfer.—When a shareholder signs the transfer form with-

out filling in the name of the transferee and the date of execution and
hands it over with the share certificate to the transferee thereby enabling
him to deal with the shares, he is said to have made a "transfer in blank,"
the piactice of holding shares in blank is widely used in India (ox spe-
culative dealings and all stock exchanges recognise a blank transfer as
valid deliveiy. When used for legitimate business purposes it has some
advantages. The holder of a blank transfer can again transfer the shares
without filling his name and signature to a subsequent transferee, and
thus avoid the payment of stamp duty. The ultimate holder, who wants
to retain the shares can fill his name and date and get it registered in
the company's books. For this ultimate transfer and registration the first
transferor will be regarded the transferor even if he is dead. On such

41. Amra^oti Electric Supply, Co. v. R. S. Chandak 1954 Nag. 239;

Jagjit D. & A. Industries v. Shiy Ram, 1957 Pepsu 18.
42 R. Mj^thalone v. Bombay Life Ass. Co. 1953 S.C. 385.
 541
COMPANY LAW
registiation ilie last transferee will become the nicniher ol the company,
'llie practice ol makin;^ blank tiaiislers li:ks often led to certain
abuses, tlie most nnponant o£ i\hich aie :—
(a) concealment o£ the identity of the real beneficial owners behind
the nominees;
(1)) e\asion of ta\ by siippiessi'^n ol 'secret' piofits inxestcd in
holdings on blank transfers.
The piactice is also adopted to window-dress the Balance• Sheets by
resluiilimg, of shares held in blank tiansfers between associated companies,
with the object of substituting inter-tompany loans and achances at the
time Ol the closing of the accounts by iiuestments. It has also been
uscti to bring into existence fictitious or antedated transactions in the
books of companies in order to create fictiiioiis losses in investments for
the purpose of reducing the taxable profits.
In order to ciirb these abuses, a new Sub-Section (l.\) has been
added to Section 108 wliich, as wc hine already stated, jjrovides that every
instrument ol transfer of shares shall I)e in a prescribed form and shall
be presented to the prescribed authority (the Registrar is the prescribed
authorit}) who will endorse or stamp a date on it before it is signed by
the transferor. The Ijlank transfer can remain in currency for two
months from the date starhped or endorsed by the prescribed authority
on tile Ijjank transfer form. The instrument of transfer must be com-
pleted by ijotli the transferor and the transf'-rce and delivered to the
company for registration within two months from the date stamped on
the form, or %vhere the siiares are dealt in on a recognised stock ex-
change, it should be delivered at any time before the date on whicli the
register of members is do.sed, in accordance with law, for the first time
after tlie date stamped on the form or within two ,months from such date,
whichever is later.
These provisions shall not apply to any shares which are held by a
company in any other body corporate in the name of a director under
Section -19(2), and to shares deposited by any person witli the State Bank
of India, or any .sciieduled bank or such banking company (other than a
scheduled bank) or financial institution as may be approved I)y the Cen-
tral Government, by way of security for the repayment of any loan ad-
vanced to any such person. In ceitain hard cases, the Central Govern-
ment may extend the times above mentioned.
Transmission of Shares.—Transmission of shafts takes place when
Ihc registeretl holder dies, or is adjudged an insolvent. Ujjon the death
of a sole registered lioider. so far as ilie company is concerned, the legal
representatives of (he deceased are (he only persons having any title to
tlic shares. All other ]>er.sons ha\e only etpiiiable intercut in the shares.
The legal representatives of the deceased member can. therefore, cran.s-
fcr the .shares or otlier inicrcst in the company held by the deceased,
without gelling thcmschcs registered as members, and ihe transferee will
get good title to the shares. The shares of an insolvent -vest in the Ofli-
542 MERCANTILE LAW

ciiil A^i>igl^ce or Receiver, eilUcr of whom may get himself registered as

holder of these shares or dispose of them. They can also disclaim them.

CALLS
Shares arc generally issueil to the public bo that a certain amount,
not less ihnn 5 per cent is jj-iyable on application and another sum on
allotment. The balance may be payable as and when called for. A Call
is a demand by the company jin pursuance ol a resolution of the Eoard
and terms of the auicles on the shaicholders to pay the whole or part
ol the balance still due on each share made at any time during the con-
tinuance ot the business, or during winding up. Each shareholder is
liable to pay a \ali<l call, which can be made only after the minimum
iubsciiption is allotted and the company is entitled to commence busi-
ness. A call must be made uniformly on all shares of a class, and must
be for tlte benelit of the comjjany. By Section 92, a company may, if
authoiised i)y its articles, receive advance calls'and pay interest on them,
as also di\'idends (Section 93).

lORFEITURE OF SHARES
'1
Sliares can be forfeited for non-payment of a call only if special po-
wer in the articles is given to the directors to do so. The forfeiture must
be made sti icily in accordance with the regulations regarding notice, pro-
(edure and manner stated in the articles. Any irregularity will make
the forfeiture void, and the shareholder may sue for annulment, 'flic
jjower to declare shares forfeit is in the nature of a trust and must be
exercised in good faith for the'1 benefit of the company, .\fter a valid
forfeiture the shareholder ceases ij to be a member of the company, but
continues to be liable for any money presently pa)able at the time ol
foifcituie, if the articles .so provide, and can be sued witliin three years
ol tlie forfeiture as an ordinary debtor to tlie company. If sliares are for-
feited within one year of winding'up of the company, he will be liable as
'15' list contiibutoiy. Forfeited shares become the property of the com-
pany and it may citlicr cancel them or re-issue them, if ai tides so provide.

SURRENDER OF SHARES
The articles usually gi\c power to the directors to acce])t iinrender
of sitarcs; this relieves them from going througli the formality of for-
feit iite. A .siuicnder of partly paid .shares cai! only be acceped when a
lorfeiime would be justilicd. Thei same rule applies to fully paid shares
whitii arc surrendcrctl for cancellation. A surrender accepted to release n
Suareholder or in consitleratton paid to him is invalid, as that amounts
to piuch.ise Ijy the company of its; owiT shares, which is strictly jjrohibit-
ed by the law.

DIVIDENDS
Dividend means "the sum paid.! and received as the (juolient forming
the share of the divisible smn paN.iijlc to the recipient." in ,';imple words,
aisidends are the profits of trading divide<! among the memliers in pro-
portion 10 their shaies. The mode of pavnicnt k d(tcnnine<l by ilie
anicies. Tlie directors are rc(iulred l)y Section 217 to m;il;c .n i-,-.^'—
 COMPANY LAW 543
en the balance slicet lecommending (he rale of diMcicnd, ivliicli ni.iy be
dcclaictl in the .innual general nicmng, but U cannot in any event ex
ctcd ilie latc itconiniciided in the icpon Bciirles tJiesc dnideiuls tlie
.'Uiclei ma) jjroMde foi ilic paNmcnt of Imeiim Dividend; which can
be declaied at any time between two annual gcnei.il meetings. Until a
dividend is declaicd, a sliaieliolder cannot enfoice its ])avineni I4ut
once It IS 'Icclaicd, it becomes a debt due liom the colTl]Jan^ to each
s'laieholdei. for the icco^ery of winch he can sift; the compaiu ' An iii-
tciim di\idend is not a debt and the directors can lescind it In a lesolii-
iion Sections ')3 and 205 to 207 make special jiroMsions for the pay
incnt of dnidends
Section 93 empowers .i company to pa), if aiithouscd by its articles,
dividends in pioportion to the amount p.iid on each share where <i lai-
gei amount ii paid up on some shaies tiian on otiiers Section 205 has
been anitndcd to imjjose an obligation on managements to piovide foi
(Vpicciation belore declaung aivideiuls and also to pay dividends only
in cash I he section, as amended, provides that no dividend cin be
dt-clarcd oi paid by a company except out of profits of the company ai-
m e d at after providing lor ilepreciation as laid down in Section H'lO,
cr in ies])ect of each item of de])icciablp asset, loi such ,m amount as
is ariived at by dividing 95 per cent of the original cost thereof to the
comp,in) 01 on any other basis approved by the Ccnti.il Goveinmen;
The dividend may also be paid out of moneys i>rovided by the Central
01 State Government for the [javinent of dividend, in pursu.uicc of a
guaiamc" given by such Govenimeiit Mthough a dividend is pay.ible
onl) 111 c.isli capitalisation of prohts or reserves foi the purpose of issuing
fidK paid up bonus shaies oi jjaving up any amount for the time being
luiijaid on any shaies held by the members of the comj)any Dividend
piust lie paid Old) to the legisteied sh.ueiiolder oi to his oidei or to his
b.inkeis 01 to the jjioduceis of coupons in lespect of sh.irc wairants (Sec-
tion 2(l(i) Wheie a dividend has been declared by the company but it
has not liccn jiaid (ot dividend warrant has not been posted) within 42
davs fioin tlie^declai.ition of the dividend, to any shaicholdtt entitled
to pavnient of the dividend, every directoi. managing agent, sccictaiies
and tie.nstircrs. who urc knowingly party to the defaidi. shall be punish-
alile witli imjirisonment up to 7 days i\iH\ witii (me. 'I he only exceptions
to this a i e ; (I) wheic dividend could not lie paid by icnson of some law;
(li) wheie the instiuctions of the shareholdei foi ])avn)cnt of dividend
cannot be coni])lied with; (iii) wheie there is a dispute as to 'tlie right
lo the divide nth (i\) where the dividend has been adjuitcd against a
claim of the compan); oi (v) wheic the company's fjiiluic to pay the
(.ividend or post the dividend wan.int was not due to any fault on its
pait (.Section 207).

1' VY?»fENT OF INTEREST OUT OF CAPITAL

The fionoial lulc as laid down in Section 205 is that dividends must
not be paid out of capital An exception to this rule is, however, tons-
tmited l)v Sttiion 208 which jjrovides in effect that w/ierc shares are'

4i Gencial \ss Societv v L I_C of India, 1961 SC 892.

544 MERCANTILE LAW

iisiicci to raise money lo dcO<iy die cost of i\oiks oi buildings or of phint

wliidi caimot be made piofitalile for a long period, the company may
pay iniei'cbt on the anioinu of capital paid up in respect of such shares,
and miiv chai.qc the same to capital as part of the cost of the woiks, build-
ings or plant, provided thail—(i) no such j>ayment shall be made unless
it is authorised by the articles or by a special resolution,, and previous
sanction of the Central Governtnent is obtained; (ii) the payment ol in-
terest shall be matle only for such period as may be determined by
the Central Go\ernment and'in no case beyond the end of the half year
loilowing tiie half year of tlie actual completion of the plan; (iii) the
rate of interest must not exceed 4 per cent per annum or any dthcr rate
which the Central Go\ernment may permit; (iv) the payment of interest
shall not operate as a reduction of the share capital.

CAPITALISATION OF PROFITS
A company, if autiiorised Ijy its ai tides, may capitalise its profits in-
stead of paying them ofl as dividends. In sudi a case, tiie company dec-
lares a dividend ot "bonus" out of its undistributed profits and issues at
the same time a corresponding number of new shares and then applies
the dividend or bonus which belongs to the shareholders in full payment
of the amount due on siiares. The effect of capitalisation is that the
company docs not part with any of its assets, and is enabled to increase
its capital, and the shareholders get their dividend in tlie shape of fur-
ther shares which are called "Bonus Shares." Thus, capitalisation of undis-
tributed piofits is made by issuing paid-up shares to the members, there-
by transferring the sum capitalised from the profit and loss account and
reserve account via the bonus to the share capital. The reason why bo-
nus is first paid out of reserve and then taken back for payment on the
newly issued shares is that direct transfer from reserve to capital m
payment of fully paid shares will be payment by the company to the
company, ivhich is illegal.

PART 16-F
BORROWING POWERS
RiORTGAGES AND CHARGES
Every commercial or trading comiiany is deemed to have borrowing
powers; but in the case of a non-trading company its memorantium mus-
lay down such powers to enable it to borrow. A company having power
to borrow may do so to any extent within the limitations laid down by
the memorandum or articles or th.> Act. If a company borrows beyond
its powers, the borrowing is ultra vires the company and void. No debt
is created, and any security which may have been in respect of the bor-
rowing is also void." The lender cannot sue the company for the repay-
ment of the loan.'" If the borrov/ing is ultra vires the directors only, the
rule in Royal British Bank. v. Turquand applied, if the shareholders elect
to ratify in general meeting the, act of the directors." In either case, if
44. Pooley v. Hall Colliery Co. (1869), 21 L.T. 690.
45. Sinclair v. Brougham (1914) A.C. 398.
46. Irvine v. Union Bank of Australia (1895) 3 Cal. 250, P.C.
 COMPANY LAW 545
the money has not been spent by the company* the lender can gee an
s injunction to prevent the company from parting witli it, or he may sui
the directors £or damages for breach of warranty of authority. If the
money has been used in paying off debts which could have been enforc-
ed against the company, the lender may sue the company as he steps into
the shoes of the creditors who have been paid off by virtue of the prin-
ciple of subrogation.
A company having borrowing powers has also the power to give se-
curity to the lender for the loan advanced by him. This may be done
by charging or mortgaging any or all of the company's property. T h e
loan may be secured by any one or more of the following ways : (i) a
iegal mortgage of its property* (ii) an equitable mortgage by deposit of
title deeds; (iii) a mortgage of movable property; (iv) bonds;"'(v) promis-
foiy notes, bills of exchange; (vi) a charge on calls made but not paid;
(vii) a floating charge; (viii) a charge on a ship or any share in a ship;
(ix) a charge on goodwill, on a patent or a licence under a patent, on
II trade mark or on a copy, (x) by debentures or debenture stock.

DEBENTURES AND DEBENTURE STOCK

When a company desires to borrow a considerable sum of money
and therefore intends to invite the general public to subscribe, it gives
a form of bond known as "debenture." A debenture is an acknowledg-
ment of a debt by a company to some person or persons, and is issued
to the public by means of a prospectus in the same manner as shares. , A
debenture siock is borrowed capital consolidated into one mass for the
sake of convenience. Instead of each lender having a separate bond, he
has a certificate entitling him to a certain sum, teeing a portion of one
large loan. It is generally secured by a trust deed.

KINDS OF DEBENTURES
Debentures, like ordinary bonds, may be unsecured by any mortgage
or charge on tlie property of the company, and are kaown as "naked"
debentures; or may be, and usually are, secured, and are called "secured"
or "mortgage" debentures. They may be "registered," when they are
made out in the name of a particular person who is registered by the
company as holder, and are transferable in the same way as shares; or
"bearer" which, like share warrants, are made out to bearer, and are nego-
tiable instruments. Debentures may also be "redeemable," tliat is to
say, issued on the terms that the company is bound to repay the amount
of the debentures, eitlier at fixed date, or upon demand; or "perpetual"
or "irredeemable" .debentures in which case no time is fixed in whicli
tlie company is bound to pay, although it may pay back at any time it
chooses; the debenture-holder cannot demand payment as long as the
company is a going concern and does not make default in payment of
interest. But all debentures, whether irredeemable or otherwise, become
payable on the company going into liquidacfoti;
Section 117 prohibits the issue of any debentures carrying voting
rights at any meeting of the company. The conditions on which deben-
tures are issued are indorsed on the back of the bond which gives differ-
54G MERCANTILE LAW

cp.t rights to the holders. One of the conditions usually is the deben-
ture is one of a series of a certain number, eacli for a like sum, say,
Ks. 100, and that all the debentures of a series rank pari passu, i e.. all
the debenluies of one series aie to be paid rateably, so that, if there is
i.ot enough to go round, iliey will all abate proportionally. It the words
"pari passu" are not used, the debentures will be payable according to
the date of issue, and if they all are issued on the same day, they will
be payable according to their numerical order.
FLOATING CHARGE
"-A charge upon property of the company may be "fixed" or '"float-
ing." A fixed charge passes legal title to certain specific assets, and the
company loses the right to dispose of the property. In other words,
the company can transfer the property charged only subject to the charge
- the charge holder must be paid first whatever is due to him. A floating
charge is -an equitable charge on the assets for the time being of a going
concern. It attaches to the subjects charged in the varying conditions
jn which they Ijapoen to be from time to time. The governing idea of
floating security is to allow a going concern to carry on its business in
the ordinary course, the effect which would be to make the assets liable
to constant fluctuations. Thus the company can deal with its property
so charged in a manner it likes until the charge "crystallises" or "attaches."
The essence of a floating charge is that the security remains dormant until
it is fixed or crystallised. The floating charge crystallises: (i) when the
company ceases to be a going concern; (ii) upon the commencement of
the winding up; (ii) ,on the appointmenf of a Receiver at the request
of a debenture-holder who has intervened. Until one of these three
thing happens the charge will not become fixed, and the company may
even sell the undertaking if that is one of the objects specified in the
niemorandum. But tlris does not make it a future security. It Is a
present security which presently affects all the assets of the company ex-
piessed to be included in it. The creation of a floating "charge leaves
the company free to create a specific mortgage of its property havinir
priority over the floating charge. A floating charge is also postponed
to the rights of the following persons if they act before the security
crystallises, namely, (i) a landlord who distrains for rent, (ii) a creditor
under garnishee order absolute, (iii) a decree holder who attaches goods
anrd has them sold, (iv) a mortgagee of the same, property, even wheie
the mortgage is created after the floating charge. Furthermore, under
Section 123, they are postponed to the preferential debts, mentioned in
Section 530, e.g., rates, taxes, wages, salaries, etc. A supplier of goods on
I-ire-purchase system has priority over such charge until goods are paid
for in full.

T R U S T DEED
The most common form of securing debentures is to execute a trust
deed conveying the property of the company to trustees and declaring a
I'ust in favour of the debenture-holders, charging the property. This
deed contains elaborate provisions for the benefit of the debenture^hold-
trs and the company unHI ihe security becomes enforceable by the
trustees. The advantages of having a trust deed are : (i) in the case of
COMPANY LAW 547
default 15y the company the trustees can take the necessary steps on be-'
half of all the debenture-holders; (ii) tlie trustees usually have power to
sell and so realise the security witli the aid of the Court; (iii) the legal
estate is vested by the deed in the trustees and thus a subsequent mort-
gagee cannot get priority; and (iv) the company can be made to issue
property by the covenants in the deed. Section 112 makes any contract
.void by which the trustee is exempted from liability for breach of trust
uhere he fails to act carefully and diligentl) as a -trustee.
Debentures may be issued at a dijcount if the. articles allow, the
reason being that they do not form part of the capital of the company.
Similarly, interest payable on them is- a debt and can be paid out of
capital. All sums allowed by way of discount- must be stated in every
balance sheet of the company until written off. Section 122 provides
that specific performance of a contract to give debentures may be -en-
forced against the company, and that the company may specifically en-
force against any one a contract to take up 'and pay for any debentures.
A debenture issued in an irregular manner may be treated as an agree-
ment to issue a debenture.

RE-ISSUE OF DEBENTURES
Unless any provision to the contrary is contained in the articles, or
in tlie conditions of issue, or in any contract, or the company has 'by re-
solution decided to cancel the debentures, the company may re-issue its
redeemable debentures which it has redeemed, ejther by re-issuing the
same debentures or by issuing other debentures in their place [Section
121 (1)]. In this manner the company can revive the debentures, i.e.,
give to a new debt the same security as if it were the old debt. It is as
if A's debt had not been paid and he had transferred the debt and secu-
rity to B. Section 121 (2) expressly provides that on the re-issue of
these debentures, the person entitled to the re-issue' debenture shall have^
and shall be deemed always to have had, tlie same rights and priorities
as if the debentures had never been redeemed.

REMEDIES OF DEBENTURE-HOLDERS
A debenture-holder who wishes to release his security and get back
his money, may make use of remedies of all or any of the following : -
1. He may sue on behalf of himself and all other debenture-holders
to obtain payment or to enforce his security by sale. T h e Court will ap-
point a Receiver and a manager, for the company's business, if necessary,
and declare the debentures to be a charge on the assets of the company,
and order the sale of the property.
2. He may appoint a Receiver, if the conditions of the issue of tlie
debentures give him power to do so. The Receiver will set the property
and the sale proceeds will be utilised for the payment of debentures.
3. He may apply to the Court for the foreclosure of the company's
right to redeem to the debentures.
4. He may, as a creditor for the principal and interest thereon, pre-
sent a petition for the winding up of the company.
54& MERCANTILE LAW
5. He may have the pioperiy sold by the trustees if the debenture
trust deed permits the sale.
6. If the company is insolvent, and his security is insufficient he
may valuf liis security and prove for the whole debt.
If a debenture-holder ,owes a debt to the company whicli is unable
to pay its debentures in full, the debenture-holder cantiot set off his debt
against tlie liability he owes to the company. The rule of law is that
a person who claims share of a fund must first pay up everything he
owes to the fund. i

REGISTRATION O F CHARGES
REGISTER OF DEBENTURE HOLDERS
Section 152 now reqiiires every company to keep in one or more
books a register of the holders of its debentures (except bearer deben-
tures) and to enter therein the following particulars: (i) the name, ad-
dress and occupation of each debenture-holder; (ii) debentures held bv
each holder distinguishing each debenture by its number, and the amount
paid or agreed to be paid on these debentures; (iii) the date at which
each person was entered in the register as a debenture-holder; and (iv)
the date at which any person ceased to be a. debenture-holder. Like a
register of members, this register should have an index, is open to ins-
pe"ction and may be closed in the same manner. Similarly, no notice of
trust is to be registered thereon (Sections 153, 154).

COMPANY'S REGISTER OF CHARGES

Section 124 provides that for tne purpose of registration and register
of charges, the expression "charge" includes a mortgage. By Section 143,
every company must keep at its registered office a register of charges in
which all charges specifically affecting property of the company and all
floating charges on the undertaking or on any property of the company
must be entered. The register must contain a short description of the
property charged; the amount of the charge; the names of the persons
entitled to the charge. Section 136 requires every company to keep at
its registered office a copy of every instrument creating any charge
requiring registration. The register and the documents should be open
to inspection.

REGISTER OF CHARGES KEPT BY REGISTRAR

Section 130 requires the Registrar to keep a register of charges in
respect of each company and register thereon the full particulars relating
to the charges created by the company and registerable under Section ^25
of the Act. This register is also open to inspection. The company sJiaO
submit to the Registrar the instrument or its certified copy which will
be returned after registration along wjth a certificate of registration. Th';,
company must cause a copy of every registration to be indorsed on everv
debenture or certificate of debenture stock which is issued b% 'the coiB-
pany, and the payment of which is secured by the charge so registered
(Section 133).
COiMPANY LAW 549
REGISTRATION OF CHARGES
Seciion 125 requires a company to file within 21 aays o£ the creation
o[ a chaige with the Regi*trar complete particulars together with the ins-
trument, i[ any, creating or evidencing tlie charge, or a verined copy, of
certain charges, otherwise the charge shall be void against the liquida-
tor and creditors, although the money will become presently payable.
The Registrar is now given power to allow 7 more' days for filing the
particulars if sufficient cause for delay is shown by the company. The
charges requiring registration are as follows:—(a) a charge for the pur-
pose of securing any issue of debentures; (b) a charge on uncalled share
capital of the company; (c) a charge on any immovable property, wher-
ever situate, or any interest therein; (d) a charge on anv book, debts of
the company; (e) a charge, not being a pledge, on any movable oroperty
of the company; (f) a floating charge on die undertaking or any property
of the company including stock-in-trade; (g) a charge on calls made Iiui
not paid; (h) a charge on a ship or any share in a: ship; ^i) a charge on
goodwill, on a patent or licence under a patent, on a trade ihark, or ou
a copyright or a licence under a copyright.
The particulars required to be registered under Section 125 by' filing
with the Registrar are as follows: (a) When the debenture-holders of
ihe same series are made to rank pari passu, Section 128 requires the
following particulars to be registered: (i) the total amount secured by
the whole series; (ii) the dates of resolutions authorising the issue of the
series and the date of the covering deed, if any, by which the security
is created, or defined; (iii) a general description of the property charged;
(iv) the names of die trustees, if any, for the debenture-holders. The
deed containing the charge, or a copy of the deed verified in the pre-
scribed manner, or, if there is no such deed, one of the debentures of
the series must also be filed. If any commission, allowance, or discount
has been paid or made by the company to any person for subscribing,
agreeing to take, or procuring or a^eeing to procure any subscription
for any debenture, the amount or rate per cent no paid or made must
also be filed (Section 129)
(b) In the case of any other charge, the particulars a r e : (.i) if the
charge was' created by the company, the date of creation of the charge;
and if the charge was a charge existing on property acquired
by the company, the date of acquisition of the property; (ii) the amount
secured; (iii) short particulars of the property charged; and (iv) the per-
sons entitled to the charge (Section ISO).
A registration under Section 125 constitutes a notice to wtio^oever
acquires a future interest on the charged assets (Section 126). The "Re
gistrar should enter in his register the appointment of a Receiver or Ma
nagar, if made (Section 137). To enable the Registrar to make an entry
relating to a charge, it is primarily the duty of the company to send to
the Registrar the particulars, but Section 134 empowers every person
interested in the charge which requires registration to get it regiiiered:
and such person shall be entitled lo recover froiu ine company any
fees properly paid by him to the Registrar (Section 134). Under Sec
lion 138, tdie company must intimate to the Registrai within 2J days of.
550 MERCANTILE LAW

when they occur any payment or satisfaction in full, oc any change in

the charpei. The Registrar, after giving notice to the change holder,
will InakB an entry of satisfaction. T h e register oi charges can be recti-
fied by the order of tlif Court. Omission to register particulars of
charges in the manner prescribed by the Act and described above is made
punishable with fine. T h e company, and every officer of the company
or other penon who is in default shall be liable to fitie up to Rj. 500
for every day of default.

P A R T 16-G
MEETING AND PROCEEDINGS
There are three kinds "of general meetings of a company-Staiutor)-,
Annual and Extraordinary, A private company is not required to hold
a statutory meeting. Every ^jeneral meeting of a company requires 21
days" notice in writing.

STATUTORY MEETING
By Section 165, every public company limited by shares, and limited
by guarantee and having a share capital, must hold a general meetihg of
its membeis, to be called "the Statutory Meeting," 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. At least 21 days before
the day of the meeting, the Board of Directors must forward to ever)'
member a report called "Statutory Report" (along with the notice of the
meeting). Tiie «tatutory report must s t a t e : (i) the total number of shares
allotted; (ii) the total -amount of cash received; (iii) an abstract of the
receipts and payments by the company up to a date within 7 days of the
date of ihe report and the balance in hand; (iv) estimate of preliminary
expenses, and any commission or discount paid on shares or debentures;
(v) the names, addresses and occupations of the directors, auditors and
also of the managing agent, secretaries and treasurers, manager and secre-
tary, if any, of the company, the changes which have taken place in the
names, etc., of the above since the date o'f incorporation; (vi) the par-
ticulars of any contract, or i(s modification, if any; (vii) the extent to
which any underwriting contract lias not "been carried out and the rea-
sons thereof; (viii) the arrears due on calls from every director, manag-
ing agent; (ix) the particulars of any commission or brokerage paid or
to be paid to any director, managing agent, etc.
T h e statutory report must be certified as correct by at least two
directors, one of whom must be a managing director, if tiiere is one.
It must- also be certified as correct by the auditors of the company. A
certified copy must be filed with the Registrar. A list of members show-
ing their names, addresses and occupations togetJier with the number of
shares held by each must be kept in readiness and produced at the com-
mencement of the meeting and kept open for inspection during the
meeting. The members may discuss any matter at the meeting relaiinff
to the formation of the company or arising out of the report. No re-
solution can. however, be passed unless notice iliereof lias l)een ffi\en.
Default lenders tiie company and every director liable to fine uj) to
 COMPANY LAW "^^
iRs. 500. Moreover, if the meeting is not held or the report is not filed,
4he Registrar or a contributory may, after expiration of 14 days of the
day when the meeting ought to have been held, apply for the winding
up of the company. The Court may either order winding up, or give
directions for the holding of the meeting and filing of the report, and
order the payment of costs by any persons at fault.

ANNUAL GENEJ^AL MEETING

The provisions of the original Section 166 were not effective against
delay in holding of annual general meeting, because a financial year
could be of more or less duration than a calendar year. The section
has been redrafted to make it more effective, Now, every company must
hold its first annual general meeting within 18 months from the date of
its incorporation. Thereafter, it must hold in each year, in addition to
any other meetings, an annual genera! meeting, so specified in the notices
calling it, provided that not more than 15 months shall elapse between
two annual general meetings. In case of diflSculty to hold any annual gene-
ral meeting (except the first meeting) the Registrar may grant an extension
up to a period of not more than 3 months. This meeting must be held on
a day other than a public holiday, during business hours, at the regis-
tered office of the company, or other place within the city, town or
village in which the registered office of the company is situate. The
Central Government may, however, exempt any class of com-
panies from this provision. A public company or a subsidiary of a pub-
lic company may by its articles fix the time for its annual general meet-
ings and may also by a resolution passed in one annual general meeting
fix the time for its subsequent annual general meetings. A private com-
pany may in like manner and also by a resolution agreed to by all the
members thereof fix the time as well as the place foi its annual gene-
ral meeting. If default is made in holding this meeting, the Central
Government may, on the application of any member of the company,
call or direct the calling of tlie meeting. Also, if this meeting is not
held either originally or when ordered by the Central Government, then
tlie company and every officer who is in default is punishable with fine
up to Rs. 5,000, and in the case of continuing default, with a further
fine of Rs. 250 per day during default. The ordinary business tn be
transacted at this meeting is : (i) consideration and adoption of accounts
and repoits of the Board and auditors; (ii) appointment of directors; (iii)
appointment and ^ fixation of remuneration of auditors; (iv) declaration
of dividend. X

EXTRAORDINARY GENERAL MEETING

Every general meeting otner than the statutory meeting and the an-
nual general meeting is an Extraordinary General Meeting. It is usually
called by the directors for transacting some special or urgent business
which has to be done before the next annual general meeting. Only the
special business for which it is coniened can be done at this mcetinir.
Section 169 provides that such meeting must be called bv the Boaid on
the requisition of members holding 10 per cent of the paid-up capital
552 MERCANTILE LAW

carrying voting right in respect of the matter, and where the company
has no share capital, on the requisition of members holding 10 per cent
of the total voting power, within 21 dgys of the deposit of the requisi-
tion, stating the matters for consideration at the meeting. If the Board
does not hold the meeting within 45 days of the requisition, the requisi-
tionists may hold the meeting within 3 months of the requisition. T h e
requisitionists can recover from the company their reasonable expenses
and the company can make them good from the directors at fault.

NOTICE OF MEETINGS
Every member of a company is entitled to a notice of not less than 21
days of every general meeting, and such notice must be given in writing
to every member. An annual general meeting may, however, be called
by giving a shorter notice, if it is consented to by all the members entitl-
ed to vote at the meeting; and any other meeting if the holders of 95
per cent of the paid-up share capital or of the total voting power con-
sent to the shorter notice. .Notice must also be given to the auditor
of the company and to the legal representatives of a deceased member.
In the case of a company having share capital, or where articles allow
the appointment of proxy, the notice should state that a member entitl-
ed to attend and vote is entitled to appoint one or more proxies, that
the proxy need not be a member of the company.

C»ID1NARY AND SPECIAL BUSINESS

In the case of an annual general meeting the ordinary business will
be (i) the consideration of the 'accounts, balance sheet and reports of the
Board of Directors and auditors; (ii) the declaration of dividend;
(iii) the appointment of directors in tlie place of those retir-
ing; and (iv) the appointment and fixing the remuneration of au-
ditors. AH other business at any annual general meeting and any
business at any other meeting will be deemed to be specia?. In the case
of any items of business deemed to be special, the notice of the meeting
must set out all material facts concerning the business. In regard to
special business, the notice should also state the nature and extent of the
interest of the directors, managing agent, secretaries and treasurers, or
manager in such business.

QUORUM
A number of members of any body sufficient to transact business at
a meeting is a quorum. The quorum is generally fixed bv the articles,
and the number of members to form this quorum must be personally
present at the meeting. Unless the articles provide for a large number,
5 members personally present in the case of a public company, and 2
members personally present in the case of a private company, shall be
the quotum for a general meeting of the company. Unless the articles
otherwise provide, if within half an hour from the time appointed for
holding a meeting of the company, a quorum is not present, the meeting
if called upon the requisition of members, shall stand dissolved: but in
all other cases, it shall stand adjourned to the same dav in the next
week, at the same time and place, or as the Board may determine. If a
COMPANY LAW 553
quorum is not similarly present at the adjourned meeting, then the mem-
bers present shall be a quorum (Section 174). Any resolution passed
without a quorum is invalid, unless all the members, though smaller in.
riumber than the quorum, are personally present.
CHAIRMAN
The chairman is a necessary element of the company's meetings, and
is usually appointed by the articles. But if he is not so designated, the
members personally present at the meeting may elect one of themselves
to be the chairman thereof on a show of hands. If a poll -is demanded
on the election of the chairman, it must forthwith he taken at that meet-
ing under the chairmanship of the person elected by the show of hands
(Section 175). The chairman must preserve order, conduct proceedings
of the meetings in a regular way and take care that the sense of the house
is ascertained with regard to the question before it. He must see to it
that the majority do not refuse to hear the minority. T h e chairman may
adjourn the meeting if circumstances demand, but he must act bona fide
and should not leave the chair. If it is brought to his notice that the
meeting was improperly convened and constituted, he should declare tlie
proceedings invalid. T h e chairman must be a member of the company.
PROXIES
A proxy is both an instrument appointing another person to vote for
the appointer as well as the person so appointed. Section 176 provides
that a member of a company who is entitled to attend and vote at a
meeting of the company may appoint another person whether a member
or not as his proxy to attend and vote instead of himself. A proxy
has no right to speak at the meeting. T h e instrument appointing a
proxy must be in writing and signed by the appointer, bearing a J 5
paise stamp, or with its seal in the case of a company. No company can
make it compulsory for any one to lodge proxies earlier than 48 .hours
before the meeting. If an invitation is issued at the expense of the com-
pany asking for the appointment of a particular person as proxy for
members, every officer at fault will be liable to a fine UD to Rs. 1,000.
During the period beginning 24 hours before the time fixed for the com-
mencement of the meeting and ending with the conclusion of the meeting
any member may inspect the proxies lodged, by giving not less than 3 days'
notice in writing to the company of his intention. As regards the right
to appoint a proxy. Section 176 states that unless the articles otherwise
provide, in the case ot a company having no share capital, a member can-
not appoint a proxy, and in the case of a private company, he can ap-
point only one proxy, and a proxy shall not be entitled to vote except
on a poll. In the case of a public company or where articles permit, a
member may appoint one or more proxies, according to the number of
votes held by him. He can split his votes and give a few to one proxy
and others to another proxy or other proxies." A proxy may be revoked
before the person appointed has voted. Where the President of India or
a Governor of a State is a member of a company, he may appoint any
one to represent him and vote for him.

47. Mahaliram v. Fort C. Jute Manufacturing Co Ltd lO';';

CaL 132.
554 MERCANTILE LAW

VOTING AND POLL

Voting is in the first instance by a sliow of hands. Since voting by
show of hands does not always reflect the interest of members upon a
'value' basis, provision has been made in Section 179 for demanding a
poll, and \oting rights must be exercised in accordance with Section 87
which provides that every shareholder will have votes in proportion to
the equity capital held by him and not according to the number of
shares. Where a company has^no share capital every member has one
vote. Only the persons whose names appear on the register as holders
of shares are entitled to vote. If a poll is demanded, then, if ii
relates to the question of election of the chairman or adjourn-
ment of the meeting, poll must be taken forthwith; otherwise it may be
taken lyiihin 48 hours of the demand, A poll may be demanded by the
chairman, or 5 members present in person or by proxy, or members re-
presenting 10 per cent of the paid-up or issued capital. In the case of
private company, onei'^meraber, where not more than 7 members "^ are
present, and 2 members, if more than 7 members are present, may de-
mand a poll. A public company or its subsidiaries cannot preclude a
member from voting on the ground that he has not held the shares for
a certain period, or any other ground except the non-payment of calls
or other sums presently payable by him,, or in regard to the exercise of
the right of lien by the company.

COURT MAY CALL MEETING

If for any reason it is impracticable to call a meeting of a company
{other than an annual general meeting), the Court may, on the applica-
tion of a director, a member having a right to vote, or on its own mo-
tion order a meeting of die company to be called and conducted as the
Court thinks fit, and may also give such other ancillary consequential
directions as it thinks expedient. Such a meeting will be a prooer meet-
ing (Section 186).

RESOLUTIONS
The Act primarily recognises two types of resolutions; (i) Ordinary,
and (ii) Special. T o these a third type has been added as a resolution
requiring special notice (Sections 189, 190). The category of extraordin-
ary resolution has been abolished; and by Section 65], any reference to
extraordinary resolution in the articles of a company, or elsewhere, shall
in future be construed as referring to a special resolution.

ORDINARY RESOLUTION
A resolution, shall be an ordinary resolution when the votes in a ge-
neral meeting cast in its favour are more than votes against it. The
votes may be cast on a show of hands or on a poll in general meetinf
of which 21 days' notice has been given [Section 189 (1)].

SPECIAL RESOLUTION
A special resolution is one in regard to which the intention to propose
the resolution as a special resolution is specificallv mentioned in the no-
tice of the general meeting, and is passed by such a majority that the
COMPANY LAW 555
number of votes cast in favour of the resolution is three times the
number cast against it, either by a show of hands or on a poll in person
or by proxy. In other words, thre^-fourths majority is necessary to a
special resolution at a general meeting of which 21 days' notice is given
[Section 189 (2)]. T h e .Act requires sanction of members by special
resolution in respect of the following matters among others :—
(1) For changing provisions of memorandum so as to (i) change its
registered office from one State to another, (ii) change the objects clause
{Section 17); (2) for changing the name of the company (Section 21);
(3) for altering articles (Section 31); (4) for reducing share capital (Sec-
tion 100); (5) for paying interest out of capital (Section 208); (6) for Jisk-
jng for investigation (Sec. 237); (7) for making directors' liability unlimited
(Section 323); (8) for removing managing agents (Section 338); (9) for
praying for an order of winding up (Section 433); (10) for voluntary
winding up (Section 484).

RESOLUTIONS REQUIRING SPECIAL NOTICE

A resolution requiring special notice may he passed by the members
.at a general meeting by a simple or three-fourths majority according to
the provision of the Act in respect of different matters, provided the fol-
lowing procedure is followed: A notice of intention to move the resolu-
tion (which requires special notice as provided by the Act or in the
articles) should be given to the company not less than 14 days before the
meeting at which it is to be moved, excluding the days on which the
notice is served and the day of the meeting; and the company should
give to its members notice of such resolution along with the notice of
the meeting, i.e., 21 days' notice, or if it is not practicable to give such
notice, it must give notice, either by advertisement in a newspaper hnv-
ing an appropriate circulation or in any other mode allowed by the ar-
ticles, not less than 7 days before the meeting.
Special notice is required by the Act in the following matters :-- ,
1. For a resolution at an annual general meeting appointing an au-
ditor, a person other than a retiring one.
2". For a resolution at an annual general meeting to provide that a
retiring auditor shall not be appointed.
3. For a special resolution to appoint certain persons mentioned in
Section 261 as diiectoii subject to retirement by rotation.
4. For a resolution to remove a director Iiefore the exuiry of Jiis
period of office.
5. For a resoluiion to appoint another director in place of the re-
moved director.

CIRCULATION OF MEMBERS' RESOLUTION (SECTION 188)

H members having 5 per cent of the total voting power of the com-
pany, or, if 100 members having the right to \oie and commanding a
paid-up capita! of Rs. one lakh or more require the conmauv to d.-> ro,
tiie company must circulate any resolution of wliiih those membtis give
556 • MERCANTILE LAW

notice of intention to move at the meeting, and also circulate any state-
ment of not more than 1,000 words with respect to any matter or resolu-
tion to be considered at the meeting, provided -the resolution is deposij.-
ed with the company 6 weeks before the meeting or the statement is so
deposited 2 weeks before the meeting, and a reasonable sum of money
to meet the cost has also been deposited. The company need not circu-
late a statement if the Cou'-t is satisfied on the application either of the
company or any other aggrieved person that the rights so conferred are
being abused to secure needless publicity for defamatory matter. A bank-
ing company need not circulate .such statement, if its Board considers that
its circulation will injure the interests of the company. Default of above
provisions renders every officer of the company in default liable to a fine
up to Rs. 5,000.

REGISTRATION OF RESOLUTIONS AND AGREEMENTS

Section 192 makes it compulsory for a company to file with the Regist-
rar printed or type written copies of the following resolutions and agree-
ments, within 30 days after the passing or making thereof:—(a) special
resolutions; (b) resolutions which have been agreed to by all the mem-
bers or class of members; (c) any resolution of the Board, or an agree-
ment appointing or re-appointing or varying the terras of appointment of
a managing director; (d) any 'agreement appointing or reappointing ma-
naging agents or secretaries and treasurers; (e) all resolutions or agree-
ments whicJi effectively bind all members of any class of shareholders
though not agreed to by all those members; (f) resolutions passed by the
company according consent to the Board of any of the powers under Sec-
tion 293 (1) (a), (d)'and (e), and approving the appointment of sole sell-
ing agents under Section 294; (f) resolutions for voluntary winding up,
passed under Section 484 (1). If default is made in filing any of the
above, the company and every officer (including a liquidator) who is in
default are liable to a fine up to Rs. 20 for every day of default. A
copy of every such resolution or agreement shall be embodied or an-
nexed to every copy of registered articles issued after passing thereof.

MINUTES OF MEETINGS
Every company must keep mmuies containing a fair and correct
summary of all proceedings of general meetings and Board meetings in
books kept for that purpose. The minutes books must have their pages
consecutively numbered and the minutes must be recorded thereon within
30 days of the meeting. Each page of every such book must be initialled
or signed by the chairman of the meeting. T h e minutes must be record-
ed on the pages of the minutes book, and In no case must the minutes be
jjasted on the pages. All appointments of officers made at anv meeting
must be included in the minutes. In the case of Board meetings, the
minutes must also state the names of directors present, and of those who
may have dissented fiom a resolution passed at a meeting. The chair-
man of the meeting mav exclude from the minutes anv matter which
he reasonably regards defamatoiy of any person or irrelevant or immaterial

Note; Director's age limit of 65 years deleted by 1965 Act.

COMPANY LAW 557

to the proceedings (Section I9S) Where the minutes are duly kepi, they
are presumptive evidence that the meeting was duly called and held and
all the proceedings were duly taken. T h e minutes books must be kept
at the registered office o£ the company and be open to inspection in the
usual manner. The minutes books of tlie Board meetings are not open
to inspection. Section 197 prohibits advertising or circulating at the ex-
pense o£ the company any report or proceedings o£ general meetings, un-
less the minutes circulated or advertised were duly made and entered in
tlie minutes book. Contravention of this provision renders the company
and every officer in default liable to a fine up to Rs. 500 for each offence.

PART 16-H
ACCOUNTS, AUDIT AND INVESTIGATION
BOOKS OF ACCOUNT (SECTION 209)
Every company must keep, at its registered office proper books of ac-
count with respect to (a) all sums of money received and expended by
the company and tlie matters in respect of which the receipt and expen-
diture takes place; (b) all sales and purchases of goods by the company;
and (c) the assets and liabilities of the company: provided that all or
any of the books of account aforesaid may be kept at such other place in
India as the Board may decide, and tlien the company must' within 7 days
of the decision file with the Registrar a notice in writing giving the full
address of that other place. Where the company has a branch office, tlie
books of account relating to transactions effected at the branch office
must be kept at that office and proper summarised returns sent to the
head office at intervals of not more than 3 months. The books of ac-
count shall give a true and fair view of the affairs of the company or
branch office, and explain its transactions. These books shall be open to
inspection by any director during business hours, as also by the Registrar
or an officer authorised by the Central Government. It is now provided
that the books of account relating to a period of at least 8 years' imme-
diately preceding the current year, or if the company has not been in ex-
istence for 8 years, then for the whole period of its existence, shall be pre-
served in good order.
Default on the part of any of the following persons to secure com-
pliance with the above requirements renders him liable in lespect of
each offence to be punished with imprisonment up to 6 months, or a
fine up to Rs. 1,000 or with both, The persons a r e : (i) managing agent
or secretaries and treasurers, or managing director or manager; (ii)
partners in a managing agency firm or a firm of secretaries and treasurers;
(iii) every director, if they are a body corporate; (iv) every director of the
rompany. if it has neither a managing agent nor secretaries and treasurers
nor managing diiector nor manager. But if any person "has been charg-
ed by any of the above persons to comply with the requirements of the
section and he makes a default, then he will be liable to the same pu-
nishment of imprisonment up to 6 months or a fine up to Rs. 1,000 or
both, and the t»erson so cliarging ivill be excused.
558 MERCANTILE LAW"
ANNUAL ACCOUNTS AND BALANCE SHEET
Section 210 requires that at every annual general meeting of the
company, the Board of Directors must lay before the company a Balance
Sheet and a Profit and Loss Account; and in the case of non-profit com-
panies, an Income and Expenditure Account should be submitted. T h e
profit and loss account should relate, in the case of the finst annual gene-
ral meeting, to the period beginning with the incorpoiation of the com-
pany and ending with a day, the interval between which and the date of
the meeting does not exceed 9 months. In the case of subsequent an-
nual general meeting, the profit and loss account should relate to tlie
period beginning with the day immediately after the period for whicli
tlie preceding profit and loss account was made, and ending with a
day, the interval between whicli and the date of the meeting does not
exceed 6 months: but where the Registrar has granted extension of
time for holding the meeting by more tlian 6 months and the extension
granted. The period to which the profit and loss account relates is-
known as tlie 'Tinancial Year"; and the period of the financial year must;
not exceed 15 months, but with the special permission of the Registrar
18 months. If any director fails to take all reasonable steps to comply
with the above requirements, he is, in respect of each offence, liable to
imprisonment up to 6 months, or a fine up to Rs. 1,000, or both, unless-
some other competent person can be held liable.

CONTENTS OF BALANCE SHEET (SECTION 211)

A balance sheet is a statement of tlie assets and liabilities of ilie
company conveying a full and truthful information as to the company j
position. Every balance sheet and every profit and loss account of a
company must give a "true and fair" view of the affaiis of tlie company
and the conipanv's profit and loss lesnectively, at the end of the financiaf
year to which thev relate. The form of the balance sheet and the det.iils-
lo be given in the profit and loss account are set out in Schcdide VI to
the Act. The requirements of this section will not apply to banking, in-
surance and electricity companies which are governed I)y ilieir respec-
tive Acts.
Tlie Balance Sheet of holding company should have annexed to it
the following documents relating to its subsidiary : (i) a copy of the
balance sheet of tlie subsidiary; (ii) a copy of its profit and loss account;
(iii) a copy of its directors' report; (iv) a copy of its auditors' report;
(v) a statement containing the following particulars; (a) extent of hold-
ing company's interest in the subsidiary at the end of last financial yeai:
(b) the net aggregate amount of the profits and losses of the subsidiary,
:vliether dealt with or not in the holding company's accoimts; (vi) a state-
ment containing the following : (a) any change in holding company's in-
terest in tlie subsidiary, (b) any material changes since last financial year;
(vii) wheie the directors of the holding company are unable to obtain
the necessary information for the purpose aforesaid then a statement to
that effect (Secion 212). The financial yeai of the sub'iidiary may end on
the- same day or not as of the holding company, but it should not be ear-
lier tlian 6 months from the dav on whidi holding company's year ends.
The durition of financial year of both must be the same (Section 213). A
COMPANY LAW ^^^
holding company may by resolution authorise its representatives to ins-
pect the books of its subsidiaries (Section 214).
Except in the case of a banking company, the balance sheet and pro-
fit and loss account of a company must be signed on behalf of the Board
by two directors and countersigned by the managing agent, secretaries and
treasurers, manager, or secretary, if any. If the company has a managing
director, he should be one of the signing director^. T h e B/S and P and
L A/C must be approved by the Board before they are submitted to the
auditors who must in turn attach their report thereto (Section? 215, 216).
There sliould be attached to the balance sheet a report of the" Board re-
garding the company's state of affairs, the amount proposed to be carried
to reserves, tlie amount recommended for dividend, and also any change
which occurred during the financial year in, regard to the nature of the
business of the company and its subsidiaries. T h e report should also
explain all adverse remarks of the auditor (Section 217).
By Section 219, not less than 21 days before the date of the meeting,
a copy of the B/S together with the P and L A/C, auditor's and Board's
reports, must be sent to (i) every member of the company, (ii) wery
registered debenture-holder, (iii) every trustee for debenture-holders, (iv)
every person entitled to a share in consequence of the death or insol-
vency of a member, (v) tlie auditors. Even a private company has to
complv with these provisions. By Section 220, three copies of the B/S
and P and L A/C must be filed with the Registrar within 42 days after the
annual general meeting. A private company will file three copies of each se-
parately. All officers of the company must make necessary disclosures
pnd give all necessary information for the purposes of the annual ac-
counts to the company and its auditors. Banking and insurance com-
panies should publish half-yearly statements in the months of February
and August.

AUDIT AND AUDITORS

Every company must, at each annual general meeting, appoint an au-
ditor or auditors to hold office from the conclusion of tliat meeting until
tl)e conclusion of the next annual general meeting and must, within 7
days of the appointment, give intimation thereof to the auditor so ap-
pointed, unless he is a retiring auditor; and such auditor must, within
SO days of the intimation of his appointment, inform the Registrar in
writing that he has accepted the appointment or refused it. A retiring
auditor must be re-appointed unless he is disqualified fot appointment as
auditor, or he has expressed his unwillingness to be appointed, or the
company has passed a resolution against his re-appointment, or notice has
been given to the company for the appointment of another person as
'lUdftor and that other person has become incapable of acting. If an
auditor is not appointed or re-appointed at the annual general meeting,
the company should notify the fact to the Central Government within 7
days thereafter, and thereupon the Central Government may make the
appointment.'" The first auditors must be appointed by tlie Board

48> See Council of C.A. of India v. Jnanendra Nath, 1955 Assam 8.

560 MERCANTILE LAW
within one month of the company's registration, and they shall hold office
until the conclusion of the first annual general meeting, unless removed
by the company at an earlier general meeting. An auditor (other than
the first auditor) may be removed by the company in general meeting
with the previous approval of the Central Government (Section 224). For
the appointment as auditor of a person other than the retiring auditor,
special notice of 14 days of the intention to move a resolution at tlie
annual general meeting should' be given to the company. On receipt of
such notice, the company should immediately send a copy thereof to the
retiring auditor, who is entitled to m.ake a written representation of rea-
sonable length, which the company should bring to the notice of tlie mem-
bers, otherwise the auditor is entitled to have his representation read out
at the meeting. If the auditor abuses this right so as to secure needless
publicity for defamatory matter, the Court may, on application, prohibit
the circulation of the representation (Section 225).

QUALIFICATIONS AND DISQUALIFICATIONS (SECTION 226)

Only a person qualified as an auditor can be appointed an auditor
of any company—private or public. To be qualified a person must be a
Chartered Accountant in jjractice, that is to sav, he must be a member
of the Institute of Chartered Accountants of India and must be in actual
practice. A firm whereof all partners practising in India are Chartered
Accountants may be appointed in its firm name and any partner may act
in firm name. But the following persons cannot be appointed as audi-
tors of a company : (i) a limited coinpany, (ii) any officer or employee of
the company, (iii) a partner or employee of the foregoing, (iv) a person
who owes the company more tlian Rs. 1,000, (v) partners of the managing
agency firm or firm of secretaries and treasurers, or members or directors
if the above are corporate bodies, (vi) directors or members holding more
than 5 per cent of the subscribed capital of the above corporate bodies.
If an auditor becomes disqualified in any of the above ways after his ap-
pointment as auditor, then he shall be deemed to have vacated office.
I

POWERS AND DUTIES

Every auditor of a company is empowered to have free and complete
access at all times to the books, accounts and vouchers of the company
wherever kept, and also require from the ofiicers of the company such
information and explanation as mav be necessary for the performance of
his duties as an auditor [Section 227 (1)1. He is further entitled to re-
ceive notice of and to attend the general meeting of the company and
be heard on any part of the business which concerns him as auditor (Sec-
tion 231).
The auditor must' make a report to the members of the companj' on
the accounts examined by him and also every B/S and P 8: L A/C. The
report, besides other things necessary in any particular case, must express-
ly state : (a) whether, in his opinion and to the best of his information
and according to the explanations given to him the accounts give tlie in-
formation required by the Act and in -the manner so required, fb) ivhe-
ther the balance '.heet gives a true and fair view of the company's affairs
as at the end of the financial year and the profit and loss account, of the
COMPANY LAW 561

P and L for its financial year, (c) whether he has obtained all the infor-
mation and explanations required by him for the purposes of his au-
dit, (d) whether, jn his opinion, proper books of account as required by
law have been kept by the company, and proper returns for the purposes
of his audit have been received from the branches not visited by him,
(e) whether the company's B/S and P and L A/C dealt with by tlie re-
port are in agreement with the books of account and returns.
Sub-section (!A) to Section 227 now further requires an auditor to
inquire :—
(a) whether loans and advances made by the company have been
properly secured and whether the terms of the loans are not
prejudicial to the interes,ts of the company or its members;
(b) whether transactions of the company which are represented
merely by book entries are not prejudicial to the interests of
the company;
(c) where the company is not an investment or a banking com-
pany, whether so much of the assets of the company as con-
sist of shares, debentures and other securities have been sold
at a price less than that at which they v/ere purchased by the
company;
(d) whether loans and advances made by the company have been
shown as deposits;
(e) whether personal expenses have been charged to revenue
account;
(f) where it is stated in the books and papers of the company
that any shares have been allotted for cash whether cash has
actually been received in respect of such allotment.
T h e Central Government may, by order, require the auditor to in-
clude in his report statement on such matters as may be specified in the
order.
Where any of the matters on which the auditor is required to report
are answered in the negative or with a qualification, the auditor's report
must state the reason for the answer (Section 227). The accounts of
branch offices should ordinarily be audited by qualified auditors, and
•where they are not so audited, the head office auditor w i l l ' audit the
books of tiie branch (Section 228). The auditor's report must be signed
•only by a qualified auditor practising in India, and in case a firm is ap-
pointed an auditor only a practising partner and. not the firm (Section
•229). The auditor's report must be read at the general meeting and be
•open to inspection by any member of the company (Section 230).
A company auditor must be honest and must exercise reasonable
skill and care, otherwise he may be sued for damages. He must be a good
watchdog, be alert and careful and ascertain the tn^e position of the
company's affairs by examining the books and by making inquiry. While
he must exercise reasonable care, he is not bound to be a detective and
approach his work with suspicion or with a foregone conclusion that
562 MERCANTILE LAW
there is something wrong. He is a watchdog, but not a bloodhound. He
must not, however, confine hinuelf raereJy to the task of arithmeticajk
accuracy of the balance-sheet,, but should ascertain by cojnparison with
the books of the company that it was properly drawn so'as to show the-
correct financial position." The auditor is personally liable for neglect-
ing wilfully to perform his duties imposed by law. Thus, default to
comply with req^uirements of Section 229 regarding his report, makes hini
liable to a fine up to Rs. 1,000, and he must be sued by the company for
damages.
SPECIAL AUDIT AT THE INSTANCE OF CENTRAL GOVERN-
MENT (SECTION 233A)
Where the Central Government is of the opinion that the affairs of
any-company are not being managed in accordance with .sound business-
principles or prudent commercial practices, or the company is being:
managed in a manner likely to cause serious injury or damage to the in-
terests of the trade, industry or business to which it pertains, or the fiis^
ancial position of the company is such as to endanger its solvency, the
Central Government may at any time by order direct that a special au-
dit of the company's accounts for such period or periods as may be speci-
fied in the order shall be conducted by a Chartered Accountant specially
appomted by the Government or by the company's auditor. Such special
auditor will report to the Central Government,-and the latter, on receipt
of the report, shall take such action as is necessary. But if the Govern-
ment does not take any action on the report within 4 months from the
date of its receipt, it shall send to the company a copy of the report witli
iti comments for circulation among the memt>ers of the company. The
expenses of the special audit, as determined by the Central Gbvernmentr
shall be paid by the company.
Cost Audit.—Proper books of accounts, in the case of companies en-
gaged in production, processing, manufacturing or mining activities miM*
include particulars relating to utilisation of material and labour and
other items of cost, so that the auditor may be able to conduct cost au-
dit. The records are expected to enable the auditor to report on the
efficiency and character of management. The Central Government may,
by order, direct that a cost audit of any of the companies following thtr
aforesaid activities be made for obtaining a true and fair view of the
stale of affairs of the company. The cost auditor should be either a Cose
Accountant or a Chartered Accountant, or other person possessing the
prescribed qualifications. His appointment will, however, be made in
the usual manner by the company as of the company auditor. He v/ill
have the same powers and duties as the company auditor, but will make
his report to the Company Law Board, forwarding at the same time a
copy of his report to the company. These pro\'isions are meant to be-
applied in those industries only which are of national importance from
the point of view of production, eflSciency, raw material utilization, cin-
fenco and such other matters.
49. Registrar Jt. St. Co. v. Htdge, 1954 Mad. ]080; In re City Efjuit-
able Fire Ins. Co. (1925) 2 Ch. 407; Controller of Insurance \. H. C D.is.
1957 Cal. 387.
COMPANY LAW 563
Registrar may require information (Section 234). Where, on per-
using any document filed with him, the Registrar is of opinion that any
information or explanation is necess&ry, he may ask the company to sup-
ply in writing such information or explanation within a- specified time.
On receipt of this order, the company and every officer of the company,
past or present, must furnish such information or explanation. If no
information is supplied or it is inadequate- the Registrar may by anotiier
order call on the company to produce before him such books as he con-
siders necessary. Default renders the company and each officer at fault
liable to fine up to Rs. 500 for each offence and for continuing default
Rs. 50 per day during default; and the Court may, on the application of
the Registrar, order the company to comply with the orders of the Re-
gistrar. Furthermore, if the information or explanation is not furnished
within the specified time, or the document submitted discloses an un-
satisfactory state of affairs, or does not disclose full and fair statement
of the matter, the Registrar must report to the Central Government. If
it is represented to the.Registrar that the business of the company is be-
ing carried on for fraudulent or unlawful purposes, he may, after hearing
the company, order it to furnish similar information and explanation.
The new Section 234A provides that where, upon information in
his possession or otherwise, the Registrar has reasonable ground to believe
that books and papers of, or relating to, any company or other body
corporate, or any managing director or manager of such company or
other body corporate, may be destroyed, mutilated, altered, falsified or
secreted, the Registrar may apply to the Magistrate of the First Class
or Presidency Magistrate having jurisdiction an order for the seiz-
ure of such books and papers. The Magistrate may, be order, au-
thorise the Registrar to enter the place or places where the' books
and papers are kept, search the places and seize such books and
papers as he considers necessary. The Registrar may take copies and
then within 30 days of the seizure return the books and papers to the
persons from whose custody he took them and inform the Magistrate ac-
cordingly. The search -will be made under the Criminal Procedure Code.

INVESTIGATION
The Central Government is given wide powers to appoint one or
more individuals as inspectors to carry out investigations and report on.
their findings. It must appoint inspectors if the company by special re-
solution, or the Court by order, declares that its affairs are. to be inves-
tigated. The Government may do so; (i) if so requested by 200 members'
of a company having share capital; or the holders of not less than one
tenth of the total voting power, (ii) in the case of a company not liaving
share capital, by not less than one-fifth of the members, (iii) in the case
of any company on the report of the Registrar that the company has
failed to supply him information or explanation under Section 234, or (iv)
of its own motion, if it has evidence of fraud or oppression or the with-
holding of information from jncmbers (Section 235).
An inspector investigating th^^affairs of the company may. witli the
previous approval of the Central "Ciovernment, inspect also the affairs
564 MERCANTILE LAW
of othei- connected companies (Section 239). The inspector may examine,
on oath past or present officers and other employees and agents (includ-
ing bankers, legal advisers and auditors), and where the company is or
was mana,ged by managing agent or secretaries and treasurers, lequire
them to produce all Jbooks and documents in their custody and also to
preserve them. The inspector has to report to the Central Government
who must supply a copy of the report to the company, and any other
body corporate, "managing agent, secretaries and treasurers, and their 'as-
sociates, applicants for investig-ation, the Court,, where Court ordered the
appointment. Copies may also be supplied to members or creditors of
the company. If it seems' desirable from 'the report, the Central Govern-
ment may petition the Court for the winding up of the company or for an
order under Section 397 for relief in case of oppression, or under Sec-
ition 398 for-relief in case of mismanagement, or may sue persons in the
name of the company or other body corporate for the recovery of da-
mages or property or prosecute persons criminally liable.

One fef tlie methods adopted to delay investigation into the affairs of
a company was tliat an application for relief against oppression and mis-
management Was pending before the Court or that the company had
passed a special resolution for its voluntary winding up. T h e new Sec-
tion 250A provides tliat an investigation under Sections 235, 237, 239, 247,
248 or 249 may be initiated notwithstanding the pendency, of such appli-
cation in the Court or the passing of the special resolution for voluntary
winding up of the company.

INVESTIGATION OF C^VNERSHIP OF COMPANY

The Central Government may appoint inspectors to investigate and
report on the membership of any company for the purpose of determin-
ing whd are the persons financially interested in its success or failure or
able to control its policy. The inspector may also investigate whethw
there are any secret arrangements or understandings observed in practice.
If the company has or had a managing agent, the powers of the inspec-
tor extend to the ownership and control of the managing agency com-
pany. He may also investigate (with the prior approval of tlie Cen-
tral Government) the ownership of other connected companies. The ins-
pector should submit his report to the Central Government who is under
no obligation to supply copies thereof to any one, Also, instead of ap-
pointing inspectors to investigate the ownership of shares or debentures,
or the associateship with managing agent or secretaries and treasurers,
tlie Central Government may require an interested party to give infor-
mation. Whenever any investigation is in progress, the Central Govern-
ment may impose the following restrictions on any shares: (i) that -no
voting rights should be exercised in respect oi; those shares; (ii) that no
payment in respect of those shares by way of dividend, capital or other-
wise should be made; (iii) that diere shall be no issue of similar shares;
(iv) that no transfer of such shares will be made. Similar restrictions can
be imposed on debentures. Contravention is punishable with imprison-
ment uu to 6 months.
 COMPANY LAW 563
PART 16-1
MANAGEMENT OF A COMPANY
T h e registration of a company under the Companies Act brings into
being a legal entity, capable of carrying on • business and of owning and
disposing of property. Yet such an impersonal creation of law must act
through some human, intermediary who, in practice, takes tlie form of the
Company Director. For its efficient management, it is essential that the
persons who discharge the various managerial and other functions should
be competent, honest, ^and legally qualified to act. The Act lays down
certain general rules for preventing the management of a company by
imdesirable persons. Therefore, Section 202 prohibits an undischarged
insolvent from acting as a director, or manager of a company, or taking
part in the promotion or formation or management of any company on
pain of imprisonment up to 2 years. Section 203 empoweis the Court
to make an order prohibiting a person (i) who is convicted of an offence
in connection with the promotion or management ef a company, (ii)
who, in the course of winding up, has been found guilty of fraud, mis-
feasance or breach of duty, from acting in any of the aforesaid capa-
cities for a period of '5 years. A company must not appoint a firm or a
company to or in any office of profit under it, (other than as
technician or consultant) for more than 5 years at a time, but the Cen-
tral Govenunent may allow the initial employment for ten years.

MANAGERIAL REMUNERATION
By Section 198, as redrafted, the total or overall remuneration
payable by a public company or* its subsidiary to, its directois or
manager in respect of any financial year shall not exceed 11 per
cent of the net profits of that company for that financial year. In
computing the above ceiling of 11 per cent the fees payable to
directors for attending Board meetings may be deducted. If, how-
ever, in any financial year a company has little or no profits, it
may, subject to the approval of the Central Government, pay not more
than Rs. 50,000 per financial year to all of them. The Central Govern-
ment mav in appropriate cases increase the minimum remuneration. T h e
remuneration shall include any expenditure incurred by coi?ipany in pro-
viding rent-free accommodation or other amenity relating to it, -or in
providing any other benefit or amenity, or in respect of any obligation or
service, or to effect an insurance on the life of or to provide any pension,
annuity or gratuity, for any of the persons aforesaid or Ijis spouse or child.

COMPANY N O T T O EMPLOY MORE THAN ONE MANAGE-

RIAL PERSONNEL A T T H E SAME TIME (SECTION I97A)
The employment of all types of management personnel at the samd
^time is very often needless and always too expensive. Therefpre, the new
Section (197A) provides as follows: Notwithstanding anything contained
in this Act or any other law or any agreement or instrument, no com-
pany shall appoint or employ at the same time, or continue the appoint-
ment or employment at the same time, of more than one of the following
566 MERCANTILE LAW

categories of managerial personnel, namely :—

(a) Managing Director,
(b) Manager.

DIRECTORS
Meaning of Director.—A company is an artificial legal person with-
out intelligence'and will and having no physical existence. It can, there-
fore, act effectively 'only through the- agency of natural persons—men or
women. The supreme executive authority in the control of a company
and its affairs resides by delegation in individuals known as directors who
are collectively designated the Board of Directors. Section 2 (13)'reads:
"director includes any person occupying the position of director, by what-
ever name called" and explanation (1) to Section 303 says: "any person
in accordance with whose directions and instructions the Board of Direc-
tors of a company is accustomed to act shall be deemed to be a director
of the company. A director may, therefore, be described as an individual
who guides, directs, conducts, governs, managers or superintends the policy
and affairs of a company by whatever name called.
Number of directors.—The articles of a company generally prescribe
the number of directors that may be appointed, but a public company
must have at least three directors, and a private company including a pri-
vate company which is regarded as a public company under Section 4SA,
must have at least two directors (Section 252). Only an individual-a
man or a woman—can be a director (Section 253)."
Appointment.—The directors of a company may be appointed in any
of the following ways :—
(a) By articles of association as first directors;
(b) By the company in general meeting;
(c) By the Board of directors as an additional director, or to fill
a casual vacancy or as an alternative director;
(d) By debenture-holders or other creditors or by workers, if arti-
cles give power so ,to appoint;
(e) By the Central Government;
(f) By the rule of proportional representation.
(a) First directors;—The first directors are usually named in the ar-
ticles, but such an appointment will be valid only if each one of the pro-
posed directors, before the registration of the articles or the publication
of tlie prospectus, has (i) signed and delivered to the Registrar a consent
to act as director; and (ii) has signed the memorandum for his qualification
shares, or taken such shares and paid or agreed to pay for them, or signed
and' filed ^vith the Registrar an undertaking to take such shares, and pay
for them, or madfe and filed an affidavit that shares to qualify him are re-
gistered in his name. These conditions do not apply to a private com-
pany (Section 266).
COMPANY LAW 567
If the articles are not registered (because Table A has been adopted)
or if the directors are not named in the articles, the subscribers to the
Memorandum may appoint directors after the company has been register-
ed. If the subscribers- do not appoint any directors, then the subscribers
to the memorandum, who are individuals, are deemed to be the_ directors,
until the first directors are duly appointed by the members in a general
meeting (Section 254).
(b) Appointment by the Company.—Section 255 provides that .not
less than two-thirds of the total number of directors of a public company
or. of a private company which is a subsidiary of a public company must
be appointed by the company in general meeting. " These two-thirds of
•the total number of directors, unless the articles provide for the retire-
ment of all the directors at every annual general me'eting, must be subject
to retirement by rotation, and at the first annual general meeting, the
ffjumber nearest to one-third must retire from office, the rotation for re-
•tirement being determined by the length of office of directors, or in case
all were Appointed on the same date, by lots. At every subsequent meet-
ing one-third must retire. The retiring directors are eligible for elec-
tion to fill up the vacancies thus created. If the place of the retiring di-
rectors is not- filled up, the meeting shall stand adjourned till the same
day in the next week. If at the adjourned meeting also, the place of the
retiring directors is not filled, the retiring directors shall be deemed to
have been re-appointed.' The "general meeting may, however, resolve not
to fill the vacancies (Section 256).
A person, other than a retiring director, who wishes to stand for
•directorship, or any other person who intends to propose him, must give
to tlie company a notice in writing at least 14 days before the meeting,
and the company shall then inform' the members not later' than 7 days
before the meeting about the candidature of the person for the office of
' directorship (Section 257). Appointment of directors of a public com-
pany or its subsidiary must be voted on individually by separate ordin-
ary resolution.
(c) Appointment by Board of Directors.—By virtue of Section 260,
tlie Board of directors may, if so authorised by the articles, appoint
additional directors who will hold office only up to the next annual gene-
ral meeting of the company. The number of directors' and additional
directors together must not exceed the maxiitium strength fixed for the
Board by the • articles.
Section 262 permits the Board to fill a casual vacancy in the office of
directorship. It says that in the case of a public company or a subsidiary
of a public company, if the office of any director appointed by the com-
pany in general meeting is vacated before his term of office will expire in
the normal course, the resulting casual ^'acancy may, subject to any re-
gulations in the articles of the company, be filled by the Board of direc-
tors at a meeting of the Board. A person so appointed shall hold office
only up to the date up to which the director in whose place he is ap-
pointed would have held ofiice.
Section SIS permits the Board of directors to appoint, if the articles
568 MERCANTILE LAW

or a resolution passed by the company in general meeting authorise,

an alternate director in place of "the original director" who may have to
be absent from the State for a period longer than S months. The alter-
nate director will not hold office for a period longer than that permissible
to the original director, and shall vacate office if and when the original
director returns to the State in which meetings of the Board are held.
(d) A]>pointment by debenture-holders, etc.—The articles may undec
certain circumstances give power to debenture-holders or other creditors
to appoint their nominee or nominees to the Board. The debenture or
the trust deed may also provide that debenture-holders may nominate a
director to the Board of the company. The articles may also provide for
tlie election of a representative of the employees on -the Poard of direc-
tors. The directors so appointed should not exceed one-third of the total
strength of the Board.

(e) Appointment by Central Government.—Section 408 lays down

that the Central Government may, either on its own motion in • public
interest or on the application of 100 members or members holding 10
per cent or jnore of the total voting po\yer, appoint 2 directors for 3 year*,
at a time. Such directors will not be subject to retirement, nor need
they holt' any qualification shares. Any such director may be removed
by the Central Govtrnment and another appointed in his place.
(f) Appointment by proportional representation—The articles of a
company may provide for the appointment of not less than two-thirds of
the total number of directors of a public company or of a private com-
pany which is a subsidiary of a public company according to the principle
of proportional reprcsenta.tion, either by the single transferable vote or by
a system of cumulative voting or otherwise. The appointments are to be
made once in every three years.
Increase in the number of director!.—Section 258 allows a company
to increase or decrease the number of its directors, by an ordinary re-
splution passed in general meeting, so long as the total number remains
within the maximum and minimum limits fixed by the articles and the
Act. A public company or its subsidiary can increase the number of its
directors beyond the maximum so fixed only with the approval of the
Central Government, although no such approval is now necessary if the
increase in the number will not make the total number of directors more
than twelve.

NUMBER OF DIRECTORSHIPS
A person cannot hold office at the same time as a director in more
than 20 companies (excluding private companies which are not subsi-
diaries). If a person, who is already a director of 20 companies, is ap^
pointed a director in any other company or companies, the appointment
will not be eEFective unless within 15 days thereafter the director has va-
cated his office in some other company or companies so as to keep the num-
bcr within the maximum allowed (Section 227). Any person who holds
office, or acts, as a director of more than 20 public componies is liable
 COMPANY LAW '569!

i to be fined up to Rs. 5,000 in respect of each of those companies aftei

the first twenty (Section 279).

SHARE QUALIFICATIONS
T h e articles usually provide for a certain share qualification for elec-
tion as director. Where a, qualification is required by the articles, then
the Act provides that (i) it must be disclosed in the projpectus; (ii) each
director must take his qualification shares within 2 months after his ap-
pointment; (iii)" the nominal value of the qualification shares must not ex-
ceed Rs. 5,000 or the nominal value of one share where it exceeds Rs.
5,000; (iv) share warrants payable to bearer will not count for purposes
of qualification shares (Section 270). If a director fails to qualify widiin 2
months, he vacates office, and if he acts as director after the expiry of the
2 months without taking the qualification shares, he is liable to a fine u p
to Rs. 50 for every day until he stops acting (Section 272). But the com-
pany will be bound to third parties for the acts of such directors until the
defect in appointment or qualification is disclosed, although acts done
after the disclosure will not bind the company! "I^hus, a de facto director
is as good as a de jure director so far as persons having no notice of the
detect are concerned (Section 290). But a de facto director cannot claim'
remuneration.

DISQUALIFICATIONS
By virtue of Section 274, the following persons cannot be appointed
as directors: (1) a person found by Court to be of unsound mind; (2) an
undischarged insolvent; (3) a person who has applied to be adjudged an
insolvent; (4) a person who has been convicted of an offence involving
moral turpitude and sentenced to 6 months' imprisonment, and a period
of 5 years has not passed from the date of the expiry of the sentence;
(5) a person who has failed to pay calls for 6 months; (6) a, person who
has been disqualified by Court under Section 203. A private company
may, by its articles, provide additional disqualifications.

VACATION OF OFFICE
By Seaion 283, the office of a director shall become vacant, if (a) he-
fails to qualify within 2 months of his appointment, or ceases to hold t h e
qualification shares; (b) he is found by the Court to be of unsound mind;
(c) he applies to be adjudged insolvent; (d) he is adjudged an insol-
vent; (e) he is convicted by Court of any pffence involving moral turpi-
tude and is sentenced to imprisonment for 6 months or more; (f) he fails
to pay any call within 6 months from the last date fixed for the payment,
unless the Central Government by notification in the 0£Bcial ©asette has
removed the disqualification; (g) he absents himself from three consecu-
tive meetings of the Board of Directors, or from all meetings of the Board
for continuous period of 3 months, whichever is longer, without leave of
absence from the Board; (h) he receives a loan from the company; (i^
he fails to disclose to the Board his interest in any contract or arrange-
ment of the company; (j) he is debarred by a Court from being a direc-
•tor; (k) he is removed from directorship by an ordinary resolution passed
by member^ in general meeting after special notice; (1) if he became-
S70 MERCANTILE LAW
director by virtue of an office or as managing agent's nominee, on com-
ang to an end of the office or the managing agency. In tiie case of (d),
•(e) and (j), the vacation of office will take effect after 30 days from the
adjudication, sentence or order, or if any appeal is filed, then after 7
days from the date of disposal of the appeal. A private company may
provide additional grounds in its articles for vacation of office. If a per-
son functions as a director after the office has become vacant, he is liable
to be fined up to Rs. 500 per day during the period he so functions.
HEMOVAL AND RESIGNATION
A company may, be ordinary resolution after special notice, remove a
•director other than a director appointed by the Central Government (Sec-
tion 408), or a director of a private company holding office for life on
April 1, 1952, or in case of proportional representation. A removed di-
rector may claim compensation for loss of office, or may continue to hold
the additional office. On the removal of a director another person may
'be appointed in the same way to hold office for the balance of the per-
.iod (Sect:on 284).
A director may resign his office in the manner provided by the ar-
ticles, but if the articles contain no provision, he may resign at any time
by giving reasonable notice, no matter whether company accepts it or not.
Once a director has resigned by a proper notice, he cannot withdraw his
Tesignation even where the company has not accepted it.''"
Remuneration.—Directors are not entitled to any remuneration aparc
irom express provision in the articles, or a resolution of the company in
general meeting."^ Section 309, recognising this principle, provides that
subject to the general provisions of Section 198 dealing with the. overall
managerial remuneration, the remuneration o£ directors may be determin-
ed by the ^articles or by a resolution of the company, or if the articles
so require, by special resolution, and the remuneration payable to such
director shall be inclusive of the remuneration payable to him for ser-
vices rendered by him in any otlier capacity. He can, however, be paid
e")(tVfi for services rendered which are of professional nature, and in the
opinion of the Central Government, the director possesses the requisite
qualifications for the practice of the profession. A director may receive
remuneration by way of a fee for each meeting of the Board, or a Com-
mittee of the Board attended by .him. The redrafted Sub-Section (4) o£
Section 809 provides that a director who is neither in the whole-time em-
ployment of the company nor' a managing director may be paid remune-
ration" (i) by way of a monthly, quarterly or annual payment with the ap-
proval of the Central Government; or (ii) by way of commission if the
company by special resolution authorises such payment: provided in
either case, t,he remuneration paid to such director, or vdiere there are
more than one such director, to all of tliem together shall not exceed one
per cent of the net profits of the company, if the company has a manag-
ing- director or manager, and tliree per cent of the net profits oi^ the com-
pany in .any other, case. Higher remuneration may, however, be paid, J{

50. Glossop V. Glossop (1907), 2 Ch. 370.

51. In re George Newman fc Co. (1895) I Ch. 674.
COMPANY LAW 571
the company in general meeting, with the approval of the Central Gov-
ernment, so authorises. Section 310 lias been amended to do away with
the approval of the Central Government, if the increase in the remune-
ration is only by way of fee for each meeting of the Board or a Committee
thereof attended by any such director and the amount of the fee after
such increase does not exceed Rs. 250.
A managing director or a ivhole-time director may be paid remjine-
ration eitlier by way of a monthly payment or ai a specified percentage
of the net profits of the company or /partly by one way and partly by
the odier: provided that except with the approval of the Central Gov-
ernment such remuneration shall not exceed 5 per cent of the net profits
for one such director, and if there are more than one such director 10
per cent for all of them togetlier. A whole-time director, or a managing
director, who is in receipt of any commission from the compahy, shall not
be entitled to receive any commission or other remuneration from any
subsidiary of .such company. The provisions of Section 309 do not ap-
ply to a private company.
Guidelines regarding remuneration.—In conformity with the socio-
economic objectives of State Policy the Government has decided to fix re-
vised ceilings on the managerial remuneration. The following guidelines
have been framed for dealing with aoplications received bv the Company
Law Board under Sections 269, 310,'321, 309(3), 198, 307 and 388 and
allied sections of the Companies Act regarding appointment of Manag-
ing Directors, whole-time directors, part-time paid directors and Managers
in public limited companies and ceilings on their remuneration as stated
in a circular letter issued on 11th November, 1969.
1. The niaximum remuneration, within the statutory limits laid
down, by the Act (diseussed above), payable to managing/whole-time or
part-time paid director/manager in a public limited company has been
fixed as under:
(a) There will be a ceiling of Rs. 90,000 per annum, i.e., R'oj.
7,500'per month on salary including dearness allowance and
all other fixed allowances.
(b) A commission on net profits up to 1 per cent of the net pro-
fits may be allowed in addition to the salary as an incentive
for efficient and sound mamtgement, but this should be sub-
ject to a maximum ceiling of 50 per cent of the approved
salai7, i.e., an absolute ceiling of Rs. 45,000 per annum.
<c) Where a. company proposes to f&y remuneration in the form -of
commission on net profits alone, this shall be subject to a ma-
ximum administrative limit of Rs. 1J5 lakhs per annum.
(d) At piesent there is no overall ceiling for the value of per
qussites apart from limits on certain individual itcias like
housing or medical benefits. In future perquisiws to be allow
ed in addition to salary and/or commission will be restricted
to an overall limit of one-tliird of the salary emoluments or
572 MERCANTILE LAW
Rs. 30,000 per annum, (i.e., Rs. 2,500 per month) whichever is
less. Rs. 30,000 per annum only will thus be admissible to
those having salary/emoluments of Rs. 90,000 per annum
or above. Within this overall limit a company will be free
to choose whatever perquisites it wants to allow. But this,
ceiling of one-third of salary will not include tlie employer's
contribution to provident/superannuation fund to the extent
these are not taxable un^ier the Income-Tax Act.* Simi-
larly, the re-imbursement of medical expenses actually incur-
red subject to the present ceiling of Rs. 5,000 per annum or
one month's salary whichever is less, and in the case oE ex-
patriate directors, passage benefits at reasonable inten-als, say,
once a year, will be excluded from the aforesaid ceiling on
perquisites. Leave salary for leave admissible within one-
eleventh of duty periods will also not be counted for this pur-
pose.
2. The above ceilings will be followed as a rule subject to excep-
tions in some deserving cases depending on the merits thereof, for ex-
ample, where higher remunerations have already been drawn in public
limited companies or in the case of expatriate directors in Indian, sub-
sidiaries of foreign' companies or in Indian companies having foreign col-
laboration arrangements provided tlie appointment is justified and the
expatriate director concerned has previously been drawing higher emo-
luments.
3. In the interest of better corporate management the Company
Law Board will not ordinarily approve a person's appointment as Mana-
ging Director in two companies, which are both of a large size and where
it is felt that tlie same person may not adequately discharge the respon-
sibilities of tlie second charge. However, where the companies Sre small in
size or are engaged in more or less similar or allied business and/or are
situated in the same area, the Company Law Board may, in the interest
of efficient and more economical management of the two companies, ap-
prove a common Managing. Director but in that event, the remunera-
tion approved for the appointment in the second company will be regu-
lated suitably.
As is the case at present, the appointment of a person who is already
whole-time director in one company, will not be approved as a paid
director in another company.
4. The number of the managing/whole-time and part-time paid di-
rectors in any company will also have to be justified when new appoint-
ments as managing or whole-time directors or grant of remuneration
paid to part-time directors in the same company are sought. It vfill no£
be adequate justification for such proposals that the total managerial re-

*The present position is that the Provident Fund contribution

not exceeding 10 per cent of the salary and .superannuation fund con-
tribution so long as it, together with the provident fund contribution,
does not exceed 25 per cent of the salary are not taxabl".
COMPANY LAW 575
inuneration to be paid to all the directors in any case will be within the
statutory ceilings. Such proposals should be jus'ified fully having regard
to the size and functions ot die company, and the responsibilities and
duties to be assigned to tlie managing/whole-tim-j or part-time paid direc-
tors and the proposal will be approved only jf iiiey are shown to be in the
interests of the company and its shareholders.
Board Meetings.—Diiectors must ordinarily act at a Board meeting,
unless special powers are delegated to a director or a Committee of the
Board. In the case of every company, a meeting of its Board of directors
must be held at least once in every three months and at least four such
meetings shall be held in every year. The Central Government may,
however, by notification exempt any class of companies (Section 285). A
written notice of every Board meeting must be given to all directors
{Section 286). The quorum for a Board meeting must-b'e one-third of
its total strength or two directors, whichever is higher. Any interested
director will not count for quorum and must be left out ot account at the
time of discussion or vote on any matter in which he is interested; and
if the number of the interested directors exceeds or is equal to two-thirds
of the lota! strength, the balance of the directors present (not being less
than two) will be the quorum (Section 287). By the amended Section 292,
the following powers must be exercised by the Board by resolutions pass-
ed at Bojrd meetings; (a) the power to make calls; (b) the power to issue
debentures; (c) tlie power to borrow moneys otherwise than on deben-
tuies; (d) the power to invest the funds of the company and (e) the
power to make loans. T h e Board may, however, by resolution passed at
a meeting, delegate to any committee of directors, the managing director,
the manager or any other principal officer of the company the jjowers
specified in clauses (c), (d) and (e) on such conditions as the Board pres-
cribe. The Board should specify the total amount up to which the dele-
gate may borrow money under (e), invest funds under (d) and make loans
•and the purposes of the loan under (e). The company may in general
meeting impose restrictions on the Board's powers. Receiving of depo-
sits by a banking company in the ordinary course of its business will not
he deemed borrowing, nor will any money borrowed from another bank-
ing company or the Reserve Bank or the State Bank of India be regarded
borrowing.

JRESTRICTIONS ON BOARD'S POWERS

lu the case of a public company and its subsidiary, the .Board can-
not do anv of the following without the consent ot the company in gene-
ral meeting : (a1 sell, lease or otherwise dispose of company's undertaking;
'•(b) remit, or give time for the repayment of any debt due by a director,
except in the case of renewal or continuance of an advance made b'V a
hanking company to its director in the ordinary course of business; (c)
invest othenvise than in trust securities the amount of compensation re-
ceived by the company in respect .of the compulsory acquisition, after the
commencement of this Act; (d) borrow in excess of the aggrega.ie paid-up
capital plus free reserves (temporary loans from the company's bankers in
the ordinary course of the business of the company being left out of ac-
count for this purpose); (e) contribute to charitable and other fundi not
574 MERCANTILE LAW
I
relating to tlie business of the company amounts exceeding Rs. 25,000-
or 5 per cent o£ its average net profits in the course of any financial year.
If the company wants to borrow in excess of (d), it shall, by resolution in
general meeting, fix the amount up to which the Board may borrow,
and also fix the amount if it wishes tb contribute more than Rs. 25,000!
under (e). The expression "temporary loans" in (d) means loans repay-
able on demand or within six' months from the date of tlie loan. If the
Board acts in contravention of the above, the third parties acting in good
faith are protected (Section 293).
•^ • I,

PROHIBITION OF POLITICAL CONTRIBUTIONS

Section 293A, as amended by the Companies (Amendment) Act, 1969,
has now totally prohibited the making of political contributions. The
section now reads : '
ri

"293A. (1) Notwithstanding anything contained in any other provi-

sion of this Act neither a company in general meeting nor its Board of
Directors shall, after the commencement of the Companies (Amendment)-
Act, 1969, contribute any amount or amounts—
(a) to any political party, or
(b) for any political purpose to any individual or body.
(2) If a company contravenes the provisions of sub-section (1) then—
(i) the company shall be punishable with fine which may extend to-
five thousand rupees; and '
(ii) every officer of the company who is in-default shall be punish-
able witli imprisonment for a' term which may extend to three years and
shall also be liable to fine." '<
By virtue of Section. 293B, however, the Board of Directors of a com-
pany may contribute any amount to the National Defence Fund or any
other Fund approved by the Central Government for the purpose of Na-
tion Defence. I

APPOINTMENT OF SOLE SELLING AGENTS

No company must, after| December 28, 1960, appoint a sole selling
agent for any area for a tenia exceeding 5 years at a time, the renewals
for 5 years at a time being permitted. Any appointment of a sole selling
agent made by the Board shall cease to be valid from the date of the
meeting, if'it is not approved by the company in the first general meet-
ing held after the appointment. Where any managing agent has ceased to
hold office as such and has been appointed sole selling agent of the com-
pany whose managing agent ,| he was, the sole selling agency agreement
whether taken in his own name or in association with, or in the name
of any other person for his benefit or on his own account shall, unless
approved by the Central Government within a period of 6 months
become void and inoperative and the appointment shall come to
an end. If a managing agent ceased to hold office as such before
April 3, 1970 and was not appointed sole selling agent befoie that date,
or ceased to be such after that date, he shall not be appointed a sole sell-
COMPANY LAW 575

ing agent o£ the company for 3 years from the date o£ such cessation ex-
cept with the approval of the Central Government.
Where a company has a sole selling- agent, the Central Government,
may require -the company to furnish to it such information regarding the
terms and conditions of the appointment for the purpose of determining
whether or not such terms .and-conditions are prejudicial to the interests,
of the company. If the company refuses or neglects to furnish any such
information, the Central Government may appoint a suitable -person to-
investigate and report. If the said Government, after the perusal of the-
information supplied by the company or of the report by the investiga-
tor, is of the opinion that the terms and conditions are prejudicial to the-
interests of the company, it may, -by order, vary them and then the terms
and conditions of appointment of the sole selling agent shall be regulat-
ed by such order. If th^re-^re more selling agents than one, the Cen-
"tral Government will, after following the above procedure, determine who-
•will be tlie sole selling agent for any particular area and on what terms-

COMPENSATION FOR LOSS OF OFFICE OF SOLE

SELLING AGENT
A company shall not pay or be liable to pay to its sole selling agent
any compensation for the loss of his office in the* following case :—
(a) where the appointment of the sole selling agent ceases to be
valid because the company in general meeting has not ap-
proved it;
- (b) where h e resigns his office in view of the reconstruction of
the company or its amalgamation with other body or bodies
corporate and is appointed as the sole selling agent of the re-
constructed or amalgamated company;
(c) whqre he resigns his office of his own accord;
(d) where he has been guilty'of fraud or breach of trust in rela-
tion to, or of gross negligence in, the conduct of his duty as
the sole selling agent;
(e) where he has instigated, or has taken part directly or indirect-
ly in bringing about, the termination of the sole selling agency.
Where the compensation is payable, it must not exceed the remune-
ration^ which he would have earned if he had been^ in office for the residue
of his term, or for S years, whichever is shorter (Section 294A).

LOANS T O DIRECTORS
Section 295 provides that without obtaining previous approval of the
Central Government, a public company or its subsidiary cannot, directly
or indirectly, lend money or guarantee or secure loans to :—
(a) a director of the company or of its holding company;
(b) a partner or relative of any such director;
(c) any firm in which any such director or relative is a partner;
S76 MERCANTILE LAW

(d) any private company of which any such director is director or

member; ""
(e) any body corporate 25 per cent or more of whose total voting
power may be exercised or controlled by any such director, or
tivo or more directors together;
(f) any body corporate, the Board, managing director, or mana-
ger whereof is accustomed to act in accordance with the direc-
tions or instructions of any director or directors of the lend-
ing company.
The above re;5trictions do not apply to loans by a private company;
o r by a banking company; or by a holding company to its subsidiary.

BISCXOSURE OF DIRECTOR'S INTEREST

Except with the consent of the Board given in advance by a resolu-
lion at a Board meeting, a director of a company, or his relative, or a
firm in which such director or a relative is a partner, or any -«artner' of
such a film, or a private company in which such director is a member or
a director, should not enter into any contract with the company for the
sale, purchase, or supply of any goods, materials, or services, or for un-
•denvriting the company's shares or debentures. Such contracts up to
Rs. 5,000 in the aggregate in any calendar year are, however, permitted
if they are part of the regular trade or business of such director, etc.,
o r the company (Section 297). Directors may carry on the affairs of the
company where managing agents' or Secretaries' and treasurers' office is
"vacated for any reason. A director of a company who is in gny way
•concerned or interested in a contract or arrangement by or on befialf of
the company must disclose such interest or concern at the Board meeting
a t which the contract is disclosed or at the first Board meeting after the
director's becoming interested. A general declaration that he is a mem-
tier of a particular firm or company will be deemed to be sufficient dis-
closure (Section 299). An interested director must not participate in the
-discussions .or vote on the particular contract. If he does vote, his vote
-will not count, nor v/ill his presence count for quorum. These
Tcstrictions do not apply in the case of a private company (Section 300).
A register must be kept* in which shall be entered particulars of all con-
tracts to which Sections 297 or 299 applies. T h e members must be in-
formed of the director's interest in any contract appointing manager,
o r managing director.

REGISTER OF DIRECTORS, ETC,

Every company must keep at its registered ofBce a Register of Di-
rectors, Managing Director, Manager and Secretary, and must file a copy
-within 28 days of the appointment of the first directors and must notify
the Registrar of any subsequent changes within 28 days of the happening
thereof. The particulars in case of each of the above that the register
must contain a r e : (a) in case of individual, his name, usual residential
address, nationality, business occupation," and details of any directorship.
COMPANY LAW 577
managerbhip, etc.; (b) in case o£ corporalioti, ils corporate name, regis-
tered office, and full name, address and nationality of its directors; (c)
in case of firm, full name, address and nationality of each partner and
the date of becoming partner; (d) if any directors have been nominated
by a corporation, its corporate name and particulars in ^(a) and (b); (e)
if any firm has nominated directors, their similar particulars as in (a)
and (c) (Section 303).
In addition to the above register, a separate register called the
"Register of Director's Shareholdings," showing in regard to each direc-
tor the number, description and amount of the shares or debentures in
tiie company or its subsidiaries or its holding company or a subsidiary.
of a holding company, held by or in trust for each director or of which
each director has the right to become the holder. The register milst
also show the date of each share or debenture transaction and the con-
sideration therefor when the transaction is entered into after the com-
mencement' of the Act. The register must be open to inspection of inem-
bers and debenture-holders immediately before the annual general meet-
ing and at die meeting (Section 307). No director can now assign his
office; if it is done, it will be void. These provisions apply to managers
as they apply to directors.'
An office or place of profit under a company or under its subsidiary
can be held by any of the following persons only with the previous con-,
sent of the company by special resolution: (1) any director of the com-
pany; (2) any partner of such director; (3) any relative of such director;
(4) any firm in which such director or his relative is a partner; (5) any
private company in which such director is a director or member; (6)
any director, or manager, of such private company. But the office of
managing director, manager, legal adviser, technical adviser, banker or
trustee for debenture-holders is exempt from the above restriction; and
they can hold office of profit (Section 314).

COMPENSATION FOR LOSS OF OFFICE

No compensation for loss of office may be paid by a company to any
director other than the managing or wholetime directors, oi directors
who are managers. Even in the case of managing or whole-time director,
or manager-directo?;, no such payment will be made; (i) where the direc-
tor resigns his office on reconstruction or amalgamation of the company,
or for some other reason; (ii) where office has to be vacated (being frau-
dulent person); (iii) he has to give up directorship beyond 20; (iv) die
winding-up of the company is due to his negligence or mismanagement;
(v) the termination of his office is biought about collusively. Where tire
compensation is payable, it must not exceed the remuneration which
would have been earned for the unexpired residue of the term or 3 years,
whichever is shorter (Section 318). In case of transfer of undertaking
of a company, a director cannot receive compensation Jor loss of office,
but tlic transferee company may pay.

LEGAL POSITION OF DIRECTORS

Directors have been described by judges as 'agents,' 'trustees,'' or
578 MERCANTILE LAW

'managing partners. The best description seems to be tlie one given by

Jessel, M. R., wjio says :'" " they are commercial men managing a trad-
ing concern %)r the benefit of themselves and of all tlie shareholders in
it. They stand in a fiduciary position towards the company in respect
of their powers and capital under their control." Lord Selborne, L. C ,
said:^ "The directors are the mere trustees or agents of the company-
trustees of the company's money and property; agents in the transactiona
which they entar into on behalf of the company."

AS AGENTS
Directors are correctly described as agents of tlie company, and the
ordinary rules of agency apply. The company being a legal person, the
directors as agents act on its behalf. They are agents for the company
wJUi powers and duties of carrying on the business subject to restrictions
ianposed by the articles and the Act. They make' contracts on behalf of
the company and are not personally liable, unless they contract in their
awn name, or fail to exclude personal liability. If they make contracts
ultra vires the company, they will not be liable on them unless there is
an implied breach of warranty of authority. If the act done is ohly
ultra vires the directors, then a contract made (i) with a member is void-
able, (ii) with an outsider, who had no notice of the want of authority,
is binding, on the company. In either case, however, it may be made
valid by the ticquiescence of ALL shareholders.

AS TRUSTEES
Directors are not trustees in the full sense of the term inasmuch as no
property is vested in them in their capacity as directors. Trustees- are
persons in whom is vested the legal ownership of assets which they ad-~
minister fpr the benefit of others, who are said to have "beneficial or
equitable interest in those assets, and who can enforce their inteiests by
suing the trustees. Directors are not vested with the ownership of the'
company's assets: the company owns its own property. Nor are the
directors trustees for tlie individual shareholders. Nevertheless, they
are in certain respects in the position of trustees for the company. In
the first place, as Lindley, L. J., observed:" "Although directors are not
properly speaking trustees, yet drey have always been considered and
treated as trustees of money which comes to tlieir hands or which is
actually under their control; and ever since joint-stock companies were
invented directors have been held liable to make good moneys which they
have misapplied, lipon the same footing as if diey were trustees." In
the second place, directors are in the position of trustees for their com-
pany as regards the exercise of all powers which they are authorised to
exercise on the company's behalf." For example, they are trustees of
their powers of allotting shares, making calls, accepting payment of calls

52. Re Forest of Dean Coal Co. (1878) 10 Ch. D. 450.:

53. G.E.R. LY Co. v. Turner (1872) L.R. 8 Ch. App. 149.
54. P.e Lands Allotment Co. (1894), 1 Ch. 616.
55. Syke's Case ^1872), X.R. 13 Eq. Cas. 255.
 COMPANY LAW ^'^
Hin advance, passing or rejecting transfer of shares and foifeiting shares
'or accepting their sunender. Thirdly, a director's position partakes of
the fiduciary character of trusteeship so that he is prechided from allow-
ing the interests of the company to clash with his own interests.

DUTIES
The duties of directors are usually regulated by the company's arti-
cles, and are likely to depend upon the size and nature of the business
of a company. Romer, J., observes;" "In discharging his duties a di-
rector must act honestly, and must exercise such degrees of skill and dili-
gence as would amount to the reasonable care which an ordinary man
might be expected to take in the circumstances on his own behalf." In
other woids, directors should use fair and reasonable diligence in the ma-
nagement of tlieir company's affairs, and to act honestly, but as long as
they fulfil these conditions, they "are not liable for want of error of
judgmeni." A director is not bound (apart from special agreement,
e.g., whole-time director) to give continuous attention to the affairs of the
company. His duties are of an intermittent nature to be performed at
periodical Board meetings. He may entrust, having regard to the exi-
gencies of business, to some trusted official. But a director cannot as-
sign his office.

LIABILITIES
The various liabilities of a director may be considered under the
following heads :—
As shareholder.—The liability of directors for payment of share
money is ordinarily limited in the same way as that of the other share-
holders of the company. But the memorandum of a company may
make the liability of any or all the directors unlimited as provided by
iSections 322 and S23. A notice that his liability will be unlimited must
be given to the director before he accepts that office.
Breach of fiduciary duly.—By Section 71 (2), any director who know-
ingly contravenes or permits the contravention of the statutory restric-
tions with respect of allotment, remains for two years after the allotment
under a statutory liability to compensate the company for any loss or
damage or costs incurred. Apart from statutory liability, directors as
trustees are liable for breach of their fiduciary duty to the Company. The
failures of directors to act within powers (ultra vires acts) will render
them liable', and they shall have to indemnify the company for any loss
or damage." Apart from ultia vires acts, directors may incur liability to
their company as for breach of trust or misfeasance, if they act mala fide,
i.e., otherwise than honestly for the benefit of the company. It is on
this ground that directors may be required to account for and surrender
^ecret profits to their company. Again, quite apart from mala fides, di-

56. Re City Equitable Ins. Co. (1925), Ch. 407.

57. Re Sharp (1892), I Ch. 154; Eastern Shipping Co. v. Banekee
(1924), A.C. 177. ii 6 ^ .b
380 MERCANTILE LAW

rectors may be liable to the company for negligence in the exercise <Sl
their povers, if tliey do not act with such care as is reasonably expected
from them, i.e., they do not exercise reasonable diligence in the manage-
ment of coiSpany's affairs and the company suffers a loss. If they give
all sorts of powers to the managing agents and thus enable them to com-
mit misconduct, they are negligent and liable to make good the loss."
Directors are also liable for wilful wrong or wilful misconduct.

LIABILITY TO THIRD PARTY

Directors may becoms personally liable to allottees of shares who
apply on the faith of a prospectus containing untrue statements. They
may also become liable,, if the money is not paid back to the applicant
for shares within 130 days of the issue of the prospectus when the com-
pany fails to allot shares within 120 days. They are also liable for irre-
gular allotments, as also when their liability has been made unlimited}
under Sections 322 and 323. In the winding up of a company, director's
responsible for fraudulent trading on the part of the company may, by
order of the Court under Section 542, be made personally liable, with-
out any libiit, for all or any of the debts or liabilities of. the company.
Apart from the Act, directors may incur personal liabilities for breach
of warranty of authority. They will also be liable for acts ultra vires
themselves. A director acting in his own name or without excluding
personal liability on a negotiable instrument may be liable.
The Act also provides for various statutory penalties for non-com-
pliance with the provisions, and they are referred to in their appro-
priate places. Directors may also become criminally liable under the
common law, the Indian Penal Code or the Companies Act, Sixteen sec-
tions of the Act provide for criminal proceedings. Offences under the
Indian Penal Code generally relate to frauds, perjury, mis-appropriation
or embezzlement of funds, conspiracy to defraud, etc. Most of th*-e
offences are now expressly covered by the Companies Act.

MANAGER
By Section 2 (24), manager means "an individual (not being the ma-
naging agent) who. subject to the superintendence, control and direction
of the Board of Directors, has fhe management of the whole, or substan-
tially the whole, of tlie affairs of a company, and includes a director or
any other person occupying the position of a manager, by whatever name
called, and whether under a contract of service or not." With effect from
April 1, 1956, a company (whether public or private) cannot appoint any
firm, company or association as its manager; and any existing appoint-
ment was to terminate by October I, 1956. No company must appoint
or continue tlie appointment or employment of any person as its mana-
ger who (i) is an undischarged insolvent; or (ii) has at any time witl&in
the precrdiflg 5 years been adjudged as insolvent; or (iii) suspends, or
has suspended payment to his creditors; (iv) makes, or has at any time
within tlie preceding 5 years made, a composition with them; (v) is, or

58. Govind v. Ranganath (1930), 45 Bom. 226.

COMPANY LAW 581
has at any time v;jchin the preceding 5 years been, convirted of an oflence
jinvolving moral turpitude. The Central Government may relax this- res-
triction in appropriate cases (Section 385). No person is eligible to be
appointed a manager or a managing director for more than 2 companies,
and any such appointment to the second company can be made only with
the unanimous resolution of the Board of which a special notice has
been given to all the directors. Any person wlfo is a manager or manag-
ing director of more than 2 companies must choose before April 1, 1957,
the two companies, in which he wishes to continue in office. The Cen-
tral Government may allow a person to be a manager of more than two
companies in special cases.
A manager must not be appointed for more than 5 years at a time,
although re-appointment or extension may be made by the company dur-
ing the last two years of the existing term. Any assignment of his office
by a manager is void.
Subject to overall managerial remuneration, the manager of a com-
pany may be paid a salary on monthly basis or by way of a percentage
not exceeding 5 per cent of net profits; provided it may be more than 5
per cent with the approval of the Central Government. Any change in
the agreement or appointment for increasing his remuneration shall be
effective only if approved by the Central Government (Section 388).

MANAGING DIRECTOR
Section 2(26) defines a managing director as "a director (therefore
an individual) who, by virtue of an agreement with the company or of a
resolution passed by the company ih general meeting. or by its Board
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." He is, however, subject
to the control of the Board.
A discharged insolvent, a person who has suspended payment, or who
has been convicted by a Court for an offence involving moral turpitude
cannot be appointed Managing Director of any company (Section 267).
In the case of a public company and its subsidiary, the appointment or
re-appoimment of a managing director, or any change in the agreement,
can be made only with the approval of the Central Government. Like a
manager, a managing director cannot act as such for more than 2 com-
panies, and in the case of the second company with the unanimous ap-
proval of the Board of directors. Like a manager, a managing director
can be appointed only for 5 years at a time, reappointment or extension
being possible on the basis of 5 years' tenure on each occasion, and
with the approval of the Central Government.

MANAGING AGENTS
By Section 2(25), Managing Agent means "any individual firm or
body corporate entitled, subject to the provisions of this Act, to the
management of the whole, or substantially the whole, of the affairs of
 582 , MERCANTILE LAW
the company by virtue of an agreement with the company, or by virtue
of its memorandum and articles, and includes any individual, firm or
body corporate occupying the position of a managing agent, by whate^'er
name called. It should be noted that the definition says he is entitled,
and the'Allahabad High Court has also held in I.T. Commr. v. Varshni,
1954 All. 58, that a managing agent is entitled as of right to the mana-
gement of the affairs of the company by virtue of the agreement, and
is not a servant of the company.
Prohibition of appointment.—Section 32t vests in the Central Gov-
ernment the power to declare by notification in the Official Ga7ette
that from a specified date companies engaged in specified classes of in-
dustry or business shall not have managing agents. T h e Government
will pxercice this power only after due inquiry; and the notification will
become effective only after it has been placed before Houses of Parlia-
ment for a period of 30 days within which either House may approve,
dis.ipprove or modify the order. When the notification becomes final,
the managing agency in the specified class of industry will terminate at
the end of 3 years from the specified date; and no further appointment
or re-appointment of managing agent shall be made.

ABOLITION OF MANAGING AGENCIES AND SECRETARIES

AND TREASURERS
The managing agencies and secretaries and treasurers have been
abolished altogether with effect from April 3, 1970. The new Section
.S24A added by the Companies (Amendment) Act, 1969 reads as follows:
"32'IA. (1) Notwithstanding anything contained in any other pro-
vision of this Act or in the memorandum or articles of association or in
any contract to the contrary, where any company has on the 3rd day
of April, 1970, a managing agent or secretaries and treasurers, the term
of office of such manag^n^ agent or, as the case may be, the secretaries
and treasurers shall expire, if it does not expire earlier, on that date.
(2) No company shall appoint or re-appoint any managing agent
or secretaries and treasurers on or after the 3rd day of April, 1970."
Intercompany loans.—A company may give a loan, guarantee or se-
curity to any other company which is not under the same management
as the lending company up to 10 per cent of the aggregate of the sub-
scribed capital of the lending company and its free reserves so long as
the aggregate of the loans to all companies not under the same mana-
gement does not exceed 30 per cent of the subscribed Capital of the
lending company and its free reserves and 20 per cent of the same if all
the companies are under the same management. Loans in excess of 10
per cent of the aggregate of the subscribed capital of the lending com-
pany and its free reserves can be made only if previotisly authorised by
a special resolution of the lending company. If the total loans to all
companies, exceed the limits of 30 per cent and 20 per cent as stated
above, then prior approval of the Central Government is also necessary
(Section 370).
Companies would be deemed to be under the same management if
there is a common managing director, or manager or a majority of com-
 COMPANY LAW 58S
mon directors between the lending and borrowing companies. Section
"^371 provides that contravention o£ Section 370 is punishable with fine up
to Rs. 5,000 or simple imprisonment up to 6 months, but i£ the loan is
repaid, fine alone can be imposed. If the loan is not paid or tlie com-
pany is called upon to pay 'guaranteed sum, then all persons party to
the contiavention shall be liable jointly and severally to repay the
amount or make good the loss (Section 371). Ntf restrictions are impos-
ed regarding loans made by banking, insurance and free private com-
panies, as also companies established for financing individual enterprises.
Inter-company investments.—The Board of directors of the investing
company may invest in the shares or debentures of any other company
in the same group up to 10 per cent of the subscribed capital of the
other company, and in all the companies up to 30 per cent of the sub-
scribed capital of the investing company and in the same group 20 per
cent. Investments in excess of the aforesaid limits may be made 'only
with the sanction of a resolution of the investing company and the Cen-
tral Government. A record of all such investments must be kept, at the
registered ofgce and be open to inspection, and every company must an-
nex to its balance sheet a list of bodies corporate in the same group,
showing the shares and debentures in which investments have been made
by it. Private companies, banking and insurance companies, and invest-
ments by holding companies in their subsidiaries, or by managing agents
in their managed companies are all exempted from this prohibition
(Section 372). Iri respect of investments made after 1st April, 1952, it
they attracted the above restrictions, evei^y company was required to ob-
tain the authority of a resdlution and the sanction of the Central Gov-
ernment b y the 30th September, 1956; and if the sanctipri was not ob-
tained by them the Board had by 31st March, 1958, to dispose of the in-
vestments (Section 373). Contravention of the above provisions is puni-
shable with fine up to Rs. 5,000 (Section 374).

"^'^MEANING OF RELATIVE
Section 6 specifically states the relatives as follows: A person shall
be deemed to be a relative of another if, and only if,—
(a) they are members of a Hindu undivided family; or
(b) they are husband and wife; or
(c) the one is related to the other in the manner indicated below.
List of Relatives:
Father; Mother (including step-mother); Son (including step-son); Son's
wife; Daughter (including step-daughter); Father's father; Father's mother;
Mother's mother; Mother's "father; Son's son;^ Son's son's wife; Son's
daughter; Son's daughter's husband; Daughter's husband; Daughter's son;
Daughter's son's wife; Daughter's daughter; Daughter's daughter's hus-
band; Brother (including step-brother); Brother's wife; Sister (including
^«cp-sister); Sister's husband.

PART IG-J
COMPROMISE AND ARRANGEMENT
Arbitracion.-Section 389 of tlie Act, empowered a company, like an
584 MERCANTILE LAW
individual or a firm, to refer to arbitration, only under the Arbitration
Act, 19-10, any dispute between itself and any other company oi peison.
This cr<;ated difTiculties witli ' regard to foreign arbitrations, as foreign
arbitral awards could not be enforced although India is one of the sig-
natoiies of tiie New York. Convention (1948) on the recognition and en-
forcement of foreign arbitral awards. Consequently, Section 389 has
been deleted and Indian companies are now free to enter into such arbi-
tration agreements as may be pevmitleii by their memoranda and articles,
and not only under the Arbitration Act, 1940.

Compromise or Arrangement—Section 391 confers power on a majo-

rity of creditors to come to some suitable arrangement (beneficial to all
concerned) with the company which is unable immediately to meet its
liabilities. Similarly, a compromise or arrangement can be made bet-
ween a company and its members. The procedure is this. Where it ii
proposed to make a compromise or arrangement between the company
and its creditors or any -class of them; or between a company and its
members or any class of them, an application is made to the Court by the
company or creditor or member, or where the company is laeing wound
up, the application is made by the liquidator. The Court may order a
meeting of the creditors or the members to be called and conducted
accoiding to the directions of the Court. If the majority in number re-
piesenting three-fourths in value of the creditors, or the members, as the
case may be, present and voting in person or by proxy, at the meeting,
agree to the compromise or arrangement, the compromise or
arrangement shall, if sanctioned by the Court, be binding on all
the creditors, or all the members, as the case may be, and also on
the company. But the Court cannot make an , order sanctioning
a compromise or arrangement unless it is satisfied that the company
or any other person, by whom an application has been made, has
disclosed to the Court, by affidavit or otherwise, all material facts
relating to company, such as the latest financial position of the com-
pany, the latest auditor's report on the accounts of the company, the
pendency of any investigation proceedings in relation to the company
under Sections 235 to 251 and the like. Furthermore, no compromise or
arrangement or scheme of amalgamation of a company which is being
wound up will be sanctioned by the Court unless the Court has received
a report from the Company Law Board or the Registrar that the affairs
of the company ha\e not been conducted in a manner prejudicial to the
interests of its members or to public interest. Similarly, no order for
the dissolution of the company will be passed by the Court unless a simi-
lar report has been received from the Official Liquidator.

T h e new Section 394A makes it obligatory on the Court to give

notice to the Central Government of every application made to it under
Section S9I or 394 and take into consideration the representation made
by that Government before passing any order on the proposed compro
mise or i.rrangcment or scheme of amalgamation. Subject to the afore-
said reqin'rem'cnts, the Court has wide powers in sanctioning or rejecting
the scheme It will sanction the scheme only if the scheme is bona fide, he-
 COMPANY LA\V 585
neficial to all concerned, and is not a coercion on the minority." Wliere
the Court has made an order sanctioning the compromise or nrrangc-
ment, it will have cflect only after a certified copy of the order has hoen
filed with the Registrar. A copy of ilie order must also be annexed
to every copy of tlie memoranthim of [lie company. Where the scheme
involves re-oiganisation or reduction of share capital, the company must
also comply with the provisions of .Sections 94 and ]00.°°

RECONSTRUCTION OR AMALGAMATION
Sections 394 and S95 provide for facilitating arrangements for the
purposes of reconstruction or amalgamation of companies. Reconstruction
of a company can take place under Section 484 by winding up the com-
pany voluntarily, but that may take a long time and involve great expense.
Sections 391 and 394 provide for reconstruction or amalgamation with-
out winding up. By Section 394, where, on an application under Sec-
tion 391, it is shown to the Court that the scheme of arrangement has
been proposed for the purpose of reconstruction of a company, or the
amalgamation of two or more companies, and the scheme involves the
transfer of the whole or any part of the undertaking, property or liabili-
ties by one company (i.e., the transferor comparty) to another company
(i.e., the transferee company), the Court may, in sanctioning the scheme
(or tlicreafter) provide by order for all or any of the following matters :
•(i) the transfer to the transferee company of the whole or any part of
the undertaking, property or liabilities of any transferor company; Tii)
the allotment or appropriation by the transferee company of any shares,
debentures, policies, or other like interests in that company; (iii) the con-
tinuation by or against the transferee company of any pending proceed-
ings; (iv) di.ssohition without winding up to transferor company; (v)
provisions for dis.senting member; (vi) any other incidental or conse-
quential matters. The property transferred by the order of the Court
vests in the transferee company, as well as liabilities.
As staled in the previous section, no scheme of amalgamation of
a company which is being wound up will be sanctioned by the Court
imlcss the Court has received a report from the Company Law Board or
the Registrar that the affairs of the company have not been conducied
in a manner prejudicial to the interests pf its members or against the
public interest. Further, no order of dissolution of the company will
be passed by the Court unless a similar repwrt has been received from
the Official Liquidator. Also, the Court must give notice to the Central
Government of every application under Section 391 or 394 and take
into consideration the representation made by that Government before
passing the order on the proposed scheme of amalgamation.
Section 395 enables the transferee company to compulsorily acquire
the shares of dissenting members," and provides as follows: Where a
59!~SeF'ln re Natore Kamala Bank Ltd. (1937) 1 Cal. 368; .Smt.
Bhagwati v. New Bank of India Ltd., 1950 E.P. I I I .
fin. Palace Hotels Ltd. (1912) 2 Ch. 4381.
61. S. Vishwanath v. East India D. 8: 5. Factories Ltd., 1957 Mad.
341.
586 MERCANTILE LAW

scheme or contract involving transfer of shares or any class of shares in

the transferor company to the transferee company has, within 1 months
after the making of the offer i n ' t h a t behalf by the transferee company,
been approved by the holders of not less than nine-tenths in value of
the shaies whose transfer is involved, the transferee company may, at
any time within 2 months after the expiry of the said 4 months, give
notice in the prescribed manner to any dissenting shareholder, that it
desires to acquire his shares; and when such a notice is given, the trans-
feree company is unless, on the application made by the dissenting share-
holders within one month from the date of the notice, the Court think
fit to order otherwise, entitled and bound to acquire those shares on the
terms on which the shares of the approving shareholders are to be trans-
ferred to the transferee company. T h e transferee company is required
to give notice to the dissenting shareholders within one month of the
transfer under the scheme or contract, and any such holder may, with-
in 3 months of the notice to him, require the transferee company to ac-
quire his shares, and the company should do so. T h e transferee com-
pany is required to notify the transferor company of the transfer to it
of the shares, pay the share value to the transferor company whereupon
the transferor company ^ u s t register the transferee company as the hold-
er of those shares.
Take-over Bids.—Section 395 has been amended to check malprac-
tices in relation to 'take-over' and acquisition of shares of dissenting
shareholders under a scheme or contract approved by the maiority. The
amendment provides for disclosure of adequate information to share-
holders in a 'take-over bid' so that they can judge for themselves whe-
ther or not to accept the offer. The amended Sub-section (3) of Sec-
tion 395 now provides that the transferor company, after registering the
transferee company as the holder of the shares of the dissenting share-
holders, inform, within one month of the date of such registration, the
dissenting shareholders of the fact of such registration and of the re-
ceipt of tlie amount or other consideration representing the price pay-
able to them by the transferee company. In the meantime, tlie trans-
feror company must keep the money so received in a separate account
in trust for those shareholders.
Another safeguard has been provided by the addition of a new
Sub-section (4A). It lays down that in relation to every offer of a scheme
or contract involving the transfer of shares or any class of shares in the
transferor company to the transferee company, no circidar containing
an offer to take over the shares of the company sliould be issued
until a coDV thereof is presented to the Registrar who will have
tho power to refuse to register any such circular if it does not
contain all the requisite information prescribed by the Government
or if it rets out any information in such a way as to give a false impres-
sion. An appeal lies to the Court against the refusal by the Registrar
to register the circular. Anyone issuing an imregistered circular is
liable to be fined up to Rs. 500.
Amnlgnmation by order of Central Govcrnpient By jSection 39(j,
the Ccnnal Government may, where it is satisfied that it isl essential in
 COMPANY LAW 587
the public interest that two or more companies should amalgamate, by
notification, provide for the amalgamation of those companies into a
single company. Every member or creditor of each of the companies be-
fore amalgamation shall have, as nearly as may be, the same interest
in and rights against the company resulting from amalgamation as he had
in the company in which he was originally a member or creditor. If his
rights in the new company become less, he shall get compensation for it.
Preservation of books and papers of Amalgamated Company.—
A new Section 396A has been added to prevent the practice of destroying
incriminating accounts and records of the company which has amalga-
mated with another company. This section provides that books and
papers of a company which has been amalgamated with, or whose shares
have been acquired by, another company under the provisions relating
to take-overs and acquisition of shares shall not be disposed of without
the prior permission of the Central Government. The Central Govern-
ment, before granting the permission, may appoint a person to examine
the books and papers or any of them for the 'purpose of ascertaining
whether they contain any evidence of the commission of an offence in
connection with the promotion or formation, or the management of the
d^-foJYsof the firs me» ned company or its amalgamation or the acquisi-
tion of its shares.

PREVENTION OF OPPRESSION AND MISMANAGEMENT

Special powers have been vested in the Court and the Central Gov-
ernment for the protection of members against oppression by the ma-
jority of shareholders and for intervention in case of mismanagement of
a company's affairs. This has been done because the cardinal rule laid
down in Foss v. Harbottle,"' that the minority is bound by the decision of
the majority, is abused in many cases. Sections 397 to 409 provide for
remedial measures.
If the oppressed minority consider that to wind up the company
would not relieve but on the contrary, they would be unfairly prejudiced
by winding up, they may petition the Court under Section 397, and the
Court may impose a solution on the disputants. A certain number of
members (stated below) may apply to the Court for relief on the grounds
that the affairs of the company are being conducted ;—
(a) in a manner oppressive to any member or members, or
(b) in a manner prejudicial to the interests of the company, or
(c) in a manner prejudicial to the public interest, or
(d) that a material change has taken place in the management or
control of the company and that by reason of siicJi change it
is likely that the affairs of the company will be conducted in
a manner prejudicial to the interests of the company.
If the Court is satisfied that the affairs of tlie company are being

€2. (1843) 2 Hare 461.

588 MERCANTILE LAW
conducted as complained of, it may pass any orders with a view to bring-
ing to an end tlie matters complained of, or apprehended.
The number of members necessary to make application is (i) in the
case of a company having share capital, 100 members or 10 per cent of
the total number of members, whichever is less, or members holding
10 per cent of the issued capital; (ii) in the case of a company not hav-
ing share capital, 20 per cent of its total number of members. The Cen-
tral Government may, in appropriate cases, authorise any lesser number
to apply. The Central Government is also entitled to apply to the Court
for an order as above.
The Court may in its discretion make any order tliat it thinks fit,
and in particular, it may provide for—
(i) the regulation of the conduct of the company's affairs in future,
and may even frame fresh regulations; (ii) the acquisition of the shares
or interests of any members by other members or by the company; (iii)
the consequent reducticm of the share capital in case of (ii) above; (iv)
termination, setting aside or modification of any - agreement, howsoever
arrived at, between the company and the managing agent, secretaries and
treasurers, managing director, any other director, or manager; (v) termi-
nation, setting aside or modification of any agreement between the com-
pany and any other person with the hitter's consent; (vi) setting aside
any transfer, delivery of goods, payment, execution or other act relating
to property made or done by or against the company within 3
months of the application which would amount to a fraudulent prefe-
rence in the case of an individual's insolvency; (vii) any other matter for
%vhich in the opinion of the Court it is just and equitable that provision
should be made (Section 402). No compensation is payable for loss of
office resulting from tlie termination of agreement by the Court. Any
person whose agreement of office has been terminated cannot act for the
company for 5 years thereafter without the leave of the Court. In addi-
tion to the above order, heavy penalties are, provided, as stated in Sche-
dule XI.

POWERS OF CENTRAL GOVERNMENT

Section 408 provides another measure to prevent oppression or mis-
management, as follows. On- the application of 100 members or mem-
bers holding LO per cent or more of the total voting power, the Central
Government may appoint 2 persons as additional directors for 3 years at
a time, and such directors will not be subject to retirement by rotation
nor need they hold any qualification shares; and any change in the Board
after such appointment will be ineffective unless confirmed by the Cen-
tral Government; or the Government may, instead, direct the company
to alter its articles so as to arrange for the election of its directors on
the basis of proportional representation. Special powers are conferred by
Section 409 on tlve Central Government to prevent changes in the Board
in consequence of a change in the ownership of shares. The Goverti-
ment can stop any change in the Board, or permit the same, if not
prejudicial to the interests o f ' t h e company.
COMPANY LAW 589
Now,*" the Government may appoint two directors of the company
on its own motion, and without application by any members, and to
prevent the affairs being conducted in a'manner prejudicial to the pub-
lic interest, even though there is no oppression of any member or mem-
bers or mismanagement of tlie affairs of the company.
Advisory Committee.—By deleting Sections 410 to 415, the Advisory
Commission has been abolished, any by a new Section 410 an Advisory
Committee has been substituted for tlie Advisory Commission. The Ad-
visory Conimittee is to consist of not more than 5 persons with suitable
qualifications and will advise, whenever required, the Central Govern-
ment or the Compauy Law Board on such matters arising out of the ad-
ministration of the Companies Act as may be referred to it by the Gov-
ernment or Board. All cases pending before the Advisory Commission
were transferred to the Central Government on October 15, 1965, for
disposal. As the result of this change the powers of the Central Govern-
ment have been enhanced, as there is no compulsion on its part to refer
any cases to the Advisory Committee as was necessary to refer certain
specified case to the Advisory Commission before it was abolished.

PART 16-K
WINDING UP
WINDING UP BY COURT )
A winding up by the Court, or compulsory winding up, as it is often
called, is initiated by an application by way of petition presented to the
appropriate Court for winding up order. The winding up of a com-
pany with a capital of one lakh or more must take place only in the High
Court; but in other cases, the High Court may transfer the application
to a District Court subordinate to it.

GROUNDS FOR COMPULSORY WINDING UP

Section 433 provides that a company may be wound up by the Court:
(a) If the company has, by special resolution, resolved to be wound
up by the Court.
(b) If default is made in delivering the statutory report to the Re-
gistrar or in holding the statutory meeting.
(c) If the company does not commence its business within a year
from its incorporation, or suspends its business for a whole year.
(d) If the number of members falls below seven (or in case of a pri-
vate company, below two).
(e) If the company is unable to pay its debts.
(f) If the Court is of opinion that it is just and equitable that tlie
company should be wound up.

WHO MAY PETITION

The following may petition: (1) the company; (2) creditor; (3) con-

63. Inserted by the Companies (Amendment) Act, 1963.

590 MERCANTILE LAW
tributory; (4) all or any of the above parties; (5) the Registrar; (6) any
person authorised by the Central Government as per Section 243, i.e.,
following upon a report of inspectors; (7) by virtile of Section 440, when
a company is already being wound up voluntarily, the Court may order
winding up by it.
A contributory can petition only on the ground (i) that the number
has fallen below the statutory minimum, or (ii) at least some of the shares
held by him were originally allotted to him, or have been held by him
and registered in his name, for at least 6 months during the 18 months
before the commencement of the winding up or have devolved upon him
through the death of a former holder. A fully paid up shareholder is
a contributory under Section 428, and may petition, even when the com-
pany may have no assets for distribution among the shareholders aftei
the satisfaction of its liabilities.
The Registrar may, with the previous sanction of the Central Govern-
ment, present a petition for winding up only t»n the following grounds:
(i) if default is made in filing the statutory report or in holding the sta-i
tutory meeting; (ii) if the company does not commence its business within
a year from its incorporation or suspends it for a whole year; (iii) if it
appears to him from the balance sheet or from the leport of the inspec-
tors that the company is unable to pay its debts; i r (iv) where the Regist-
rar is authorised by the Central Government under Section 243 to pe-
tition.

PROCEDURE
On hearing the petition, die Court may dismiss it, adjourn it, make
an interim order, or make a compulsory order for winding up the com-
pany. Where tlie winding up order is made, tlie Official Liquidator at-
itached to each High Court will' become the liquidator. The Court will
also settle tlie list of contributories, make calls and settle any question
prising out of winding up. The creditors will be asked to provide their
flaims, where necessary and the liquidators will realise the assets and distri-
bute the proceeds among the creditors, whereupon the Court may pass an
order that the company be dissolved. But within two years of the dis-
solution, the Court may, on the application of the Liquidator or any
other person interested, declare the dissolution to have been void.

VOLUNTARY WINDING UP
A company may be wound up voluntarily: (i) when the period (if
any) fixed for its duration has expired or an event on the happening of
which the company is to be wound up has happened and the company
in general meeting has passed an ordinary resolution to wind up; or (ii)
if the company passes a special resolution to wind up voluntarily (Section
484). When the resolution has been passed, notice must be given by the
company within 14 days of the passing thereof by advertisement in die
Official Gazette, and also in some newspapers circulating in the district
where the registered office is situated.
There are two kinds of voluntary winding up, namely : Members' or
COMPANY LAW 591
Creditors'. A company may be wound up as members' voluntary wind-
ing up, if a declaration _o£ tlie company's solvency is made by its direc-
tors, or where there are more than 2 directors, by the majority direc-
tors, at die Board meeting that tliey are of opinion that the company
has no debts, or that it will be able to pay its debts in full within 3 years
from tlie commencement of winding up. The declaration must be sup-
ported by an affidavit of the above directors, and must be made within
5 weeks, immediately precedirig the date of the resolution for winding
up and must be delivered to the Registrar before that date, and should
embody a statement of company's assets and liabilities. On the passing
of the resolution for winding up the company must in general meeting
appoint one or more liquidators and fix his or their remuneration. Any
remuneration so fixed cannot be increased at all, not even by the sanc-
tion of the Court (Section 490). On the appointment of tire liquida-
tor, all tire powers of the Board and tlie managing or whole-time direc-
tor and manager, cease. Within 10 days of the appointment of the
liquidator, the company must give notice to the Registrar.
I£ in a members' voluntary winding up, the liquidator is of opinion
that the company will not be able to pay its debts in full Xvithin the per-
iod stated in the declaration, or if the period has expired without full
payment of debts, he must forthwith call a meeting of the creditors and
lay before it a statement o£ company's assets and liabilities. In the event
of the winding up continuing for more than one year, tlie liquidator must
call a general meeting of the company at the end of the first year of the
commencement of winding up and of each succeeding year, and must lay
before the meeting an account of his acts and dealings and of the conduct
of winding up. When the affairs of the company are fully wound up the li-
quidator must make up an account and call a final meeting of the company
and lay these accounts before the meeting, then within one week of this
meeting send to the Registrar and the Official Liquidator a copy each
of the accounts and make a return to each of them of the holding of the
meeting ;>nd of the date thereof; and the Registrar will forthwith re-
gister them. The Official Liquidator will scrutinise the book and pa
pers of company and make a report to the Court that its affairs have not
been conducted in a manner prejudicial to the interests, of its members
or against public interest. If the report indicates tliat the affairs have
been conducted in prejudicial manner the Court may order the Ofiicial
Liquidator to make further investigation. On receipt of this report,
the Court may either make an order that the company shall stand dis-
solved from the specified date or make such other order as the circums-
tances of the case brought out in the report permit.

CREDITORS' VOLUNTARY WINDING UP

Where a declaration of solvency is not made and filed with the Re-
gistrar, it is presumed that the company is insolvent. In such a case, the
company must call a meeting of its "Creditors for the day or the day next
following tlie day fixed for company's general meeting, for passing the
resolution for winding up.
592 MERCANTILE LAW
' Subject 10 the right of the preferential creditors, the assets of a com-
pany on its winding up are applied in satisfaction of its liabilities pari
passu, and any surplus is divided among the members according to their
lights (Section 511).

WINDING UP UNDER SUPERVISION

Where a company is being wound up voluntaiily the Court may
order the continuation of voluntary winding up subject to its supervi-
sion on any terms or^ conditions. The liquidator will continue to exer-
cise all powers subject to any restrictions laid down by the Court.

CONSEQUENCES OF WINDING UP GENERALLY

AS T O SHAREHOLDERS
A shareholder is liable to pay full amount of shares held by him.
This liability continues after winding up, but he is then described as a
"contributory." By Section 428, a Contributory is "every person liable
to contribute to the assets of a company in the event of its being wound
up, and includes a holder of fully paid up shares, and also any person
alleged to be contributory." Contributories are either present or past,
and it is the former who is liable to pay calls, and the latter can be called
upon to pay only if the present contributory is unable to pay. The na-
ture of a cdntributory's liability after winding up is legal and not con-
tractual. He cannot set off his debt against his liability for calls even
if tliere is an express agreement to do so.

AS T O CREDITORS
A company can never be adjudged insolvent, although it may have
become insolvent in the sense that it is unable to pay its debts. Where
a solvent company is to be wound up all claims against the company
are admissible, and when they are proved, payment is made. In the case
of an insolvent company, the insolvency law applies. A secured creditor may
either (i) rely on the security and ignore the liquidation, or (ii) value his
security and prove for the balance of his debt, or (iii) give up his security
and prove for the whole amount. Unsecured creditors of an insolvent
company are paid in 4his order : (i) preferential payments under Section
530, (ii) other debts pari passu.
Preferential Payments are as follows :
(a) all revenues, taxes, cesses and rates are payable by the company
within 12 months next before the commencement of winding up;
(b) all wages or salary of any employee due for the period not ex-
ceeding 4 months within tlie 12 months next before the commencement
of winding up, provided the amount payable to one claimant will not
exceed Rs. 1,000;
(c) all accrued holiday remuneration becoming payable to any em-
ployee on account of winding up;
(d) unless the company is being wound up voluntarily for the pur-
pose of reconstruction, all contributions payable during the 12 months
 COMPANY LAW 593
next before wmding up, by the company as" the employer of any per-
sons, tinder Employees' State Insurance Act, 1948, or any other law for
the time being in force; ' .
(e) nil sums due as compensation under Workmen's Compensation
Act, 1923;
([) all sums clue to any employee from a provident fund, a pension
fund, a gia.tuity fund or any other fund for the welfare of the employees,
maintained by the company;
(g) the exnenses of any investigation held under Section 235 or 237,
in so far as they are payable by the company.
Persons who claim to I5e creditors must prove their debts within the
time fixed by the Court, or by the voluntary liquidator.

FRAUDULENT PREFERENCE
The insolvency rules as to fraudulent preference apply to companies.
T h e oljject of the Act being a pari passu distribution, Section 531 pro-
^ides mat every transfer of property, movable, or immovable, delivery
of goods, payment, execution or other act relating to property made, taken
or done by or against a company within 6 months before the commen-
cement of its winding up shall be deemed, in the event of its being
%vound up, a fraudulent preference of its creditors and be invalid ac-
cordingly.

AS T O SERVANTS AND OFFICERS

A winding ui5 order operates as a notice of discharge to the emplo-
yees and officers of the company except when the business of the com-
pany is being continued (Section 444). A voluntary winding up also ope-
Ifrates as a notice of discharge. '

AS T O PROCEEDINGS
After a winding up petition is presented the Court may stay all pro-
ceedings against the company. After the winding up order is passed,
all proceedings against the company must cease unless the Court gives
special leave for them to continue. Further, any attachment,, distress,
execution put in force against the assets of the company after the com-
mencement of winding up is void (Section 537). In voluntary winding
up also the Court may restrain proceedings against the company if it
thinks fit.

AS T O COSTS
7f the company, while in liquidation, brings or defends any action
>;^md is ordered to pay costs, they are paid first out of the assets of the
company. The same rule applies in a voluntary winding up. Similar-
ly, all costs, charges and expenses of liquidation are payable out of the
assets of the company prior to all other claims except those of secured
creditors, if any (Section 520).
594 MERCANTILE LAW-
OFFENCES ANTECEDENT T O OR IN COURSE OF WINDING UP
OFFENCES OF OFFICERS
Every pasf and present officer of a company which is being wound
up must assist the liquidator and i£ he fails to do so he is liable to be
punished. He is liable to be imprisoned up to 5 years, or fined or given
both punishments, if he witliin 12 months ne\t before winding up and
at any time tliereatter fraudulently or under false pretences obtains cre-
dit for or on behalf of the company which company does not pay, or
pawns, pledges or disposes of any property of the company whicii has
ijeen obtained on credit and has not been paid for. The pawnee or pled-
gee is also punishable with impiisonment up to 3 years or fine or both.
Similarly, a past and present officer of the company is punishable with
imprisonment up to 2 years, or fine, or both, if he does not fully and
truly disco\cr to the liquidator all property of the company within his
knowledge, or does not deliver up to liquidator all property, books and
papers that are in his custody or under his control, or conceals any part
of the company's property to the value of Rs. 100 or more or conceals
any debt due to or from the company, or fraudulently removes any part
of company's property, or makes any material omissibn in any statement
relating to the affairs of the company, or fails to inform the liquidator
about false debts having been proved within his knowledge, or preven's
the production of any books after winding up or cancels, destioys, muti-
lates or falsifies any book or paper alTecting or relating to the properly of
the company, or makes any false entry in any book or paper relating to
tJie property of the company, or is guilty of any representation or other
fraud for getting creditor's consent in relation to affairs of the company.
If with intent to defraud or deceive any person, any officer or con-
tributory of a company in liquidation destroys, mutilates, alters, falsifies
or secretes (or is privy to any of these acts) and bookst papers, or securi-
ties, or makes any fiaudulent entry in any register, book of account or
document belonging to the company, he shall be punishable with im-
prisonment UP to 7 years and fine (Section 539).
If proper books of account \vcre not kept by a company for a per-
iod of 2 years immediately preceding the commencement oE \vinding up,
or period between incorporation and winding up, whicli is shorter, every
officer who is in default is liable to imprisonment up to one year (Sec-
tion 5-11).
If in the course of the winding up of a company, it nppeari that
any business of the companv has been carried on with intent to defraud
creditors of the company, or any other persons, or for any fraudulent
purpose, the Court may declare that any persons who were knowincrjv
parties to the carrying on of the bu'iines'i in the manner aforesaid sliall
be personally responsible %\ithour anv limitation of liability for all O'
any debts or other liabilities of the companv. Tn addition, the persons'
are liable to imprisonmem up lo 2 )cais, ov fine up to Rs. 5,000 or both.
MISFEAS.\NCE PROCEEDINGS
Section S-IS provides that v\heie. in the course of winding up a com-
COMPANY LAW 595
pany (whether voluntarily or by or .under the supervision of the Court),
it appears that any person who has taken part in the promotion or for-
mation of the company or any past or present director, managing
agent, secretaries and treasurers, manager, liquidator or officer oE tho
company, has misapplied or retained or become liaisle or accountal)le for
any money or property of the company, or has been guilty of any mis-
feasance or breach of trust in relation to the company, the Court, ma/,
on the application of the liquidator, or of any creditor or contributory,
made within 5 years from the date of the winding up order, or of the
first appointment of the liquidator, or of the misapplication, retainer,
misfeasance or breacli of trust, as the case may be, whichever is longer
examine into the conduct of the person, director, managing aqent, iec
letaries and treasurers, minagcr, liquidator or officer aforesaid, and com-
pel him to repay or restore the money or projjerty or any part thereof
respectively with interest at such late as tlie Court thinks just, or to con-
tribute such sum to the assets of tlie company by way of compensation,
notwithstanding that oifence is, one for which the offender may be crimi-
nally liable. An luditor of the company is an officer for th^^ above pur-
pose, as also the secretai v

PROSECUTION OF DELINQUENTS
Bv Section 545, if in a winding up by or under the super^-ision of
the Court, it appears that any past or present officer, or any member,
has been guilty of any offence in relation to the company in respect o.f
which he is criminally liable, the Couit may direct the liquidator either
himself to prosecute the offender or to refer the matter to the Registrar.
In voluntary winding up, the liquidator must refer the matter to the
Registrar. The Registrar may, in turn, refer it to the Central Govern-
ment for further inquiry. The Central Government must thereupon in-
vestigate and may apply to the Court for an order conferring d^n anv gov-
ernment nominee the power to investigate the affaiis of the company.
After the report of die investigation is received the Central Government
may direct the Registrar to prosecute the offender.

LIQUIDATORS
COMPULSORY WINDING UP
The official Liqtiidator attached to e.nch High Court will become the
liquidator on a winding up order being pas^ied. He may also be ap-
pointed as a provisional liquidator with the same powers.
Within 21 days after the ivinding up order, or the appointment of
provisional liquidator, a statement of affairs of the company must be
submitted to the OfTicial Licjuidator. The statement must show the
lassets and liabilities, the names, addresses of creditors and amount due to
eacii, debts due to the company, together with the names, addresses, oc-
cupations of debtors and amounts due froni each of ihem, and anv oiher
information reruiiied by the Official Liquidator. The statement must be
supported by an affidavit by one or moie directors and by the manager,
secretary or any other chief officer of the company
596 . MERCANTILE LAW
T h e Official Liquidator must, after f^e receipt of the statement, with-
in 6 months at the latest of the order, submit to the Court a preliminary
report as to the amount of capital issued, subscribed and paid up, and
the estimated amount of the company's assets and liabilities if the com-
pany has failed, the causes of its failure, and whether in his opinion
any further inquiry is desirable (Section 455).
Within 2 months of the winding up order, the Official Liquidator
must convene a meeting of the creditors to find out whether they would
like to appoint a "Committee of Inspection." Then within 14 days of
the above meeting, he should convene a contributories' meeting for the
purpose. If the committee is to be appointed, then the total number of
its members will not be more than 12, made up of equal number repre-
senting creditors and contributories.

POWERS OF LIQUIDATOR
As soon as a winding up order is made, or a provisional liquidator
is appointed, the liquidator ivill take into his custody or under his con-
trol all the property of the company and its effects and actionable
claims and get the help of the Presidency Magistrate or the District Magis
trate for this purpose (Section 456).
The liquidator may, with the sanction of the Court, (i) institute or
defend any suit, prosecution, or the legal proceeding in the name of
the company, (ii) carry on the business of the company for its benefi-
cial winding up, (iii) sell company's property, (iv) raise money on the
security of the company's assets, and (v) do all other things necessary
for the winding up. He may, without sanction of the Court, (i) do all
acts, and execute in the name of the company, all deeds, receipts and
'other documents, (ii) inspect the records and returns of the company on
the files of the Registrar gratis, (iii) prove, rank and claim in the insol-
vency of any contributory and to receive dividends therefrom, (iv) draw,
accept, make, endorse any negotiable instrument in the name of the
company, (v) take out, on his official name, letters of administration to
any deceased contributory, and do other necessary things to obtain pay-
ment, (vi) appoint an agent.
By Section 456, the liquidator may, with the sanction of the Court
or a special resolution, according as the winding up is compulsory or
voluntary, (i) pay any class of • creditors in full; (ii) make compromise
or arrangement with creditors; (iii) coinpromise with contributory o'
debtor.
DUTIES OF LIO.UIDATOR
Section 460 requires the liquidator to conduct the winding up ac-
cording to the direction given by resolution of creditors' or contribu-
tories' meeting or by the Committee of Inspection. He must summon
meetings of creditors or contributories when requisitioned by the holder
of 10 per cent of the value. His principal duty is to get in the property
and pay the debts and distribute thfe balance among contributories. He
must keep the»proper books of account, minutes books, and allow ins-
COMPANY LAW 597
pection thereof; twice in each year present to the Court an account ol
his receipts and payments in duplicate, and send a copy of the audited'
accounts to each creditor and contributory. He must keep all the funds
of the company in "the public account of India" in the Reserve Bank of
India; and must not keep any sucli money in his private account. All
papers of the company must indicate that the company is being wound
up, e.g., by adding tlie words "In liquidation" after the name of the com-
pany.

VOLUNTARY LIQUIDATOR
The -voluntary liquidator is appointed by resolution in genetal meet-
ing of tiie company and/or of the creditors, and his remuneration hxed.
By Sections 513 to 515, a body corporate cannot be appointed a volun-
tary liquidator; and peison who gives or agrees to give or offers tO'
any member or creditor any gratification with a view to securing his owrt
appointment as company's liquidator, or that of some other person, will
be punishable with fine up to Rs. 1,000.
^Vithin 21 days after his appointment, the liquidator must publisli
in the Official Gazette and deliver to the Registrar a notice of his ap-
pointment.-

PO^VERS AND DUTIES

A voluntary liquidator is a paid agent of the company and is liable
in damages if he neglects his duties as such. He must not make any sec-
ret profits and must keep funds of the company in Scheduled Bank to
the credit of a special banking account called "the Liquidation Account
of. . . . C o . Ltd." or "private Ltd.," or "company." He must not deposit
such money in his personal account nor must he retain'with him more
than Rs. 500 for more than 10 days. He will also be liable for mis-
feasance, if he pays any money to a person who has no claim against
the company. He may, with the sanction of special resolution, in
members' or of the Court in creditors', winding up or the Committee of
Inspection, do what an Official Liquidator can do under clauses (i) to-
(iv) of Section 457 (2) noted above. Section 512 further empowers him
to do without the sanction of the Court everything that the Official Li-
quidator can do, and also exercise some of tlie powers of the Court, e.g.,
settle lists of contributories, admit claims, make calls, call general meet-
ings, etc., and perform other functions.

DISCLAIMER BY A LIQUIDATOR
Section 535 (I) empowers the liquidator, with the leave of the Court
to disclaim any onerous property of the company. It provides that where
any part of the property of a company in liquidation is unsaleable or is
not readily saleable, the liquidator, with leave of the Court, may dis-
claim it in writing signed by him at any time wiJiin 12 months after
the commencement of %vinding up. But ivhere an application in writ-
ing is made to the liquidator by any person interested in the property,
requiring him to decide whether he will disclaim or not and the liqus-
•598 MERCANTILE LAW
dator has not within 28 days o£ the receipt o£ the apphcation given notice
to Kie aoplicant o£ his intention to disclaim, the right to disclaim is lost.

WINDING UP OF REGISTERED COMPANIES

Section 582 specifies "unregistered companies" which may be wound
up by the order of the Court. By that section, an "unregistered com-
pany" does not include (and so cannot be •wound up under Section 583),
(i) a railway company incorporated by any Act of Parliament or other
Indian Law. or any Act of Parliament of the United Kingdom; (ii) a com-
pany registered under the Companies Act of 1956; or (iii) a company re-
gistered under previous companies law, whose registered office is in India.
Except as aforesaid, any partnership, associalion or company consisting
of more than seven members at the time of petition for winding up ivill
be deemed to be an "unregistered company" and 'may be wound up bv
order of tl^e Court, An "illegal association", formed in contravention o£
Section 11, cannot be wound up by order of the Court under the pre-
sent Act,
Section 583 provides that an unregistered company may be wound
up by the order of the Court having jurisdiction in the State where th?
company has its prin-'ipal place of business, and where the principal
place of business is situated in more than one State, in each such Slate,
and wlicre the proceedings are instituted on the following grounds:
(a) if the company is dissolved, or has ceased to carry on business, or
is canyiiig on business only for the purpose of winding up; (b) if the com-
pany is unable to pay its debt; (c) if the Court is of opinion' that it h
just and equitable that the company should be wound up. An unre-
gistered company cannot be wounded up voluntary or subject to the
supervision of the Comt.
By virtue of Section 58-1, if a company, incorporated outside India
rairying on business in India, ceases to carry on business in India, it may
be oulcred to be wound up as an "untegistered company," even if
the company has been dissolved or ceases to exist by virtue of the laws
of the coiiJitry under ivhich it was, incorpoiated.
Where an unregisteied company is being wound up, every person is
deemed to Ijc a contributory, who is liable' to pay, or contribute to the
Ij.nnicnt of (i) any debt or liability of the company, (ii) any sum for the
adjusiment of the rights of members among themselves, or (iii) the costs,
chais^es and expenses of winding up (Section 585).
The same provisions as are applicable in the winding up of a "com-
pany" under the Act will apply in respect of the stay of proceedings
before or after tlie winding up. If an unregistered company has no
power to sue and be sued in a common name, or if the Court for any
other reason considers it expedient, the Court may direct that all or anv
part of the property of all description shall vest in the Official Liquida-
tor. The Official Liquidator may sue or defend a suit in his oiiiclal name
(Section 588). Section 589 makes it clear that these provisions are in
addition to other provisions relating to winding up of a "company."
COMPANY LAW 599
CASES FOR RECAPITULATION
1. A solicitor, on the instructions of promoters who became the
directors of the company, prepared the Memorandum and Articles be-
fore its. formation. On demand by the solicitor of his costs and charges,
it was held that the company was not liable to pay, although it had taken
the benefit of his work [Re English & Colonial Produce Co. Ltd. (1906)
2 Ch. 435].
2, A loan was advanced by a director of a company, acting on beh'aJf
of the company. This director was also a director of a. private com-
pany which :vas the managing agent of the borrower company, and the
entire powers of the managing agency had been vested in him. T h ?
lender sued the company for the recovery of the loan. It was pleaded
that the company was not liable to puy as no resolution had been pass-
«d by the Board of directors of the company authorising him to borrow
o n its behalf. Held, the lender is entitled to recover from the company,
The act of 'the director in borrowing the money bound the company.
It did not matter that there was no resolution of the Board oC direc-
tors of the borrower company, autlioriging the director to borrow on .be-
half of the company. The lender was protected by the doctrine of In-
door Management (Lnxmi Ratan Cotton Mills Go. Ltd. v, J. J. Jute Mills
•Co. U d . (i951i 11 Comp. ' C M . GftO].
S. The N. Company agreed with C, as agent of the Pauline Syndi-
cate before its formation, that the company would grant a lease of H
mine to the syndicate. The syndicate, after it was incorporated, discov-
ered a seam of coal, The company refused to carry out the contract.-
Held, tliere was no binding contract between the company and the syn-
dicate, as at the time of agreement with C, who purported to act on
•behalf of the syndicate it did not come into existence by incorporation
[Natal Land, etc. Co. v. Pauline Colliery Syndicate, Ltd. (1904) A.C.
120].
4. The company acquired a piece of land for the purposes of its
railway. The railway line was laid and die railway rini on irches. The
company let the arches as workshop, etc. T h e neighbours objected (on
account of noise and rubbish), and claimed that letting the articles was
•ultra vires the company. Held, the act of company was valid, as bein.j
fairly incidental to the powers of the company [Foster v. London, Cha-
tham and Dover Rail Co. (1895) 1 Q.B. 711].
5. The memorandum gave die company power to make and sell
railway carriages. The directors bought a railway concession in Belgium.
T h e article ga;-e express power to the company to extend its business
beyond the memorandum by special resolution. The company passed u
•special resolution to ratify the purchase. Held, the purchase was bad,
being ultra vires of the company. Lord Cairns, L.C., said: "If evecy
shareholder had been in the room, and if every shareholder had said,
•"that is a contract which we authorise the directors to make,' it would
be void. The shareholders would thereby, by unanimous consent, have
Taeen- attempting to do the very thing which by the Act of Parliament they
•were prohibited from dc-'ng" [Ashbury Railway Carriage and Iron Co.
••.. Riciie (1875) L.R. 7 H.L. 653].
6. A company in which the directors held a majority of the shares
altered its articles so as to give power to the directors to require any
•shareholder who competed with the company's business to transfer hi'!
:3hares at their full value to nominees of the directors. A shareholder
 600 ' MERCANTILE LAW

holding a minority of share;, was doing competing business with the com-
pany. Held, the alteration was valid, as it was made bona fide for the
benefit of the-company as a whole, and so enforceable by_the majonrv
against the minority [Sidebottom v. Kershaw Lees & Co. Ltd. (1920)" i
Ch. 154].
7. The articles gave the company a lien on all shares "not fully paid
up," for calls due to the company. A was the only holder of fully piid
up shares; he also owed money to the com)3any lor calls due to other
shares. A died. The company altered its articles by striking out thij
words "not fully paid up," and thus gave itself a lien over all A's shares.
Held, the alteration was valid and gave the company a lien on fully paid
, up shares of A in respect of debts before the date of alteration [Allen v.
Gold Reefs of West Africa, Ltd. (1900) 1 Ch. 656].
8. The directors of a company prepared a document, which was irb
form an ^-offer of shares to persons generally. T h e document was not,
however, advertised, but was shown only to Nash with a view to his
joining the company and becoming a director. The document omitted
to state the number of sliares allotted for a consideration other than
cash.- On discovering that almost all the shares had been allotted for A
consideration other than cash, Nash claimed damages (£2,000) on the
ground that they had issued a false prospectus. Held, Ijy the House of
Lords, reversing the decision of the Coutt of Appeal, that the documeuf
was not a prospectus because it was never "issued" to the public as :i
prospectus. Nash was not entitled to claim any damages or compensa-
tion [Nash V. Lynde (1929) A.C. 158].
9. An employee of the press where a prospectus was being printed
read it during the printing and on the faith of the statements ma-ie
therein purchased some shares in the company. 'Ihe statements were
false. He claimed to repudiate the contract and also compensation from
the director. T h e directors are not liable to him as the prospectus had
been "issued to the public," including him. [Based on Nash v. Lynde].
10. R converted his business into a company. He has business
assets of the value of £1,000 and debts of the same amount. R continj-
ed to carry on the whole business of the company, and without any meet-
ing of the Board of directors or of the company issued debentures to
D for £5,000 xmder the seal of the company. T h e articles empowered
the company to issue debentures. The company was ordered to be
wound up. Held, D was entitled to assume that the debentures were
valid (doctrine of Indoor Management), and he thus had priority over
the other creditois [Duck v. Tower Galvanizing Co. Ltd. (1901) 2 K B .
314].
11. A prospectus offering debentures for subscription stated th?t
"the annual balance available... .after providing for depreciation and in-
terest on the existing debenture stocks' has been sufficient to pay inter-
est on the present issue more than five times over," and after providinjj
for all taxation, depreciation of the fleet, e t c . . . . t h e dividends on the
ordinary stock, during the last 17 years have been as follows Every
statement in the prospectus was literally true; but the prospectus did not
disclose that profits had been made in the vears 1918 to 1920, and that
there had been losses in every year from 1921 to 1927, and that dividends,
had been all these years out of the reserves accumulated in tiie ]xist.
Meld, the prospectus was false in a material particular in tliat it con-
veyed a false impression that the company had been prospering betwcj;-
1921 to 1927, whereas actually it had been suffering losses. T h e manuT-
COMPANY LA\V 601

ing directoi and Cliairman, Lord Kylsant, who had made the statement,
was held to be criminally liable [R. \ . Kylsant (Lord) (1932) 1 K.B. 412].
12. A company carr)ing on busirless in jute is empowered by the
objects clause ot its memoiandum to do any other business not connect-
ed with jute. By a special resolution passed unanimously the compan)
resohed to alter the objects claiUe to include the power to cairy on.
additional business in lubber '1 he Registrar opposed the company's
application to tlie court for confirmation ol the alteration oil the giound
that the business sought to be added was entiiely new and also alien t a
the e.'^isting business and that it could not be profitably, convenientlv
or ad\dntagec)us!y combined with the, existing business. Held, the Rf-
gisirar's contention could not pie\ail and the company could alter its
objects clause lor including the power to carry on additional business in
lubber, since the additional business is not destiuctive o£ or inconsistent
with the existing business of jute fSee Parent Tyie Co., Ltd. (11)27) 2
Sh 222, In re Bhutoria Bros. (P) Lt"d., 1957 Cal. 593; In re Natesai Spg.
& Wvg. Mills, 1960 jMad. 257].
13 T h e directors of a company are piosecuted for default in filinv^
the balance sheet and the profit and loss account with the Registrar of
companies Their defence is that the annual general meeting for the
relevant )ear was not held for some leason and therefore, since the occa-
sion for placing the same before the general meeting did not ai'b-,
thev aie not guilty of contravention of Section 220 Held, the diiectois
cannot take advantage of tJieir cwn default in holding the annual geneial
meeting and were therefore guilty. Tlie fact that no annual generil
meeting of the company has been held is no defence to a prosecution
for not hling the balance sheet and piofit and loss account [State of
Bombay v. Bhandhan Ram (1961) I. S C. 801; (1961) 31 Comp Cas 1;
India Nutriments Ltd. v. Registrar of Companies (1946) 34 Como. Cas.
I60J.
14. The directors of a company bought some of its shares from .i
shareholder while they were negotiating for a transaction financially ad-
vantageous to the company, and which, if successful, would have subs-
tantiJilly raised the market value of its shares. They did not disclose
diis information to the shareholder when buying his shares. The erst
while shareholder sued the directois for^rescision of sale on the ground
of fraud. Held, the purchase of shares by the directors Was good and
the transaction could not be set aside, as there had been no misiepressn-
tacion. The directors are trustees and agent lor the company and for
individual shareholders; they owed no duty to the shareholder to disclose
the cncumstances which would increase the value of the shares [Perciv.il
V. Wright (1902) 2 Ch. 421].
15. Two directors of P company gave guarantee to a railivay com-
pany, by reason of which the railway company agreed to cgiry goods on
credit for P company. T h e Board of directors of P company therefore
agreed that it should indemnify the two directors by creating a charge
on its uncalled capital T h e articles of P company had given to ihs
directors to secure money only when borrowed and also contained a p'o-
vision generally authorising the Board of diiectors to cairy on all busi-
ness of the company in accordance witli the memorandum and articles
T h e memorandum had given powers to the company to issue secunnos-
generally Held, the directors liad power to give this charge The ducc-
tors arc the only persons who can deal with the matters tjius assigcurt
to them, and their decision cannot be overruled even l)v a Rencr.il nitc"
ing of the company [Re. Pvle Works (No 2) (1891) 1 Ch 173]
'602 MERCANTILE LAW
V

16. The debentures issued by a company created a floating charge

•on the company's proj^eny and stock-in-trade, with the condition that die
company was not to create any prior charge. The manager o£ the com-
pany having forgotten his comrnitment deposited the title deeds of tne
company's property widi a bank, by way oi: security f®r a loan obtained.
The bank also happened to hold some of the company's debentures on
deposit lor one of its customers. In a contention between the deben-
ture-holders and the bank as regards profits of charges it was held that
the bank had priority as it had no notice, actual or constructive, of the
piovision in the debentures [Re* Vallert Sanitary Steam Laundry Co. Ltd.
(1903). 2 Ch. 654]. ^
17. On March 15, 196G, a company, in consideration of a past debt
•of Rs. 75,000 and a future advance of Rs. 25,000, issued debentures to a
creditor accompanied by a floating charge over its assets. On August 20,
lilGG, the company is woiind up. Held, the floating charges, so far as
the past debt of Rs, 75,000 is concerned, is invalid, but so Tar 33 the fresh
advance of Rs. 25,000 is concerned tlie charge is valid-S. 53'1 [In re Hay.
man Christy, and Lilly, Ltd. (1917) 1 Ch. 283],
18. A creditor having recovered judgment against a company in res-
pect of a trade debt the Sheriff levied execiiMon on the goods of the
•company which paid the amount of the debt and the costs to the .Sheriff
in order to avoid sale. Before the money was paid over by the ShcfifC'
to the execution creditor, certain debenture-holders of the company wno
JiCild a floating charge on its assets made their security effective by the
apjjointraent oE a receiver who iherqupon claimed the money in the
hands of the Sheriff. Held, tiiat the title of the receiver subsequently ap-
pointed under the debentutefi prevailed over that of the garnishor or
execution .creditor, Where aCier a judgment creditor has obtained and
served on a company a garnishee order absolute, attaching debts due from
the company to the jucigment creditor, the company borrows money on
the security of the attachment on its goods the title of the receiver sub-
liecjuently appointed under the debenture prevails over that of the gar-
nishor [Geisse v. Taylor (1905) 2 K. B. 658].
19. The auditors of a company presented a confidential report to
the directors, pointing out that die security for the loans was insufficient
and that there was difficulty in realisation. They also reported that in
their opinion no dividend should be paid for the year. In their report
to the shareholders, they m.erely stated that the value of the assets depend-
ed upon realisation. The company declared a dividend of 7 per cent
out of the capital and not out of income. Held, the auditors were guilty
of misfeasance and liable to make good the amount of the dividends paid
[Re London and General Bank (2) (1895) 2 Ch. 673].
20. A buys from B 4,000 shares in a company on the faith of a share
•certificate issued by the company. A tenders to the company a tran.sfer
from B to himself duly executed together with B's share certificate. The
company discovers that the certificate in the name of B has been fraudu-
lently obtained and refuses to register the tiansfer. Held, although the
certificate is not a warranty of title upon which A can maintain an action
against ihe company, it estopps the company from disputing A's right to
be registered. The companv cannot deny the title of the holder to 'be
shares as against a person who has relied and acted upon the certificate. A
could claim damages from the company to the extent of the value of DIP
shares at the time of the refusal to register [In re Ottos Kopje Diamond
Mines (1893) 1 Ch. 618].
21. A company, without passing a resolution in its general me-^tins^
and getting sanction of the Court, allotted 500 shares at a discount to G,
COMPANY LAW 605

jts chairman aiul placed his name on ihc legistcr o£ mcml^eis. In tilt;
winding up o[ the compan), & tlaiined ihat he was not liable to be niadn
a coninljutoiy as tlie alloimcnt was made in coiiLra\ention o£ ihe pio\i-
sions of the Coini)anies Act and io \OKI Held, & was liable to be made
a contributory. His name appeared as a member on the register of mem
Jjers at the time of •VMnding up of the company, and so he was liable under
Section 426 of the Act and his statiitoiy liability to contribute arose on
the \Mnding up of the company. He was not thereafter entitled to raise
•any objection as regatds tlic in\alidity of, oi ii regularity in, the allotment.
"When the company is in the process oL being wound up, the liability o£
'the members is e\ lege and not ex. comractii. Whatever liability there
was under the contiatt, whethei \oid or voidsTjle, terminates and liability
theveafier, when the jjioccbs of •wnuUnK up sians, become') a statutory
liability and attaches by rcai>ou of ihe fact that the peison is a member
of the comnany [K. L. Goenka v. &. R. Majiundar (l'Jj8) 26 Com. C.is.
530], • ^
22, A was on the list of coiiiiibiitoues as a nienil)er who had tiaii'j-
fcrred liis ahaies jvithin a ycai hcrore iho wiiidius^ up oulci. After a call
had been m;ule againbc hiiii by the lit|itidaU)i, he hou^^ht certain debis
•which Avcic due fiom the tompiny iji.foie he iiansferretl liis shares, and
iclainied a veiiuction in his liability uiukr the cM lo the cMcnt of thoou
debts. Held, his claim wis not tenabj!., A iieiion wiio is both a contri-
biitoiy and a cicditor of tlic coinp.uiy rannot set off Jiis debt against hi?
liability for calls even if ihcro is an e>.piC!!S a}(iccmcnt to do so. Tho
<iebt of contubutoiy became i)a>ablc on (all and could only be extinguist-
ed by payment; and that his liability was not reduced by the purcha«o
alter call of debts due by the company brfoie the transfer of his shaics
{In re Ape.v film Distjibiuois, l t d . (li)5<)) S W.L.R. 8].
23. The e\ecuiois of L weri' the vegisteied shaieholders of 700
sliares in a company. In March, 1966, ihev tiansfeired these shares to M
and in May, 1960, a winding up order of the company was made. M was
put on A list foi 4,500 shares, including these 700 shaies. In Februai\,
1067, a call of Rs. 400 pei share was made on M; but he was able to pdv
only a small amount. In No\embei, 1967. the liciuidator put the execu-
tors of L on B list and in June, 1968, a call of Rs. 350 per share (in rc:s-
pect of these 700 shares onl}) was made on them. Evidence showed thit
tlieie i\as a probabilitv that amounts itceived from the contributories in
the \ list would not be sudicient to pay all the debts of the company in-
d u d i n g some debts which the company owed whilst L, and his executois
were its members Fteld, th.it m the circumstances, the executors were right-
Iv put on the B list and a call uas iightlv made on them to the extent
that M was unable to pay the calls made on the 700 shares formerly held
bv the e\ecutois [Helber v Banner, Re. Barned's Bank (1871) L.R. 5
H.L 28]
24 A lent a sum of money to a company, upon the terms that he
•should ha\e a collateral security of fullv paid shares in the company. Tha
company handed over to A ceriificites foi 10,000 shares of €1 each. Th-"
certificates stated that he was the registeicd holdei of the shares and that
they were fully paid. No money had in fact been paid upon the shares
ivhich •i\erp issued from the company diicct. V did not know it and be-
lieved that they were fully paid shares Subsequently the company WcW
-ivoimd UD and \ was placed on the list of coninbutones Held, the com-
pany and its liquidator ^\erc estopped fiom denying that die shares wetf
fullv paid and A could lac ioino\cd fiom the list. Jf the certificate states
that the shaies TIC fiilU paid, {he company cannot afteruaids aliege that
they are not fully paid [Bloomcnthal % Ford (189?) A C . 156].
604 MERCANTILE LAW

25. D carried on business under the name and style of Oriental Me-
tal Pressing Works. In 1955, a private company was incorporated under
the name of Oriental Metal Piessing Works Private Ltd., and D trans-
fened his business to diis company. By an agreement between the con.-
pany and D, he was appointed the managing director of the company for
life and was given the power to appoint any person to be a managing
director in his place and stead. D died in 1957, leaving a will wheieby
he purported to appoint G, his son and one of the shareholders of thn
company. The Bombay High Court held the appointment as void beinj
in contravention of Section 312 whicii piohibits assignment of his office
by a director. The Supreme Court, in receiving this judgment, held that
Section 312 makes the assignment of his olhce by a director void. It does
not on the face of it say that an appointment-by a director of another
person as the director in his place would be void. In Section 312 t h :
word assignment does not include or mean 'appointment.' In assign-
ment there is a transfer of his office by a- director when he holds if,
whereas an appointment to an office can be made only if the office i>
vacant [Oriental Metal Pressing Works (Private) Ltd. v. Bhasker Thakoo.%.
1961 S.C. 573].
26. For the year ending 31st December, 1959, a private com-
pany doing agency business had declared dividends and had stat-
ed that the dividends would be disbursed as soon as it receiv.
ed the commission due to it. The company received the commis-
sion due to it in May, 19t)0, but the dividends were not paid.
H and K, two shareholders, made a statutory demand on . the
company for the payment of the dividends, and on the failure of the
company to pay the dividends, H Sc K hied a petition for the winding
up of the company. On behalf of the company it was contended tliat.(-)
when the shares held by K were transferred to B in April, 19G0, the right
to the dividend was transferred along with the shares; (ii) the resolutioa
passed in 1959 to disburse dividend on receipt of the commission was in-
valid as it enabled payment of declared dividends conditional; (iii) the
applicants would be contributories in case the company was wound up-
and so could not be regarded as creditors of the company. The petitioii
was dismissed on the ground that the company being solvent an order for
its winding up could not be passed. On appeal, the Division Bench ol
Madras High Court held the company can be wound up under Section
434 (1) (a) even though it is solvent if it fails to meet its creditors' demand
for Dayment. Held, further that a*' transfer of shares effected after the
declaration of dividends does not convey title to the dividend to the trans-
feree as far as the company is concerned even if tlie shares have been
expressly transferred cum dividend. When the di\idend is declared, it
becomes a deb-: immediately payable by the company to registered sliarc-
liolders; die company becomes their debtor. It was also held that" it is-
open to a company to declare a dividend on the basis of its accounis.
Where it is based on estimated profits which have not actually come In
the foiTO of cash to the company, it will be open to it to pay such divi-
dends from out of other cash in its hands or even to bonow and pif
them off. The declaration of dividends before actual receipt of
assets was therefoie valid. As the dividends had become debts due •(•«
the shaieholders, H & K could file a petition as creditors of the company
for its winding up. The Court ordered tlie winding up of the com-
panv on the giound of its inability to pay its dcln, but at the same time=
diiected the order to be kept in abeyance for a period of 3 weeks in
order to enable the company to pay up the dividends to the two creditors
COMPANY LAW 605

JHari Prasad v. Amalgamated Commercial Traders Private Ltd. (1964)

34) Comp. Cas. 209].
27. The A company ]ias offered to buy all the shares in the B com-
pany and the holders of nine-tenths in value of the shares in the B com-
pany have agreed to the sale. The remaining shares are held by X,
ivho objects to the sale. The A company may acquire the shares held
by X compulsorily and so obtain all the shares in the B company, by
giving notice to him witliin 4 months of the offer by die A company as
provided by Section S95.
28. A was appointed a director of a company on April 1, 1970.
The company was ordered to be wound up on May 29, 1970, before A
had obtained his qualification shares. The liquidator has placed his name
•on the list of contributories in respect of the qualification shares. Held,
A's name cannot be included in the list of contributories, as he does not
hold any shares and his name does not appear on the register of mem-
"bers. A director is required "~to obtain his qualification shares any time
within 2 months after his appointment. Since winding up of the com-
pany has commenced before the expiry ,of the 2 months and before he
acquired the shares, he was not a member [Zahir Ahmed v. Banaji
<1957) 27 Comp. Cas. 634].
 Chapter XVII

Banking Companies

Banking romprinies in maltcis pcit.iiniiig to banking are governccL

by Banking Regulation Act, 1919 which has been amended [lom time
to time. With a view to biinging about social contiol ovei banks, Oie
Act was amended Ijy the Banking Laws (Amendment) Act, 1968'
Definition of Banking Company. Section 5 of the Act defines a
banking company as a company which transacts tlie business of banking
in India, namely, of accepting, for the purpose of lending or in\estment,.
of deposits of money from the public, repavable on demand or other-
wise, and withdiawablg by cheque, draft, older or otherwise. A manu-
facturing or trading company which accepts deposits of money merely
for financing its business as such manufacturer or trader is not a bank-
ing company. But a banking company does not cease to be,one meiely
because it has been prohil)ited by the Central Government under Sec-
tion 5 of the Banking Companies (Inspection) Ordinance, 1946, fron
receiving fresh deposits [Jwala Bank Ltd. v. Shitla Singh, 1950, 20 Comp.
Cas. 238].
Business of Banking Company. Section G provides that in addition
to the business of banking, as detailed above, a banking company may
engage in any one or more ot the following foirns of business.— "
(1) The bonowing, raising or taking up of money; the lending or
advancing of money either upon or Miiihout, security; tlie drawing, mak-
ing, accepting, discounting, buying, selling, collecting and dealing in
bills of exchanger hoondees, promissory notes, coupons, drafts, lad-
ing, railway receipts warraini, debentures, certificates, scrips and other
instruments, and seciulties •whether ti ansferable or negotiable or not
the granting and issuing of letters of credit, tiavellers' cheques and cir-
cular notes; the buying, selling and dealing in bullion and specie; .the
buying and selling ot loieign exchange including foreign notes; tlie
acquiring, issuing on commission, undeiwriting and dealing in stock,
holding funds, shares, debcntuies. debeiituie stork, bonds, obligations,
securities and investments of all kinds the jnirchasing and selbng of
bonds, scrips oi other foims of securities on behalf of constituents or
otheis, the negotiating of loans and ad\aiires; the receiving of all kinds
of bonds scrips or valuables on depomi or foi safe custody or otherwise'
the providing of sale deposit vaidts; the collecting and transmitting of
money and securities;

1. Fourteen major Indian banks ha\c been nationalised, but ','e

are here concerned with the piovisions of the Banking Regulation AvC,
1949, as amended up to-date
BANKING COMPANIES 607
(2) acting as agents for any Government or local authority or aiiy
other person or persons; the carrying on of agency business of any des-
cription including the clearing and forwarding of goods; giving of re-
ceipts and discharges and othenvise acting as an attorney on behalf of
customers, but- excluding the business of a managing agent or secretaries
and treasurers of a company;
(3) contracting for public and private loans and negotiating and
issuing the same;
(4) the effecting, insuring, guaranteeing, underwriting, participat-
ing in managing and carrying out of any issue, public or private, of State,
municipal or other loans or shares, stocks, debentures, or debenture
stock of any company, corporation or association and the lending of
money for the purpose of any such issue;
(5) carrying on and transacting every kind of guarantee and indem-
nity business;
(6) managing, selling and realising any property which may come
into the possession of the company in satisfaction or part satisfaction of
any of the claims;
(7) acquiring and holding and generally dealing with any property
or any right, title or interest in any such property wliich may form the
security or part of the security for any loans or advances or which may
be .connected witli any sucli security;
(8) undertaking and executing trusts;
(9) undertaking the administration of estates as executor, trustee
or otherwise;
(10) establishing and supporting or aiding in the establishment and
support of associations, institutions, funds, trusts and conveniences cal-
culated to benefit employees or ex-employees of the company or the de-
pendents or connections of such persons; granting pensions and allow-
ances and making payments towards insurance, subscribing to or gua-
ranteeing moneys for charitable or benevolent objects or for any exhibi-
tion or for any public, general or useful object;
(11) the acquisition, constitution, maintenance and alteration of
any Isuilding or works necessary or convenient for the purpose of the com-
pany;
(12) selling, improving, managing, developing, exchanging, leasing,
mortgaging, disposing of or turning into account or otherwise dealing
with all or any part of the property and rights of the company.
(13) acquiring and undertaking the whole or .any part of the busi-
• ness of any person or company when such business is of a nature enume-
rated or described in this sub-section ;
(14) doing -all such other things as are incidehtal or conducive to
the promotion or advancement of the business of the company;
(15) any other form of business which the Central Government may,
by notification in the Official Gazette, specify as a form of business in
which it is lawful for a banking .company to engage.
Ko banking company can engage in any .ori'n of business other than
the aforesaid businesses. No company, other than a banking company,
can use as part of its name any o£ the words "bank." "banker" or "bank-
ino-", and no company can carry on die business of banking .in India witJi-
«08 MERCANTILE LAW

out using as a part of its name at least one of such words. No firm, in-
dividual or group of individuals shall, for the purpose of carrying on any
business, use as part of its or his name any of the words 'bank.', 'banking'
-or 'banking company'. This will not apply to a subsidiary of a bank-
ing company or one registered under Section 25 of Companies Act, (Sec-
tion 7).
Prohibition of Trading. No banking company can directly or in-
directly deal in the business of buying or selling or bartering of goods,
•except in connection with the realisation of security given to or held by
the company; and no banking company shall engage in any trade, or buy,
sell or barter goods for others otherwise than in connection with bills of
exchange received for collection or negotiation or for ,the administration
•of estates as executor, trustees or otherwise (Section 8). "Goods" here
m.eans every kind of movable property other than actionable claims
shares, money, bullion and spfecie ^nd instruments mentioned in (1) of
Section 6 above. Moreover, a banking company cannot hold any immov-
able property howsoever acquired, except for its own use. for any period
•exceeding 7 years from the acquisition thereof, or from 16th March, 1949,
whichever is later or arty extension of such period as may be allowed, and
such property shall be disposed of within such period or extended period
•of time, as the case may be. The company is permitted, within 7 years,
to deal or trade in any property facilitating its disposal. The Reserve
Bank m'ly, in the interest of the depositors, extend the period of 7 years
by any period not exceeding five years (Section 9).
Managing Agents and other Employments (Section 10). No banking
company can employ or be managed by a managing agent. Furthermore,
a banking company is prohibited from employing any person (i) who is,
or at- any time has been, adjudicated insolvent, or has suspended payment
•or has compounded with his creditors, or who is or has been convicted of
an offence involving moral turpitude; or (ii) whose remuneration or part of
whose remimeration takes the form of commission or of a share in the
profits of the company; provided that this will not apply^ to payment of
any bonus by any banking company in pursuance of a settlement or award
under any law relating to industrial disputes or in accordance with any
scheme of the banking company or according to the usual practice pre-
-vailing in banking business or any comriiiission or brokerage; or (iii)
whose remuneration is. in the opinion of the Reserve Bank, excessive. In
forming its opinion the Reserve Bank will take into account the finan-
cial condition of the company, its size and area of operation, its resour-
ces, the volume of its business, and the trend of its- earning, capacity; the
number of its branches or offices; the qualifications, age and experience or
the per.'ion concerned; the remuneration paid to other persons employed
lay the banking company or any person occupying in any other hanking
company similarly situated, and the interest of its depositors. A bankinij
•company is further prohibited from being managed by any person, (i)
who is a director of any other company not being a subsidiary company
of the banking company; or (ii) who is engaged in any other business or
"vocation or (iii) who has a contract with the company for its manage-
ment for a period exceeding five years at any time; provided that' anv
such contract with the company for its management may be removed or
extended for a further period not exceeding five years at a time if and
so often a.s lite directors so decide ; provided further that nothing in this
clau.'^e shall apply to a director, other than the managing director, of a
banking company bv reason only of his being such director. Any d?ci-
«ion or order of (he Reserve Bank shall be final for all purposes under
this section.
BANKING COMPANIES , 609

Board of directors to include persons with professional or 'other

expeiience (Section lOA). Every banking company must comply with
the following requirements, namely :—
I. Not less than 51 per cent of totar number of members of its
Board of directors must consist of persons who shall have special^ know-
ledge or practical experience in respect of one or more of the following
matters: (i) accountancy, (ii) agriculture and rural economy, (iii) bank-
ing, (iv) co-operation, (v) economics, (vi) finance, (vii) law, (viii) small-
scale industry, (ix) any odier matter the special knowledge and praci'-
cal experience in which would, in the opinion of the _ Reserve Bank, be
useful to the banking company : provided that out of the aforesaid num-
ber of directors, not less dian two must be persons having special know-
ledge or practical experience in respect of agriculture and rural econo-
my, co-operation or small-scale industry. None of the persons so ap-
pointed as directors must have substantial interest'' in, or be connected
with, whedter as employee or manager, any company or any firm which
carries on any trade, commerce or industry and which, in either case,
is not a small-scale industrial concern.^
Where the Reserve Bank is of opinion that the composition of the
Board of directors of a banking company does not conform to the
above-mentioned requirements, it may, after hearing the banking com-
pany, diiect the banking company, by an order in writing, that it should
reconstitute the Board so as to fulfil the above requirements. If the
banknig company does not, within 2 months of the receipt of the orjler,
comply with the directions, the Reserve Bank may, after determining
by lots, remove a person or persons from the Board and appoint
suitable person or persons, as the case may be, in place of the person
or persons so removed. Whereupon the person or persons so appointed
sliall be deemed to have been duly elected by the banking company
as its director or directors. The action of the Reserve • Bank shall be
final and shall not be called into question in any court.
Wholetime Chairman (lOB). Every banking company inust have a
wholetime Chairman of its Board of directors who shall be entrusted
with tlie management of tlie whole of the affairs of the banking com-
pany, but will exercise his powers subject to the superintendence, con-
trol and direction of tlte Board of directors, • T h e Chairman shall be
employed for such period, not eiceeding 5 years, as the Board of direc-
tors may fix, but can be re-appointed. If there is a managing director
of a banking company, he shall vacate office, as both a chairman and a
managing director cannot be employed.
The chairman must have special Jknowledge and practical. experi-

2. Substantial interest in a company means the holding of a be-

neficial interest by an individual or his spouse or minor child, whe-
dier singly or taken together, in the shares thereof, the amount paid-
up on which exceeds Rs. 5 lakhs or 10 per cent of the paid-up capital
of the company, whichever is less; and in a firm similarly held and which
represents more than 10 per cent of the total capital subscribed by all
the paif.iers of the firm.
3. Small-scale industrial concern means any industrialism in which
die investment in plant and machinery is not in excess of Rs. Vi lakhs
or such higher amount, not exceeding Rs. 20 lakhs, as the Central Gov--
ernment may, by notification in the Official Gazette, specify in this be-
half, having regard to the trends in industrial development and other
relevant matteis.
 610 MERCANTILE LAW
ence of (i) the working of a banking company, or the State BanL of
India, -or any subsidiary bank or a financial institution, or (it) financial,
economic or business administration.
No per-son can be appointed a Chairman of a Lanking company
who (i) IS a' director of any company other than a company lequircd
under Section 25 of the Companies Act, 195fi, or (ii) is a partner ol any
firm which carries on any trade, business or industry, or (iii) has subs-
tantial interest in any other company or firm, or (iv) is a director, mana-
gfet, partner or proprietor of any tradmg, commercial or mdu'Anal
concern, or (v) is engaged in any other business or vocation. The chair-
man may be writing under his hand addressed to the banking com-
pany resign his office but shall continue in office until his successor
assumes office.
Without prejudice to the provisions of Section 36AA, where the
Rescive Bank is of opinion that any person who is, or has been elect-
ed to be, the chairman of the Board of directors of a banking company
is not a fit and proper person to hold such office, it may, alter giving
to such person and to banking company a reasonable opportunity to be-
ing^ heard, by order in writing require the banking company to elect
or appoint any other person as the chairman. In case, within a per-
iod of 2 months from the date of the receipt of the order, the banking
company fails to elect or appoint a suitable person as the chairman,
the Reserve Bank may, by order, remove tlie first-mentioned person from
tlie office of the chairman and appoint a suitable person in his place
•wtrereUpon the person so appomted shall be deemed to have been elect-
ed or appointed as chairman of the Board of (lirectois by the company
and the person so appointed shall hold office for the residue ol the
period of office of die person in whose place lie has been si elected
or- appointed. The chairman so removed and ilic banking company
may, within .30 days of the communication of the order of removal, ap-
peal to the Central Government and the decision of the Central Gov-
ernment shall be final and shall not be called into question in any court
Where a chairman- dies or resigns or does not act for any other rea-
son, the banking company may, with the approval of the Reserve Bank,
make' suitable arrangements for carrying out the duties of chaiiman foi
a total period not exceeding 4 months.
Section IOC states that any directoi or chairman appointed by the
Reserve Bank shall not be retjuired to hold qualification shares in the
banking company. Section lOD provides that any person vvlio iias been
removed from office as director or chairman shall not be eiiiitlcd to
any compensation for loss of office, notwithstanding anytliing contained
in any law or in any contract, memorandum or articles of association.
Paid-up Capital and Reserve (Section 11)...No banking com.pany in
existence on March Ifi, 1940, can after March 16, 1952, cany on Ijanking
business in India without having a paid-up capita! and reserves of
such aggregate value as is mentioned below, unless the Reserve Bank
allows an extension in any particular case which cannot go beyond
March 16, 1953. Other companies (iliose coming into existence after
March 19, 1949) cannot commence or cany on business without having
a paid-up capital and reseivcs as noted below.
In tlie case of a lianking company incorporated outside fnth'.i. the
aggregate value of iis paid-up capital and lesenes must not be Je.ss than
Rs. 15 lakhs; and, if it has a place ot places of busincbs in tlic City of
Bombay or Calcutta or both, it must not be less than Rs. 20 l.iklis: and
BANKING COMPANIES 611
this amount must be deposited and kept deposited willi tlie Reserve
i>ank. either in cash or la unencumbered appioved securities or partiy
111 casa and partly in such securities, and aiso ^U per cent ol as proiii»
ol eacU year. It liie company ceases to carry on banKiiig business in
iiiuia, suca deposit snaii be treated as an asset ol the compjxiy on wnica
an Its creditois will have hrst. charge.
in the case o£ a banking company incorporated in India, the a.^gre-
gaic \aiue Ol Its paid-up capital and reserves must no: be less uian
is.b. 3 laivhs, if it iias piaces ot business in more than one State, and
not less tiian K.s. 10 laiois it any sucli place or places ot Ousmess is oi
are situated in lUe city ot Jbombay -oi Calcutta or both. It suca a
Lompany lias ail its places of business in one State none ot which is
siiuaieu in the city or Bombay or Calcutta, tlie aggregate vaiue ot ita
paiu-up capital and reserves must not be less than Ks. i laKii in res
peci ol Us principal place ot business, plus Rs. lO.UuO in respect ot
each ol its oiaer places ot business situatea in llie same district in which
It nas us principal place ot business, plus K.s. Za.OUU in respect ot eacu
piace ot auusiness situated elsewhere m the State otherwise taan in the
same district: provided, however, that such banking company shall not
be required to nave paid-up capital and reserves exceeding an aggregate
vaiue ol Ks. 6 lakhs, and if sucli company has only one place ot Dusi
ness tne aggregate value need not exceed Rs. 5U,UuO. it it has all its
places of business in one State, one or more ot suca places being
situated in the city of Uombay or Calcutta,'• the -aggregate value ot its
paiu-up capital and reserves must be at least Rs. 5 lanhs, plus Rs. 25,00'J
in resyect ol each place of business situated outside tlie city ot Bombay
or Caicutia : provided that such banking company shall not be required
lo have paid-up capital and reserves exceeding an aggregate value oi
Rs. 10 laUts. It there be any dispute in computing tae aggregate value
ol the paid-up capital and reserves of any banking company the Re-
serve Bank's decision shall be final.
Regtdation of Capital and Voting (Section 12). A banking, com-
pany, which is registered after the 14th January, 1937 can carfy on busi-
ness in India only if its subscribed capital is not less dian oae-half of
its authorised capital and its paid-up capital is not less than one-half of
its subscribed capital. If its capital is increased it must comply with
conditions prescribed, within such period not exceeding two years
as the Reserve Bank may allow. All the shares of a banking company
must be ordinary shares only (excepting the already existing shares of
different kinds which were issued prior' to July 1, 1944). The voting
rights of any shareholder shall not exceed 1 per cent of the total vot-
ing riglits (on poll) of all the shareholders of the banking company.
Notwithstanding anything contained in any law for the time being
ill force or any contract or instrument no suit or otlier proceeding shall
be maintained against any person regi.siered as the hoider of a share
iu a banking company on tlie ground chat the title to the said sliare
\c.'.ts in a person other than the registered holder; but a suit may be
instituted by a transferee of the sli.uc on tlie ground tliat-hc^has obtain-
ed from the registered holder a transfer oi the share, or on'behalf of a
' minor or lunatic on the grounil that the regi.stcfcd Jioldcr liolils the
share on behalf of the minor or lunatic.^ It is^ now provided that every
cU.iivm-.ui, m-.maging director or chief executive olHcer l5f wliatever name
tailed ot a banking company siiall hmiish to tlie ltt5ei-vc Bank iJirougli
[he Ijaiikiiig company ictunis containing full particulars of ilie extent
of the value of his holding of shares, whether diiecily, or indirectly.
 612 MERCANTILE LAW
in ilie banking coinp.iiiy aiitl oi any d u n g e in tlic extent of suci
hoklnig or an) ^.lu.ition in the iigliii attaching tlieieio and biicli otJier
inloiniaiion lejatiiig to iliobu siiarca ai ilie Rciervc Bank, may, by order,
lequiie ni iucli loriu and ai sucli time as may be specmed in tlie older.
JEJectioii oi iieiv direcioss (Section liAj. I h c Reserve Bank may,
by order, leqiine any banking company lo call a general meeting oi tne
snaieJioJfJwi oi the tonJ2>any vviilun iucli time, jioi jesi tJian 2 montiis
iiom tJie date ol the oidei, as may be spccihed in the ordei within
siitn tuuhci time as the Reserve Bank may allow in tins behalt, to eleot
in acLoidaiicc with the \oting lights pcimissible undci tins Act Iresk
dneciois, and die banking company sli.dl be buLind to comply wiilv
the oiilci. E\eiy dnectoi so eiccied \MU liold olhce until the date up
to winch his picdecessoi \\ould lia\e held ofiice, if the election had
not been helil. Any election didy held will not be questioned in Court.
Commissions, etc. A banking company cannot pay out directly or
indirectly an) commission, biokeiage, ciiscounr oi remuneration in any
iorin 111 lespect of any shates issued by it, exceeding, in the aggregate
2 i pel cent of the paid-up \alue ol those siiares (Section 15). No
cnaige can be cieated upon its unpaid capital by a banking company;
and il it ts cieatcd it shall be nnahd. No banking company .shall
cieate a (loamig chaige on an) projjciiy without the written certificate
Irom the Rescivc Bank as not being ag.iinst the interests of depositors
(Section H). 1-urtheimoie no dnideiul shall be paid by a banking
company on its shaie until all its capitalised expenses have been com-
pletely x\ritten oil. Capitalised expenses include preliminary expen
ses, oiganisation expenses, shaie-selling commission, brokerage, amounts
of losses incuired and any other item of expenditure not represented by
tangible assets. But it may pay dividends witiiout writing off (i) the
depreciation, if any, in the value of Us investments in sjiares, d^'be^-
lures oi bonds if adecpiate provision lor depicciation has been made;
(il) the dcpieciation in appioved securities if depieciation lias not been
tapJiaJJscd or oiliciwisc accounted for as a loss; (lii) iJie bad debts, '•[
adequate piovision ioi sucli debts has been made to Llie satisfaction,
of the auditor (Section 15). '
No Common Director (Section 16). No banking company incorpo-
rated in India can liavc as a director any jjcison who is a director (i)
ol anotlicr banking company, or (ii) of companies whicli among them,
selves are entitled t6 exercise \oting rights in excess of 20 per cent of
the total voting rights of all the shareholders of the banking company.
If immediately befoie the commencement of the Banking Companies
(Amendment) Act, 1956, any person hohhiig oflice as a directoi of a
banking company is also a director of companies which among them-
selves aie entitled to exercise \oting riglits in excess of 20 per cent of
the total voting rights of all shareliolders of tlie banking company he
shall, wiihin such period as tlie Reserve- Bank may specify, either re-
sign his oHice as director of the ))anking company or clioose such num-
ber of conqjanies as among themselves are not entitled to toercjse
voting rights in excess of 20 per cent of the total voting rights of all
the shaieholders of the i)anking company as companies in which he
wishes to continue "to Jiold office of a director and resign his office as a"*
director in the other companies. These Jfstrictions do not ai)ply to a
director appointed by tiic Rescue Bank erf India.
Reserve Fund and Cash Rcse»-ve (Sections 17, 18). Eveiv b inkiiio
company mcoiporated- in India must create a rcseivc out of tlie ba-
lance of piofit o f each as disclosed in the piofit and loss nccount
 BANKING COMPANIES 615
prepared under Section 29 and before nnv dividend is dcrlarcd. irons-
fer to the reserve fund a sum equivalent to not less than 20 per cent
of sucli piofit. But where the amount in the reser^e fund is not less
than the paid-up capital of the banking company, the Ccnlral Govern-
ment may," on the recommendation of the Rescn'c Bank, exemnt the
banking company from this reqiu'rement for a specified period of time.
U'hcre the comfiany appropriates any sum or sums from tlic reserve
fund or the share premium accoimt, it must, within 21 davs from the date
of sucli appropriation, report the fact to the Reserve Bank explaining
the circumstances relating to such appropriation. T h e Reserve Banji
may extend the period of' 21 days or condone the dclav in making such
report. Evcr\' banking company, otlier than a scheduled bank, must
maintain in India, by way of cash reserve with itself or in current .ic-
couni opened with the Reserve Bank or the State Bank of India or any
other bank notified bv the Central Government in this behalf or partly
in cash with itself and pat tly in such accoimt or accotuits, a sum enuiva-
lent to at least 3 per cent of th^ total of its time and demand liabiliti'^s
in India, and must submit to' the Reser^'C Bank before the 15th dav
of everv month a return showing the amount so held on Tridav of each
week of the preceding month' with particulars of its time and demand
liabilities in India on each such Friday, or, if anv such Fridav is a pub-
~ lie holiday, at the close of business on the preceding working dav.
Subsidiary Companies (Section 19). 'With a view lo preventing
banks from carr\ing on trading activities bv acquiring a controlling in-
terest in non-banking companies, it is provided that no banking com-
panv cfn form any subsidiary companv unless stich subsidiarv company
is formed for one or more of the following purposes: (]) The under-
taking and execiuing of trusts; (2) the undertaking of the administra-
tion of estates as executor, trustee or otherwise; (3') th*^ provi lir^r of safe
deposit vaults; and ('1) such other purposes as are iricidt^ntnl (o the busi-
ness of banking piovided the previous sanction in writing of the Reserve
Bank has been taken in that behalf. Except as aforesaid, a bTnking
company shall not hold shares in any companv. whether as pledgee,
mortcagp or absolute owner of anv amount exceeding 30% of the paid-
up share capital of that company or 30 per cent of its own naid-up share
cajiital and reserves, whichever is less. Also, a banking comoanv must
not hold shares whether as pledgee, mortgagee or absolute, owner, in any
companv in the management of which any managing director or m^nv
ger of the hanking companv is in anv manner concerned or interested.
Restrictions on loans and advanc- (Sections 20, 20A. 21) Not-
withstanding anvthing to the contrary contained in Section 77 of the Com-
panies Act, 1956, no banking company shall grant any loans or advances
on the security of its own shares, or enter into any commitment for grant-
ing any loan or advance to or on behalf of (i) any of its directors, (ii)
any firm in which anv of its directors is interested as partner, manager,
emplovee or guarantor, (iii) any company (not being a subsidiarv of the
banking company or a company registerfed under Section 25 of the Com-
panies Act or a Government company') of which anv of the directors of
the banking company is a director, manager, emplovee or sjuarantor or
in which he holds subsantial interest, or (iv) any individual in respect of
i;
.whom any of its directors is a partner or guarantor.
If any commitment or loan or advance had been made by a bank-
ing companv before the commencement of the Banking "Laws (Amend-
ment') Act, 1968, steps shall be tak^n to recover the amounts due to the
companv together witli interest, if anv, due thereon within the period
stipulated at the time vi the gi-ant of the Joan or advance, or where tio
6H MERCANTILE LAW

5iich period has been stipulated, before tlie expiry of one yeai from ilic
commencement of the Amending Act, 1968. The Reser\'e Bank
may, on application, extend the period for recovery up to 3 yeais. If
the difcctor concerned vacates the office of director of the banking com-
pany, wliether by death, retirement, resignation or otherwise, this provi-
sion will not apply. No loan or advance or any part of it can be re-
mitted withoiii the previous approval of the Reserve Bank, and any
remission witliout such approval shall be void and ineffective. If any direc-
tor, who had borrowed an\ money from the banking companv before thf3
commencement of the 1968 Amendment Act, fails to pay back within
the stipulated period or within one year of the commencement of the
Act, he will be deemed to have vacated his office as director.
Section 21 states that where the Reserve Bank is satisfied that it is
necessary or expedient in public interest or in the interests of depositors
or banking policy' so to do, it may determine the policy in relation to
advances to be followed by banking companies generally or by any
banking company in particular, and the banking companies or the bank-
ing company concerned must follow that policy.
The Reserve Bank may also give directions to banking companies
generally or to any particular banking company or group of banking
companies regarding the purposes for which advances may or mav not
be made, the margins to be maintained in respect of secured advances
and the rates of interest to be charged on advances. Every bankint; com-
pany shnll be bound to comply with any directions given to it under this
sectibn.
Licensing of Banking Companies (Section 22). No banking company
can do business in India unless it has been .granted a licence bv the
Reserve Bank in that behalf. An application in writing has to be made
to the Reserve Bank for a licence under Section 22. Before erantinq;
the licence the Reserve Bank may ask for an insoection of the book's of
the bankine- company or require to be satisfied that all or anv of tlie fol-
lowing conditions are fulfilled : (]) that the company is and will be in
a position to pay its present and future denositors in full as and when)
their claims fall due: (ii) that the affairs of the comnany are not being
conducted to the detriment of the depositors: and fiii) if the company
is registered outside India, that the carrying on of banktnc-.^u-ilness by
such Companv in India will be in the public interest and -that the Gov-
ernment or the law of the country where the comoariy is incorporated
does not discriminate in any way against banking companie'! incornorated
in India: and that the company satisfies all the provisions of the Banking
Regulation Act, 1949, applicable to banking companies incorporated out-
side India. The Reserve Bank may cancel anv licence if any of th2
aforesaid conditions ceases to be satisfied or if the company cf-ases to
carrv on banking busine.ss in India or Roes into liouidation. The Rc-
ser\'e Bank may, at anv time after granting licence, renuire that anv of
the conditions, the fulfilment of which was not renuired at the time of
Granting the licence," shall be fulfilled to the satisfaction of the Reser^'e
Bank, within such time as it may specify: and if such condition are not
then fulfilled, the Reserve Bank may cancel the licence. Anv banking

4. Banking policy means any policy which is specified from time

to time by the Reserve Bank in the interest of the banking system or in
the interest of monetary stability or sound economic growth, havinf; due
regard to the interests of the depositors, the volume of deposits and other
resources of the bank and the need for equitable allocation and the effi-
cient use of those deposits and resources.
BANKING COMPANIES 615
company aggiieved by the cancellaiion of its licence, may appeal to tlie
Central Goveinmcnt; but the decision of the Central Government on
such appeal shall be fuial, and where no appeal is filed that of fhe Re-
set ve Bank.
New Places of Business or Transfer of Existing^ Business (Section 23).
A bankins^ company cannot, without first obtaining the permission in
i\ritui!5 of the Reserve Bank, open a new place of business in any part
of India, or cliansre (otherwise than within the same city, town or village),
tlie location of an existing place of business situated in any part of India,
The same apulics also to banking companies incorporated in India wish-
mg to open a new place of business outside India or wishing to change
in any other country pr area outside India the location of its existing
place of business Before giving permission the Reserve Bank may re-
quire to be satisfied by an inspection under Section 35, or otherwise,
about the financial condition and history of the company, the general
chaiactei of its management, the adequacy of its capital structure and earn-
nigs, prospects and that public interests will be served by the opening
01 change of location of the place of business. These provisions do not
apply when a temporary place of business is opened for a period not
excecdinq one month within a city, town or village within which the
banking comnam already has a place of business, for affording banking
facilities to tlie public on the occasion of an exhibition or conference or
mcla. Tiie Rcseive Bank may revoke any permission if the company
fails to comply ^vitli any conditions imposed by it. The "place of busi-
ness" includes any sub office, nay-office, sub-nay-office and any place of
business at which deposits are received, cheques cashed or moneys leat;^
Assets (Sections 24. 25). Every banking company must maintain in
India in cash, gold or unencumbered approved securities, valued at a
pi ice not exceeding the current market price, an amount which shall not
ai the close of business on any day be less than 20 per cent of the total
of its time and demand liabilities in India. Liabilities do not include
the paid up capital or the reserves or any credit balance in the profit
and loss account of the icompany or the amount of any loan taken from
ilic Reserve Bank. In computing the amount so maintained the depo-
sit made with the Reserve Bank by a banking company incorporated
outside India and any balance maintained by a banking company
with the Rcseue Bank oi its agents or both shall be deemed to be cash
maintained in India. Foi the purpose of ensuring compliance witn
these moMsions, every banking company must,'•not later than 15 days of
the end of the month to which it relates furnish to the Reserve Bank
in the nresci ibed form and manner a monthly return showing particu-
lars of its assets, and its time and demand liabilities at the close of bu-
siness on each Fiiday during the month or if any Friday be a public
holidav then the close of business on the preceding working day. The
assets in India of every banking company at the close of the last working
da^ of "^ ery quarter, (i.e , the last day of Afarch, June, September, Dec-
ember), shall not be less than 75 per cent of its time and demand liabili-
ties in India Notwithstanding these requirements, a scheduled bank, in
addition to the average daily balance, as required under Section 42 of
the Reserve Bank of India Act, and every other banking comoany, in
addition to the cash reserve, must maintain in India in cash, gold or un-
encumbered apnroved securities, valued at a price not exceeding the cur-
rent maiket nrice. an amount which shall not at the close of business of
any da\ be less than 25 per cent of the total of its demand and time
liabilities in India Every banking company must, within one month
from the end of every quarter, submit to the Reserve Bank a return in
616 MERCANTILE LAW

the prescribed form. and manner of the assets and liabilities as at tlic
close of the Friday of the previous quarter. "Assets in Jndia" are
deemed'to include export bills drawn in, and import bills drawn on and
payable in, India and expressed in such currencies as the Reserve Bank
may from time to time approve and also such securities as might be ap-
proved by the Reserve Bank, even where such bills or securities are held
outside India.
Section 26 requires every banking company to submit, within 30 days
from the close of each calendar year a return in the prescribed form and
manner to the Reserve Bank at the end of such calendar year of all
accounts in India which have not been operated upon for 10 years, pro-
vided tliat where money is deposited for a fixed period the said term of
ten years shall be reckoned from the date of expiry of such fixed period.
Under Section 27, every banking company must, before the close of
the month succeeding that to which it relates, submit to the Reserve Bank
a return in the prescribed form and manner showing its assets and liabi-
lities in India as at the close of business on the last Friday of every
month, or, if that Friday be a public holiday, then at the close of busi-
ness on the preceding working day. In addition, the Reserve Bank may
at any time direct a banking company to furnish it within such tinie as
may be specified by Reserve Bank, witli statements and information re-
lating to the business of • affairs of the banking company (including any
business or affairs of the banking concerned) as the Reserve Bank
may ^consider necessary or expedient to obtain for the purposes of
this Act, and without prejudice to the generality of tlie foregoing jiower
may call for information every half year regarding the investments of' a
banking company and the classification of its advances in respect of in-
dustry, commerce and agriculture. The Reserve Bank may, in the public
interest,' publish any information obtained under this Act (Section 28).
Accounts and Balance Sheet (Section 29). At the expiration of each
calendar year, every banking company -incorporated in India, in respect
of all business transacted by it, and every banking company incorporat-
ed outside India in respect of business transacted through its branches
in India, is required to prepare witli reference to that year a balance
sheet and profit and loss account as on the last working day of the year
in the Forms set out in the Third Schedule or as near thereto as cir-
cumstances admit. In the case of a banking company incorpoi.ated out-
side India the profit and loss accou" may be prepared as on a^^date not
earlier than two months before the last working day of the year. The
balance sheet and profit and loss account must be signed by the manager
or the principal officer of the banking company, and when there are more
than three directors of the company, by at .least three of those directors, or
where there are not more than three directors, by all the directors; this is
in the case of a banking company incorporated in India. In the case of a
banking company incorporated outside India, the br.lance sheet and pro-
fit and loss account must be signed by the manager or agent of the prin-
cipal office of The company in India.
Section 30 requires that the balance sheet and profit and loss ac-
count of a banking company must be audited by the auditor or auditors
of the company. Such an auditor must be a duly qualified auditor,
as required under the Companies Act. The auditors shall have the
same powers and duties as under the Companies Act. In the case of a
banking company incorporated outside India the auditor may be either'
qualified as required by the Indian Companies Act or by the Law
of the country in whicli the company has been incorporated. The
auditor'^hall have to state in his report whether or not books have been
BANKING COMPANIES , 617
properly kept by the company and whetlier or not the infoiniaiion and
the explanations demanded by hi;n have been supplied to him by the
directors of the company, and whether or not the balance sheet is in
conformity with the law and is a true and correct view of the company's
affairs and conditions. In addition to this general requirement in rela-
tion to all companies auditors of banking companies incorporated in
India aie also required to state in their report: (i) whether or not the
information and explanations required by them have been found to be
satisfactory; (ii) whether or not the transactions of the company which
have come to their notice have been within the powers x)f the company;
(iii) whether or not the returns received from branch olhces of the com-
pany have been found adequate for tlie purpose of their audit; (iv) whe-
ther the profit and loss account shows a true balance of profit or loss for
the period covered by such account shows a true balance of profit or
loss for the period covered by such accoimt; and (v) any other matter
which they, as auditors, consider it their duty to disclose to the share-
holders of the company.
Banking companies must publish in the prescribed manner the ac-
counts and balance sheet with the auditors' report theieon, and also
furnish to the Reserve Bank tliree copies of these documents within three
months from the end of the period to which they relate or within an
extended peiiod not exceeding three months. After furnishing these to
the Reserve Bank, a banking company may, and when it is a private com-
pany, it must, send to the Registrar three copies of the balance sheet and
accounts and of the auditors report. This will be sufficient to comply
with Section 134 (1) of the Companies Act. Section 33 requires that
every banking company incorporated outside India must, not later than
the first Monday in August of any year in which it carries on business,
display conspicuously in its principal office and every branch oSice m
India a copy of its last audited balance sheet and profit and loss ac-
count, and must keep a copy so displayed until replaced by a copy of
the subsequent balance--sheet and profit and loss account so prepared.
Production of documents of confidential nature- (Section 34A). Not
withsanding anything contained in Section' II of the Industrial Disputes
Act, 1947, or any other law for the time being in force, no banking
company shall, in any proceeding, appeal under or arising from pr con-
nected with ^ the aforesaid Act or law, be compelled by any authority be-
fore which such proceeding is pending to produce, or give inspection ot,
any of its books of account or any other document or furnish or dis-
close any statement or information, when the banking company claims
that such document, statement or information is of confidential nature
and that the production or inspection of these would involve disclo-
sure of information relating to any reserves not shown as such in its
published balance sheet, or any particulars not shown therein in respect of
provisions made for bad and doubtful debts and other usual or neces-
sary provisions. Iir order to decide whether such reserves or any amount
out of them or provision should be ' taken into account by die autho-
rity, the Reserve Bank should be referred to, which shall, after looking
into the matter, furnish to the authority a certificate stating tJiat the
authority shall not take into account any amount as such reserves or
provisions of the banking company or may take them into account only
to the extent of the amount specified by it in the ceitificate. This
certificate shall be final and shall not be called in question in any pro-
ceeding. For the purposes of this section, "banking company" includes
the Reserve Bank, the State Bank of India and- any subsidiary bank of
tlie State Bank of India.
618 MERCANTILE LAW
Inspection (Sertion 35). The Reserve Bank may at any time, and
must, on being asked by the Central Government, cause an inspection t j
be made bv one or more of its officers, in respect of any banking com-
pany and its books and accounts; and must supply to the bankine; com-
pany a copy of its report on such inspection. At such examination or
inspection every director or other officer of the bankin;:? company is
bound lo produce to the officer making tlie inspection all books, accounts
and othei documents in his possession or power and relatinc; to the
alTairs of the company, and is also bound to furnish such officer with
any statements and information relating to tlie affairs of the company
as such investigating officer may require. The investigating officer can
examine on oatli a director or any other officer of tlie company regarj-
ing its lousiness. If the Central Government'is satisfied that interests of
the flanking company are at stake and that its affairs are being conduct-
ed to the detriment of die depositors, it may, after giving the banking
company an opportunity of making a ^representation to it. isy a written
order prohibit the banking company from receiving fresh deposits or
may order the Reserve Bank to apply, under Section 38 of the Act, for
the winding up of the company.
Poweis of Reseroye Bank to give directions (.Section o5A). Where
the Reserve Bank is satisfied that (a) in tire public interest or (aa) in the
interest of flanking nolicy or (b) to prevent tfie affaiis of any fjanking
company being conducted in a manner detrimental to the interests of the
depositois or in a manner piejudicial to^ the inteicsts of the banking
company; or to secure the nroper management of any bankmg company
generally, it is necessary to issue directions to banking companies generally
or to any banking company in particular; it may, from time to tiitie. issue
sucli directions as it deems fit. and the banking companies or the flanking
company, as tlie case may be, shall be bound to comply witti sucfi directions.
It is also Drovided that the Reserve Bank may. on renresentation made
to it or on its own motion, modify or cancel any diiection issued as
stated above and in so modifying or cancelling any direction may im-
pose such conditions as it thinks fit, subject to wliich tlie modification
or cancellation shall have effect.
Amendments of nrovisions relating to ai>nointments, etc., of chair-
man, etc., with previous approval of Reserve Bank ('Section 35B). In
the case of a banking company (a) no amendment of anv provision re-
lating to appointment or le-appointment oi termination of apoointment
or remuperation-of a chairman, a managing ^director or any other direc-
tor, wholetime or part-time or a manager or a chief executive officer by
whatevei name called, whether that provision be contained in the'com-
•pany menioiandum or articles, or in an agreement entered into by it,
or in any resolution passed by the company in general meeting or by
its Board of directors shall have effect unless approved by the Reserve
Bank; fb) no appointment oi re-appointment or termination of appoint-
ment of a cfiahman, a managing or whole-time director manager or
chief executive officer by whatever name called, shall ha\e effect unless
such appointment, reappointment or termination of appointment is made
with the previous approval of the Reserve Bank.

It is, however, provided that no act done by any of the above-men-

tioned persons shall be deemed to be invalid on tlie ground that
it is subsenuently discovered that his appointment had not taken
effect by rea.son of any of the provisions of this Act: but the act will
not be valid if it is done after his appointment has been shown to the
banking company not to have had effect.
BANKING COMPANIES 619

Section 36 furtlier empoweis the Reset ve Bank to caution or pro-

hibit banking companies generally, or any banking company m pauicu-
lai, against entering into any particular transaction or class of trans-
actions. It may also generally give advice to any banking company.
On a request being made, the Reserve Bank may assist in proposals for
the amalgamation of the banking companies concerned. Tlie Reserve
Bank may assist any banking company by granting it a loan or advance.
At any time, if it is satisfied that in tiie public interest or in the in-
terest of lianking policy or for preventing the affairs of the banking
company being conducted in a manner detrimental to the interests of
the banking company or its depositors it is necessary so to do, the Re-
sei-ve Bank may, by a written order, require the banking company to
call a meeting of its directors for considering any matter, or require
an officer of^ the banking company to discuss any matter with an oflTic-r
of the--Rcseive Bank.
The Reserve Bank may depute one or more of its officers to watch
tire proceedings at any meeting of the Board of directois of the banking
company or of any committee or of any other body constituted by it;
require the banking company to give an opportunity to the officer so
deputed to be heard at such meetings and also require such officer to
send report of such proceedings to the Reserve Bank. It may further
require the Board of the banking company or any committee or any
other body constituted by it to give in writing to any officer specified
by the Reserve Bank in this behalf at his usual address all notices of,
and other communications relating to, any meeting of the Board, com-
mittee or other body constituted by it. The Reserve Bank may appoint
one or more of its officers to observe the manner in which the affairs of
•the banking company or of its offices or branches are being conducted
and make a report thereon. The Reserve Bank may require the banking
company to make, within such 'time as may be specified in the order,
such dranges in the management as the Reserve Bank may consider ne-
cessary. The Reserve Bank is required to make an annual report to
tlie Central Government on tire trend and progress of banking in the
country with its suggestions, if any, for the strengthening of banking
business throughout the country. The Reserve Bank is authorised to
appoint any staff at any place co scrutinise returns, statements and in-
formfition furnished by banking companies and generally to ensure tha
efficient performance of' its functions under the Act. The provisions
of Sections II (1), 12, 17, 18, 24 and 15 shall not apply to a banking
company which has been refused a licence under Section 22 or prohibi'-
ed from accepting fresh deposits by a compromise, arrangement or
scheme sanctioned by a Court, or prohibited from accepting deposits by
virtue of any alteration in its memorandum, or to a company who^e
licence has been cancelled. Where the Reserve Bank is satisfied th,>t
any such company has repaid or has made adequate provision for repay-
ing all deposits by it either in full or to the maximum extent possibb,
the Reserve Bank may by notice in the Official Gazette, ilotify that the
banking company has ceased to be a banking company and thereafter
this Act will cease to apply to it (Section 36A).

CONTROL OVER MANAGEMENT

Power of Reserve Bank to remove maiiagerial and •other person from
office (Section SBAA"). Where the Reserve Bank is satisfied that in the
public interest or for preventing the affairs of a banking company being
conducted in a ma))ner detiimental to the iiUerests of the deposi(ois ot
620 MERCANTILE LAW
for scciiriiif^ the proper management oE any banking company it is ne-
ces'snry so to do, the Reserve Bank may, for reasons to be recorded in
wiitinjT, In' order, remove from office, with effect from such date as may
be specified in the order, any chairman, ch"rcctor, chief executive officer
(by wliatcver name called) or other officer or employee of the banking
company. T5nt before such order is made, an oppoituniiy should be
given to the chairman, diiector, chief executive officer, etc.. to make re-
r^resentation. If, however, in tlie opinion of the Reserve Bank, -any de-
lay would be detrimental to the interests of the banking company or the
depositors, the chaiiman, director, etc., may be ordered to cease acting
pending the consideration of the representation. An appeal against the
order of removal is allowed to be made to the.Central Government with-
in 30 davs of the ^order, but the decision of the Central Government
shall be final and cannot be questioned in any court. Where the order
of removal has been issued the person so removed must cease to act forth-
with directiv or indirectly and if he contravenes the order he shall be
liable to be fined up to Rs. 250 for each day during which contravention
continues. A suitable person may be appointed by the Reserve Bank in
place of the removed person: and the removed person shall not be en-
titled to any compensation for loss or'termination of office.
Power of Reserve Bank to appoint additional- directors fSection
jfiAB). If the Reseive Bank is of opinion that in the interest of bank-
ing policy or in the: public interest or in the interests of the banking
company or its depositors it is necessary so to do; it mav, fiom time to
time bv Older in writing, appoint any number of persons not exceed-
ing 5 as additional directors of the banking company to hold office at
the iileasure of the Reserve Bank. Such persons shall not be required
to hold any qualification shares.
Prohibition of certain Activities in Relation to Banking Companies.
Punishments for certain activities (Section SfiAD). No person shall (a)
ob.'-iruct any person from lawfully entering or leavinpr any office or place
of business of a banking company or from carrying on any business
there, or (b) hold, within the office or place of business of any
banking company, any demonstration , which is violent or which
prevents, or is calculated to prevent, the transaction of normal business
by the banking- company, or (c) act in any manner calculated to under-
mine the confidence of the depositors in the bankina; company. Who-
ever contravenes these provisions without any reasonable excuse shall be
punishable with imprisonment tor a term which may extend to 6 months,
or with fine which mav extend to Rs. 1,000, or with both. For the pur-
poses of this section, banking company includes the Reserve Bank of
India, the Industrial Development Bank of India, the State Bank of
India, and any subsidiary bank.

ACQUISITION OF T H E UNDERTAKINGS OF BANKING COM-

PANIES IN CERTAIN CASES
Power of Central 'Government to acquire undertakings (Section
36AEV If, tipon a receipt of a report from the Reserve Bank, the Cent-
ral Government is satisfied that a banking company—
(a) has, on more than one occasion, failed to comnly with the
directions given to it in writing under Section 21 or Section
35A, in so far as such directions relate to banking pblicy, or
(b) is being managed in a manner detrimental to the interests ot
its depositors, and that—
BANKING COMPANIES 621
(i) in the iiueiebts o£ die depoiiiois o£ such banking compaiiy, or
(u) in the inteicst of banking policy, oi
^in^ loi ihe bctier piovibion ot ciedit geneiail) oi of ciedicL to an)
particular section ot tlie community or in any paiticuiai aiea.
It is necessary to acquire tlie uudei taking ol such banking company, the
Central Covemnient may, alter" such consultation with tlie K-Cicne Bank
as It tliinks ht, by notiUed order, acquue tlie untleuaking ot sticii com
pany witli eftect trom such date as may be specihed in this belialt by
tne Central Government (such date being reieued to tne apponucu
day) : provided that no undertaking ot any banking company snail be
so acquired unless such banking company has been given a leasoiiabie
oppoiiuriity ot showing cause against the pioposed action. An under-
tawng in India of a banking company incorpoiatcd outside India can
also lie so acquired.
If tlie urideitaking of a banking company (herenialter refeued to as
the acquired bank) has been acquired, then on the appointed day, the
undertaking of the acquired banK. and alt its assets ana Tiabilities shall
stand transferred to, and vest in, the Central Government. 'Ihe under-
taking and assets and liabilities ot the acquired bank shall include all
rights, powers, authorities and privileges and all properly, -whether mo\-
able 01 immovable, including, in particular, cash balances, leseive funds,
investments, deposits and ^all other interests and lighu, in, or held by, the
acquired bank immediately before the apponited day and all books, ac-
counts and documents relating thereto, and shall also be deemed to in-
clude all debts, liabilities, obligations, ot whatever kind then existing
of die acquired bank.
Alternatively, the Cential Government may vest in a company estab-
lished under any scheme or in any corporation (known as the tiansteree
bank) tlie said undertaking, including tlie assets and liabilities thereof.
The transferee bank will then become tlie transferee of the acquired
bank and ail the rights and liabilities of the acquired bank shall be deem-
ed from the date ot vesting to have been the rights and liabilities of the
transferee bank. Unless otherwise expressly provided by or under the
Act, all contracts, deeds, bonds, agreements, powers of attorney, grants of
legal representation and other instruments ot whatever nature subsisting
or having effect immediately before^tlie appointed day and to which the
acquired bank is a party or which are in favour of the acquired bank
sliall be of full force and effect against or in favour of tlie Central Gov-
ernment, or as the case may be, of the transferee bank," and may be en-
forced or acted upon as fully as if in the place of the acquired bank the
Central Government or the transferee bank had been a' party diereto
or as if they had been issued in favour of die Central Government or
the transferee bank, as the case may be. Any suit, appeal or other pro-
ceeding pending by or against die acquired bank shall not abate, but
will be continued, prosecuted and enforced by or against the Central
Goveinment or the transferee bank, as the case may be.
Central Government may make Scheme (Section 36.-\F). The Central
Goveinment may, after consultation widi the Reserve B.ink, make a
scheme for carrying out the jnirposes of tlic Act in relation to any ac-
quired bank. T h e scheme may piovidc foi all oi any ol ihe lollowing
matters, namely :—
(a) the corijoration, or the company iiicoipoiaicd for ilie purpose
- to which die undeitaVing including dte piopcity. assets, liabi-
622 MERCANTILE LAW
lities o£ the acquired bank ma" be transferred, and the capital,
constitution, name and office .^lereof;
(b) the constitution of tJie first Board of management (by what-
ever name called) of the transferee bank,'and all such matters
in connection there^vith or incidental thereto as the Centra]
Government may consider to be necessary or expedient;
(c) the continuance of (he services of all the employees of the
acquired bank in the Central Government or the transferee
bank;
(d) the continuance of the right of any person who, on the ap-
pointed day, is entitled to or is in receipt of, a pension or
other superannuation or compassionate allowance or benefit
from the acquired bank or any provident, pension or other
fund or any authority administering such fund", to be paid by,
and to receive from, the Central Government or the transferee
bank;
(e) the manner of payment of compensation payable to the
shareholders of the acquired bank;
(f) the provision, if any, for completing the effectual transfer to
the Central Government or the transferee bank of any asset
or any liability which forms part of the undertaking of the
acquired bank in any country outside India;
(g) Such incidental, consequential and supplemental matters as
may be necessary to make die transfer effective and complete,
The Central Government may, after consultation with the Reserve
Bank, by notification in the Official Gazette, add to, amend or vary any
scheme made under this section. Every scheme shall be published in
the Official Gazette and its copies shall be laid before each House of
Parliament as soon as it may be after it is made. Every scheme shall be
binding on the Central Government or on the transferee bank and also
on all members, creditors, depositors and employees of the acquired bank
and of the transferee bank and on any other person having any right,
liability, power or function in relation to, or in connection with, the
acquired bank or the transferee bank, as the case may be.
Compensation to be given to shareholders of the acquited bank,
(36.AG). 'Every person who, immediately before the appointed day, is
registered as a holder of shares in the acquired bank or, where the ac-
quired bank is a banking company incprporated outside. India, the ac-
quired bank, shall be given by the Central Government, or the transferee
bank, as the case may be, such compensation in respect of the ti.uisfer
of the undertaking of the acquited bank as is determined in accoi dance
with the principles contained in the Fifth Schedule. If the amount ot
the compensation offered in full satisfaction thereof is not acceptable
to any Dcrson to whom the_^jcomp_cnsation is payable, such person m.iy
Kxniest ilie Central Govcnmicnt to ha\e the niattqv lereircd to the Tii-
bunai constituted under Section 36AH. If the Central Go\crnment re-
ceives icdiicsts from not less than one-fouith in ntnnl)er of the sliare-
hokieis holding not less th.ui oiie-fouiih in value of the ])aid-iip share
cii])ital of the acciiiiicd bank, oi, wheie tlie ac(iuiicd bank is a l).niking
comiJ.my incor])oi,'ued oiitside India, fiom tlie accjuiicd bank, the Cleutr.il
Government must ha\e the mattei lefcned to the Tribunal for decision.
The decision of the Tribunal shall be final and bmding on all p.iitics
BANKING COMPANIES 623
concerned. If no requests are received for refeience to the Tiibuiial, die
amount ot compensation oftered by the Central Government shall be final
and binding on all paities concerned.
Principles of compensation. The compensation to be gi\en under
Section oOAG and, as laid down in the Fitth Schedule to tlie Act, shall
be an amount equal to the value of the assets of the acquired bank as
on tlie day immediately before tlie appointed day, computed in accord-
ance with the provisions as stated below less the total amount of liabili-
ties thereof computed similarly as given below.
Assets. "Asse'ts" means the total of the following:
(a) the amount of tlie cash in hand and with the Reserve Bank
and the State Bank of India (including foreign currency notes
which shall be converted at the maiket rate of exchange);
(b) tlie amount of balances with any bank, in India or abroad;
(c) the market value, as on the day immediately before the ap-
pointed day, of any securities, shares, debentures, bonds and
other instruments, held by tlie bank concerned;
(d) the amount' of advances (including loans, cash credits, over-
drafts, bills purchased and discounted) and other debts, whe-
ther secured ot unsecured, to the extent to ^vhich they are rea-
sonably considered recoverable;
(e) the value of any land or buildings;
(f) the total amount of tlie premia paid, in respect of all lease-
hold properties, reduced in tlie case of each such premium by
an amount which beais to such premium the same proportion
as the expired term of the lease in respect of which such pre-
minimum shall have been paid bears to the total term of the
lease;
(g) the written down value as per books, or the realisable value,
as may be considered reasonable, of ail furniture, fixtures and
fittings;
(h) (he market or realisable value, as may be appropriate, of other
assets appearing on tlie books of the bank, no value being
allowed tor capitalised expenses, such as share selling commis-
sion, organisational expenses and brokerage, losses incurred
^ and similar other items.
Liabilities. "Liabilities" means the total amount of all outside liabi-
lities exi;-iiiig on the appointed day, and all contingent liabilities wJn'ch
tlie Central Government or tlie transferee bank may reasonably be ex-
pected to be required to meet out of its own resources on or after the
a])]joiiucd day and where the acquired bank is a banking company in-
corporated outside India, includes the liabilities of the olhces and biaiiclies
in India of the acquired bank to its offices and branches outside India.
If ilic .ic(iuircd bank is not incor])oratcd in India, the assets or, as the
case may be, the liabilities' of the bank shall be the assets and liabilities
of tlie oiiicub of the bank situated in India. '
Comjiensatioii payable to shareholders. Every shaieliolder of the ac-
c|uiicd hank to whom the compensation is payable^ shall he given such
amount as compensation as bears to the total compensation, calculated in
accoulance with tlie provisions stated above, tlie same propoition as the
amount of paid-up capital of tltc shares held by the shareholder bears to
the total paid-up capital of the acquired bank.
624 MERCANTILE LAW

No beparate compensation shall be payable for any profits or any

dividend in respect of any peiiod immediately preceding the appointed
day, for which, m the ordinary course, piofits would have been transferied
or dividend declared after the appointed day.
The Tribunal (Section 36AH). I h e Central Government may cons
titute a Tribunal which shall consist of a Chairman and two membeis.
The Ciiairman shall be a person who is, or has been, a Judge of a High
Court oi the Supreme Court, and, of the two members one sliall be a
pcison who, m the opinion of the Central Government, has had experi-
ence of commercial banking and the other shall be a person who is a
chartered accountant. The Central Government may fill any vacancy by
ap]jointing a suitable person. The Tribunal is empowered, for the pur-
pose of determining any compensation payable, to choose one -or more
person having special knowledge or experience of any relevant matter
to assist it in the determination of such compensation.
By viitue of Section 36AI, the Tribunal shall have the powers of a
civil court, wliile trying a suit, under the Code of Civil Procedure, in res-
pect of (he following matters, namely :— -^
(a) summoning and enforcing the attendance of any peison and
e.Kamining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on aflidavits;
(d) issuing commissions for the examination of witnesses or do-
cuments.
The Tiibunal shall not, however, compel the Cential Government
01 I he Rcseive Bank to produce any books of account or otiier documents
of conriduntial nature, nor shall it make sucli books or documents part
of the record of the proceedings before it, not give any inspection of
any such books or documents to any paTrty before it or to any other
person. I'he 'J'ribunal will regulate its own procedure and may hold tlie
whole or any part of its inquiry in camera.
Suspension of Business and Moratorium (Section 37). A banking com-
pany, wliich is only temporarily unable to pay its debts (and which de-
sires to be saved from embarrassment caused by a suit or legal proceed-
ing against it) may apply to the High Court praying for a postponement
of the action against it for a fixed period of time. The High Court may
make such order as it thinks fit on such application and may from time to
time extend the period of such stay or suspension so that the total period
of moratorium shall not exceed six months A copy of the order of the
High Court is required to be forwarded to the Reserve Bank. It is to be
noted that no such application for moratorium can be made to the Higli
Court unless it is accompanied by a report of the Reserve B:gik that in
the opinion of the Reserve Bank the company will be able to pay its
debts if the application is granted. It is also to be noted that a mora-
torium can be allowed only in the case of a company temporal ily unable
to pay its debts. When an application is made, the High Court may ajj-
]3oint a special officer who shall forthwitli take into his custody or under
Iiis control all the assets, books, documents, effects and actionable claims
of the banking comjjany and shall exercise such othei powers as aie given
by the High Court in the interests of the depositois.
\VIierc tlie Rcscnc Bank is satisfied tliat the afF.iirs of a hanking com
pany, which has been gianted moratorium, are being conducted in a
 BANKING COMPANIES 625

1 manner detrimental to tlie interests of the depositors, it may apply to the

High Court for the winding up of the company, and thereupon tlie High
Court shall not extend tlie p&iod of moratorium.
Winding up by High Court (Section 38). Notwitlistanding anything
contained in Sections 391, 392, 433 and 583 of the Companies Act, 1956,
but •^^?ithout prejudice to its powers under Sub-Section (i) of Section 37
o[ this Act, the High Court shall order the winding up of a banking com-
pany, if (i) the banking company is unable to pay its debts, or (ii) an
application for its winding up has been made by the Reserve Bank
under Section 37 or this section. T h e Reserve Bank shall make an ap-
plication under tliis section for the winding up of the company if it is
directed so to do under Section 35 (4) (b). The Reserve Bank may make
an application under this section for the winding up of a banking com-
pany—
(a) if the banking company (i) has failed to comply with- the re-
quirements of Section 11 in respect to paid up capital and reserves; or
(ii) has by reason of tire provisions of Section 22 become disentitled t o .
carry on banking business in India; or (iii) has been prohibited from
receiving fresh deposits; or (iv) has been guilty of continued contraven-
tion of any of the provisions of this Act; or,
(b) if in the opinion of the Reserve Bank (i) a compromise or ar-
rangement sanctioned by a Court in respect of the banking company can-
not be worked satisfactorily with or without modifications; or (ii) the re-
turns, statements or information furnished to it disclose that the bank-
ing company is unable to pay its debts; or (iii) the continuance of the
banking company is prejudicial to the interests of the depositors.
Without prejudice to the provisions contained in Section 434 of the
Companies Act, 1956, a banking company i shall be deemed to be un-
able to pay its debts if it has refused to meet any lawful demand nlade
at any of its offices or' branches witliin two working days. - IE such de-
mand is made at a place where there is an office, branch or agency of
j : h e Reserve Bank, or within 5 working days, if such demand is made
'elsewliere, ;ind if the Reserve Bank certifies in writing that the banking
company is unable to pay its debts. A copy of every application made by
the Reserve Bank must be sent by the Resen'e Bank to the Registrar.
Section 38A provides that there shall be attached to every High
Court a Court Liquidator of banking companies to be appointed by the
Central Government for conducting the winding up of such companies
and performing such other duties as may be imposed by the High Court.
^Vhere the Reserve Bank has applied for the winding up, it shall be
appointed as the Official Liquidator (Section 39) even where a Court Li-
quidator is attached to the High Court (Section 39). All the provisions
of the Companies Act relating to a liquidator, in so far as they are not
inconsistent widi the provisions of this Act shall apply to a liquida-
tor appointed under Sections 38A and 39. Subject to any directions by
the High Court, tlie remuneration of tlie official liquidator, the cost and
expenses of his establishment and cost and expenses of winding' no shall
jbe met out of the assets of tlie banking company, and no fees shall be
'^pa}able to the Central Governrnent out of the assets of the banking com-
pany. By virtue of Section 41, where a winding up order of a-»bank-
ing company has been made, the official liquidator shall submit a preli-
minary report to the High Court within 2 months from tlie date ol the
winding up order as lequired under Section 455 of the Companies Act
and also stating how much assets have come into his custody or under
626 MERCANTILE LAW
his control. And, within 15 days of the winding up order, the liquidator
shall, for making an estimate of the liabilities and debts (other than de-
posit liabilities) invite from every preferential claimant under Section
530 of the Companies Act, 1956, and every secured and unsecured cre-
ditor claim within one month of tlie receipt of the notice; and informing
these claimants that if they fail to submit the claims within one month
then the claim slwU be treated as an ordinary debt and not preferen-
tial. A secured creditor should be asked to value his security within
one raontli Trom die date of the notice and if he fails to c\o so witliin
tliis period, the liquidator will value it and such valuation shall be bind-
ing on the creditor.
By Section 43, in any proceeding for the winding up of a banking
company every depositor shall be deemed to have filed his claim and
that the amount shown in 'tlie books shall be presumed to have been
proved unless the Liquidator shows diat there is reason for doubting
the correctness of the amount. Under Section 43A, as amended, pre-
ferential payments of all claims received imder Section 41A must be
made or £{dequate provision for sucli payments should be made by the
liquidator." After these preferential payments have been made or ade-
cjuate provision made, the liquidator shall pay within the said jjeriod of
3 months, (i) in the first place to every depositor in the savings bank
account up to Rs. 250 or the balance to his cretlii, whichever is less;
and thereafter (ii) in the next place, to every other depositor a sum of
Rs. 250 or the balance at his credit, whichever is less. If the amount
available is not sufficient to make full payment, the liquidator shall make
a pro rata payment and pay the balance as and when sufficient assets
are available. After these two payments have been made, the remaining
assets will be utilised in payment pro rata to all the general creditors and
any further sums shall be paid to the depositors. In order to have suffi-
cient cash widr him, the-liquidator will redeem the securities given to
secured creditors, by paying cash to the creditors.
Section 44 provides that no banking company may be voluntarily
wound up tmless the Reserve Bank certifies in writing that the company
will be able to pay all its debts in full. The High Court may, in an^^
case, order that the voluntary winding up will be under the supervision
of the Court. Also, the High Court may of its own motion and must on
the" application of the Reserve Bank order the winding up of a bank-
ing company (i) where the banking company is being wound up volun-
tarily and at any stage during voluntary winding proceedings the com-
]5any is not able to meet its debts as they accrue„ or (ii) when ihe bank-
infj company is being wound up voluntarily or subject to the supervision
of the Court and the High Court is satisfied that the voluntary winding
up' subject to the supervision cannot be continued without detriment
to the interests of the depositors.
Section 44A provides that a banking company cannot be amalgamat-
ed with any other banking company, unless a scheme containing the
terms of the amalgamation has been drafted and placed before the share-
liolders of each of the banking companies proposed to be amalgamated.
These drafts are required to be placed separately before the shareholders
of each.of the companies, and must be approved by a majority in num^
ber of the shareholders representing two-thirds in value of the share-
holders of each of these companies present in person or by proxv, and
sanctioned by the Reserve Bank. Notice of the meeting must be given to
every shareliolder of each of the banking companies concerned. Such
notice must specify the time, place and object of the meeting, and must
 BANKING COMPANIES 627

also be published at least once a week for tliree consecutive weeks in at

least two newspapers circulating in the localities where the registered offi-
ces of these companies are situated, one of such newspapers being in a
language commonly understood in tlie locality or localities. If a share-
holder dissents from the sclieme o£ amalgamation, and the scheme is
sanctioned by the Reserve Bank, he may claim from the banking company
concerned the value of his shares as fixed by the Reserve Bank at the
time it sanctioned tlie scheme.
Section 44B provides that a compromise or arrangement between a
banking company and its creditors or any class of its creditors or bet-
ween it and its members or any class of its members cannot be sanction-
ed by any High Court, unless sudi compromise or arrangement is certi-
fied by tile Reserve Bank in writing as not being incapable of being
worked and as not being detrimental to the interests ol the depositors
of the company. The Reserve Bank may not modify a-scheme sanction-
ed by the shareholders, for that would amount to refusal to certify it
as workable and as being not detrimental to the interests of the depo-
sitors.^ Where an application under Section 391 of the Indian Com-
panies Act is made for the sanction of a scheme of arrangement in res-
pect of a banking company to the High Court, the High Court may
direcc the Reserve Bank to make an inquiry into the affairs of the bank-
ing company and the conduct of its directors and submit its report to
the High Court.
Section 45 provides that die Reserve Bank may for good reasons
apply to the Central Government for an order of moratorium in respect
of a banking company, or apply for suspension of business by a banking
company and to prepare a scheme of reconstruction or amalgamation.
The Central Government may giant moratorium staying the commence-
ment or continuance of all actions and proceedings against the company
on whatever terms and conditions it considers pioper and for a period
or periods not exceeding 6 months in the aggregate. The banking com-
pany, unless otherwise recpiired by the order, shall not make any pay-
ment to any depositor or discharge any liabilities or oliligations to any
otlier creditois. During the period of a moratorium, if the Reserve
Bank is satisfied that (a) in the national interest; (b) in the interests of
the depositors, or (c) in order to secure the proper management of tlie
banking compamy; or in the interests of the banking system of the coun-
tiy as a whole, it is necessary so to do, then, notwithstanding anything
in this Act oi' any other law or any agreement or instrument, the Re-
serve Bank may prepare a scheme—(i) for the reconstruction of the
banking com])any, or (ii) for its amalgamation with anotiier banking com-
pany, with such constitution, ivitli such capital, assets, powers, riglits. in-
terests, authorities and privileges, ivith such liabilities, duties and obliga-
tions and on such terms and conditions as may be snecified in the
scheme.
The scheme may pioA'ide for the appointment of a new Board of
direciois—(a) of the banking company on its reconstruction, or (b) ol
the other lianking company with -which it is amalgamated in accordance
witli the scheme, and tlie authority by whom, the manner in wliicJi, the
pciiod for which, and the other terms and conditions on which, sutli

1. Bengal Bank Ltd. v. Siiresh Chakrava.lhi (]95\) 21

Cas 31.5.
^'SS . MERCANTILE LAW
appointment shall be made, shall be as provided in the scheme. The
scheme may also contain such consequential, incidental and supplemental
provisions as ma}, in the opinion of the Reserve Bank, be necessary to
give effect to the reconstruction or amalgamation. It may also pro\ide
for the reduction of the interests or rights which the member oi ci editors
have in or against the banking company before its reconstruction or its
amalgamation with the other banking company, to such an extent as tlie
Reserve Bank considers necessary in the public interest or in the inter-
ests of the members and creditois or for the maintenance of the business
o£ the banking company. A copy of the scheme prepaied by the Re-
serve Bank shall be sent to the banking company and, m case of amalga-
mation, to both the banking companies for suggestions and objections,
if any. The Reserve Bank may modify the sclieme in the light of tliese
suggestions and objections. The scheme will thereafter be placed before
the Central Government and the said Government may sanction the
scheme either as it is or with modifications as it thinks necessary, when
it will come into force on a date specified by the Government and shall
be binding on the banking coihpany or companies concerned and also
on all the members and creditors thereof- Copies of every scheme made
under this section shall be laid before both Houses of Parliament as soon
as may be after the sclieme has come into force.
Sections 45A to 45H were first inserted in this Act by an Ordinance
which w.is replaced by the 1950 Act, Part IIIA containing these sections
has been thoroughly overhauled by the Amendment Act, 1953, and in
place of these Sections new Sections 45A to 45X have been inserted, It
has been made clear that Sections 45A to 45X will pre\ail and supersede
any other law in so far as tliey are inconsistent with or vary that law
(Section 45A). These changes have been made for speedy disposal of.
winding vip proceedings relating to banking companies. TV'hen Sections
36A and 45B are read together, the High Court has jurisdiction to decide
all matters relating to or arising out of the winding up of a banking
company, regardless of the fact that the contributories or creditors reside,
or the cause of action arose, outside the High Court's jurisdiction. The
nowers are •very wide and the expression relating to winding up of a
banking company has been construed veiy widely.^ The High Court
must also deal with applications under Section 391 of the Indian Com-
Danies Act, Section 45C provides that where a %vinding-up order has
Been made in respect of a banking company all proceedings pending be-
lore any other Court may either be transferred to the High Court order-
Jflg winding up or left by the order of the High Court to be proceeded
tffith by that other Couit. But any proceeding pending in appeal • before
ilie Supreme Court or a High Court shall continue there. Section 45D
empowers tlie High Court to settle the lists of debtors according to pro-
cedure, when the Official Liquidator has submitted the lists in order that
lealisation may begin immediately. Section 45E provides that the High
Court may, if it appears to it necessary or expedient so to do, at any
lime after making a winding-up order, make a call on and order pav-
ment thereof by any contributory who has been placed on the list of

1. Puri Bank Ltd. v. Jitendianath Das (954), 24, Comp. Cas. 294;
Associated Banking Corp. v. Nozaiali (1952), 22 Comp. Cas. 82; Discount
Bank of India Ltd. v. Tiriok Nath (1953), 23 Comp. Cas. 82; Jadunath
Rov V. Bank of Cal. Ltd., (1952), 22 Comp. Cas. 69; H.C. Mukeriee v. M.
Ghakravarthi (1952), 22 Comp. Cas. 270; Pioneer Bank Ltd. v. Gyan Koer
(1952), 23 Comp. Cas. 284.
BANKlffG COMPANIES 629

coiuributories by, the Official Liquidator and has not appeared to dis-
pute his liability. Under Section 45F entries in the books of account
OT other documents o£ a banking company i n liquidation are admissible
as evidence in all legal proceedings by or against the banking company.
The entries can be proved either by the production of the originals or
by ccpies certified by the Official Liquidator as true^
Section 45G provides for the public exararoation of promoters,
directors, and auditors, whether past or present, when an order for the
winding up of a banking company has been made, and the High Covu-t,
on consideration of a report submitted by the Official Liquidator as to
whether in his opinion any loss has been caused to rlie banking com-
jjany since its formation by any act or omission of any promoter, direc-
tor or auditor, even where such act or omission did not amount/ to
fraud. If, on public examination, in which, the Official Liquidator, any
contributory or creditor may take part, the' High" Court finds any pro-
moter, director or auditor an unfit person to act as such, the High'
Court may prohibit any such person to act as director or auditor or
manager of any company for 5 years. Section 45H is complementary
to Sec. 543 of the Companies Act and provides that the High Court shall
order any promoter, director, manager, liquidator or officer of a banking
company, against whom an application under Section 543 is made, to
repay and lestore tlje money or property of the company unless he
proves that he is not liable for misfeasance. Section 451 enjoins upon
directois and other officers of a banking company to assist the Official
Liquidator in realisation and distribution of the pioperty of the bank-
ing company. Section 45J empowers the High Court to try jn a sum-
mary manner any offence committed by a promoter or director or mana-
ger or officer of a banking company which is being wound up, provided
that the offence is one punishable upder this Act or under the Com-
panies Act, 1956.
Section 45K has been deleted from tlie Act by the Amendment of
1S5S; Section 45L has been amended by the Second Amendment Act of
1960. The amended Section 45L provides for public examination of
promoters, directors and auditor even where scheSme of a banking com-
pany is being considered or conducted. It similarly provides for mis-
feasance proceedings. Where the scheme of reconstruction or amalgama-
tion has been sanctioned by the Central Government under Section 45
and the Central Government is of Che opinion that any person who
has taken part in the promotion or formation of the banking company
or has been a director or auditor should be publicly examined, thdi Goi-
ernment may apply to the High Court for the examhiation of such per-
son and if on such examination the High Court finds (whether a fraud
has been committed or not) that that person is not fit to be a directoi
of a company or to act as an auditor of a company or to be a paitne:
of a film acting as such auditors, the Central Government shall make
an order that that person shall not, without the leave of the Ccntial
Government, be a .director of, or in any way, whether directly or in-
diiectly, be concerned or take part in the management of any company
or, as the case may be, act as an auditor, or be a partner 6f a firm acting
as auditois of, any company for such period not exceeding 5 vears as
may be specified in the order. Furthermore, where the scheme of recons-
truction or amalgamation has been sanctioned by the Central Govern-
ment, the provisions of Section 543 of the Companies Act, 1956, and
Section 45H of this Act shall, as far as may be, apply to a banking com-
pany as tliey apply to a banking company T^hich is being wound up
-BO MERCANTILE LAW
a& il tue order sanctioning the scheme o£ reconstruction or amalgamation
were an order for the winding up of the banking company; any refe-
rence in the said Section 543 to die application of the official liquidator
shall be construed as reference to the application of the Central Govern-
ment.
Section 450 lays down the special periods of limitation in relation
to banking companies, which are being wound up. T h e limitation stops
to run against a banking company from the date of the winding up order
so that it can file a suit or application any time aftei' winding up order.
As regards a claim against a director tor calls in arrears, debts or
any contractual liability, there is no period of limitation; but in regard
to all. other claims of a banking company against its directors the limi-
tation is 12 years. Section 45P empowers the Reserve Bank to tender
advice in winding-up proceedings; and Section 45Q gives it power to
inspect a banking company wlien directed by the Central Government or
the High Court so to do and then report on it. Under Section 45R.
the Reserve Bank may rsgiiire the' liquidator to submit to it any
statement or information %vithin the stated time and the liquidator shall
have to do so. Section 45S requires the Chief Presidency Magistrate or
the Distiict Afagistrate within -whose jurisdiction any property, books of
account or other documents of the banking company in liquidation are
situate to assist the Official Liquidator, on his request, to take possession
of these. • Section 45T empowers the High Court to enforce its orders
in any civil proceeding in the same manner in wliich its decrees may
be ^enforced.
Penalties. Section 46 lays down the penalties. Whoever in any re-
turn, balance sheet or other document or in any information required
or furnished by or under or for the purposes of any provision of tlie
Act wilfully makes a statement which is false in any material particular,
knowing it to be false, or wilfully omits to make a material statement,
shall be punishable with imprisonment for a term which may extend to
three years and shall be liable to fine. If any person fails to produce
any books, account or other document, or to furnish any statement, or
information which he is bound to produce or furnish, or to answer any
question regarding the business of a banking company, which is asked
by an officer making an inspection imder Section 35 of the Act, he shall
be punishable with a fine up to Rs. 2,000 in respect of each offence, and
if he persists" in such refusal he shall be liable to a further fine up to
Rs. 100 tor e^'ery day during which the offence continues. If any depo-
sits are received by a banking company in contravention of an order
made by the Central Government under Section 35(4) (a) of the Act,
every director or other officer of the banking company shall be deemed
guilty of such contra\ention and shall be punished with a fine which
may e.Mcnd to twice the amount of the deposit so recei\ed, unless he
proves that the contravention tt)ok place without his knowledge or that
he had exercised all diligence to pievenf die contravention. If any other
provision of the Act is contravened or a default is made, any person who
is giiiltv of such contravention or default shall be punishable with a fine
up to Rs. 2,000, and where the contravention or default is a continuing
one he shall be punishable with a further fine up to Rs. 100 for e^ery
da) during which it Continues. By Section 4G.\, every chairman, direc-
tor, auditor, liquidator, manager and any other employee of a banking
company shall he deemed to be a public servant for the purpose of Chap-
ter IX -of the Indian Penal Code.
No court tihall try any offence punishable under Section 4(5, unless
 BANKING COMPANIES 631

^ a complaint in writing is made to it by an officer of the Reser\e Bank

generally or specially authorised by the Reserve Bank to do so.' No
court interior to that 6£ a Presidency Magistrate or a Magistrate of the
First Class shall try any such offence (Section 47). Section 47A, added
by liie 1968 Amending Act, empowers the Reserve Bank to levy penal-
ties for contravention or default of the nature referred to in Section
46, unless a complaint has been filed against the banking company in
any court in respect of such contravention or default. Similarly, where
the Reserve 3 a n k has imposed a penalty, no complaint sliall be filed in
a court.
Section 49 of the Act provides that the exemption conferred on pri-
vate companies by Section 90, 165, 185, 204 and 255, 293(1) (a) and (b),
300, 388A, and 416 of the Companies Act shall riot apply in favour of a
private company which is a banking company. This Section practically
relegates private banking companies to the position of public companies.
Section 49A provides that no person other than a banking company, the
^ Reserve Bank, the State Bank of India or any other banking institution,
"^firm or otlier person notified by the Central Government in this behalf
on the lecommendation of the Reserve Bank' shall accept from the de-
posits of money withdrawable by cheque; provided that nothing con-
tained in this Section will apply to any savings bank scheme run by the
Go\'ernment. Section 49B says that not withstanding anything contained
in Section 521 of the Companies Act, 1956, the Central Government shall
not signify its approval to the change of name of any banking company
unless the Reserve Bank certifies in writing that it has no objection to
such change. Similarly, by virtue of Section 49S, no application for the
confirmation of tlie alteration of the memorandum of a banking com-
pany shall be maintainable unless the Reserve Bank certifies that there is no
objection to such alteration. Section 52 gives the Central Government
power to make rules under the Act, after consultation with the Resen'e
Bank, in respect of all matters for which provision is necessary or expedi-
ent for the purpose of giving effect to the provisions of tlie Banking Com-
panies Act. Section 54 protects the Central Government, tlie Reserve Bank,
, ^ d officers for anything done in good faith or intended to be so done
in pursuance of this Act. No suit or other legal proceeding shall lie
against any of them.

Section 55A provides tliat if any difficulty arises in giving effect to

any provision of this Act, die Central Government may take necessary
steps to remove the difficulty. But such power cannot be exercised after
the expiry of 3 years from the commencement of the Banking Laws
(Amendment) Act, 1968.

CO-OPERATIVE SOCIETIES
Section 3 provides for the appointment by the State Government of
a Registrar of Co-operative Societies and a number of Assistant Re-
gistrars according to needs.
Section 4 provides for the registration of the following types of
societies, namely :—
•^
(a) A society which has as its object the promotion of economic in-
terests of its members in accordance with the co-operati\'e
principle, or
(b) A society established with the object of facilitating tlie ope-
ration of a society may be registered under the Co-operative
!632 MERCANTILE LAW
Societies Act with or without limited liability.
Unless tlie State Government otherwise ditects:
(a) the liability o£ a societv of which a member is a registered
society should be limited;
(b) a credit society the majority of members of which are agricul-
turists, and of which no member is a registered society must have un-
limited liability. Section 5 provides that where the liability is limited
by shares, no member other than a registered society shall (i) hold more
rhan such portion of the share capital of the society, subject to a maxi-
miim of one-fifth, as may be prescribed by the rules; or (ii) have a claim
to any interest in the shares of the society exceeding Rs. 1,000.
Registration (Section 6). No society odier than a society of which a
member is a registered society shall be registered which does riot consist •
of at least 10 persons above the age of 18 years and, where the object of
the society is the creation of funds to be lent to its members, unless such
persons (i) reside in the same town or village or in the same group of
villages; or (ii) save where the Registrar othervvise directs, are members
of the same tribe, class, caste or occupation. The Registrar shall be the
final authority regarding tribe, caste or occupation (Section 7). By
virtue of Section 8, the application for registration must be signed (a)
bv 10 persons of 18 years, where a registered society is not a member;
(b) where registered societies are members, by a duly authorised person
on behalf of each registered society; (c) where all the members of the
society are not registered societies, by 10 other members or, wheri there
are less dian 10 other members, by all of them. The application must
be accompanied by a copy of the proposed by-laws of the society. If the
Registrar is satisfied that the society has complied with the provisions of.
the Aqt and the rules and its proposed by-laws are not contrary to the
Act or to the rules, he may register the society and its by-laws (Section
9). T h e certificate will be conclusive evidence of registration. Any
amendments must be registered, but only after Registrar is satisfied.
' Members. No member can exercise the rights of membership or
acquire any interest without payment of membership subscription under'
the rules (Section 12). Where the liability is not limited, each member
has one vote, but xvhere a society is limited by chares, each memlier
shall have as many votes as may be prescribed by by-laws; and a registered
society having funds invested in another society may appoint a member
as its proxy at tJie meeting of the society (Section 13). Any transfer of
share interest can be made as laid down in the Act: (a) where the liabi-
lity is unlimited, a member cannot transfer his share unless he has held
it for one year, he can transfer j t only to the society or another mem-
ber (Section 14).
Duties of Society. A registered society must have a registered ofTice
to receive communications and notices (Section 15), It must keep at its
registered office for inspection free of charge a copy of the Act. rules
and bv-laws (Section 16). T h e Registrar shall audit or cause to be au-
dited by authorised persons accounts of registered societv once a venr.
He is to examine overdue debts, if any, value assets and liabilities. Tlie,
Registrar and the authorised person shall have access to the books, ac-
counts, papeis and securities at all times, and every office of the society
must furnish information as required (Section 17).
Privileges. After legistration a society becomes a corporate body
with perpetual succession and common seal. It can hold property, enter
into contracts, institute and defend suits and proceedings and do odier
BANKING COMPANIES 633
things necessary for its constitution (Section 18): Subject to prior claim
of Government for land revenue, or lent by the landlord, a registered
society has priority to other creditors for claims from a member or past
member (a) in respect of supply of seeds or manure or of loan money for
seeds or manure, upon the crops or other agricultural produce of such
member at any time within 18 months from the date of such supply or
loan; (b) in respect of supply of cattle, fodder for cattle, agricultural or
industrial implements or machinery^ or raw materials for manufacture,
or of the loan of money for buying of any of the above, or any such
thing supplied or purchased in whole or in part from such loan, or any
articles manufactured or produced (Section 19); (c) A registered society will
have a charge for its debts against a member or past member on (i) his
share or interest in capital, (ii) his deposits, (iii) any dividend, bonus or
profits payable to him. It will also have a right of set off against any
such, sum credited to him for debts due to the society (Section 20). Ex-
cept as stated in Section 20 above, the share or interest of a member is
not liable to attachment or sale under any decree or order of Court,
nor will the Official Assignee or Receiver have any claim on it (Section 21).
Transfer of interest on death of member. On the death of a mem-
ber, the society may (i) transfer his share or interest to his nominee; (ii)
if there is no nominee, then to his legal representative; (iii) or pay to
nominee or legal representative a sum representing the value of his
share or interest. But in the case of an unlimited society, such nominee
o) legal representative may require payment only. However, in the case
of limited liability, the society must transfer to noijiinee, heir or legal
lepresentative, if qualified according to the rules of the society; or on
application within one month after death transfer to any one else. All
other money due to tlip deceased may be paid to such person. Such
payment made will be v?lid against any claim by any one else (Section
22). The liability of a prtst member for debts of a registered society
as they existed when he ceased to be a member shall continue for 2 years
after he ceased to be a member (Section 23). But the estate of deceased
membei shall be liable only for one year after his death (Section 24).
A registered society also enjoys die following privileges : (1) No regis-
tration under Section 17 of the Registration Act is necessary (i) of an
instrument relating to shares in a registered society, even if all assets con-
sist of immovable propety; (ii) of any debentures issued by any such
society; (iii) of any endorsement upon or transfer of any debentuies
issued by it (Section 27). (2) T h e Central Government may by notifica-
tion remit income tax payable in respect of profits of the society, or of
dividends or other payments leceived by members on account of profits It
may also remit stamp duty on any instrument executed by or on behalf
of a registered society by a member or officer relating to the business of
the society, as well as any fee payable under the law of legisti-ation (Sec-
tion 28).
Loan. A registered society must not make a loan to a non-member,
although it may m a t e it to another registeied society with die sanction
of the Registiai. Save with the sanction of^ the R'egistrai an unlimited
society shall not lend any money on the security of movable pioperty.
Tlie State Government is empowered to prohibit lending by an\ society
or class of societies on mortgage of immovable propeity (S,ection 29). A
society may receive deposits and loans from non-members according to
iules and by-laws CSection 30).
Investments. .A registered society may invest or deposit its iunds (i)
in the Government Savings Banks, or (ii) in any of the securities specified
634 MERCANTILE LAW
in Section 20 of the Trusts Act, or (iii) in shares or on the security of
any other registered society; or (iv) with any bank or person carrying on
banking business, approved by the Registrar; or (v) in anv otlier mode per-
mitted by rules (Section 32). No part of the funds of a registered so-
ciety is to be divided by way of bonus or dividend or otherwise among
its members unless at least one-fourth of the net profits in any year have
been carried to a reserve fund; and in the case of an unlimited society,
without the general or special order of the State Government in this
behalf (Section 33). • A society may, after one-fourth has been carried
to the reserve fund, pay 10 per cent of the remainder to charity '(Sec-
tion 34)
Dissolution. T h e Registrar may cancel the registration of a society
if (i) after inquiry, (ii) after inspection, or (iii) on receipt of an appli-
cation from at least three-fourths of the members, or all the meiiibers if
the number is below ten. T h e order is appealable to the State Govern-
ment within 2 months of the passing thereof. If no appeal is filed, the
order becomes • effective after the expii7 of 2 months, or when confirmed
after appeal (Section 39). T h e effect of cancellation of registration is
that the society will cease to exist as a corporate body (Section 41). After
the cancellation, a liquidator is to be appointed to wind up the affairs of"
the society. T h e liquidator is empowered to institute and defend suits
and any other legal proceedings, determine the contribution to be made
hv members to the assets of the society and to make investments (Sec-
tion 42).
 Chapter XVIII

The Insurance Act, 1938

T h e Insurance Act, 1938 was passed to control companies carrying

on insurance business of all kinds—life, marine, fire, accident and provi-
xlent. The Act lays down- rules in respect of 'registration, compulsory
deposits, investments, inspection and commission payable to agents. T h e
Act has been amended se\eral times, but two amendments are major in
scope and nature—one in 1950, and the other in 1968 which has extended
social control over insureis carrying on general insurance business, as life
insurance business was nationalised in 1956.
The Life Insurance Corporation of India which has taken over all
the life insurance business was established in 1956 with the original capi-
tal of Rs. 5 crores ]3rovided by the Central Governmefit. By Section 7
of the L. I. C. Act all the assets and liabilities of the life insurance com-
panies and those pertaining to life insurance business of insurers doing
life and other insurance business have been taken over by the L. I. C,
and all the life insurance business is now done by the L. I. C. alone.
Therefore, the provisions of the 1938 Act relating to deposits, invest-
ments, inspection and social control do npt apply to life insurance
business.
Insurance business. Section 2C provides that the business of insur-
ance in India can be carried on only by a (i) public company, which may
be incorpoiated-in India or outside India, or (ii) a co-operative society
registered under the Co-operative Societies Act, 1912.
Registration. Section 3 states that before commencing any insur-
ance business, it is necessary to obtain a certificate of Registration from
the Controller of Insurance. T h e Controller may withhold or cancel
such certificate in case of a foreign company, if its state debars Indians
from carrying on insurance business within its tenitory.
The Controller must cancel the registration of an insiu-er—
(a) if the insurer fails to make the compulsory denosit and keep
it deposited; or
(aa) if die insin-er fails, at any time, to comply with the provisions
of Section 64VA as to the excess of the value of his assets
over die amount of his liabilities; or
(b) if the insurer is in liquidation or is adjudged an insolvent; or
(c) if the business has been transferred to or amalgamated with
the business of any other 'insurer; or
(d) if the Whole of the deposit has been retuined lo insurer; or
636 MERCANTILE LA^\'
(e) if, in die case of a. person Iiaving a standing contract with
underwriters who are members of Lloyd's, the standing con-
tract is cancelled or suspended and continues to be suspended
for 6 months; or
(ee) if the Central Government so directs the Controller under
Section 3o('l) (b). The CoiitroUer may cancel the registration—
(f) if the insurer makes default in complying widi, or acts in con-
travention of, any requirements of the Act; oi
(g) if the Controller has reason to believe that any claim upon
the insurer arising in India under any policy of insura'nce re-
mains unpaid for 3 months af^er final judgment in regular
course of law; or /
(h) if the insurer carries on any business other than insurance
business or any prescribed business.
When the Controller withholds or cancels any registration, he will
give notice to the insurer. After this the insurer shall not enter into any
contract of insurance, but the rights and liabilities in respect of contracts
of insurance entered into before the cancellation continue as if no can-
cellation has been made. After 6 montlis of the cancellation the Control-
ler will apply to the court for the winding up of the insurance company.
The registration is granted for a year at a time, and the insurer must
apply for renewal of registration and pay the necessary fees into tire
Reserve Bank of India before the 31st day of December of the preceding
year. The 'fee, as stated in the amended Section 3A (2) is to be such
as may vary according to the total gross premium written direct in India,
during the year preceding the year in which the application is required
to be made under this section, by the insurer in the class of insurance
business to which the registration relates but shall not—(a) exceed one-
fourth of one per cent of sudi premium income, (b) be less, in any case,
than Rs. 500 for each class of insurance business.
Capital structure and voting rights. Section 6A. as amended, states -
that after the commeiicement of tlie 1968 Amendment Act, no public com-
pany limited by shares may carry on any insurance business in India unless
its capital consists only of ordinary share^ each of which has a single
face value, and the paid up, amount is the same for all shares, and also
the voting right of every shareholder in all cases is strictly proportionate
to the paid-up amount of the shares held by him.
The public company must maintain, in addition to the registei of
members as required "by the Companies Act, a register of shares in which
must be entered the name, occupation and address of the beneficial owner
of each share. T h e company must not register any transfer of its shares'
unlefs, in addition to compliance with Section 108 of the Companies Act,
the tiansferee furnishes a declaration in the prescribed form as to whe-
ther he proposes to hold the shares for his own benefit or as a nominee,
whether jointly or severally, on belialf of otheis, and in the latter case
giving the name, occupation and address of the beneficial owner or own-
ers, and the extent of the beneficial interest of each. Further, where,
after the transfer, the total paid-up holding of the tranrferee is likely
to exceed 5 per cent of its paid up capital or where the transferee is a
banking or an investment company 2|- per cent, the company must not
register the transfer without obtaining the pre\ious sanction of the Cen-
tral Government If the tolal holding of any person or a banking co-n
 T H E INSURANCE ACT, 1938 637

pany exceed the limits stated above, he shall flot be entitled to any vote
as a shareholder in lespect of such excess holding of shares.
T h e holding o£ a person in the shares of a company shall be deem-
ed to include—
(a) the total paid-up holding in such shares held by such person
in the name of others; and
(b) if any shares of the company are held—
(i) by a public company of, which such person is a member
holding more than 10 per cent of the paid-up capital, or
(ii) by a company, of which such person is a managmg direc-
tor, manager or in which he has a controlling interest, or
(iii) by a firm in which such person is a partner, or
(iv) by such person' jointly with others,
such part of the total paid-up holding of the company or firm or of the
total joint holding in 'those shares, as is proportionate to the contribution
made by such person to the paid-up capital of the company, the paid-up
capital of the firm or the joint holding, as the case may be.
Thus, after the commencement of the 1968 Amendment Act, the
capital structure of companies carrying on general insurance is controlled.
Manipulation of voting rights by interested persons by holding deferred
shares is also controlled. Transfer of shares with ulterior objects is con-
trolled.
Conversion of company limited by shares into company- limited by
guarantee, (i.e., a "Mutual Company"). Section 6C states that where a
public company limited by shares carrying on insurance business has
passed a* special resolution for converting itself into a public company
limited by guarantee, popularly known as a "Mutual 'Company", it may
apply to tlie Central Government with a scheme for putting the special
resolution into effect, including any provision for the alteration of tiie
memorandum or articles of association in so far as it may be necessary
for this purpose.
If the Central Government, after giving such notice to any person
.concerned as it thinks fit, is satisfied—
(a) that the scheme makes suitable provision with respect to the
repayment, conversion or liquidation of the paid-up capital of
the company,
(b) that the consent of the creditors to the conversion of the
company has been obtained, or that suitable provisions have
been made for discharging, determining or securing the debts
or claims of sucli creditors, and
(c) that, tlie scheme is otherwise reasonable,
it may sanction and thereupon tlie' scheme will become binding on the
company and on all the persons concerned.
Any person, who is aggrieved by the decision of the Central Govern-
-^.ment sanctioning the scheme, may within 90 days of the date of die order
sanctioning the scheme, prefer an appeal to the High Court within whose
jurisdiction the registered office of the insurer is situate. The decision
of the High Court or of the Central Government where no appeal has
been preferred shall be final and binding on all the persons concerned.
638 - AtERCANTlLE LAW
After tlie sanction of the scheme, a certified copy thereof is to be filed
by the company with the Registrar of Companies.
Dejjosits. Every insurer other than a Lloyd's Agent must, in respect
of the insurance.business carried'on by him in India, deposit and keep de-
posited with the Reserve Bank of India for and on behalf of the Central
Government the amount hereafter specified, either in cash or in approved
securities estimated at the market value of the securities on the day of
deposit, or partly in cash and partly in approved securities so estimated :
where his total gross premium written direct in India in respect of
general insurance business in any calendar year after the 31st December,
1967, did not exceed Rs. one crore, a sum of Rs. ten lakhs, and where
it exceeded Rs. one crore, a sum of Rs. 20 laklis.
If tlie business done or to be done is matine insurance only and
relates exclusively to country craft or its cai-go or both, the amount to be
deposited shall be Rs. one lakli. Where an insurer has no share capi-
tal' and carries on an insurance business which k not carried on by in-
surers under separate policies, the Central Government may by notifi-.
cation require him to deposit a sum not less than one lakh and fifty
thousand rupees instead of Rs. 20 lakhs or Rs. 10 lakhs.
The Act provides a facility for existing, insurers to make up the
amounts of deposits now required in five instalments. T h e difference
between die sum already deposited and kept deposited on the dijte of
the 196S Amendment Act and the sum required under diis Act may
be deposited in five instalments of which—
(a) Ahe first shall be not less than one-fifth of the said sum and
shall be paid before die expiry of one year from such com-
mencement (of the Act),
(b) the second shall be not less thari one-fourth of die balance
left after making the deposit under clause (a) and shall be
paid before die expiry of two years from such commencement;
(c) die third shall be not less than one-third of the balance left
after making deposit under clauses (a) and (b) and shall be
paid before the expiry of three years from such commence-
ment,
d) the fouith shall be not less than one-halt of the residue and
shall be paid before die expiry oi foiu" years from such com-
mencement, and
(e) the balance shall be paid before the expiry of five years from
such commencement.
Where a group of insurers operate in India as a group, the total
amount deposited by all insurers in the group should not be less than
the amount which the group, if considered to be a single insurer, would
have been required to deposit, provided the deposit made by each in-
surer in the group is not less than that proportion of the total deposit
required to be made as the proportion of his share of the risk on each
policy issued by the group bears to the total risk on that policy.
Section 8 states that the deposits made by an insurer with die Re-
serve Bank of India shall be deemed to be pait of the a.ssets of the in-
surer and cannot be assigned or charged or mortgaged, nor can they be
attached in execution of any decree, although the interest-income on such
securities can be assignecl or mortgaged or attached. These deoosits can
be used only to discharge 'the liabilities out of policies of insu'iance, or to
T H E INSURANCE ACT, 1938 639
satisfy the decree obtained by a policy-holder in respect of his claim on
the policy.
Refund of deposit. Section 9 states that where an insurer has ceased
to carry on in India all classes of insurance business, and his liabilities
in India in respect of all classes of insurance business have been satisfied
or are otiierwise provided for, the court may, on the application of the in-
surer, order the return to tlie insurer of the deposit made by him under
the Act.
Where the insurer carries on business of more than one of the follow-
ing classes, namely, life insurance, fire insurance, marine insurance or
miscellaneous insurance, he shall keep a separate account of all receipts
and payments in respect of each such class of insurance business. In the
case of miscellaneous insurance a separate account of each sub-class must
be kept.
Balance sheet, profit or loss account and profit or loss appropriation
account must be prepared and audited annually as prescribed under the
Act (Section 11).
All the audited accounts and statements as well as the abstract must
be printed and four copies of each must be furnished as "Returns" to the""
Controller of Insurance within 6 months from the end of the period to
which they refer (Section 15).
Powers of Controller regarding returns. If it appears to the Con-
troller that any return furnished to him is inaccurate or defective in any
respect, he may—
(a) require the insurer to supply such further information, certi-
fied by an auditor or actuary, as he may consider necessary to.
correct or supplement such return;
(b) call upon tlie insurer to submit for his examination at the
principal place of business of the insurer any book of ac-
count, register or otiier document;
(c) examine any officer of the insurer on oath in relation to the
return.
(d) decline to accept any return unless tlie inaccuracy has Ijeen
Lorrected or the deficiency has been supplied before the expiry
of one month from the date when requisition by Controller
was made for correction, etc.
The insurer has a right of appeal and the High Court may, after
hearing the insurer and the Controller, cancel any order made by the
latter or may direct the acceptance of the .return.
Investment o£ assets.—According to Section 27B, which lias been
added by the 1968 Amendment Act, no insurer carrying on general in-
surance business shall, after the commencement of the Insurance (Amend-
ment) Act, 1968, invest or keep invested any part of his assets otherwise
tlian in any of the following approved investments, namely :—(a) approv-
ed securities; (b) debentures or securities guaranteed by any State Gov-
ernment; (c) first mortgages on immovable property situated in India
under any housing or building sdierae of the insurer approved by the
Goveiument, (d) unencumbered immovable property, (e) fixed deposits
with banks, (f) debentures of, or shares in co-operative societies, (g) de-
bentures secured by a first charge on any immoyable j^ioperty, plant or
eqiu'pment of any company which has paid interest in full for 3 years im-
mediately preceding, (h) debentures secured as in (g) when the book
G40 MERCANTILE LAW

value or the market value whichever is less, of such property, equipment

or plant is moie than twice the value of such 'debentures, (i) first deben
tures secured by a floating charge on all its assets or by a fixed charge on
fixed assets and floating charge on all other assets which has paid divi-
dend for the preceding three years on its equity shares, (j) preference
shares of a simdar company, (k) shares of any company which have been
guaranteed by another company, provided that the total amount of
shares o£ al\ the companies vmder guarantee is not in excess o£ 5t) per
cent of the paid-up amount of preference and equity shares of the gua-
ranteeing company, (1) shares of any company on which dividends of
not less than than 4 per cent including bonus have been paid for the
preceding three years. Not more tlian 25 per cent of the assets may be
invested in any security or manner subject to the following restrictions:
An insurer will not invest any part of its assets in the shares of any
banking or investment company more than 10 per cent of l>is assets or
2 per cent of the subscribed share capital and debentures of the bank-
ing or investment company. In any otlier company the investment must
not exceed 10 per cent of his assets or 10 per cent of the subscribed
share capital and debentures of the company, whichever is less. An in-
surer shall not invest or keep invested any part of his assets in tlie shares
or debentures of any private company.
By Section 28B, every insurer carrying on general insurance business
shall, evei-y year -vvithin 31 days from the beginning of the year, submit
to the Controller a return in the prescribed foim showing as at 31st Dec-
ember of the preceding year the investments made out of the assets and
any changes that occurred in the investments dtiring the period. T h e
return must be certified by a principal officer.
A'ssignment of policies and nomination. Sections 38 and 39 deal witli
assignment and nomination. These have been discussed in Chapter X.
Provident Societies.—A Provident Society means a pliblic company
or a co-operative society which enters into contracts of insurance for the
payment of annuities of Rs. 100 or less or for the payment of a gross sum
not exceeding Rs. 1,000 on the'occurrence of any one of the following
contingencies:
(a) birth, marriage or death of any person or the survival by a
person of a stated or implied age or contingency;
(b) failure of issue;
(c\ the occurrence of a social, religious or other ceremonial occa-
sion;
(d) loss of or retirement from employment;
(e) disablement in consequence of sickness or accident;
(f) the necessity of providing for the education o f a dependant;
(s) any other contingency which may be provided by the State
Government with the approval of the Central Government
(Section 65).
A pro\ident societv must not do any business other than those specified
above. It cannot carry on any business on dividing principle. It must
make a deposit ivith . the Reserve Bank like other insurance comoanies
of Rs. 5,000 • and must make a further deposit each year of one fifth oE
the amount of premiums and entrance fees received in the previous year.
T H E INSURANCE ACT, 1938 641
A provident society must cause an investigation made at least once in
every five years, and the controller should visit offices once in every two
years.
Mutual Insurance Company. A Mutual Insurance Comp?(ny means
a company carrying on the business of insurance whicli has no sliare capi-
tal and of ^v'hich by its constitution all policyliolders and only policV-
holdeis are members. ' '
Co-operative Life Insurance Society.—A Co-operative Life Insuran-
ce Society me^ns a co-operative society which carries on the business of
life insuiance and whicli has no share capital on which dividend or bo-
nus is payable and^of which by its constitution only the original mem-
bers of the society and tire policyholders are members,
Everj mutual insurance company and co-operative lite insurance
society must be registered under the Insurance Act, 1938. It will be
registeied only if it has a working capital of Rs. 15,000, exclusive of de-
posit to be made. It must, in respect of any life business, deposit and
keep deposited at the Reserve Bank of India a sum of Rs. 2,00,000.
 Chapter XIX

The Indian Trusts Act, 1882

T h e Act applies to private trusts only. It does not apply to (i) public
trusts, (ii^ public or private charitable or religious trusts, or (iii) to
trusts to distribute prizes taken in war among'captors. It does not affect
the rules of Mohammedan law as to_JWaqf, or the mutual relations of
the members of an undivided family as determined by any customary
or personal law (Section I)
Befinitions (Section S). A Trust is an obligation annexed to the
ownership of property, and arising out of a confidence reposed in and
accepted by the owner, or declared and accepted by him, for the bene-
fit of another, or of another and the owner. This definition, however,
is defective because (i) it is not exhaustive of all cases of fiduciary rela-
tionship, (ii) it would not include those cases where a t'rust is created
for a specific purpose as when A may convey property to B "to sell the
same and divide the sale-proceeds among A's heirs." This is a valid
trust bilt does not fall witliin this definition, (iii) the definition is some-
what obscure,
' T h e person who reposes or declares the confidence is called the
aatlcior oi tlie trust; the peison -who accepts the confidence is cal\ed the
trustee; the person for whose benefit the confidence is accepted is called
the beneficiary or the cestui que trust; the subject-matter of the trust is
called trust property or trust money; the beneficial interest or the interest
o£ the beneficiary is his right against the trustee as owner of the trust
property. The instrument, if any, by which the trust is declared is call-
ed the instrument of trust. A breach of trust is a breach of any duty-
imposed on a trustee, as such,~ by any Jaw for the time being in force.
Creation of Trust (Sections 4-10). A trust may be created for any
lawful, purjjosf'. T h e purpose of trust is lawful unless it is (a) forbid-
den by "law, or (b) is of such a nature that, if permitted, it would defeat
the provisions of any law^ or (c) is fraudulent, or (d) involves or implies
injury to the person or property of another, or (e) is immoral or oppos-
ed to public policy. Every trust of which the purpose is unlawful is
void. Where a trust is created for two purposes, of which one is law-
ful and tlie other unlawful, and the two purposes cannot be separated,
the whole trust is vbid (Section 4). Thus, where A conveys property
to B in trust to applv the profits to -die nurture of female foundlings to
be trained up as prostitutes, or where A bequeaths property to B in ""trust
to employ it" in carrying on a smuggling business, and out of the profits
thereof to support A's children, the trust is void. Again, A while in in-
solvent circumstances, transfers property to B in trust for A dni-ing his
life, and after his- death for B. A is declared an insolvent. T h e trust
T H E INDIAN TRUSTS -ACT, 1882 643

Iftr A is invalid against his creditors. A trust of immovable property

will be valid only if (a) it is declared by a non-testamentary instrument
in writing, signed by the author of the trust or the trustee and register-
ed, or (b) it is made by the will of the author of the trust or of the
trustee. A trust of movable property can be made either in the above
manner or by transferring the ownership of the trust property to the
trustee (Section 5). A trust is deemed to be properly created when the
author of the trust indicates with reasonable certainty by any words or
act (i) an intention to create a tiust, (ij) the purpose of the trust, '(iii)
the beneficiary, and (iv) the trust-property, and (unless the trust is aec-
lared by a will or the author himself is the_trustee) transfers the trust-
property to the trustee (Section 6).
A trust may be created by (a) every person' corjipetent to contract
and (b) with the permission of Court, by or on behalf of a minor (Sec-
tion 7). T h e subject-matter of a trust must be property transferable to
the beneficiary. It must not be merely beneficial interest under a sub-
sisting trust (Section 8). Every person capable of holding property ma^
be a beneficiary; but a proposed beneficiary may renounce his interest
under the trust by (i) a disclaimer addressed to the trustee, or by (ii)
setting up, with notice of the trust, a claim inconsistent with the trust
(Section 9). Similarly, every person capable of holding property may
be a trustee; but, where the trust involves the exercis^f of discretion, he
cannot execute it unless he is competent to contract. A trustee may
accept the trust or may disclaim it, for Section 10 expressly provides that
'no one is bound to accept a trust.'

DUTIES AND'LIABILITIES OF TRUSTEES

(Sections 11—30)
Duties (Section 11—22). 1. T o execute trust.'The trustee is bound
(a) to -fulfil the purpose of the trust, (b) to obey the directions of the
audior of tlie trust except as modified by~ consent of all bfeneficiaries
competent to contract. Consent of an incompetent or minor benefi-
ciary may be given by a competent court of original jurisdiction. A
trustee need not obey any direction which is (i) impracticable, (i;) mani-
festly injurious to the beneficiaries.
2. T o inform himself of state of trust property. T h e trystee must
(a) acquaint himself with 'the nature and state of the trust-property, (b)
transfer the same to himself, and (c) get in trust-money invested on in-
sufficient or hazardous security (Section 12).
3. T o protect title to trust property. He should'maintain and de-
fend suits, and take steps for the preservation of the trust-property and
the assertion or protection of the title thereto (Section 13).
4. Not to set up adverse title. The t.ustee must not set UD, either
for himself or for another, any tffle adverse to the beneficiary (Sec-
tion 14).
5. To exercise-care ancj diligence. He must deal with "the trust
property as carefully as a man of ordinary prudence would deal witli
such property if it were his own; and, in the absence of a contract to
the contrary, a trustee so dealing will not be responsible for the loss,
destruction or deterioration of the trust-property (Section 15).
6. T o convert perishable property. Where the trust is created lor
the isenefits of sevei-al persons in succession, and the trust property is of a
wasting nature or a future or reversionary interest, the trustee is bound
644 MERCANTILE LAW

to convert, it into property of a permanent and immediately profitable

character (Section 16).
7. T o be impartial. Where there are more beneficiaries than one
the-trustee must* be impartial, and must not execute the trust for the
advantage of one at the expense of another. Where he is given discre-
tion, the Court cannot control its exercise reasonably and in good faith
(Section 17).
8. T o prevent waste by another. Where the trust is created for
the benefit of several persons in succession and one of "them in posses-
sion commits, or threatens to commit, any act which is destructive or
permanently injurious to the property, the trustee must take measure
to prevent such act (Section 18).
9. T o keep and render accounts. The trust must keep clear and
accurate accounts of the trust-property, and furnish information about
the same to the beneficiary (Section 19).
lO'. T o invest trust money. Where the trust-money cannot be ap-
plied immediately or at an early date to the purposes of the -tiust the
trustee is bound (subject to any direction 'contained in the instrument
of trust) to invest the money on the following securities, and on no
others: viz.—in (a) promissory notes, debentures, stock, (b) bonds, (c)
shares in railways guaranteed by Government, (d) on a first mortgage
of movable property in India, (e) any other security sanctioned by the
Court (Section 20). A trustee may invest in any of these securities,
even if the same is redeemable and the price exceeds the^ redemption
value. He may retain until redemption any redeemable stock, fund or
security whicli he may have purchased as above (Section 20A). When a
trustee who is directed to sell within a specified time extends such time,
the onus of proving diat such extension did not prejudice the bene-
ficiary lies on the trusteee (Section 22).
Liabilities (Sections 23-30)—Liability for breach of U-ust. 1. When a
trustee commits a breach of trust, he is liable to make good the loss
•which the trust-property or the beneficiary has thereby suEered> unless
(a) the beneficiary has by fraud induced the trustee to commit the
breach, or (b) the beneficiarv, being competent to contract, has himself,
without coercion or undue influence having been brought to bear on him,
concurred in the breach, or' subsequently acquiesced therein, with full
knowledge of his rights against the trustee (Section 23). For example,
Section 20 (c) authorises a trustee to invest the trust money on a mort-
gage of land or building, provided that the value of the property exceeds
(i) by one-third the mortgage money, in the case of mortgage of land, and
(ii) by one-half the mortgage money in the case of mortgage of a build-
ing. The proviso to Section 20 further requires that where the bene-
ficiary is sui juris (competent to contract) and entitled in possession to
receive the income of the trust-property for his life, or for any greater
estate, the trust money will not be invested on a mortgage without his
consent in writing. If a trustee of a will fails to comply %vith any of
these provisions and invests trust money on mortgage of land and build-
ings, he is guilty of a breach of trust and is liable to make good die loss
owing to the securities turning out to be_ insufficient unless he can show
tliat the beneficiary has (1^ by fraud induced him to commit the breach,
or (2) concurred in the breach, or (3) subsequently acquiesced therein.
Again, where B a trustee for C of Rs. 15,000," invests the Tvhole of the
amount in the purchase of shares of various joint stock companies, the
present market value of the shaxes being Rs. 10,000, B has committed a
breach of trust in so far as he has mvestcd Jie trjst 'ncney in ••„r.au-
T H E INDIAN TRUSTS ACT, 1882 646
tliorised securities. He is liable to C to make good the loss wliich the
t'rust property has suffered. C is eutitled to claim •either (i) lor the
actual depreciation of the trust property, or (ii) for the loss to the trust
property consequent upon B's not investing the trust moneys in authori-
sed securities. But, if the shares were purchased at the suggestion of C,
tie could not have any remedy against B, provided C was sui juris, and
liad full knowledge 'of the facts.
Section 23 further provides that a trustee committing a breach of
trust is not liable to nay interest except (a) where he has actually receiv-
ed interest. In this case he must account for interest actually received
by him; (b) where the breach consists in unreasonable delay in paying
trust-money to the beneficiary; (c) where the trustee ought to have re-
ceived interest, but has not done so; (d) where he may be presumed to
have received it. In (b), (c) and (d) the trustee is liable to account for
simple interest at 6 per cent per annum. But in the following two cases
the trustee is liable to account for compound interest (with half-yearly
rests) at 6 per cent per annum : (1) where the breach consists in failure
to invest trust-money and to accumulate the interest thereon, and (2)
where the breach consists in the employment of trust-property or tlie
proceeds tliereof in any trade or business.
2. A trustee can in no case set-off his liability. Thus, a trustee
who is liable for a loss occasioned by a breach of trust in respect of one
portion of the trust property cannot set-off against his liability again
which has accrued to another portion of the trust-property through an-
other and distinct breach of trust (Section 24).
3. Where one trustee succeeds another, he is not as such, liable for
the acts or defaults of his predecessor (Section 25).
4. One trustee is not, as such, liable for a breach of trust commit-
ted by his co-trustee except (a) ivhere he delivered trust-property to his
co-trustee without seeing to its • proper application, or (b) wiiere h e
allows his qD-trustee to receive trust-property and fails to make due en-
quiry as to the co-trustee's dealings there%vith or allows him to retain
it longer than the circumstances of the case reasonably require, or (c)
where he becomes a'vvare of a breach of trust committed or intended by
his co-trustee, and either actively conceals it or does not take proper
steps to protect the beneficiary's interest. A bequeaths certain property
to B and directs him to sell it and invest the proceeds for the benefit
of D. B and C accordingly sell the property, and the money is received
by B and retained in his hands. C pays no attention to the matter for
two years, and then calls on B to make the investment. B is unable to
do so, becomes insolvent, and the purchase-money is lost. C may be
compelled to make good the amount. But a co-truste^ who joint in
signing a receipt for trust-property and proves that he has not received
the same is not answerable, by reason of his signature only, for loss or
misapplication of the property by his co-trustee (Section 26).'
5. Where co-trustees jointly commit a breach of trust, or where one
of them by his neglect enables die other to commit a breach of trust,
each is liable to be beneficiary for the whole of the loss occasioned by
such breach. But as between the trustees- themselves, if one be less
guilty than another and has had to refund the loss, the, former may com-
pel tlife latter (or his legal representative) to make good such loss except
when the trustee himself is guilty of fraud. If, however, all be equally
guilty, then any one or more of the trustees who had to refund the loss,
may compel the others to contribute (Section 27).
646 MERCANTILE LAW

6. When any beneficiary's interest becomes vested in another pet-

son, and tlie trustee, not having notice o£ the vesting, pays or delivers
trust-property to the person who would have been entitled thereto in
the absence of such vestfng, the trustee is not liable for the property
so paid or delivered (Section 28).
7. When the beneficiary's interest is forfeited to the Government,
"the tru*tee. is bound to Hiold the property for the beneficiary in such
manner as the State Govei^nment may direct (Section 29).
8. Trustees are to be chargeable only for such moneys, stocks funds
and securities, as they may actually receive an(J shall not be ?rnwerable
for any banker, broker or other person in whose hands the trust-pro-
perty may be placed, noi for any insufficiency of any stocks, funds or
securities nor for involuntary losses CSection 30). ,

RIGHTS AND POWERS OF TRUSTEES

(Sections 31-45)
Rights (Sections 31—36). 1. A trustee is entitled to have in his pos-
session the instrument of trust and all documents of title to trusi pro-
perty (Section 31)
2, A trustee has a right to reimburse l^imself, out of trust-property,
for all expenses properly incurred by him, e.g., expenses incurred in the
execution of the trust, or the realisation, pieservation or benefit of the
trcibt-property. If he makes such expenses out of his own pocket, he has
a first charge on the trust-property for such expenses and interest thereon.
If, however, the trust-property is not sufficient to meet such expenses the
trustee has i right to recover them from the beneficiary personally (Sec-
tiein 32).
3 Where a trustee has, by mistake, made an over-payment to the
beneficiary, he has a right to reimburse the trust-property out of the be-
neficiary.'! jnierest; and if such interest fails, he may recover from the
beneficiary personally the amount of such over-payment (Section 32).
4, A trustee has a right to be indemnified by a stranger who has
gi^ined an advantage from a breach of trust to the extent of the amount
aGtuaiJ> received by such stranger and where such person is a beneficiary
himself the trustee has a charge on such beneficiary's interest for such
amount except when the trustee himself is guilty of fraud in the com-
mitting of the breach of trust (Section 33).
5 A trustee has a right to apjply to the Court for opinion, advice
o r diiection in question legarding the management of the trust-property.
He shall be deeme^l to have discharged his duties if he acts upon such
opinion, advice or direction (Section 34).
6. A trustee is entitled to have, after his duties as trustee are com-
pleted, the accounts of trust-property examined and settled and an ac-
knowledgement in writing to that effect (Section 35).
7. A trustee has a general right to do all proper Sets for the reali-
sation, piotection^ etc., of the trust property, as also for the support to
a beneficiary who is incapable of contracting (Section 36).^ T h e Section
further lays down that except with the permission of the Court, no trustee
Ghall lease the trust-property for a term exceeding 21 years.
Powers (Sertions 37-45). L Where the trustee is empowered to sell
any trust-property, he may sell it all together or in lots; by public auc-
tion or private contract; and cither At one time or at different times.
T H E INDIAN TRUSTS ACT. 1882 647

He may make any reasonable stipulation with the purchaser while sell-
ing. He may also buy the property again and resell it at profit (Sec-
lions 37-38).
2. For the purpose of completing any such sale, the trustee has
power to convey or dispose of the , property in any reasonable manner
(Section 39).
3. A trustee has power to vary investments at his discretion. T o
this end, he may call in any trust-pioperty invested in any security and
invest it in any other security mentioned in Section 20 above as he thinks
fit (Section 40).
4. Where the trustee holds property for minor beneficiary, he ma^
pgy to the guardian (if any) of such minor, or otlierwise apply, a rea-
sonable sum for his maintenance or education or advancement in life
•as also expenses for his worship, marriage, funeral, etc. He^is also em-
powered to accumulate the income of such minor beneficiary and invest
it. If the income of the trust-property is insufficient to meet these ex-
penses, a trustee has power, with the permission of the Court, to apply
the trust-property towards such maintenance, education, advanceinent
or expenses as the case may be (Section 41).
6. A trustee has power to give receipts for any money, securities,
etc., in the exercise of tlie trust-power. In the absence of fraud, such
receipt shall discharge the person paying tlie money, etc., from liability
of any kind (Section 42).
6. Two or more trustees acting together (and when the instrument
of trust so provides, a single trustee) shall have power (a) to compound
any debt, (b) to allow any time for payment of debt, (c) to compromise,
compound, abandon or otherwise settle any debt or claim relating to
the trust, (d) to give, execute or enter into any agreement, or release or
arrangement regarding the trust-property (Section 43).
7., The powers of a deceased trustee or a disclaiming trustee survive
to the surviving trustee or trustees, unless the trust instrument requires
otherwise (Section 44).
8. 'When a decree has been made for the execution of a trust,
tlie trustee must exercise his powers in conformity with the decree only
•and not otlierwise (Section 45).
Disabilities of Trustees (Sections 46—54). A trustee'who has accept-
€d the trust cannot afterwards renounce it .except (a) with the permission
of the Court, or (b) with the consent of the beneficiary if he is compet-
ent to contract, or (c) by virtue of a special power in the instiument o£
trust (Section 46)'.
2. A trustee cannot delegate his office or any of his duties either to
a co-trustee or to a stranger except (a) when the instrument of trust
so provides, or (b) the delegation is in regular course of business, or (c)
the delegation is necessary, or (d) the beneficiary, being competent to con-
tract, consents to the delegatiori. The appointment of an attorney or
proxy to do art act merely ministerial and involving no independent
discretion is not a delegation iWthin the meaning of this section (Sec-
tion 47). Thus, (i) A, a trustee of certain property with power to sell,
-mav employ an auctioneer to sell the same; or (ii) A bequeaths to B
SO house? in trust to collect-their rent, and pay them to Q. B may em-
ploy a proper person to collect these rents.
3. When there are more trustees than one, all must join in the ex-.
648 MERCANTILE LAW

ecution of the trust except^where the instrument -of trust otherwise pro-
vides (Section 48). Where a discretionary power of a trustee is not - ex-
ercised by him in good faith, such power may be controlled by the Court
(Section 49).
4. A trustee has no right to any remuneration for his trouble, skill
and loss of time in executing his trust, except (a) when the instrument
of trust provides for it, or (b) where there is a contract to that elTect with
the beneficiary, or (c) with the permission of the Court (Section 50).
5. A trustee must not use or deal with the trust-property for hiS'
own benefit or for any other purpose not connected with the trust. (Sec-
tion SI).
' 6. A trustee (or his agent) whose duty it is to sell property must
not directly or indirectly buy the same either on his own account or as
agent for a third person (Section 52). '
7. A trustee must not buy or become mortgagee or lessee of the
trust property without the permission of the Court and the permission
would be given only if the proposed purchase, "mortgage or lease is
for the advantage of the beneficiary. Similarly, a trustee whose duty it
is to buy or mortgage must not buy it for, or mortgage it to, himself
(Section 53).
8. A trustee or co-trustee whose duty it is to invest trust-money on
mortgage or personal security must not invest it on a mortgage by, or on
the personal security of, himself or his co-trustee (Section 54).

R I G H T S AND LIABILITIES OF T H E BENEFICIARY

(Sections 55-69)
Rights (Sections 55—67). T h e beneficiary--has a right—
1. to the rents and profits of trust property (Section 55);
2. to have the trust specifically executed by the trustee (Sec-
tion 56);
3. to require ttie trustee to transfer to him (or them) the trust-
property provided that all the i beneficiaries are competent to
contract and all of them agree (Section 56);
4. to inspect and copy (a) the instrument of trust, (b) the ac-
counts of the trust property, and (c) all the vouchers relating
to trust property (Section 57);
6. to transfer his beneficial interest in the trust-property to an-
other, provided he is competent to contract (Section 58);
6. to sue for the execution of the trust where all the trustees die-
or disclaim, or are discharged; and the Court shall, until the
proper appointment of a trustee, execute the trust (Section 59)r
7. to demand that the trust-property shall be protected • and ad-
ministered by proper persons as trustees, and that where the ad-
ministration of the trust involves the receipt and. custody of
money, the number of truy^es should be two at least. T h e
following persons are not proper persons for appointment as-
trustees: (a) a person domiciled abroad, (b) an alien enemy,
(c)' a person having an interest adverse to, or inconsistent with
that of -the beneficiary', (d) an insolvent, (e) a' married woman,,
(f) a minor (Section 60);
T H E INDIAN TRUSTS ACT, 1882 649
8. to compel his trustee to any act of duty and to restrain him
from committing any probable breach of trust (Section 61);
9. where a trustee has ivrongfully bought trust-property, (a) t»
have the property declared subject to the trust, or (h) to have
it retransferred by the trustee if it is not sold to a stranger
and had, notice of the trust and of the breach thereof;
10. to follow' the trust-property which has come into the hands-
of a third person inconsistently with tlie trust (Section 63);
11.' to follow that into which the trust-property is converted if the
trustee has disposed ot it to a third person (Section 64). The
beneficiary cannot, however, proceed under Section 63 against
a third party or a transferee for value who has acted in good
faith, nor can he follow trust-property under Section 64, when
it is money, currency notes, > or negotiable instruments only
when they have cpme into the hands of bona fide holders in
circulation;
12. where a trustee wrongfully mingles the trust property with his
own, to have a charge on the whole fund for the amount due
to him (Section 66);
13. when a trustee wrongfully transfers trUst-property and after-
wards himself becomes tht owner of the property so transfer-
red, the property again becomes subject to the trust notwith-
standing any want of notice on the part of intervening trans-
ferees in good faith for consideration (Section 65);
14. if a partner, being a trustee, wrongfully employs trust-property
in the business, or on the account of the partnership, no other
partner is liable therefor in his personal capacity to the bene-
ficiaries, unless he had notice of the breach qf trust in which
case they will be jointly and severally liable for the breach of
trust (Section 67)'.
Liabilities (Sections 68—69). Where one of several beneficiaries—(a)
joins in committing a breach of trust, dr (b) knowingly obtains any ad-
vantage from it, or (c) becomes aware of a breach of trust and actually
conceals it or 'does not take proper steps to protect the interest of other
beneficiaries, lor (d) has deceived the trustee and thereby induced him
to commit a breach of trust, the other beneficiaries have a right to have
his interest impounded against him and all who claim under him (ex-
cept against transferee in good faith and for value) until the loss caused
by the breach has been compensated (Section 68). Section 69 provides-
that every person to whom a beneficiary transfers his interests has the
rights, and is subject to the liabilities, of the beneficiary in respect of
such interest at the date of the transfer.
Vacating Office of Trustee (Sections 70—76). T h e office of, a trus-
tee is vacated either (i) by his death, or (ii) bv-his discharge from office
(Section ^70).
A trustee may be discharged from his office only as follows: (a) by
the extinction of the trust; (b) by the cornpletion of his duties under
the trust; (c) by such means as may be prescribed in the instrument o£
trust; (d) by appointment of a new trustee in his place; (e) by consent
of himself and all the beneficiaries being competent to contract; or ([)
by the Court to which a petition for his discharge is presented by the
trustee himself under Section 72'of the Act (Sedions 71—72).
650 MERCANTILE LAW
Appointment of New Trustees (Sections 73—76). Whenever a trus-
tee (i) disclaims, or (ii) dies, or (lii) is absent from India for 6 montiis
or more, or (iv) leaves India for the purpose of residing abroad, or (v)
is declared and insolvent, or (vi) desires to be discharged, or (vii) refu-
ses, or (viii) becomes unfit or incapable to act in the trust, or (ix) accepts
an inconsistent trust, a new trustee may be appointed in his place by
(a) any person named in the instrument of trust (i£ any), or (b) die
author of the trust (if alive and competent to contract), or (c) tlie sur-
viving trustee or his legal representative, or_(d) with the consent of the
Court the last retiring trustee (Section 73). Every such appointment
shall be in writing under the hand of the person making it. The Offi-
cial trustee may, by order of the Court, be appointed in any case in
•which only one trustee is to be appointed, and such trustee is to be
the sole trustee (Section 73). Any beneficiary may, without ,a suit, apply
by petition to the Court for appointment o£ a new trustee (Section 74).
On his appointment, all the trust pioperty vests in the trustee and he
may exercise all the powers, authorities and discretions as if he had been
originally nominated a trustee by the author of the trust (Section 75).
Unless the instrument of trust declares otherwise, on the death or dis-
c-harge of one of the trustees, the trust survives and the trust-property
vests in his co-Crustees (Section 76).
Extinction of Trust (Sections 77—79). A trust is extinguished (i)
when its purpose is completely fulfilled; oi (ii) when its purpose becomes
unlawful; (iii) when the fulfilment of its plirpose becomes impossible by
destruction of the trust-property; or (iv) when tlie trust, being revocable,
is expressly revoked (Section 77).
Revocation of Trust. I. A trust created by will may be revoked at
the Dleasure of the testator.
2. A trust otherwise created can be revoked only (a) by the consent
of the beneficiaries, provided all are competent to contract, or (b) by
virtue of an exercise of a power of revocation reserved by the author of
the trust, where .the trust has been declared "either by a non-testamen-
tary instrument or by word of mouth; or (c) at the pleasure of the
author of the trust, where the trust is for payment of his debts and the
trust has not been communicated to his creditor (Section 78). But no
trust can be revoked by the author of the tijust so as to defeat or pre-
iudice what the trustees may have duly done in execution of the trust
(Section 79).
Certain Obligations in tlie Nature of Trust or Constructive Trusts
(Sections 80—96). An Obligation in the nature of a trust is created in
the following 15 cases :—
1. Where tire owner of property transfers or bequeaths it. to an-
other and it cannot reasonably be ascertained that he intended to dis-
pose of tiie beneficial interest therein, the transferee or legatee must hold
such property for the benefit of the owner or his legal representative (Sec-
tion 81).
Illustrations, (i) A conveys land to B without consideration and dec-
lares no trust of any part. It Cannot,' consistently with the circumstances
under which the transfer is made, be inferred that A intended to trans-
fer the beneficial interest in the land. B holds the land for the
benefit of A. (ii) A conveys to B two fields, Y and Z, and dec-
lares a trust of (Y, but says nothing about Z. It cannbt, consistently'
with the circumstances under which the transfer is made, be inferred that
A intended to transfer the beneficial interest i n Z. B holds Z for the
T H E INDIAN TRUSTS ACT, 1882 651

benefit of A. (iii) A tiansfers certain stock belonging, to him into 'the

joint names o£ himself and B. It cannot consistently with tlie circums-
tances under which the transfer is made be inferred that A intended to
transfer the beneficial interest in the stock during his life. A and B hold
the stock for the benefit of A during his life- (iv) A makes a gift o£
certain land to his wife B. She takes the beneficial interest in the land
free from any trust in favour of A, for it may be inferred from the cir-
cumstances that the gift was for B.
2. Where property is transferred to one person for a consideration
paid by i another person, and it appears that such other person did not
intend to pay such consideration for tlie benefit of tlie transferee, the
tiansferee must hold the property for the benefit of the person paying
the consideration (Section 82).
S. Where a trust is (a) incapable of being executed, or (b) is com-
pletely executed without exhausting the trust-property, the trustee must
hold the trust-property or so much thereof as is unexhausted for the au-
thor of the trust or his legal representative (Section 83).
Illustrations. A conveys certain land to B (i) "upon trust," and no
trust is ^declared; or (ii) "upon trusts to be hereafter declared" and no
such declaration,is ever made; or (iii)'upon trusts that are too vague to
he executed; or (iv) upon trusts that become incapable of taking effect
or (v\ in trust for C, and C renounces his interest under die trust. In
each of these cases B holds the land for die benefit of A. (b) A. trans-
fers Rs. 10,000 in the four per cents to B, in trust to pay the interest
annually securing due to C for her life. A dies. Then C dies. B holds
the fund for the benefit of A's legaf lepresentative. (c) A Qonvevs land
to B upon trust to sell it and apply one moiety of the proceeds for cer-
tain charitable purposes, and the other for the maintenance of the wor-
ship of an idol. B sells the land, but the charitable purposes wholly
fail, and tlie maintenance of the worship does not exhaust the second
moiety of the proceeds. B holds the first moiety and the part unapplied
of the second moiety for the benefit of A or his legal repfesentative. (d)
~A bequeaths Rs. 10,000 to B, to be laid out in buying land to be con-
veyed for purposes which, either wholly or partially fail to take effect.
B holds for, the benefit of A's legal representative the undisposed part
of interest in the money or land if purchased.
4. Where the owner of property transfers it to another for an ille-
gal purpose, and (a) such purpose is not executed, or (b) the transferor
is not as guilty as the transferee, or (c) the effect of permitting the trans-
feree to retain the property might be to defeat the provisions of any law,
the transferee must hold the property as constructive trustee for the
benefit of • the transferor (Section 84).
5. When a testator bequeaths certain property on trust, the purpose
whereof is apparently unlawful, or the legatee agrees with the testator
to apply the property for an unlawful purpose, tli^ legatee ijiust hold
the property for the benefit of the testator's legal representative (Sec-
tion "85)".
6. Where property is bequeathed, and the revocation of the be-
'^ quest is prevented by coercion of the legatee the legatee must hold the
•property "for the benefit of testator's legal representative (Section SBA^
7. Where property is transferred in pursuance of a rescindable
Contract, or a contract induced by fraud or mistake, the transferee must
hstld the property for the bentfit of the transferor (Section 86).
652 MERCANTILE LAW
8. Wliere a debtor becomes the executor or otlier legal leprcsenta-
tive of his creditor, he must hold the debt for the beneht o£ tlie per-
sons interested therein (Section 87).
9. Where a fiduciary, i.e., a trustee, executor, partner, agent, direc-
tor of a company, legal adviser, or other person bound in fiduciary cha-
racter to protect the interests of another person, by availing himsulf of
his diaracter gains for himself any pecuniary advantage, he must hold for
the benefit of sucli otlier person the advantage so gained (Section 88).
Illustrations, (a) A, an executor, buys at an undei"vnlue from B, a
legatee, his claim under the will. B is ignorant of the value of the be-
quest. A must hold for the benefit of B the difference between the price
and value, (b) A, a trustee, uses the trust properly for the pur-
pose of his own business. A holds for the benefit of liis beneficiary' the
profits arising from sucli uses, (c) A, a trustee, retires from his trust in
consideration of his successor paying him a sum of money. A holds such
money for the. benefit of his beneficiary, (d) A, a partner, buys land in
his own name with funds belonging to the partnership. A holds such
land for the benefit of the partnership, (e) A, a partner, employed on
behalf of himself and his co-partners in negotiating the terms of a lease,
clandestinely stipulates with the lessor for payment to himself of a lakh
of rupees, A holds the lakh for the benefit of the partnership, (f) A
and B are partners. A dies. B, instead of winding up the affairs of
the partnership retains all die assets in the business. B must account tp
A's legal representative for the profits arising from A's share of the capi-
tal, (g) A, an agent, employed to obtain a lease for B, obtains the lease
for himself. A holds the lease for the benefit of B. (h) A. a guardian,
buys up for himself encumbrances on his ward B's estate at an imdervalue.
A holds for the benefit of B the encumbrances so bought and can only-
charge him what he has actually paid.
10. Where, by the exercise of undue influence, a person gains any
advantage without paying any consideration, the person gaining such ad-
vantage must hold it for the benefit of the person from whom he gained
such advantage (Section 89).
11. Where an advantage is gained by a qualified owner, such as a
tenant for life, co-owner, mortgagee, etc., in derogation of the rights of
other persons interested in such property, he must hold such advantage
for such other person (Section 90).
Illustrations, (a) A, the tenant for life of leasehold property, re-
news tlic lease in his own name, and for his own benefit. A holds the
renewed lease for the benefit of all those interested in the old lease, (b)
A village belbngs to a Hindu family. A, one of its members, pays
nazrana to Government and thereby procures his name to be .entered as.
the inamdar of the village. A holds the village for the benefit of him-
self and the other members, (c) A mortgages land to B who enters into
possession. B allows the Government revenue to fall into arrear with
a View to the land being put tip for sale and his becoming- himself the
purcliaser of it. T h e land is accordingly sold to B. Subject to the re-
payment of the amount due on the mortgage and of his expenses pro-
perly incurred as mortgagee, B holds the land for the benefit of A.
12. Where a person acquires property with notice that another
person has entered into an existing contract affecting that property of
which specific performance could be enforced, the former must hold it
as trustee for the latter (Section 91).
T H E SOCIETIES REGISTRATION ACT, 1860 653
13. Wheie a person contracts to buy property to be held on trust
for certain beneficiaries and buys the property accordingly he must hold
the property for theif benefit to the extent necessary to give cfTect to
the contract (Section 92).
14. \Vhere creditors compound their debts wjtli the d e b t o r a n d one
of such creditors, by a secret arrangement with tlie debtor gains ^ n un-
due advantage over his co-creditors, he must hold for the benefit of his
co-creditors the advantage so gained (Section 9S).
15. In any case not coming within the scope of any of the preced-
ing sections, where there is no trust, but the person having possession
of property has not the whole beneficial interest tlierein, he must hold
the property for the benefit of the person having such interest, to the
extent necessary to satisfy their just demand (Section 94).
Jllustrations. (a) A, an executor, distributes the assets of his testator
B to the legatees witliout having paid the whole of B's debts. The le-
gatees hold for the benefit of B"s creditors, to the extent necessary to
satisfy their just demands the assets so distributed, (b) A, by mistake,
assumes the character of a trust for B and under colour of the trust,
receives money. B may compel him to account for such moneys, (c)
A makes a gift of a lakh of rupees to B, reserving to himself, with B's
assent, power to revoke at pleasure the gift as to Rs. 10,000. The gift
is void as to Rs. 10,000 arid B holds that sum for the benefit of A
{Section 94).
Obligator's Duties, Liabilities, etc. (Section 95). The persons (obli-
gator) holding property under Sections 80 to 94 must perform the same
duties, and is subject to the same liabilities as an ordinary trustee, pro-
vided tliat (a) where he rightfully cultivates the properly, or employs
it in trade or business, he is entitled to a remuneration for his trouble
and skill; and (b) where he holds the property by virtue of a contract
with the person for whose benefit he holds, he may buy, or become lessee
or mortgagee of the same without the permission of the Court.

T H E SOCIETIES REGISTRATION ACT, I860

(Act XXI of I860)
This Act was passed to improve the legal condition of societies es-
tablished for the promotion of literature, science, or the fine arts, or for
the diffusion of useful knowledge and political education, or for chari-
table purposes.
Societies Registerable imder this Act. Section 20 expressly lays
down that the following societies may be registered under this Act, name-
ly : Charitable societes, tlie military orphan funds or societies establish-
ed at the several presidencies of India, societies established for the promo-
tion of ."icience, literature, or the fine arts, for instruction. the diffusion
of useful knowledge, the diffusion of political education, the foundation
or maintenance of libraries or reading-rooms for general use among the
members or open to the pubh'c, or public museums and galleries of
painting and other works of art, collections of natural history, mechani-
cal and philosophical inventions, intruments, or designs.
T h e Act is not confined to societies of public or charitable nature
t u t it extends also to private societies, established for any of the purpo-
ses stated above. There has been some confusion with regard to religious
society and charitable society, particularly where some of the purposes
are not strictly charitable but religious. It has, however, been held both
654 MERCANTILE LAW

in England and India that where a society is formed for certain purposes
•whose paramount object is charitable, tlie fact that some of the purpo-
ses are mainly religious, would not render the society any the less chari-
table. For example, a society formed for the purpose of the improve-
ment of Islamic education and rendering possible pecuniary help to the
poor Musaffars and worthy Alim and Ulema for removing their difficul-
ties is a society whose paramount object is charitable and therefore ihe
fact that one of the purposes is the managelnent of the affairs of the
mosque cannot take away from the character of the society as a chari-
table society.' In the same way it was held in Radha Swami Sat Sangh
Sabha v. Tara Chand, 1939 All. 557 that the society was registerable un-
der the Act. In White v. White, 3 Ch. D 41 it was stated that a religious
purpose would ordinarily be charitable purpose. Any mode of promot-
ing the welfare of mankind would be charitable purpose. Charitable-
purposes are not restricted to giving alms or other charitable relief, but
the words have a much wider legal meaning. And the Indian Legisla-
ture does not make a distinction between religious and charitable pur-
poses. But societies for recreation or enjoyment, e.g., billiards, play-
ing-cards, as is distinguished from instruction are not registerable under
the Act (Re Badger) (1905) 1 Ch. 568..
Section 1 provides that any seven or more persons associated for any
of tlie purposes as described above (Section 20) may, by subscribing their
names to a memorandum of association and filing the same with tl]e
Registrar of Joint Stock Companies form themselves into a society under
this Act. After registration the position of a society is that of a com-
pany and that of its members like the shareholders of a company.
Memorandum of Association (Section 2). T h e memorandum of as-
sociation must state (1) the name of the society; (2) the objects of the
society; (3) the names, addresses, and occupations of the governor;., coun-
cil, directors, committee or other governing body to whom, by the rules
of the society, the management of its affairs is entrusted. A copy of the
rules and regulations of the society, certified to be a correct copy by
not less three of the members of the governing body must be filed with
the memorandum. The Registrar will, on the payment of a registration
fee of Rs. 50 or any smaller amount as fixed by tlie'State Government
register the society and issue a certificate of registration.
Alteration of the Obiects (Section 12). Whenever the governing
body of a society is of the opinion that it is advisable to extend or
abridge the pirrpose or purposes or to arnalgamate the society either
wholly or partially with any other society, it may alter the purpose or
objects. The procedure for doing so is that the governing body should
submit the proposition to the members of the society in a wiitten or
printed report and convene a special meeting for considering \he same
according to the regulations of the society. The report must be deli
vered or sent by post to every member ten days previous to this special
meeting and the members present at such meeting must agiee to tliis
alteration by three-fifths of the \otes delivered in person or by proxy
and confined by an equal number at a second special meeting convened
at an inter\'al of one month after the former meeting.
Once in every year, within 11 days of the annual general meeting,
a list shall be filed with die Registrai, of the names, addresses and occu-
1. MOIKI. Hussain v. Majisday Mahmood Jamait Managing Com-
mittee. Pudimet 19-10 Mad. 167; Anjuman Jslamia of Muttra \. Nasir-
uddin (1906) "29 All. 384.
T H E SOCIETIES REGISTRATION ACT, 1860 655

pations of the governors, council, directors, committee or others govern-

ing body then entrusted with the management of the society (Section 4).
Suit by and against Society (Section 6). T h e society can sue or b e
sued in tlie name of the president, chairman or principal secretary, or
trustees as shall be determined by its rules and regulations. If tiie rules
afe silent on the point, then the society may sue or be sued in the name
of any such person as is appointed by the governing'- body. On regis-
tration the society becomes a legal entity apart from the members cons-
tituting it and it can sue or be sued in tlie name of the pre-
sident, etc. Section 7, therefore, provides that the death or retire-
ment from ofBce of a plaintiff or defendant does not cause the abate-
ment or discontinuance of civil proceedings brought by or against a
society. Tire proceedings' are continued in the name of or against the
successor of such person. T h e society being a corporate body does not
die; therefore the death or retirement of the oificer suing or being sued
only brings in the successor and makes no change in the person suing
or sued. Judgments recovered against the nominees of a society are
enforceable against the property of the society and not against the pro-
perty or bodies of the society's nominees.
Property of Society (Section 5). T h e property of the society is to-
%'est in the trustees, if any, otherwise the governing body shall be treated
in all proceedings,, civil and criminal, as the proprietors of the property
of the society for the time being. Any judgment obtained against the
society is to be in force against the property of the society and not against:
the body of the personal officer sued for the society or against such per-
son's property (Section 8).
T h e members can be sued as strangers by the society for arrears of
subscriptions or for any damage or injury to the property of the society
or for any offence against it (Sections 10-11).
Dissolution of Society (Sections 13-14). A society may be dissolved
voluntarily if not less than three-fifths of tlie members determine that it
shall be dissolved. Thereupon the society shall be dissolved, and neces-
sary steps shall be taken, according to the rules of the society, if any,
failing that as tlie governing body shall find expedient, for the disposal
and settlement of tlie property of the society. In case of any difference
or dispute among tlie members of such society in this connection the
matter must be referred to the Court in the district in which the chief
building of the society is situated. If any Government is a member of
or a contributor to, or otherwise interested in any society, such society
sliall not be dissolved without the consent of the Government of the
State of registration.
On dissolution, after paying all' debts and liabilities of the society
tlie property which remains shall not be paid or distributed among the
society's members, but must be given to some other society to be deter-
mined by the votes of not less than three-fifths of tlie members present
personally or by proxy at the time of dissolution or by the Court. This
clause does not apply to a society founded or established by shareholders
as a joint stock company.
Member and Governing Body Defined (Sections 15-161. A member
of a society shall be a person -who, having admitted tlierein ac-
cording to die rules and regulations theieof. shall have paid a sub-
scription or shall have signed the roll or list of members thereof and
shall not have resigned in accordance with such lules and regulations;
bi>6 MERCANTILE LAW
but in all proceedings under this Act no person shall be entitled to vote
or to be counted as a member whose subscription at the time shall have
been in arrear for a period exceeding three months.
The governing body of the society shall be the governors, council,
directors, committee, trustees or other body to whom by the rules and '
regulations of the society the management of its affairs is entrusted
(Section 16).
By virture of Section 17, any company or society established for a
literary, scientific or charitable purpose and registered under the Com-
panies Act or any such society not so registered, may at any time be regis-
tered as a society under 'this Act, provided the assent to its being so regis-
tered has been given by three-fifths of its members present personally or
by proxy at some general meeting convened for that purpose.
Benefits of Registering a Society. The Societies Registration Act is
an Act for the registration of literary, scientific and charitable societies,
and the object of the Act as stated in the preamble is to make provision
for improving the legal condition of societies established for the promo-
tion of literature, science, or the fine arts, or for the diffusion of useful
knowledge, or for charitable purposes. By virtue of the provisions of
the Act, once a society is registered, it .enjoys the status of legal entity
apart from the members constituting the same and is cauahle of suing
and being sued. It has been given a. legal entity by law for the purpose
of preserving in perpetual succession rights wJiich would fail if vesfed
in natuial persons. An unregistered society has no juridical status and
a suit for the recovery of a debt due to the society could be brought
only by all the trustees joining together as plaintiffs, and if one of the
trustees refused to join, the Secretary of the society or any other offi-
cer could not maintain it. A promissory note executed in favour of an
unregistered society in the name of its Secretary was held void and no
suit could be filed to enforce it on behalf of the institution.^ .'V ^regis-
tered society can own property, whereas in the case of an unregistered
society the property vests in the trustees. A registered society can there-
fore sue and be sued.
•To further facilitate the working of the society and for maintaining^
its continuity, it is provided that if an officer, in whose name a suit is
filed, dies or retires, a successor takes his place and the suit continues
without abatement, as the death of the officer does not mak€ any change
in the person suing. A registered society can sue its members as stran-
gers for the recovery of arrears of subscriptions or for any damage to
the property of tlie society.
An association for the promotion of literature, science or the fine
arts, etc., can be registered under Section 25 of the Companies .\ct, 1956.
But it is mucli better to register societies not for gain under the Socie-
ties Registration Act. No as'^ociation can be registered under Section 25
of the Companies Act without a licence from the Central Government.
T h e prof-edure for registration is more cumbersome and fees payable are
lartre. The provisions of the Companies Act are more stringent, .After
dissolution the surplus assets of the company may be distribiited amont?
its shareholders, but in the case of a society, the surplus assets cannot
be distributed among its members but must be utilised by some other^*
society witli kindred objects.

7. Jamboodas Devidas Chawre v. Chawre Dig&mbar Tain Boardini?

1934 Nag. 207. ^
 T H E ELECTRICITY ACT 657

' T H E ELECTRICITY (SUPPLY) ACT, 1948

(Act No. 54 of 1948)
This Act has been passed for the rationalisation of tlie production
and supply of electricity, and for taking measures conducive to electrical
aevelopment in tlie country.
Central Electricity Authority. The Central Government is required
under Section 3 to constitute a body called the Central Electricity Au-
thority to exercise the following functions :—
(i) to develop a sound, adequate and uniform national ^ power
policy, and to co-ordinate the activities of tlie planning agen-
cies for the control and utilisation of national power resources;
(ii) to act as arbitrators in matters arising between State Govern-
ments or the Board and a licensee or other person;
(iii) to carry out investigations and to collect and record the
data concerning the generation, distribution and utilisation of
power and the development of power resources; and
(iv) to publish information relating to above matters and to pro-
vide for the publication of reports and investigation.
T h e Authority will consist of not more than 6 members appointed
by the Central Goverfiment, and will hold office during the pleasure of
the Government. T h e Authority is empowered to appoint a Secretary
with the approval of the Central Government, and other officers in con-
sultation with the said Government. The Authority has the power to
ask every State Electricity Board, State Government Electricity Depart-
ment or other licensee or person supplying electricity for public or pri-
vate purposes, or generating electricity for its or his use, to furnish to the
Authority any accounts, statistics and returns relating to the generation,
.^supply apd use of electricity.
No full-time member of tlie Authority can be in any manner con-
cerned or interested in or have any share or interest in any company
or other body corporate or an association of persons, or a firm engaged •
in the business o r supplying electrical energy or fuel, solid or liquid, for
the generation of electricity.
State Electricity Board. Section 5 enjoins upon the Stote Govern-
ment to 'constitute by notification in the Official Gazette a jState Hectri-
city Board consisting of not less than three afid-not more than severi^mem-
bers appointed by the State Government. Of these. members, (1) one
must be a person who has experience of, and has sliowh capacity in com-
mercial matters and administration; (2) one must be an electrical en-
gineer with wide experience; and (3) one must be a person who has ex-
perience of accounting and financial matters in a public utility under-
taking, preferably an electricity supply undertaking. One of these shall
be appointed by the State Government as the Chairman of the Board.
A person who is, or witliin the 12 months last preceding was, a member
- of Parliament or 'of any State Legislature or any local autliority cannot
be appointed.
Inter-State Agreement. Where a State Government is not in a posi-
tion to constitute its own Board, it may enter into~aiii agreement with a
contiguous State that tiie Board "Constituted for the latter State will act
for it also: The agreement must be for at least 25 years, although it
may be terminable by mutual consent. The Board will have full powers
in the States which are party to the agreement (Section 6).
658 MERCANTILE LAW
Before appointment as a member o£ the Board, a person shall have
to give up any interest that he may have in his own name or otherwise
in any firm or company carrying on the business^ of supplying electricity
or any fuel for the generation of electricity, or of the manufacture, sale
or hire of machinery', plant, equipment, apparatus or fittings for die
generation, transmission, distribution or use of electricity, or any inter-
est or the managing agency or shares or securities of any such company;
and it shall not be lawful for him during his term of office to acquire
any such interest, and if he inherits or gets it by gift, he must dispose
of it within three months (Section 9).
Removal or suspension of Member. The State Government may sus-
pend for a certain period or remove altogether from office any member
of the Board who is (i) found to be a lunatic or becomes ot unsound
mind; or (ii) is adjudged insolvent; or (iii) fails to comply with the'pro-
visions of Section 9 above; or (iv) becomes or seeks to become a member
of Parliament. or any State Legislatiire or any local authority; or (v) i n
the opinion of the State Government, has refused to act, or has become
incapable of acting,, or has abused his position, or is otherwise unfit to
continue as a member; or (vi) is convicted of an offence involving moral
turpitude. A removed member is not eligible for re-appointment in any
capacity (Section 10). And if any transaction in which a member is in-
terested is made by tlie Board the State Government may declare it
void (Section lOA).
T h e Board shall be a corporate body, and all its orders shall be au-
thenticated by its Chairman or any other member authorised by the
Board. T h e Board may appoint a Secretaiy and other officers.
State Electricity Consultative Council. The State Government shall
constitute a State Electricity Consultative Council for the State, consist-
ing of the members of the Board and such other persons being not less
than 7 and not more than 15.as tlie State Government may appoint after
consulting die following interests: local self-government, electricity sup-
ply industry,, commerce, industry, transport, agriculture, labour employed
in electricity supply industry and consumers of. electricity, but so that
there shall be at least one member representing each such interest in the
Council.
The Chairman of tlie Board shall be the ex-offido Chairman of the
Council. The Council shall meet at least once in every S monthsi T h e
Function of the Council shall be : (i) -to advise the Board on 'major
questions of policy and major sfchemes; (ii) to review the progress and
work of the Board; (iii) to consider the annual financial statements and
such other matters as 'the Board may place before it; (iv) to consider any
other matters as the State Government may prescribe.

POWERS AND DUTIES OF, STATE ELECTRICITY BOARD

General Duties of Board. It shall be the general duty of the Board

to promote the Co-ordinated development of the generation, supply and
distribution of electricity within the State in the most efficient and eco-
nomical manner, particularly, in undeveloped areas. T h e Board shall—
(a) prepare and carry out schemes of electricity development;
(b) supply electricity to owners of controlled stations and to licen-
sees whose Btaiions are closed down;
(c) supply electricilty as soon as practicable to any other licensees
T H E ELECTRICITY ACT , 659

or persons requiring such supply ana wnom tne ^Board may

be competent under this Act so to supply.
Powers of the Board. T h e Board has the £ollowing powers :—
1. T o supply electricity to any licensee or person, requiring such
supply in any area
2. T o manufacture, purchase, sell or let on hire or hire-purchase
system oi otherwise, any electric machinery, control-geai, fittings, wire -or
other apparatus for lighting, heating, cooling, or motive power, or any
industrial or agricultural machinery operated by electric power.
3. T o maintain shops and shovrrooms for the display, sale or hire
of fittings, etc., as aforesaid, and conduct displays, exhibitions and de-
monstrations thereof and generally advertise ihem.
4. T o take such measures as are calculated to advance the develop-
ment of water-power in the State.
5. T o conduct such investigations, experiments ana trials as it
tliinks fit for the improvement of the methods of transmission, distribu-
tion and supply of electricity.
6. T o grant loans and advances to licensees.
7. T o contribute sums to associations or societies formed for tlie
purpose of development and use of electricity.
8. With a view to rationalising the production and supply ot elec-
tricity in any area, to prepare a scheme for—
(i) the establishment of its own generating stations;
(ii) designation of stations for generating electricity;
(iii) interconnection of generating stations;
(iv) construction or acquisition of any main transmission lines for
the scheme;
(v) use by Board of any transmission line of any licensee.
9. To close down any generating stations.
10. T o purchase generating- stations or undertakings or main trans-
mission lines.
11. To place any wires, poles, wall-brackets, stays, apparatus and
appliances for the transmission and distribution of electricity, or for the
iransmission of telegraphic or telephonic communications necessary for
tlie proper co-ordination of the works of the Board.
12. T o purchase surplus electricity from any producer of electricity
within the State.
13. T o connect with the apparatus of any licensee, correct meters,
switchgear and other equipment at the Hoard's cost.
14. T o borrow, with the previous sanction of the State Government,
any sum, provided the maximum amount of the loan at any time does
.*jiot exceed" Rs. 10 crores.
 Chapter XX

The Factories Act, 1948

(Act No. LXIII of 1948)

Deflnitions—According to S. 2 of the Act,—

(a) adult means a person who has completed his 18th year of age;
(b) adolescent means a person who has completed his 15th year of
age, but has not completed his 18th year;
(c) child means a person who has not completed his 15th year of
age;
(d) young- person means a person who is either a child or an
adolescent;
(dd) calendar year means the period of 12 months beginning wiili
the first day of January in any year;
(e) day means a period of 24 hours beginning at midnight;
(f) week means a period of seven, days beginning at midnight on
Saturday night or such other night as may be approved in wilt-
ing for a particular area by the Chief Inspector of Factories;
' is) power means electrical energy, or any other form of energy %vliich
is mechanically transmitted and is not generated by^ human or
animal agency;
(h) prime mover means any engine, motor 6r any other appliance
which generates or otheiwise provides power;
(i) transmission machinery means any shaft, wheel, drum pulley, sys-
tem of pulleys, coupling clutch, driving belt or other appliance
or device by which the motion of a prime mover is transmitted
to or received by any machinery or appliance;"
(j) machinery includes prime movers, transmission machineiy and all
other appliances whereby power is generated, tiansformed,
tiansmitted or applied;
(k) manufacturing process means any process for (i) making, alter-
ing, repairing, ornamenting, finishing, packing, oiling, washing,
clearing, breaking up, demolishing, or otherwise treating or^
adapting any article or substance with a view to its use, sale,
transport, delivery or disposal; (ii) pumping oil, water or sewage;
(iii) generating, transforming or transmitting power; (iv) com-
posing types for printing, printing by letter press, litliography,
photogravure or other similar process of book-binding, or
T H E FACTORIES ACT, 1948 6G1
(v) constructing, re-constructing, repairing, refitting, finishing or
breaking up ships or vessels;
(1) worker means a person employed, directly or through any ager.cy,
whether for wages or not, in any manufacturing process, or in
cleaning any, parts of the machinery or premises • used for <j
manufacturing process, or in any other kind of work incidental
to, or connected with, the manufacturing process, or the subject
of the manufacturing process;
(m) factory means any premises including the precincts thereof (i)
whereon ten or more workers are working, or were working on
any day of the preceding twelve months, and in any part of
which a manufacturing process is being carried on with the aid
of po\;er or is ordinarily so carried on, or (ii) whereon 20 or
more workers are working, or were working on any day of the
preceding twelve months, and in any part of which a manu-
facturing process is being carried on without the aid of power,
or is ordinarily so carried on; but it does not include,a mine,
as the latter is regulated by the Indian Mines Act, 1952, or a
railway running shed.
Under the old Act a factory was an industrial establishment using
power and employing 20 or more persons. According to the present de-
finition an industrial establishment using power and employing 10 or more
workers or an industrial establishment employing 20 or more workers
where it does not use power, is a factory. The definition has been widen-
ed with a view to bringing smaller establishments within the ambit of the
Factories Act, This definition abolishes the distinction between perennial
and seasonal factories. As a result, tlierefore, the same provisions relating
to safety, health, and welfare will apply to all factories whether they run
for the whole year or only for a part of the year. The term factory in-
cludes premises where anything is done towards the making or finishing
of an article up to the stage when it is ready to be sold or is in a suitable
condition to be out on the market. It includes everything, machine rooms,
sheds, godowns, yards. But a room used solely for sleeping purposes'^or
a place within the precinct of a factory solely used for some purpose other
than the manufacturing process or handicraft carried on in the factory
is not a factory. A railway workshop is a factory. The dictionary mean-
ing of the word "premises" is a building or house and its adjuncts. There-
fore, premises will include all the buildings of the factory together witii
the compound in which they stand. "Precinct" means a limit or bound-
ary of a place or the space enclosed by the walls or any other boundaries
of a particular place or buildings, and also the region lying immediately
round a place—the environs, or the area within the jurisdiction of the
factory;

(n) occupier of a factory means the person who has ultimate con-
trol over the affairs of the factory, and where the said affairs
are entrusted to a managing agent, such agent shall be deemed
to be tlie occupier of the factory.
Approval, Licensing and Registration of Factories, and Notice by Occupier
Sections 6 and 7 have been introduced to enable the Factory Inspector-
ate to scrutinise the plans and specifications of factory buildings prior to
 662 MERCANTILE LAW
their construction or extension. Section 6 empowers the State Govern-
ment to make rules—(a) requiring the previous permission in writing of
the State Government or the Chief Inspector to be obtained for the site
on which the factory is to be situated and for the construction or exten-
sioi. of any factory or class or description of factories; (b) requiring for
the purpose of considering applications for such permission the submission
of Dlans and specifications; (c) prescribing the nature of such plans and
spprifications and by whom they shall be certified; (d) requiring regis-
tration and licensing of factories of any class or description of factories,
and prescribing the fees payable for such registration and licensing and
for the renewal of licences; (e) requirng that no licence shall be granted or
renewed unless tlie notice by the occupier as specified in Section 7 below'
has been gnen. T h e section, however, provides that if no order is passed
by the State Government or by tlie Chief Inspector within three months
from tlie date of submission of the application for permission, the said
application shall be deemed to have been granted. If the application is
not granted, the applicant may within 30s^days of the date of rejection
appeal to tlie Central Government if the decision appealed from was of
the State Government and to the State Government in any other case.
Section 7 provides that the occupier shall, a t least 15 days before he
begins to occupy or use any premises as a factory, send to the Chief In-
spector a written notice containing (a) the name and situation of the
factory; (b) the name and address of the occupier; (bb) the name and
address of the owner of the premises or building (including the precincts
thereof) referred to in Section 93; (c) die address to which communi-
cations j-elating the factory may l)e sent; (d) tlie nature of the manufactur-
ing process carried on in the factory during the last twelve months in the
case of factories in existence oh April, 1949, and to be carried-on in the
factory during the next twelve months in the case of all factories; (e) the
nature and quantity of power to be used; (f) the name of die manager of
the factory; (g) the number of workers likely to be employed in the fac-
tory; (h) the average number of workers per day employed during the last
twelve months in the case of a factory in existence on April 1, 1949; (i)
such other particulars as may be presciibed. In tlie case of a factor)'
which ordinarily works for less than 180 working days in the year this
notice must be given to the Chief Inspector within 30 days of the resump-
tion of the work. Whenever a new manager is appointed, the occupier
must send to the Inspector a written notice and "to the Chief Inspector a
copy tliereof within 7 days from the date on which 'such person takes
over cliarge. If during any period no person has been designated as
manager of a factory or during which the person designated does not
manage the factory, any person found acting as manager, or if no such
person is found, die occupier himself, shall be deemed to be the manager
of the factory lor the purposes of this Act.

T H E INSPECTING STAFF
An equitable law always provides for its adequate administration.
The most important branch of factory administration is inspection, and
the main responsibility for inspection rests on the whole-time inspection
staff which consists of such persons as are appointed by the State Gov-
T H E FACTORIES ACT, 1948 663

emment by notification in the Official Gazette to act as inspectors in

specified local lifliits. As the factory law is penal in its nature it is essen-
tial tliat it should be effectively enforced. T o this end Section 8 (3) pro-
vides that no person shall be appointed an Inspector or Chief Inspector, or
having been so jippointed, shall continue to hold office, who is or becomes
directly or indirectly interested in a factory or in any process or business
carried on therein or in any patent or machinery connected therewith.
T h e Chief Inspector, in addition to exercising his powers as such, is en-
titled to exercise the powers of an Inspector throughout the State. In ad-
dition to the regular factory inspection staff, referred to above, there are
many other officers who may exercise the powers of Factory Inspectors.
Every District Magistrate is an ex-officio Inspector for his district. State
Governments sometimes empower various other officers, such as Sub
Divisional and other Magistrates, and Medical Officers, to act as Factory
Inspectors.

Powers of Inspectors (S, 9) -,

T h e powers of inspectors are laid down in Section 9, which pro-
vides: "Subject to any rules in this behalf, an Inspector may, within tlie
local limits for which he is appointed, (a) enter, with such- assistants, being
persons in the service of the Government, or any local or other pubjic au-
thority, as he thinks fit, any place which is used, or which he has reason
to believe'is used, as a factory; (b) make examination of the premises,
plant and machinery, require the production of ^ny prescribed register
and any other documerit relating to the factory, atid take on-the-spof or
othersvise statements of any persons which he may consider necessary for
carrying out the purposes ot this Act; (c) exercise such other powers as
may be prescribed for carrying out the purposes of this Act." No person
must, however, be compelled under tliis Section to answer any question
or give any evidence tending to incriminate himself.

Certifying Surgeons (S. 10)

Special provisions have been made in the Act for tlie protection o£
children and adolescents (yoimg persons), but the question of determin-
ing the proper 3ge of these persons and v also their physical fitness could
not be safely left with Factory Inspectors. So the Act gives power in
Section 10 to the State Government to appoint qualified medical practi-
tioners to be certifying surgeons within such local limits or for such factor/
or' class or description of factories as it may assign to tliem respectively.
A ceitifyino- surgeon may, with the approval of the State Government, au-
tliorise any qualified medical practitioner to act as a certifying surgeon.
The certifying surgeon is required to carry out the following duties:
(a) to examine children and adolescents desirous of being employ-
ed, re-exapiine young persons under Section 75, and to issue
certificates of age and fitness to young persons who are found
qualified to receive them;
(b) to examine persons engaged in factories in -such dangerous oc-
cupations or processes as may be prescribed;
(c) to exercise such medical supervision as may be prescribed i<iY-
anv laftrtrv where—
 664 MERCANTILE LAW
(i) cases of illness have occurred whicli it is reasonable to believe
are due to the nature of the manufacturing process carried on,
or other conditions of work prevailing therein;
(iij by reason of any change in the manufacturing process carried
on or in the substances used therein or by- reason of the adop-
tion of any new manufacturing process or of any new substan-
ces for use in a manufacturing process, there is a likelihood of
injury to the health of workers 'employed in that manufactur-
ing process;
(iii) young persons aire, or dre about to be, employed in any Work
wh-ch is likely to cause injury to their health.
The certifying surgeon shall ordinarily visit every factory within his
local limits, in which young persons are known to be employed, at least
once in three months, and shall give previous notice of his visit. At each
of these visits the certifying surgeon shall, by personal examination, satisfy
himself as to the fitness of the young persons employed in the factory and
shall revoke the certificates of any whom he considers unfit.
HEALTH
In modem industry workers are exposed to serious hazards to health
and life. Our Act has introduced elaborate provisions relating to the-
heajth, safety and welfare of workers.
GieanliaeSs (S. 11)
Every factory shall be kept clean and free from effluvia arising from
any drain, privy or other jiuisance, by removing all dirt and refuse daily
froxn all parts of the factory, and by washing the floors of every workroom
at least once a week and keeping it dry and clean. Whitewashing and
varnishing and colour-washing must be done at least once in every 14
months.
Disposal of Wastes and Effluents
Section 12 provides that effective and suitable arrangements must be
made in every factory for the disposal of wastes and effluents due to the
jnanufacturing proce^ cai-ried therein.
Ventilation and Temperature (S. 13)
Insufficient, ventilation reduces both physical and mental alertness.
Good ventilation leads to efficiency. Section IS lays down that effective
and suitable piovision must be made in every factory for securing and
maintaining in every workroom (a) adequate ventilation by circulation of
fresh air, and (b) such a temperature as will secure to workers • therein
reasonable conditions of comfort and prevent injury to health. It further
lavs down that walls and roofs must be of such material and so (designed
that such tempeiature must not be exceeded but kept as low as practicable;
and where the nature of the work carried on in the factory involves, or is
likely to involve, the production of excessively high temperatures, such
adequate measures as are practicable mu&t be'taken to protect the workers
therefrom, by separating the process which produces such temperatures
 T H E FACTORIES ACT, 1948 665

T h e State Government may prescribe standards of adequate ventilation

and reasonable temperature for any factory. If the State Government .finds
that in any factory excessively high temperature can be reduced by jsuch
methods as whitewashing, spraying, or insulating and screening outside
walls or roofs or windows, or by raising the level of the roof, or by in-
sulating the roof materials, it may order the factory to adopt any of tliese
or other methods.

Dust and Fume (S. 14)

In a number of factories such as textile, jute and cotton ginning, the
manufacturing process disseminates large amount of dust, arrangements
for the elimination of which are frequently defective. Effective measures
must be taken to clieck the dust and fumes causing injury to the health
of the workers. Section 14 provides in this direction as follows:—
(1) Every factory in which, by reason of the manufacturing process
carried on, there is given off any dust or fume or^other impurity of such
a nature and to such an extent as is likely to be injurious or offensive to
the workers employed therein, or any dust in substantial quantities, effec-
tive measures stia.ll be taken to prevent its inhalation and accumulation
in any workroom, and if any exhaust appliance is necessary for this pur-
pose, it shall be applied as near as possible to the point of origin of the
dust, fume or other impurity, and such point shall be enclosed so far as
possible.
(2) In any factory no stationary internal combustion engine shall be
operated unless the exhaust is conducted into the open air, and no other
internal combustion engine shall be operated in any room unless effective
measures have been taken to prevent such accumulation of fumes there-
from as are likely to be iniurious to workers employed in the room.

^ Artificial Humidiiicadon (S. 15)

The humidifijcation of cotton mills in India affects the physique of
workers. It is, therefore, necessary that adequate standards 'must be laid
down to check -exceisive humidity, which is artificially introduced in our
country.
FoT this purpose. Section 15 provides that in respect of all factories
in which the humidity of air is artificially increased, the State Govern-
ment may prescribe standards of humidification, regulate the methods for
artificially increasing humidity and require the recording of humidity at
different intervals, during the working hours. It iriay also prescribe
methods for securing adequate ventilation and cooling of the air in the
workroom. T o this end, all .cotton mills, in which artificial humidity is
introduced, are required to maintain hygrometers and kata thermometers,
and record readings thrice daily in the humidity and air-cooling registers
respectively. It is furtlier provided that, if the humidity exceeds a defi-
' nite standard based on temperature, the introduction of humidity must
cease. A hygrometer has two bulbs—wet bulb and dry bulb—and there
is reauired to be a certain correlation between the two. For instance,
under the Dellii State Factories Rules, artificial humidification in a cotton
mill must cease whenever the wet bulb reading of tiie hygrometer is
higher than tliat specified in the following schedule in relation to the dry
bulb temperature of the same hygrometer 9t the same time:—
 666 MERCANTILE LAW
D r y Bulb W e t Bulb Dry Bulb W e t Bulb D r y Bulb W e t Bulb
60-0 58-0 SO-0 78-0 100-0 89-0
70-C 68-0 90-0 i^i-6 12J-0 95-0
I t is further provided that live steam as a means of artificial humidifica-
tion must not be introduced when the dry bulb temperature of a depart-
ment exceeds 85 degrees Fahienlieit. Again, the water used for making
steam must be pure drinking water, which must either be obtained from
a public supply or effectively purified before use.
Overcrowding (S. 16)
Overcrowding is another factor that injures the health of workers.
Section 16 provides tliat no room in an-y factory shall be overcrowded to
a n extent injurious to the health of tiie workers employed therein. In
«very workroom of a factory in existence on April 1, 1949, there must be
a t least 350 cubic feet of space for every worker employed therein. In
the case of factories built or to be built after April 1949, the space re-
•quirement is • 500 "cubic feet. This space measurement has to be taken
up to 14 feet above the level of 'the floor of the room.

Lighting (S. 17)

The sense most employed in locating tilings is sight. Section 17 pro-
•vides that in every part of a factory where workers are working or pass-
ing, there must be provided and maintained suificient and^ suitable light-
ing, natural or artificial, or botli. All glazed windows and skylights must
always be kept dean so as to admit adequate ligiit. Effective provision
is also required to be made for the prevention of glare, either directly
from a source of light or by reflection from a smooth or polished surface,
and tlie formation- of shadows which are likely to cause eye strain or acci-
dent to any worker. T h e State Government is empowered to lay down
standards of sufficient and suitable light.

Drinking Water (S. 18)

In a country like India there is hardly any need to emphasize the
importance of providing a liberal supply of cool and pure water. Section
18 lays down that in every factory effective arrangements must be made
to provide and maintain at suitable points conveniently situated for all
wbrkers employed therein a sufficient supply of wholesome drinking
-water. All such points must be legibly marked "drinking water" in a
language understood by a majority of the workers employed in the fac-
tory and i)o such point must be situated within 20 feet of any washing
place, urinal or latrine unless a shorter distance is approved in writing
by the Chief Inspector. Also, in every factory wherein more than 250
v/orkers are ordinarily employed provision must be made for cooling
drinking water during hot weather by effective means and for distrib)Ution
thereof. T h e State Government may make rules for securing compliance^i'
-with tliese provisions.

i a t r i n e s and Urinals (S. 19)

In every factory—
^a^ sufficient latrines and urinal accommodation of prescribed types
T H E FACTORIES ACT, 1948 667

shall be provided conveniently situated and accessible to wor-

kers at all times while they are at the factory;
(b) s'eparare enclosed accommodation shall be provided for male
and female workers;
(c) such accommodation shall be adequately lighted and ventilated,
and no latrine or urinal shall unless specially exempted in writ-
ing by the ,Chie£ Inspector communicate with any workroom
except through an intervening open space or ventilated pas-
sage;
(d) all sucli accommodation shall be maintained in' a' clean and
sanitary condition at all times;
(e) sweepers shall be employed whose primary duty it will be to
keep clean latrines, urinals and washing places.
It is furtlier provided that in every factory wherein more than 250
workers are ordinarily employed: '^
(a) all latrine and urinal accommodation, shall be of prescribed
sanitary types;
(b) the floors and internal walls, u p to a height of 3 feet of the
latrines and urinals and the sanitary blocks shall be laid in
glazed tiles or otiierwise finished to provide a smooth polished
impervious surface:
(c) in addition to the urinal -and latrine accommodation being kept
clean all the time the floors, portions of the walls and blocks
so laid or finished and the sanitary pans of latrines and urinals
shall be thoroughly washed and cleaned at least once in every
7 days with suitable detergents or disinfectants or with both.
T h e State Government may prescribe the number of latrines and
urinals to be provided in any factory in proportion to the number of
male and female workers ordinarily employed therein, and provide for
such further matters in respect of sanitation in factories, including the
obligation of workers in this regard, as it considers necessary in the inter-
est of the health of the workers employed therein.

Spittoons
Under S. 20, a sufficient number of spittoons are required to be pro-
vided in every factory at convenient places and kept in a clean and
liygienic condition. No person must spit within the premises of a fac-
tory except in the spittoons provided for the purpose. Anyone spitting
in contravention of this condition shall be punishable %vith a fine not
exceeding rupees 5. A notice containing this provision and the penalty
for its violation must ^be prominently displayed at suitable places in the
premises. T h e State Government may prescribe the number of spittoons
and their location in any factory.

SAFETY
T h e present Act contains many new safety provisions of a high stan-
dard based on modern industrial practice, places a definite responsibility
on the occupier to comply with the safety provisions without waiting for
668 MERCANTILE LAW
an Inspector to visit the factory and give instructions for what ought to
be done. Moreover, it is he who has to see that the guards provided for
the safety of the workers are used by them. Default by -worker to use
the guards, in spite of instructions, is no excuse. The occupier must
secure compliance with the legal requirements by discipline among his
employees as he would naturally see to adequate turn out of work. T h e
following provisions deal with safety measures:—

Fencing of Machinery (S. 21)

In regard to fencing of machinery the general principle is that every
part of the transmission machinery and every dangerous part of odier
machinery must be securely fenced, unless it is in such a position or of
sucli construction as to be as safe to every person employed or working
on the premises as it would be if securely. fenced. (Supdc. and R. oE
Legal Affairs, West Bengal v. P. Sen, 1949 Cal. .604.) Section 21 requires
that transmission machinery and dangerous parts of other machinery
must be securely fenced so as to protect not only the ordinary worker
employed in the factory, every day, but also those engaged on temporary
jobs such as painting or whitewashing or carrying out repairs to overhead
electric lights and so on.

Work on or near Machinery in Motion (S. 22)

In the past a good deal of latitude was given, in respect of occasional
approach to unfenced machinery in motion. The proviso to S. 21 (1)
now lays down strict limitations and restrictions. If a part of the mach-
inery is left unfenced, on the ground that it is safe by reason of its posi-
tion, effective steps must be taken by the factory occupier to prevent any-
one from getting within the danger zone while the machinery is running.
Section 22, however, provides an exception strictly confined to the case
of a person carrying out, while the machinery is in motion, an examiiia-"
tion of the machinery which it is necessary to carry out while the mach-
inery is in motion, or such work as the mounting or slipping of belts,
lubrication or other adjustment shown by the examination to be necessary
while the macliinery is in motion. A person so engaged may approach
the machinery for any of these purposes, if (a) all belts, screws or other
projections and all gearing with whidi the person would otherwise be
I|ikely to come in contact are securely fenced so as to prevent such con-
tact; (b) the belt to be mounted or slipped is less than 6 inches in width
and the joint is either laced or flush with the belt; (c) the person doing
the job is a specially trained ADULT MALE worker, wearing tight-fitting
clothing and his name is entered in the prescribed register of workers as
a person designated for such duties; (d) any further precautions laid down
in rules made by the State Government are complied with.

With regard to women and young persons the requirements are very>.
stringent. No woman and young p>erson must be allowed to clean, lubri-
cate or adjust any part of a prime mover or of any transmission mach-
inery while the prime mover or transmission machinery is in motion, or
to clean, lubricate or adjust any part of any machine if the cleaning,,
lubrication or adjustment thereof would expose the woman or young per-
T H E FACTORIES ACT, 1948 669
son to risk of injury from any moving part either of that maxJiine or of
any adjacent machinery. \

Employment of Young Persons on Dangerous Machines

Section 23 lays down that a young person must not work at certain
machines to be specified as dangerous by tlie State Government (e.g.,
power presses, milling machines, guillotines, patent printing machines,
etc.) unless (a) he has been fully instructed as to the dangers arising in
connection with the machines and the precautions to be observed, and
(b) he has received sufficient training to work at the machine or is under
adequate supervision by a person who has a tliorough knowledge and ex-
perience of the machine.
Additional Safeguards in Connection with Transmission Machinery:
Striking Gear and Devices for cutting off Power. Section 24(1) re-
quires that suitable and efficient mechanical appliance such as striking
gear must be provided and always used for moving driving belts to and
from fast and loose pulleys which form part of the transmission machinei^,
and such a gear or appliance' must be so constructed that it prevents the
belt from creeping. Further, a driving belt, when not in use must not '
be allowed to rest or ride upon a revolving shaft. Belt hangers or perches
shouid be provided or the shaft may be sleeved or encased so that the belt
can rest on the sleeve or casing. This provision has been made to check
accidents resulting from the dangerous practice of allowing belts to hang
idly on a revolving shaft, which may easily lap on tlie shaft and drag up
around the Shafting any worker in the immediate vicinity. The Section
further requires tliat in every workroom of a factory some efficient means
of cutting off the power promptly from the running machinery must be
provided and maintained. This may be done by fitting fast and loose
pulleys, clutches .or stop buttons, and the provision of such stopping de-
vices is required, in the case of factories in operation before April I, 1949,
only in those workrooms where electricity is the motive power, and in the
case of factories registered after this date, in all workrooms whatever tlie
motive power used.
Self-acting Machines. To reduce risk of accidents. Section 25 pro- -
vides that no traversing part of a self-acting machine, and no material
carried on it, shall be allowed to run within a distance of 18 inches from
any fixed structure, if the space over which it runs is one in wliich a per-
son, whether in the course of his employment or otherwise, is liable to
pass. Further, the materials or articles being worked which are likely to
be dangerous, as may be in the case of a stock-bar of a lathe, i.e., the long
bar of metal %vhiclr passes through spindle of a hollow spindle lathe, must
now be securely fenced by enclosing them in a metal tube or by other
equally effective means.
Casing of New Machinery (S. 26). It has been recognised by de-
signers and makers of machines that proper safeguarding of dangeious
parts should be embodied in the design, but this has not always been
done. The Act, tlierefore, introduces a new principle in tliat in case of
new machinery intended to be driven by meclianical power, certain re-
quirements as to the sinking or guarding or set-screws, gearing, etc., must
be complied with. When die maclrine is in the factory, the occupier is
responsible for seeing that this is the case; but it is now an offence for
any person to sell or let on hire (or as agent for seller or hirer to cause
670 MERCANTILE LAW
or procure to be sold or let on hire) for use in a facloi7 in India a
inachine which does not comply with the requirements. Non-compliance
has been made punishable with imprisonment up to 3 months or fine u p
to Rs. 50'0 or both.
Hoists and Lifts (S. 28). Hoists and lifts are responsible for numer-
ous accidents. Section 28 requires that every hoist and lift sliall be pro-
perly constructed so as to be of good mechanical construction, sound,
material and adequate strength, and properly maintained (Galashiels Gas
Co. Ltd. V. O'Donnell [1949], I.A.E.R. 319), it shall be examined at least
every six months by a competent person, and the particulars of such ex-
amination shall be entered in a register maintained for tliis purpose.
Every hoistway and liftway must be sufficiently protected by an enclosure
fitted with gates and the hoist and lift and every such enclosure must be
so constructed as to prevent any person or thing from being trapped bet-
ween any pari of the hoist or lift and any fixed structure or moving part.
T h e cage of every hoist or lift used for carrying peisons must be fitted
with a gate on each side from whicli access is afforded to a landing.
Every landing gate or cage must be fitted with interlocking or other effi-
cient device to secure that the gate cannot be opened except when the
cage is at the landing and that the cage cannot be moved unless the gate
is closed. T h e maximum safe working load, which is in no case to be
ex'ceeded, must be plainly marked on every lift and hoist. The following
additional safeguards are now required to be provided in respect of
hoists and lifts installed or reconstructed in i factory after April 1, 1949:
(a) where the case is supported by rope or chain, there shall be at least
two ropes or cliains, with its attachments which Shall be capable of carry-
ing the whole of the cage together with its maximum load; (b) efficient
devices shall be provided and maintained capable of supporting tlie case
together with its maximum load in the event of breakage of the ropes,
chains or attachments; (c) an efficient automatic device shall be provided
and maintained to .prevent the cage from over-running.
Lifting Machines, Chains, Ropes and Lifting Tackles (S. 29). Very
often, failure of parts of cranes and other lifting machines results in acci-
dents. I'o safeguard against this, the Act provides that all parts must be
of good construction and be properly maintained. They -must also be
thoroughly examined at least once a year by a competent person, and
must not be overloaded. So many workers have been killed or injured
by being struck by travelling cranes that the Act now requires effective
measures to be taken to ensure that a crane does not approach within
20 feet of any person working on or near the wheel track of the crane.
Merely to warn the crane-driver of the danger is not sufficient; stock-
block, detonators and/or cut-outs are more likely to be effective and one
•or more of these methods should be used.
Revolving Machinery (S. 30). The bursting of a fly-wheel or the
failure of an abrasive wheel is likely to cause very serious injury to the
worker. Section 30 lays down that effective steps must be taken in every
factory to ensure that the safe working peripheral speed of every revolv-
ing vessel, cage, basket, fly-wheel, pulley, disc or similar appliance driven
by power is not exceeded. It also requires that in every room in a fac-
tory in which tlie process of grinding is carried on there shall bfe perman-
ently affixed to or placed near each macliine in use a notice indicating
the maximum safe working peripheral speed of every grind stone or abra-
sive wheel, the speed of the shaft or spindle upon which the wheel is
mounted, and the diameter of the pulley upon such shafts or spindlii
T H E FACTORIES ACT, 1948 671

necessary to secure such safe working peripheral speed. The speeds indi-
cated in the notices must in no case be exceeded.
Pressure Plant (S. 31). Precautions in respect of machinery or plant
working at a pressure above atmospheric pressure are obviously necessary
when one considers the danger of an explosion or failure of the plant in
a crowded factory. Section 31, tlierefore, requires effective measures to be
taken to ensure that the safe working pressure of such plant or madiinery
is not exceeded. Power has been given to the State Government to make
rules specifying details of examination and test of pressure plant or
machinery and prescribe tlie provision of such safety measures as may be
necessary.
Precautions against Falls (Ss. 32, 33). Provisions in Sections 32, 33
are designed to check accidents by requiring floors, steps, stairs, passages,,
and gangivays to be of sound construction and kept in good order and
substantial handrails to be fitted where necessary to secure safety. There
must also be safe means of access to every place at which any person is
at any time required to work (Dorman Long & Co. Ltd. v. Hillier, 1951,
I.A.E.R. 357). Every fixed vessel, sump, tank, pit or opening in the
ground, or in a floor which, by reason of its depth, situation, construction
or contents, is or may be a source of dangei, must be securely covered or
securely fenced (Lavender v. Diamints Ltd., 1949, I.A.E.R. 532).
Excessive "Weights (S. 34). No person shall be employed in any fac-
tory to lift, or move any load so heavy as to be likely to cause him injury.
The State Government may make rules prescribing the maximum weights
that may be lifted, carried or moved by adult men, adult women, adoles-
cents, and children employed in factories or in any process carried on in
a factory.
Prohibition of Employment of Women and Children near Cotton-
openers (S. 27). No woman or child shall be employed in any part of a
factory for pressing cotton "in which a cotton-opener is at work; provided
that if the feed-end of a cotton-opener is in a room separated from the
delivery" end by a partition extending to the roof or to such height as the
-i^nspector may in any particular case specify in xvriting, Tvomen and child-
ren may be employed on the side of tlie partition where the feed-end is
situated.
Protection of Eyes (S. 35). A great many accidents causing. eye in-
juries occur in factories every year. Effective screens or suitable goggles
should be provided for the protection of persons employed on any manu-
facturing process or in the immediate vicinity of the process, if such a
process involves risk of injury to the eye from particles/or fragments
tlirown off in the course of the work, "or risk to the eyes by reason of ex-
posure to excessive light. Also, a new Section in the Act (S. I l l ) makes
it obligatory on the part of the worker to use protective devices provided
for them.
Precautions against Dangeroijs Fumes. Section 36 lays down that in
any factory no person shall enter or be permitted to enter any cliamber,
tank, vat, pit, pipe, flue or other confined space in which dangerous fumes
Ese _likely to be nresent to such an extent as to involve risk of persons
being overcome thereby, tmless it is provided with a manhole of adequate
size or other effective means of egress. The Section further prohibits tlie
use inside such spaces, of hand or portable electric light of voltage ex-
ceeding 24 volts, and of any lamp or light other than that of flame proof
672 MERCANTILE LAW
construction, i£' the dangerous fumes are likely to Be inflammable. T h e
Section also prohibits persons from entering such confined spaces unless
all practical steps have been taken to remove any fumes which may be
present and to prevent fumes from entering and unless (a) a certificate in
writing has been given by a competent person based on a test carried
out by himself, that the space is free from dangerous fumes and fit for
persons to enter, or (b^ the worker is wearing suitable breathing appar-
ratus and a belt securely attached to a rope, the free end of which is held
bj^ a person standing outside the confined space. In order to instantly
meet any emergency that may arise the Section requires the keeping ready
for instant use beside such confined space which any person has entered
suitable breathing apparatus, reviving apparatus, life-belts and ropes,
which must be periodically examined and certified by a competent person
to be fit/ for use. And a sufficient number of persons employed in the
factory must be trained and practised in the use of all/ such apparatus
and in the method of restoring respiration. T o fensure further safety, it
is provided that no person must be permitted to enter any boiler furnace,
boiler flue, chamber tank, vat, pipe, or other confined space for the pur-
pose of working or making any examination therein until it has been
Eufirciently cooled by ventilation or otherwise to be safe for persons to
enter. , Provision has been made to grant exemption in certain cases and
to specify minimum dimensions of manholes.

Precautions against Dust Explosion (S." 37)

We all know that coal dust is explosive and that this leads to many
disasters in coal-mines, but it may be a surprise to some to learn that
other familiar domestic articles, such as flour, sugar and starch, are also
explosive if they are ignited when in the form of a dust cloud. Section
37 provides:
"(1) Where in any factory any manufacturing process produces dust,
gas, fume or vapour of such cliaracter and to such extent as to be likely to
explode on ignition, all practical measures shall be taken to prevent any
such explosion by (a) effective enclosure of the plant or machinery used in
the process; (b) removal or prevention of the accumulation of such dust, i
gas, fume or vapour; (c) exclusion or effective enclosure of all possible
sources of ignition.
(2) Where in any factory the plant or macliinery used in processes such
as is referred to in sub-section (1) is not so constructed as to withstand the
probable pressure which sucli an explosion as aforesaid would produce, all
practicable measures shall be taken to restrict the spread and effects of the
explosion by the provision in the plant or machinery of choke?, baffles,
vents or other effective appliances.
(3) Where any part of the plant or machinery in a factory contains any
explosive or inflammable gas or vapour under pressure greater than atmos-
pheric pressure that part shall not be opened except in accordance with
the following provisions, namely, (a) before the fastening of any joint of
any pipe connected with the part or the fastening or the cover of any open-
ing into the part is loosened, any flow of the gas or vapour into the part
of any such pipe shall be effectively stopped by a stop valve or other meansM^
(b) before any such fastening as aforesaid is removed all practicable mea-
sures shall be taken to reduce the pressure of the gas or vapour in the
part or pipes at atmsopheric pressure; (c) where any such fastening as
aforesaid has been loosened or removed, effective measures sliall be taken
 FACTORY LEGISLATION 673

to prevent any explobive or inflammable gas or vapour from. entering tiie

part or pipe until tlie fastening has been secured, or as the case may be,
securely replaced. The provisions o£ this sub-section (a) shall not apply
in the case of plant or macliinery installed in the open air.
(4) No plant, tank or vessel which contains or has contained any ex-
plosive or inflammable substance shall be subjected in any factory to any
welding, brazing, soldering or cutting operation which- involves the appli-
cation of heat unless adequate measures have first been taken to remove
such substance and any fumes arising therefrom or to render such substance
and fumes non-explosive or non-inflammable, and no such substance shall
be allowed to enter such plant, tank oi vessel after any sucli operation un-
til tlie metal has cooled sufficiently to prevent any risk of igniting the
substance.
(5) The State Government may by rules exempt, subject to such condi-
tions as may be prescribed, any factory or class or description of factories
from compliance with all or any of the provisions of this Section.
Precautions in case of File (S. 38)
The law relating to safety provisions in case of fire has been con-
siderably strengthened. The general principle is that_every factory must
be provided with adequate means of escape in case of fire, and that if a
factory is not so provided the Inspector may serve on the Manager an
order in writing specifying the measures'which should be taken and re-
quiring them to be carried out before a specified date. Section 38 then
goes on to lay down the following requirements, namely:—
Doors. Doors of rooms must not be locked or fastened, so that they
cannot be easily and immediately opened from the inside and unless they
are of the sliding type, they must open outwards.
Fire Exits. Every fire e\it, i.e., every window, door or other exit afford-
ing means of escai^e in case of fire, other than the means in ordinary use,
iBust be distinctively marked in a language understood by the majority of
the workers and in red letters of adequate size or by other effective sign.
Audible Warning. Clearly audible means of giving warning in case
of fire must be provided.
Free Passage. Passage way to fire exits must be kept clear and free
from dbstiuctions.
Fire Instructions. In the following cases, namely, (1) where in any
factoiy moie than 20 persons are employed in the same building above the
ground floor, (2) wheie in a factory explosive or highly infiammable mate-
rials aie stoied or used, effective steps must be taken to ensure that all the
persons therein are familiar with (a) the means of escape and their use,
and (b) the loutine to be followed in case of fir^. This can be achieved by
occasional chill. The State Government may specify the nature and amount
of hre-hgliting equipment to be pro^ ided^in a factory and the means of
escape from a factory.
^,
Safety of Buildings, Machinery, etc. (Ss. S9, 40)
If it appeals to the Inspector tliat any building, part of a building,
or part ot the ways, macliinery or plant in a factory is or-may be dangei-
oiis to luimaii life, oi safety, he may take any of the following three
couises of action:—
674 MERCANTILE LAW
1. Possibility o£ Danger. If danger is possible he may require the
factory manager (a) to furnish drawings, specifications and other p a r t r
culars for determining whether the building, etc., can be used with safety,
or (b) to carry out certain tests and to inform him (Inspector) of the
results.
2. Danger not Imntinent. If danger appears to exist but it is not
imminent he may require the factory manager .to adopt certain measur'fes
before a specified date in order to make the building, etc., safe.
3. Imminent Danger. If danger appears to be imminent he may
serve on the factory manager an order in writing prohibiting the ui,e of
the building, etc., until it has been repaired or altered.
Section 41 gi\es further powers to the State Government to make
rules requiring the provision of any additional devices that it may deem
iiecesiary for the workers.

WELFARE
tVelfare work may be described as the voluntary effort of employers
to improve tlie condition of their employees. Tiie present Act has ex-
tended the scope of the obligatory welfare activities in each factory, •H'hicli
are given below.

Washing Facilities (Ss. 42, 43)

Section 42 requires that in every factory separate and adequately
screened washing facilities, conveniently abcessible to male and female
workers must be provided and maintained. They must be adequate, suit-
able and kept in clean condition. Section iS empowers the State Govern-
ment to prescribe standards of adequate and suitable facilities for washing,
and requires the provision of suitable places for keeping clothing not worn
during working hours and for the drying of wet tlothing. (Macarthy v.
Daily Mirror Newspapers, Ltd., 1949, I.A.E.R. 801.)

Facilities for Sitting (S. 44)

In every factory suitable arrangements for sitting must be provided
and maintained for all workers obliged to work in a standing position, in
order that they may take advantage of any opportunities for rest wliich
may occur in tlie course of their work. The Slate Government may, liow-
ever, grant exemption to any factory from the application of tliis provis-
ion. ,\gain, if in the opinion of the Chief Inspector, any work or manu-
facturing process can be done efficiently in a sitting position, he may, by
order in writing, require the occupier to piovide before a specified day
such seating arrangements as may be practicaljle for all such workers.

First-aid Appliances (S. 45)

First-aid boxes or cupboards equipped with prescribed contents aiKJ
not less tlian one in numljcr for every 150 workers at any one time must
be presided and maintained in every factory so as to be accessible duiinfi;
all vorking liours.. T h e boxes or cupboards must not cont.iin anything
CNcept the prescribed first-aid equipment, and must be in the cliaige of a
sejjarate responsible person who is tiained in first-aid treatment aiid who
 FACTORY LEGISLATION 6VS,

must always be available during the working hours of the factory. Further,
in every factory in which more than 500 workers are employed an ambul-
ance room o£ the prescribed size, containing tiie prescribed equipment and
in the charge of such medical and nursing staff as may be prescribed, must
be provided and maintained.

Canteens (S. 46)

The State Government is now empowered to require the occupif' of
any factory employing more than 250 workers to provide and maintain a
canteen or canteens lor the use of the workers. It may also lay down the
standards in respect of construction, accommodation, furniture and other
equipment, the foodstuffs to be served and the charges which may be
made, and the constitution of the managing committee including workers'
representatives for the canteen.

Shelters, Rest Rooms and Lunch Rooms (S. 47)

In every factory wherein 150 workers are ordinarily employed, ade-
quate and suitable shelters or roo^ms and suitable lunch rooms sufficiently
lighted and ventilated, with provisions for drinking water, where workers
can eat meals brought by them, shall be provided and maintained in a
cool and clean condition for the use of the workers. When such rooms
are provided the workers must not eat their food in work rooms. Where
a canteen is jsrovided it can serve the purpose of lunch rooms. The State
Government may lay down standards regarding construction, accommoda-
tion, furniture or other equipment of such rooms and shelters or may ex-
empt by notifacation in the ofiictal Gazette any factory from providing
them.

Creches (S. 48)

(1) In every factory wherein more than 50 women workers are or-
ifdinarily employed there shall be provided and maintained a suitable room
or rooms for the use of children under the age of six years of such women.
(2) Such rooms shall provide adequate accommodation, shall be adequately
lighted and ventilated, shall be maintained in a clean and sanitary con-
dition and shall be unde the charge of women trained in the care of
children and infants. (3) The State Governments may make rules (a) pres-
cribing tlie location and the standards in respect of construction, accom-
modation, furniture and other equipment of rooms to be provided under
this Section; (b) requiring the provision in factories to which this Section
applies of additional facilities for the care of children belonging to women
woikeis, including suitable provision of facilities for -washing and chang-
ing their clothing; (c) requiring the provision in any factory of free milk
or refieshment or both for such children; (d) requiring that facilities shall
be given in any factory for the mothers of such children to feed them at
the necessary intervals. '

n'elfare Officeis (S. 49)

In every factoiy wherein 500 or more workers are ordinarily employ-
ed the occupier sliall cui]jloy in the factory such number of Welfare
OihcL'ii as m.iv be picsciilied. U i e Si;ue Government may prescribe the
duties, qunlilications and conditions of service of such Welfare Officers.
 676 MERC.\I^TIL£ LAW

Section 50 empowers the State Government to exempt any factory or.

class or description of factories from compliance with any of tliese welfare.'''
provisions, provided that it prescribes alternative arrangements for the wel-
fare of workers. It may order tliat the workers' representatives shall be
associated witii tlie 'management of the welfare arrangements of workers.

WORKING HOURS OF ADULTS

It is now generally recognised that shorter hours of labour result in
increased efhciency, Sections 51 and 54 provide that no adult workers shall
be required or allowed to work, in a factory for more than 48 hour,s in any
week, or 9 hoiu-s in any day provided that, subject to the previous ap-
proval of the Chief Inspector, the daily maximum of 9 hours may be ex-
ceeded in order to facilitate the change of shifts. Sections 55 and 56
pio\ide iJiat the period of adult workers in a factory each day shall be so
hxed that no period exceeds 5 hours and no worker §hall work for more
than 5 hours befoie he had an interval of rest for half an hour, but in
special casei the period of work may be 6 liours if tlie Chief Inspector
^permits it. The spread-over on any day (i.e., the total number o£ hours
ot his stay in the factory inclusive of rest interval) shall not be more than
lOJ, unless it is increased by tlie Chief Inspector in writing for specifiied
reasons, to 12 houis.

Weekly Holidays (S". 52)

No adult worker shall be required or allowed to work in a factory on
the hrst day of the week (i.e., Sunday, hereinafter referred to as rhe said
day), unless (a) he has or will have a holiday for a whole day on one of
the tliree days immediately bclore or alter the said day, and (Ij) the
manager of the factory has, before the said day or thd substituted day
under clause (a), whicliever is earlier, deli\eied a notice at ilic office of
the Inspector of his intention to require the woikcp to wotk on the said
day and of ihe day which is to be substituted, and displayeil a notice tcr
that effect in tlie factory. No substitution sliall, liowe\ei, be miula which
will icsult in any worker working for more than 10 days consfcutively
without a holiday for a whole day. The aljovc notices may be cancelled,
if necessary, by a notice delivcied at the oilice of the inspector and a notice
displayed in tiie factory not later than the day before the said_ day or the
holiday to be cancelled, whichever is earlier. Again, where any worker
woiks on the said day and has h.id a holiday on one of the three days im-
metliaiely before it, that said day shall, for the purpose of calculating his
weekly hours of work be included in the preceding week.

Compensatory Holidays (S. 53)

•W'Jiere, as a result of the passing of an order or the making oi' a rule
^ under the piovisious of this Act exempting a factoiy oi the workeis there-
in from tiie provisions of Section 52 with regaid to weekly holiday, ;^
worker is deprived of any of the weekly holidays for which i3ro\ision is
made in that .Section, he shall he allowed, witliin the month in which the
holidays weie due to him or within the two months immediately follow-
ing that month, compensatory holidays of wjiial number to the holidays
so lost.
 FACTORY LEGISLATION 677

^Night Shifts (S. 57)

Where a worker in a factory works on a shift wliich extends beyond
midnight, (a) for the purposes of Sections 52 and 56, a holiday for a whole
day shall mean in his case a period of 24 consecutive hours beginning when
his shift ends; (b) the following day for him shall b^e deemed to be the
period of 24 hours beginning when such shift ends, and the houts he has
worked after midnight shall be counted in the previous day.

Prohibition of Overlapping Shifts (S. 58)

Work shall not be carried on in any factory by means of a system of
shifts so arranged that more than one relay of workers is engaged in work
of the same kind at the same time. T h e State Government or subject to
tlie control of the State Government, the Chief Inspector may, however,
exempt anv factory or class or description of factories from tins provision
•pn specified conditions.

Extra Wages for Overtime (S. 59)

(1) Where a worker works in a factory for more than 9 hours in any
day or for more than 48 hours in any week he shall, in respect of over-
time work, be entitled to wages at the rate of twice his ordinary rate of
wages. (2) Where any workers in factory are paid on a piece-rate basis,
the State Government, in consultation with the employer concerned, and
the representatives of the workers shall, for the purpose of this Section,
fix time rates as nearly as possible equivalent to the average rate of earn-
ings of those workers, and the rates so fixed shall be deemed to be the or-
dinary rates of v,rages of those workers. (3) For the purposes of this Sec-
tion "ordinary late of wages" means the basic wages phis such allowances,
including the cash equivalent of the advantage accruing through the con-
cessional sale to workers of foodgrains and other articles, as die worker is
for the time being entitled to, but does not include a bonus. (4) The
cost equivalent of the advantage accruing through the concessional sale to
a worker of foodgrains and other articles shall be computed as often as
may be prescribed on the basis of the maximum quantity of foodgrains
and other articles admissible to a standard family, consisting of the wor-
ker, his or her spouse and two children below the age of 14 years requiring
in all three adult consumption units. The State Government may prescribe
the manner in which cash equivalent shall be computed and alst. the re-
gisters that shall be maintained in the factory for securing the compliance
with the provisions of this Section.

Restriction on Double Employment (S. 60)

No adult worker shall be required or allowed to work in any factory
on any day on which he has already been working in any other factory,
sikt in such circumstances as may be prescribed.

Notice of Periods of Work for Adults (S. 61)

In every factory there shall be displayed at some conspicuous and
convenient place at or near the main entrance of the factory and main-
lined in a clean and legible condition, a notice in Enslish and in ^ i-.""-
678 MERCANTILE LAW

age understood by the majority of workers in the factory, stating the periods
of work for adults, and showing clearly everyday the periods during which
adult workers may be required to work. Tlie periods shown in the notice
must be Sxed beforehand in accordance with the provisions given below,
and must in no case contravene any of the provisions of Sections 51, 52,
54, 55 and 56. The periods of workers must be fixed as follows:—
1. Where all the adult workers are not required to work during the
same periods, the manager shall classify them into groups according to
the nature of their work indicating the number of workers in each group.
2. For each group which is not required to work on a system of
shifts, the manager shall fix the periods during which the group may be
required to work.
3. Where any group is required to work on a system of shifts and
the relays and not to be subject to pre-determined periodical changes of
shifts, the manager shall fix the periods during which each relay of the
group may be required to work. But if the relays are to be subject to
pre-determined periodical changes of shifts, the manager shall fix periods
during which any relay of the group may be required to work and the
relay which will be working at any time of the day shall be known for
any day. , "^
The State Government may prescribe forms of the notice and the
manner in which it shall be maintained. In the case of a factory begin-
ning work after April 1, 1949 a copy of the notice shall be sent in duplicate
to the Inspector before the day on which work is begun in the factory.
Further, if any change in system of ivork is proposed in' any factory which
will necessitate a change in the notice, it shall be notified to the Inspector
in.duplicate before the change is made, and except with the previous
sanction of the Inspector, no such change shall be made until one week
has elapsed since the last change.

Register of Adult Workers (S. 62)

The manager of every factory shall maintain a register of adult wor-
ker to be available to the Inspector at all times during workiijg hours,
or when any work is being carried on in the factory, showing (a) the name
of each adult worker in the factory, (b) the nature of his work, (c) the
group; if any, in which he is included, (d) where his group works on shifts,
the relay to which he is allotted, and (e) such other particulars as may be
prescribed; provided that, if the Inspector is of opinion that any muster
roll or register maintained as part of the routine of a factory gives in res-
pect of any or all of the workers the particulars required, under this Sec-
tion, he may, by order- in writing, direct that such muster roll or register
shall to the corresponding extent be maintained in place of, and be treat-
ed, as, the register of adult workers in that factory. The State Govern-
ment may prescribe tlie fonn of the register, the manner in which it shall''
be maintained and the period for which it shall be preserved.
Section 63 provides that the hours of work must correspond with notice
under Section 61 and register under Section 62. Section 64 empoivers
the State Government to make rules defining the persons who hold posi-
 FACTORY LEGISLATION 679

^fons of supervision or management or are employed in a confidential

position in a factory; and the above provisions, except tiie pro\ision pro-
hibiting the employment of women between the hours of 7 p.m. and 6
a.m., shall not apply to any person so defined.
Section 65(2) provides that the State Government may make rules in
respect of adult workers in factories providing for the/ exemption, to such
extent and subject to such conditions as may be prescribed—
(a) of workers engaged on urgent repairs, from the provisions of
Sections 51, 52, 54, 55 and 56;
(!)) of workers engaged in work in the nature of preparatory or
complementary work which must neces.sarily be carried on out-
side the limits laid down for the general working of the factory,
from the provisions of Sections 51, 54, 55 and 5G;
(c) of workers engaged in work which is necessarily so intermittent
that the intervals during which they do not work while on duty
ordinarily amount to more than the intervals for rest required
by or under Section 55, froih the provisions of Sections 51, 54,
55 and 56j
(d) of workers engaged in any work which for technical reasons
' must be carried on continuously, from the provisions of Sections
51, 52, 54, 55 and 56;
(e) of workers in making or supplying articles of prime necessity
which must be made or supplied everyday, from the provisions
of Section 52;
(f) of workers engaged in a manufacturing process which cannot be
carried on except at times dependent on the irregular action of
natural forces, from the provisions of the Sections 52 and 55;
(g) of workers engaged in a manufacturing process which cannot be
carried on except during fixed seasons, from the piovisions of
Section ^2;
(h) of workers engaged" in engine-rooms or boiler-houses or in at-
tending power-plant or transniission machinery from the provi-
sions of Section 52;
(i) of workers engaged in the printing of newspapers, who are held
up on account of the breakdown of machinery, from the provi-
sions of Sections 51, 54 and 56.
(j) of workers engaged in the loading or unloading of railway
wagons, from the provisions of Sections 51, 52, 54, 55 and 56.
(4) In making rules under this Section', the State Government shall not
exceed, except in the case of workers engaged on urgent repairs, the fol-
lowing limits of work inclusive of over-time: (i) the total number of hours
of work in any day shall not exceed 10; (ii) the spread-over, inclusive of
intervals for rest, shall not exceed 12 hours in any one day: provided that
tjfte State Government may, in respect of workers engaged in any work
which for technical reasons must be carried on continuously, n i k e rules
prescribing the circumstances in which, and the conditions subject to which,
the restrictions iinposed by (i) and (ii) shall not apply in order to enable
a shift worker to'^Xvork th" whole or part of a subsequent shift in the ab-
sence of a worker who has failed ro-report for duty; (lii) the total numbei
680 MERCANTILE LAW
of hours of overtime work, shall not exceed 50 tor any one quarter. These
rules for exemption shall lemain in force for not more than three years.
Explanation. "Quarter" in (ii) above means a period of 3 consecu-
tive m<&iths beginning on the 1st of January, the 1st of April, the 1st of
July or the 1st of October.
Power to make Exempting Orders (S. 65). Where the State Govern-
ment is satisfied that, owing to the nature of the work carried on or to
other circumstances, it is unreasonable to require the fixation in advance
of the working periods, it may by written order, relax or modify the provi-
sions of Section 61. It or, subject to its control, the Chief Inspector, may
by written order exempt any or all of the adult workers in any factory or
group or class or description of factories from any or all of the provisions
of Sections 51, 52, 54 and 56 on the ground that the exemption is required
to enable the factory or factories to deal with an exceptional press of work:
provided that any such exemption does not permit' (i) the total number
of hours in any day to exceed ten, (ii) overtime v/ork to exceed 50 hours
for any nne quarter, (iii) the spread-over to exceed 12 hours in any one
day. The Section, however, limits the periods of exemption to those pro-
vided in Sec. 64(4).

EMPLOYMENT OF WOMEN
In addition to the general provisions applicable to adult workers of
both sexes a few special provisions relating to women workers have been
introduced in the Act. All the different provisions of the Act have been
collected here for the convenience of the reader:
1. No woman shall be allowed in any factory to clean, lubricate or
adjust any part of the machinery while that is in motion, or to work bet-
ween moving parts, on between fixed and moving parts, of any machinery
which is in motion [S. 22 (2)].
2. No woman shall be employed in any part of a factory for pressing
cotton in which a cotton-opener is at work: provided that if the feed-end
of a cotton-opener is in a room separated from the delivery end by a
partition extending to the roof or to such height as the Inspector may in
any particular case specify in writing, women may be employed on the
side of the partition where the feed-end is situated (S. 27).
3. In every factory wherein more than 60 women workers are or-
dinarily employed there shall be provided and maintained a suitable room
or rooms tor the use of children under the age of 6 years of such women.
Facilities shall be given for the mothers of such children to feed them at
the necessary intervals (S. 48).
4. No exemption from the provisions of Section 55 may be granted
in respect of any woman. In other words, no woman shall be required
or allowed to work rnqre than 48 hours in any week or 9 hours in any
day [S. 66 (a)].
5. In the case of women workers, there shall be no change of shifts
except after a weekly holiday or any other holiday.
6. No woman shall be employed in any factory except between the
hours of 6 a.m. and 7 p.m. provicSed that JJie State Government may by
notification in the Official Gazette, in respect of any class or description of
FACTORY LEGISLATION 681

factories, vary the limits, but so tlvat no s\ich variation shall authorise the
employment of any woman between the hours of 10 p.m. and 5 a.m. The
State Government may, however, make rules providing tor the employ-
ment of women workers during the night in fish-curing and fish-canning
factories to prevent damage to. or deterioration in, any raw material.
Such rules shall remain in force for a maximum period of three years at
a time (S. 66).
7. Where under Section 87 the State Government declares any oper-
ation in any factory as dangerous it may prohibit or restrict the employ-
menr of women in that operation [S. 87 (b)].

EMPLOYMENT OF YOUNG PERSONS

Child labour laws have been adopted in all civilised countries. They
are founded on the principle that the supreme right of the State of the
guardianship of children controls the natural rights of the parent when
the welfare of society' or of the children themselves conflicts with parental
rights. The supervision and control of minors is a subject which has al-
ways' been regarded as within the province of the legislative authority.
How far it shall be exercised is a question of expediency which it is the
province of legislature to determine. The legislature has fixed an age
limit below which children shall not be employed. It has also prohibited
their employment at night in one or more kinds of work, and without a
medical certificate of age and fitness. The present Act lays down certain
special provisions relating to children and adolescents under the above
heading, but some other provisions are also introduced at different places.
For the sake of continuity, all the provisions relating to children and
adolescents are given here.

Prohibition of Employment of Young Children (S. 67)

No child who has not completed his fourteenth year shall be requir-
ed or allowed to work in any factory.

Non-adult Workers to carry Tokens (S. 68)

A child who has completed his fourteenth year or an adolescent shall
not be required or allowed to work in any factory unless (a) a certificate
of fitness granted with reference to him under Sectiop 69 is in the custody
of the manager of the factory and (b) such child or adolescent carries while
he is at work a token giving a reference to such certificate.

Certificates of Fitness (S. 69)

(1) A certifying surgeon shall, on the application of any young per-
son or his parent or guardian accompanied by a document signed by the
manager of a factory that such person will be employed therein if certified
to be fit for work in a factory, or on the application of the manager of the
factory in which any young person wishes to work, examine such person
and ascertain his fitness for work in a factory.
(2) The certifying surgeon, after examination may grant to such
young person, in the prescribed form, or may renew—
(b) a certificate of fitness to work in a factory as an adult, if he is
682 MERCANTILE LAW
satisfied tlini the young person has completed his fourteenth
year, that he has attained the prescribed physical standatds and
that lie is fit for such work;
(b) a certificate of fitness to work in a factory as an adult, if he is
satisfied that the young person has completed his fifteenth year
and is fit for a fidl day's work in a factory:
Provided that unless the certifying surgeon has personal knowledge
of the place where the young person proposes to work and of the manu-
facturing process in which he will be employed, he shall not grant or re-
new a certificate under this sub-section until he has examined such place.
(S) A certificate of fitness granted or renewe.d under sub-section (2)(a),
shall be valid only for a period of twelve months from the date thereof;
(b) rnay be made subject to conditions in regard to the nature of the
work in which the young person may be employed, or requiring re-examin-
ation of the young person before the expiry of the period of twelve months,
(4) A certifying surgeon shall revoke any certificate granted or renewed
under sub-section (2) if in his opinion the holder of it is no longer fit to
work in the capacity stated therein in a factory.
(5) Where a certifying surgeon refuses to grant or renew a certificate
or'a certificate of the kind requested or revokes a certificate, he shall, if so
requested by any person who could have applied for the certificate or the
renewal thereof, state his reasons in writing for so doing.
(6) Where a certificate under this Section with reference to any young
person is granted or renewed subject to such conditions as are referred to
in clause (b) of sub-section (3), the young person shall not be' required or
allowed to work in any factory except in accordance with those conditions.
•(7) Any fee payable for a certificate under this Section shall be paid
by the occupier and shall not be recoverable from the young person, his
parents or guardian.

Effect of Certificate of Fitness granted to Adolescents (S. 70)

An adolescent who has been granted a certificate of fitness to work
in a factory as an adult, and who while at work in a factory carries a token
giving reference tcr the certificate, shall be deemed to be an adult; pro-
vided that no such adolescent who has not attained the age of 17 years
shall be employed or permitted to work in factory during night, i.e., bet-
ween 10 p.m. and 7 a.m. An adolescent who has not been granted a certi-
ficate of fitness to work as an adult shall, notwithstanding his age, be deem-
ed to be a child for all the purposes of this Act.

Working Hours for Children (S. 71)

(1) No child shall be employed, or permitted to work in any factory
(a) for more than H- hours on any day, and (b) during the night, i.e., a
period of at least 12 consecutive hours which sball include an interval of
at least 7 consectitive hours^falHng between 10 p.m. and 6 a.m. (2) The
period of work of all children employed in a factory shall be limited to
two shifts which shall not overlap or spread over more than five hours
each; and each child shall be employed in only one of the relays which
FACTORY LEGISLATION 683

shall not, except with thq previous permission in writing of the Chief
Inspector, be changed more frequently than once in a period of 30 days.
(3) The provisions of Section 52 relating to weekly holidays apply also to
child workers, and no exemption from the provisions of that section may
be granted in respect of any child. (4) No child shall be required to work
in any factory on any day on which he has already been working in an-
other factory.

Notice of Periods of Work for Children (S. 72)

There shall be displayed and correctly maintained in every factory in
which children are employed a notice of period of work for children in
the same manner as provided for adult workers in Section 61. The fix-
ation of the periods in the notice shall be made according to the procedure
laid down in that Section; but such periods as shown in the notice relating
to work by children must not be such as woidd require or allow the chil-
dren to work in contravention of Section 71.

Register of Child Workers (S. 73)

The manager of every factory in which children are employed shall
maintain a register of child workers, to be available to the Inspector at
all times during working hours or when any work is being carried on in a
factory, showing (a) the name of each child worker in the factory, ^b) the
nature of his work, (c) the group, if any, in which he is included, fd)
where his groun works in shifts, the relay to which he is allotted, and fe)
the number of his certificate of fitness granted under Section 69. The
State Government may prescribe the form of the register of child workers,
the manner in which it shall be maintained and the period for xvhich it
shall be preserved.

Hours of Work to correspond with Notice and Register (S. 74)

No child shall be employed in any factory otherwise than in accord-
ance with the notice of periods of work for children displayed in the
factory and the entries made beforehaftd against his name in the register
of child workers of the factory.

Power to require Medical Examination (S. 75)

Where an Inspector is of opinion (a) that any person working in a
factory without a certificate of fitness is a young person, or (b) that a
young person working in a factory with a certificate of gtness is no longer
fit to work in the capacity stated therein, he may serve on the manager
of the factory a notice requiring that such person or young person, as the
case may be, shall be examined by a certifying surgeon, and such person
or younc person shall not, if the Inspector so directs, be employed, or
permitted to work, in any factory until he has been so exami'^ed and has
been granted a certificate of fitness or a fresh certificate of fitness, as the
case may be, under Section 69, or has been certified by the certifying
surgeon examining him not to be a young person.
Power to make Rules (S. 76"). The 'State Government may make rules
6i1 -iDecifying the forms of certificates of fitness, providing tor the grant of
duplicates in the event of loss of the original c-ertificates, and fixing the
684 MERCANTILE LAW

fees wliich may be charged for such certificates and renewals thereof and
such (luijlicatcs, (b) prescribing the physical standards to be attained by
children and jdolescents woiking in factories, (c) reguhiting the procedure
of ccnifyin" surgeons, (d) specifying other duties which the certifying sur-
geons may be refjuired to perform in connection with the employment of
young peri-ons in factories, and fixing the fees for such duties and the per-
sons i)y whom they shall be payable.
Section 22 (2) provides that no child shall be allowed in any factory
to clean, lubricate or adjust any part of the machinery while that part is
in motion, or to work between moving parts, or between fixed and moving
parts, of any'machinery which is in motion.
Section 23 lays down that no young person, shall work at any machine
which has been declared by the State Government as dangerous for young
peisons, unless he has Ijeen fully introduced as to the dangers arising in
connection with the macliine and tlie precautions to be observed and has
also received sufficient training in work at the machine, or is under ade-
quate supervision by a peison who has a thorough knowledge and experi-
ence of the machine.
Section 27 provides that no child shall be employed in any part of a
factory for pressing cotton in which a cotton-opener is at work: provided
tliat if the feed-end of a cotton-opener is in a room separated from the
delivciyend by a partition extending to the roof or to such heiglit as the
Inspector may in any particular case specify in writing, children may be
employed on the side o{ tlie partition where the feed-end is situated. It
further lays down that where the State Government declares any operation
in any factory as dangerous it may prohibit or restrict the employment of
adolescents or children in that operation.
Furthermore, Sec. 77 lays down that the provisions of this Act re-
lating td young persons are in addition to, and not in derogation of the
provisions of the Employment of Chiidrea Act, 1938, The Act has been
passed to prohibit the employment of children in certain occupations and
workshops to which the Factories Act does not apply. Sec. 3 of the Em-
ployment of Children Act reads:
"(I) No child who has not completed his fifteenth year shall be em-
ployed or permitted to work in any occupation (a) connected with the
, transport of passengers, goods or mails by railway or (b) connected with a
Port Authority wijliin the limits of any port.
(2) No child who has completed his fifteenth year but has not com-
pleted his seventeenth year shall be employed or permitted to work in any
occupation referred to in sub-section (1), unless the periods of work of
such a child for any day. are so fixed as to allow an interval of rest for at
least twelve consecutive hours whicli shall include at least seven such conse-
cutive ,hours between 10 p.m. and 7 a.m. as may be prescribed.
Also, no child who has not completed his fourteenth year shall be
employed or permitted to work in any workshop, where any of the follow-
ing scheduled processes are carried on, namely;—Bidi-making; carpet-weav-
ing; cement manufacture, including bagging of cement; cloth printing,
dyeing and weaving; manufacture of matches, explosives and fireworks;
mica cutting and splitting; shellac manufacture; soap manufacture; tan-
ning and wool cleaning. The requirements of this provision will not,
however, apply to any workshop wherein any process is carried on by the
occupier with the aid of his family only and without employing hired
FACTORY LEGISLATION 685
labour or to any school established by, or leceiving assistiince" or recogni-
tion from, a State Government,
A contravention of any of the provisions of this Act is made punishable
with simple imprisonment which may extend to one month oi with fine
up to Rs. 500 or witii both."

LEAVE W I T H WAGES
The Industrial Labour Conference adopted in 1936 a Convention
(No. 52) whereby workers in industrial and connticrcial undertakinj-s are
entitled to an annual paid holiday of at least six working days aftci one
year of service. The Indian Factories Act, 1934, was amended in 19'15 to
include a special section dealing with annual paid holidays in rcspect'^of
all perennial factories. The present Act has introduced elaborations and
deals with the question of paid holidays in a separate cliapier (Ss. 78—84),
which has again been recast by the Amending Act of 1954.
Section 78 lays down that the following provisions relating to leave
with wages will not in any way prejudice tiie riglits lo whicli a worker
may be entitled under any other law or under the terms of any award,
agreement or contract of service; and where such award, agreement or
contract of service provides for a longer leave with wages than provided
in the present Act, the worker shall be entitled only to such longer leave.
The Railway rules regarding leave are more liberal than the provisions
of this Act; therefore, the provisions stated here do not apply to a work-
shop of a Railway administered by the Government.

Annual Leave with Wages (S. 79)

(1) Every worker who has worked for a period of 240 days or more
in a factory' during a calendar year shall be allowed during the subsequent
calendar year leave with wages for a number of days calculated at the rate
of-
(i) if an adtdt, one day for every 20 days of work performed by him
during the previous calendar year;
(ii) if a child, one day for every 15 days of work performed by him
during tlie previous calendar year.
For the purposes of the sub-section (1): (a) any days of lay off, by
agreement or contract or as permissible under the standing orders; (b) in
the case of a female worker, maternity leave for any number of days not
exceeding 2 weeks; and (c) the leave earned in the year prior to that in
whicli tliis leave is enjoyed, shall be deemed to be days on which the
worker has worked in a factory for the purpo.se of computation of 240 days
or more, but he sliall not earn leave for these days. Also, the Iea\e admis-
sible under tiiis sub-section sliall be exclusive of ail holidays whcdier occiir-
ling thuing oi at ciiiier end of tlie pciiod of iea\e.
(2)-.\ woiker whose service commences oiiicrwise than on the fust day
' of Januaiy siiall be entitled to ie.nc wiiii wages at die rate laid ilown above
il he has woiked for two-thiids of tlie toi.d nirnibei of da^s in the rc-
ni.iiudci of tlic calendar year.
(3) If a worker is discharged or dismissed fiom scnite duiing the
course of die year lie shall be entitled to lea\e with wages ai the lates laid
686 MERCANTILE LAW
down in sub-section (1) even i£ hej has not %voiked for the entire period
specified in sub section (1) or (2) entithng him to earn leave.
(4) In calculating leave under this Section fraction of lea\e of halt a
day or more shall be treated as full one day's leave, and a fraction of less
than half a day shall be omitted.
(5) If a worker does not in any one calendar year take the whole of
the leave allowed to him under sub-sec. (1) or sub sec. (2), as the case may
be, any leave not taken by him shall be added to the leave to be allowed
to him in die succeeding calendar year, subject to a maximum of 30 days
in tlie case of an adult or 40 days in tlie case of a child. If, however, a.
worker who has applied for leave with wages but has not been given such
leave in accordance with any scheme laid down in sub-sees (8) and (9) he
shall be entitled to carry forward the unavailed leave without any limit
(6) A worker may at any time apply in writing to the manager of a
factory not less than 15 days (30 days in case of a public utdity service)
before tlie date on which he wishes his leave to begin, to take all leave or
any portion thereof allowable to him during the calendar year. A worker
cannot take leave more than 3 times during a year.
(7) If a worker wants to avail hunself of the leave with wages due to
him to cover a period of illness, he shall be granted such leave even if the
application for leave is not made ivithm tlie time specified in sub sec (6);
and m such a case wages as admissible under Sec. 81 shall be paid not later
dian 15 days, or in the case of a public utility service not later than 30
days, from the date of the application for leave.
(8) For the purpose of ensuring tlie continuity of work, the occupier
or manager of the factory, m agreement with the Works Committee of the
factory constituted under the Industrial Disputes Act, 1947, it any, or a
similar Committee constituted under any other Act, or m the absence of
any Works Committee or tlie otlier Committee, in agreement with the
representatives of tlie workers therein, may lodge with the Chief Inspector
a sclieme in writing whereby the grant of leave allowable under this Sec-
tion may be regulated.
(9) Such a scheme, which shall be in force for 12 months, shall be post-
ed in a conspicuous and convenient place in tlie factory and may be re-
newed with or without modification tor a period of 12 months at a time,
providecf that there is an agreement as stated in (8) above.
(10) No application for leave duly made as required by sub-sec (6) can
be refused unless the refusal is in accordance, with the schemes mentioned
above in sub sees (8) and (9).
(11) If the employment of a worker who is entitled to leave is termi-
nated by the occupier before he jjas taken tlie en'ue leave to which he is,
entitled, or if having applied foi and having not been gianted such leaic,
the worker cjiuts his employment befoie he has taken the leave, the OCLU
picr of the factor) shall pay him wages ior the leave not taken befoie the
e\piry of the second working day aftei the tciminaiion ol emplo)mciU, oi
on or before the next pay day where the worker himself quits his emplo)
mcnt.
(12) The unavailed leave of a woiker must not be taken into consi
delation in computing the period of any notice required to be given before
dischaigt or dismissal.
 FACTORY LEGISLATION 687
Wages during Leave Period (S. 80)
(1) For the leave allowed to him-under Sec. 79, a worker shall be jwid
at rate equal to the daily average of his total full-time earnings lor the
days on which he worked during the month immediately preceding his
leave exclusive o£ any overtime and bonus but inclusive ot dearness allow-
ance and the cash equivalent of the advantage accruing through conces-
sional sale to the worker of foodgrains and other articles.
(2) The cash equivalent of tlie advantage accruing through the con-
cessional sale to the worker of foodgrains and other articles shall be com-
puted as often as may be prescribed, on the basis of the maximum quantity
of foodgrains and other articles admissible to a standard family. A
"standard family" has been defined to mean a family consisting of a
worker, his or her spouse and two children below the age of 14 years, re-
quiring in all three .adult consumption units. An "adult .consumption
unit" means the consumption unit of a male above the age of 14 years;
and of a female above the age o£ 14 years and that of a child below the
age of 14 years shall be calculated at the rates of .8 and .5 respectively of
one adult consumption unit.
The State Government has been empowered to make rules for tlie
computation of tlie cash equivalent of tlie above-mentioned advantage and
for the maintenance of registers in the factory.

Payment in Advance in Certain Cases (S. 81)

A worker who has been allowed leave for not less than 4 days, in the
case of an adult, and 5 days in the case of a child, shall, before his leave
begins, be paid tlie wages due for the period of leave allowed.

Mode of Recovery of Unpaid Wages (S. 82)

Any sum required to be paid by an employer for the leave period but
not paid by him shall be recoverable as delayed wages under Sec. 15 of
tlie Payfnent of Wages Act, 1936, >
Scciion ^ 3 empowers die State Government to prescribe for die keep-
ing by managers of factories of registers showing such paiticulars as
may be required and requiring such registers to be made available for ex-
amination by Inspectors. Section 84 provides Uiat when the State Gov-
ernment is satisfied tliat die leave rules applicable to workers in a factory
provide benefits which inJEts opinion are not less favourable than those
provided by this Act, it may exempt, by a wriiicn ordei,' the factory from
all 01 any of the provisions relating to leave with wages, subject to such
conditions as may be specified in die order.

SPECIAL PROVISIONS
Power to Apply Act to Certain Premises (S. 85). (1) Tlie State Gov-
einnicm may, by notification in the Official Gazette, declare that all or
.my ot the pio\isions of this Act shall apply to any pjace wliciein a manu-
faciiniiig piocess is earned on with or without the aid of powei or is so
oidinaiily cairicd on notwithstanding that—
(i) the numbei of persons employed dierein is less than 10 if work-
 <'88 MERCANTILE LAW

ing with the aid o£ power, and less than 20 if v/orking without
the aid of power; or
(ii) the perions working therein are not employed by the owixer
thereof but are working with the pennission of, or under agree-
ment with, such owner:
Provided that the manufacturing process is not being carried on by
the owner only with the aid of his family.
(2) After a place is so declared, it shall be deemed to be a factory for
the purposes of this Act, and the owner shall be deemed to be the occu-
pier, and any person working therein a worker. For the purpose of this
Section, "owner" shall include a lessee or mortgagee with possession of the
premises.
Power to Exemjjt Public Institutions (S. 86). The State Governnient
may exempt subject to such conditions as it may consider necessary, any
workshop or workplace where a manufacturing process is carried on and
which is attached to a public institution maintained -for the' purpose of
education, training or reformation, from all or any of the provisions of
this Act: provided that no exemption shall be granted from the provisions
relating to hours of •work and holidays, unless the persons having the con-
trol of the institution submit, for the approval oi the State Government,
a scheme for regulation of the hours of employment, interval for meals, and
holidays of the persons employed in- or attending the institutions or who
are inmates of tfte institution, and the State Government is satisfied that
the provisions of the scheme are not • less favourable than the correspond-
ing provisions of this Act.
Dangerous Operations (S. 87). Where the State Government is of
opinion that any operation carried on in a factory exposes any persons
I employed in it to a serious risk of bodily injury, poisoning or disease, it
may make rules applicable to any factory or class or description of factories
in which the operation is carried on (a) specifying the operation and dec-
laring it to be dangerous; (b) prohibiting or restraining the employment
of adolescents or children in the operation; (c) providing for the periodi-
cal medical examination of persons employed or seeking to be employe^},
in the operation, and prohibiting the employment of persons not certified
as fit for sucli employment; (d) providing for the protection of all persons
employed in the operation or in the vicinity of the places where it is car-
ried on; (e) prohibiting, restricting or controlling the use of any specified
materials or processes in connection with the operations.
Notice of Certain Accidents (S. 88). Whete in any factory an acci-
dent occurs which causes death, or which causes any bodily injury by rea-
son of whicli the person injured is prevented from working for a period
of 48 hours or more immediately following the accident, or which is of
such natine as m;iy be prescribed in this behalf, the manager of the fac-
tory shall send notice tliercof to such authorities, and in such form and
within such time, as may be prescribed.
It is to be noted that the duty to give notice to the authorities about
the accident i.s laid on the manager; and it is tlierefore primarily the
manager who will be deemed to liave contravened this provision if notice
is not sent, allliough holli the occupier and manager are made responsible
jointly anil severally for this contravention. (Wazir Chand v. Emperor,
A.I.R.', 1930 Lahore, G58).
Notice of Certain Diseases (S. 89). This is altogether a new provi-
FACTORY LEGISLATION 689

sion, ,and in addition to making tlie manager responsible, it places certain

obligations to be discharged by the medical practitioner who treats a
worKcr patient in certain cases. The Section provides: (1) where any
woiker m a factory contracts any oE the following scheduled diseases, the
manager of the factory shall send notice thereof to such authorities, and in
such lorm and within sudi time, as may be prescribed.
List of Notifiable Diseases. 1. Lead poisoning, including poisoning by
piepaiaiion oi comjjound of lead or their sequelae. 2. Lead tetraethyl
poisoning. 3. Phosphorus poisoning or its sequelae. C Mercury poison-
ing or its sequelae. 5. i\Ianganese poisoning or its sequelae. 6. Arsenic
poisoning or its sequelae.'- J . Poisoning by nitrous fumes. 8. Carbon bisul-
phide poisoning, y. Benzene poisoning, including poisoning by any of its
homologues, their nitro or .amino derivatives or its sequelae. 10. Chrome
ulceration or its sequelae. 11. Anthrax. 12. Silicosis. 13. Poisoning by
halogens or halogen derivative of the hydrocarbons of the aliphatic series.
14. Pathological manifestations due to radium or radio-active aubstances
and/or X-rays. 15. Primary epitheliomato cancer of the skin. 16. Toxic
anaemia. 17. Toxic jdimdice'due to poisonous substances.
2. If any medical practitioner attends on a person who is or has been
employed in a factory, and who is; or is believed by- the medical practitio-
ner to be suffering from any of the abo\e-mentioned diseases, the medical
piactitionei shall without delay send a report in writing to the office of
the Chief Inspector stating (a) die name and full postal address of the
patient, (b) the disease from whidi Itc believe_s the patient to be suffering,
and (t) the name and address of the factory in which the patient is, or was
lasj, employed.
3. Where th-e report sent by the attending medical practitioner is
confirmed to the satisfaction of the Chief Inspector, by the certificate of a
certifying surgeon or otherwise, that the person is suffering from any of
the specified diseases, he shall pay to the medical practitioner such fee as
may be prescribed, and the fee so paid shall be recoverable as an arrear of
land levenue from the occupier of the factory in which the person con-
tracted the disease.
4. If any medical practitioner fails to send a report as required, he
shall be punished widi hne which may extend to Rs. .^O.
Power to Direct Enquiry into Cases of Accidents or Diseases (S. 90).
(1) The State Government may, if it considers it expedient so to do, ap-
point a competent person to enquire into the causes of any accident occur-
ring in a factory or into any case where any of the specified diseases has
been, or is subjected to have been, contracted in a/-factory and may also
appoint one or moie persons possessing legal or special knowledge to act
as assessors in 'such enquiry. T h e person shall report to the State Gov-
ernment stating the causes of the accident or disease, together with his
obsen-ations. The State Government may publish this report.
Power to take Samples (S. 91). (1) An Inspector may at any time dur-
ing the normal working hours of a factory, after informing the occupier
or manager of the factory or other person for the time being purporting
to be in charge of the factory, take in the manner hereinafter provided
a sufficient jample of any substances used or intended to be used in the
factory, such use being (a") in the belief of the Inspector in contravention
of any of the provisions ol this Act or dre rules made thereunder, or (b) in
the opinion of the Inspector likely to cause bodily injury to, or injury to
the health of workers in the factory.
 690 MERCANTILE LAW
(2) Where the Inspector tateb a sample under sub-section (1), he shall,
in the presence of the person informed, under the sub-section unless such
, person wilfully absents himself, divide the sample into three portions and
effectively seal and suitably mark them, and shall permit sudi person to
add his own seal and mark, thereto.
(3) The person informed as aforesaid shall, if the Inspector so re-
quires, provide the appliances .for dividing, sealing and marking tlie sample
taken undei this section.
(4) The Inspector shall (a) forthwifh give one portion of the sample
to the person informed under sub-section (1); (b) forthwith send the second
portion to a Government Analyst for analysis and report thereon; (c) re-
tain liie tliird portion for production to the Court before which proceed-
ing.' if any, are instituted in respect of the substance.
(5) Any document purporting to be a report under the hand of any
Government Analyst upon any substance submitted to him for analysis
and report under tliis Section may be used as evidence in any proceedings
instituted in respect of the substance

PENALTIES AND PROCEDURE

General Penalty for Offences (S. 92). Save as is otherwise expressly
provided in this Act and subject to -the provisions of Section 93, if in, or
in respect of, any factory there js any contravention of any of the provi-
sions of this Act or or anyTiile maae thereunder or of any order in writing
given thereunder, the occupier and manager of the factory shall each be
guilty of an olfence and punishable with imprisonment for a term which
imay extend to three months or with fine which may pviend to Rs. 500 or
with both, and if the contravention is contiimed .after conviction, a further
fine which may extend to Rs. '75 for each day on which the contravention
is so continued
As the punishmjent provided under this Section is rather drastic, there
must be a definite and strict proof that the person was employed or allow-
ed to work in contiav^mtion ot the provisions of the Act. Both occupier
and manager are jointly and severally liable to pay the fine for an offence
under this Section. Occupier means a perhon who occupies the factory
either by himself or through agent, and, thersforo, even if the owner shows
that he knows nothing about the inanagement which he has entrusted to
a manager, he is not free from liability; The manager, however, is not
liable-tor offences conunitted diu-ing his absence.
Liability of Owner of Premises in Certain Circumstances (S. 9S), T h e
Section has been recast by the Amending Act, 1954, and provides for the
liability of the owner of a building, instead of tlie occupier in the following
tircumstances;—
(1) Where in any premises separate buildings are leased to different
occupiers for use as separate factories, the oivner of the premises shall be
responsible for the pxovision and maintenance of cdmmon facilities and
services, such as roads, drainage, water supply, lighting and sanitation.
(2) The Chief Inspector shall have, subject to the control of the Statfe
'Government, po-»ver to issue ordei's- to the owner of the premises in respect
of the carrying out oi the provisions of subsection (1).
(3) Where in any premises independent or self-contained, floors or
flats are leased to diffeient occupiers for use as separate factories, the owner
FACTORY LEGISLATION 691

of the premises shall be liable as if h e were tlie occupier or manager of'a

factory, for any contravention of the provisions o f this Act in respect, of—
(i) latrines, urinals, and washing facilities in so far as the main^en-.
ance of the common supply of water for these purposes is con-
cerned;
(ii) fencing of machinery and plant belonging to the owner and not
specifically entrusted to tlie custody or use of the occupier;
(iii) safe means of access to the floors or flats and maintenance apd
cleanliness of staircases and common passages;
(iv) precautions in case of hre;
(v) maintenance of hoists and lifts; and
(vi) maintenance of any other common facilities provided, on the-
premises.
(4) The Chief Inspector shall have, subject to the control of the State
Government, power to issue orders to the owner of premises in respect of
tlie carrying out of the provisions of sub-sec. (B).
(5) T h e provisions of sub-sec. (3) relating to liability of the ownef shall
apply where in any premises independent rooms with common latrines,
urinals and washing facilities are leased to different occupiers for use as
separate factories: provided that the o%vner shall be responsible also for
complying with the requirements relating to the provision and mainten-
ance of latrines, urinals and washing facilities
(6) T h e Chief Inspector shall have, subject to the control of the State
Government, the power to issue orders to the owner of the premises refer-
red to in sub-section (5) in respect of the carrying out of the provisions of
Section 46 relating to the provision and maintenance of canteens and Sec-
tion 48 relating to the provision and maintenance of suitable creches.
(7) Where in any premises portion of a room or a shed are leased to
different occupieis for use as separate lactories, the owner of the premises
shall be liable for any contravention of the provisions relating to—
(i) health (Cs. 11—20) except Sections 14 and 15 which relate to dust
and fume, and artificial humidification respectively
(ii) safety (Ss. 21-41) except Sections 22, 23. 27, 34, 35 and 36;
provided that iti respect of Sections 21 (fencing of machinery)
24 (striking gear and devices for cutting off power) and 32 (floors,
stairs and means of access) the owner's liability shall be only in
so far as such provisions relate to things under his control; and
the occupier shall be responsible for complying with the provi-
sions relating to safety in respect of plant and machinery belong-
ing to or supplied by him;
(iii'l Sectien 42, relating to washing facilities.
(8) The Chief Inspector shall have, subject to the control of the State
Government, power to issue orders to tlie owner of the premises in respect
of the carrying out the provisions of sub-sec. (7).
(9) In respect of sub-sees. (5) and (7), while computing for the pur-
poses of any of the provisions of this Act the total number of workers em-
ployed, the whole of the premises shall be deemed to be a single factory.
£nhanced Penaltv after Previous Conviction (S. 94). If any person who
692- • I\IERCANTILE LAW
has- been convicted of any ofEence punishable under Section 92 is within 2
)ears again guilty of an oiience involving a contravention of the same pro-
vision, he shall be punishable on a subsequent conviction with imprison-
ment for a term which may extend to six months or with fine which may
extend to Rs. 1,000 or with both.
Penalty for Obstructing Inspector (S. 95). Whoever wilfully obstructs
an Inspector in the exercise of any power conferred on him by or under
this Act, or fails to produce on demand by an Inspector any registers or
other documents in his custody kept in pursuance of this Act or of any
rules made thereunder, or conceals or prevents any %vorker in a factory
from appearing Taefore, or being examined by, an Inspector, shall- be punish-
able with imprisonment for a term which may extend to three month.", or
^s'ith fine which may extend to Rs. 500 or with both. It is to be noted
that, before a person cin be convicted for obstruction or any other defaults
mentioned above it must be shown that it was he who obstructed the Ins-
pector or made the default and that the obstruction or default ivas wilful
Therefore, where the assistant, manager failed to produce the register on
being asked by the Inspector when on inspection, the manager, even if
lie were hiding in the factory, could not be convicted under this Section
(R. R. Das V. Emperor, 41 Cal. W.M. 740). Also, when the manager is
charged with liaving obstructed the Inspector the onus is not on the accus-
ed to show that any other person obstructed; and if there is no direct
p\idence to shov/ that the manager had obstructed he must be acquitted
(In re Polisetti Govinda Rao 1947 Mad. 223).
Penalty f'or Wrongfully Disclosing Results of Analysis (S. 96). Section
91 provides for analysis of an injurious substance used or intended to be
used in a factory. In order to provide a penalty for an unauthorised 'pub-
lication or disclosure of the results of an analysis Section 96 has been iiitro- '
duced. It lays down that whoever, except in so far as it may be necessary for
the purposes of a prosecution for any offence punishable under this Act,
publishes or discloses to any person the results of an analysis made under
Section 91, shall be punishable with imprisonment for a term which may
extend to three months or with a fine v^hich may extend to Rs. 5Q0 or with }
both.
Offences by Workers (S. 97). This Section and Section 111 are new
provisidns, under which contravention by workers of any provisions of this
Act or any obligations placed upon them by the Act are made punishable.
This has evidently been done to check irresponsible acts on the part of the
workers. Since the occupier has been saddled with a definite and positive
responsibility for the safety and welfare of the workers, a duty has also
been cast upon the workers not to contravene any provisions of the Act
made for their safety and good nor any obligations placed upon them.
Therefore, if a worker is punished under Section 97 the occupier or mana-
ger may escape liability for the same contravention, unless it is proved that
he failed to take all reasonable irieasures for its prevention. Section 97
provides that (1) subject lo the provisions of Section 111, if any worker
employed in a factory contravenes any provisions of this Act or any rules
or orders made thereunder, imposing any duty or liability on ivorkers, he ,
shall be punishable with ftne which may extend to Rs. 20; (2) where a ^
worker is convicted of an offence punishable under sub-section (1), the
occunier or manager of the factory shall not be deemed to be guilty of an
ofEence in respect of that contravention, unless it is ptoved that he failed
to lake all reasonable measures for its prevention.
FACTORY LEGISLATION 693

Penalty for Using False Certificate of Fitness (S. 98). Whoever know-
ingly uses or attempts to use, as a certificate of fitness granted to Iiimself
under Section 70, a certificate granted to another person under that Sec-
tion, or who having procured such a certificate, knowingly allows it to be
used or an attempt to use it to be made by another person, shall be
punishable witli imprisonment for a term which may extend to one month
or with fine which may extend to Rs. 50 or with both.
Penalty for Permitting Double Employment of Child (S. 99). If a
child works in a" factory on' any day on which he has already been work-
ing in another factory, the parent or guardian of the child or the,person
havir.g custody of or control over him or obtaining any direct benefit from
his wages, shall be punishable with fine which may extend to Rs. 50, unless
it appears to the Court that the child so worked without the consent or
connivance of such parent, guardian or person.
Determination of Occupier in Certain Cases (S. 100). (1) Where the
occupier of a factoi-y is a firm or other association of individuals, aiiy one
c£ the individual partners or members thereof may be prosecuted and
pimished for any offence for Tvliich the occupier of the factory is punish-
able:
Provided that the firm or association may give notice to the Inspector
that it has nominated one of its members, residing in' India to be the occu-
pier of the factor)', and such individual shall, so long as he is so resident,
be deemed to be the occupier of the factory, until--further notice cancelling
his nomination is received by the Inspector or until he ceases to be a part-
ner or'member of the firm or association.
(2) Where the occupier of a factory is a company, any one of the di-
rectors thereof may be prosecuted and punished for any offence for which
the occupier of the factory is punishable:
Provided that the company may give notice to tlie Inspector that it
has nominated a director, who is resident in India, to be tlie occupier of
the factory, and such director shall, so long as he is so resident, be deem-
ed to be the occupier o£ tlie factory, until further notice cancelling his
nomination is received by die Inspector or until he ceases to be d"e tor
or shareholder.
I
(3) Where the owner of any premises or building referred to in Sec-
tion 93'is not an individual, tlie provisions of this Section shall apply to
such owner as they apply to occupiers of factories who are not-individuals.
Exemption of Occupier or Manager from Liability in Certain Cases
(S. 101). Where the occupier or manager of a factory is charged with an
offence punishable under this act, he shall be entitled, upon complaint
duly made by him and on giving to prosecutot not less than three days'
notice in writing of his intention so to do, .to have any other person whom
he charges as the actual offender brought before the Court at the time
appointed for hearing the charge; and if, after the commission of the
olleiice has been proved, the occupier or manager of the factory, as the
case may be,'proves to the satisfaction of the court (a) that he used due
diligen.cc to enforce the execution of this Act, and (b) that the said other
person committed the offence in question without his knowledge, consent,
or connivance, that person shall be convicted of .the.offence anfti shall b t
liable to the like punishment as if he were the occupier oi'iJianager of
the factory, and the occupier or manager, as the case may be, shall be
discharged from any liability under this Act in respect of such offpnce:
 694 MERCANTILE LAW
Provided that in seeking to prove as aforesaid, the occupier or man-
ager of the factory, as the case may be, may be examined on oath, and
his evidence and that of any witness whom he calls in his support shall
be subject to cross-examination on behalf of. the person he charges as the
actual offender and by the prosecutor:
Provided further that if tlie person cliarged as the actual offender by
the occupier or manager cannot be brought before the Court at the time
appointed for hearing the cliarge, the Court shall adjourn the hearing
from time to time for a period not exceeding three montlis and if by the
end of the aaid period the person charged as the actual offender cannot
still be brought before the Court, the Court shall proceed to hear the
charge- against the occupier or manager and shall if the offence be proved,
convict the occupier or manager. I h e "other .person" means some person
of the supervisory staff intermediary between the manager and die worker.
Pd^er. of Court to make Orders (S. 102). (I) Where the occupier or'
manager of a factory is convicted of an offence punishable under this Act
the Court may, in addition to awarding any punishment, by order in wait-
ing require him, within a period specified in the order (which the Court
may, if it iliinks fit and on applifcation in suda behalf, from time to time
extend) to take such measures as may be so specified ion- remedying the'
matters in respect of wliich the offence was committed.
(2) Where an order is made under sub-section (I), the occupier or
manager of the factory, as the case may be, shall not be liable under the
Act in respect of the continuation of the offence' during the. period or ex-
tended period, if any, allowed by the Court if, on the expiry of such"
period or extended period, as the case may be, the order of the Court
has not been fully complied with, the occupier Or manager, as tlie case
may be, shall be deemed to have committed a further offence, and may'
be sentenced therefor by the Court to undergo imprisonment for a term;
which may extend to six months or to pay a fine which may extend to •
Rs. 100 for every day after such expiry on which the order has not been'
complied with, or both to undergo such imprisonment and to pay such'
fine, as aforesaid.
Presumption as to Employment (S. 103). .If a person is f6und in a
factory at any time, except^during/intervals for meals or rest, when work is
going on or the machinery is in motion,' he shall, until the contrary is
proved, be deemed for the purpose of this Act and the rules made there-
under to have been at that time employed in the factory.
Onus as to Age (S. 104). When any act or omission would, if a
person were under a certain age, be an offence punishable under this Act,,
and such person is in the'opinion of the Court prima facie under such
age, the burden shall be on the accused to prove that such person is not
under such age. (2) A declaration in writing by a certifying surgeon re-
lating to tlie worker that he lias personally examined him and • believed
hiita to be under the age stated in such declaration shall, for the purposes
of this Act and the rules made thereunder, be admissible as evidence of the
age of that worker.
Cognizance of Offences (S. 105). (1) No Court shall take cognizance
of any offen.ce under this Act except on complaint, by, or with tJie'.pre-
\!Ous sanction in writing of, an Inspector. (2) .No Court below that of a'
rrc-jdsncy iMajjisirais or of a Magistrate of the First Class shall try any
fA'tcMC putsishible undtr ihiy Act. The Chief Inspector is Inspector ior
 FACTORY LEGISLATION 695

this purpose. (Thakur Chand, v. State, 1960 All. 61; State v. D. N .

Bhargava, 1960 All. 62.)
Limitation of Prosei ittion (S. 106). No Court shall take cognizance
of^any offence punishable under tliis Act unless complaint tlwreof is made
within three niontlis of the date on which the alleged commission of the
ofFence came to the knowledge of an Inspector; provided that where the
offence consists of dissbeying a written order jmade by an Inspector, com-
plaint tbeieof may be made within six months of the date on which the
offence is alleged to have been committed. It is to be noted that the rule
of limitation laid down in diis Section is peremptory and no consider-
ations imported from" the provisions of the Limitation Act can circupivent
it.

SUPPLEMENTAL
Appeals (S. 107). (1) T h e manager of a factory on whom an order in
writing by an Inspector has been served under the provisions of this Act
or the occupier of the factory may, within 30 days of the service of the
order, appeal against it to tlie prescribed authority, and sudi aathority
may, subject to rides made injthis belialf by the State Government, confirm,
modify or reverse the order.
(2) Subject to the rules made in tliis belialf by tlie State Government
(which may prescribe classes of appeals whicli shall not be heard with the
aid of assessors), the appellate authority^may, or if sp required in the
petition of appeal shall, hear the appeal witli the aid of assessors, one of
i^hom shall be appointed by the appellate authority and the other by
snail body repiesenting the industry concerned as may be prescribed:
Provided that if no assessor is appointed by such body before the time
fixed for hearing the appeal, or if the assessor so appointed fails to attend
the hearing at such time, the appellate authority may unless satisfied that
tjje failure to attend is due to' siifficient cause, proceed to hear the appeal
without the aid of such assessors or, if it tliinks fit, witliout the aid of any
assessor.
(3) Subject to such rules as the State Government may make in this
'• behalf and subject to such conditions as to partial compliance or the
adoption of temporary measures as the appellate audiority may in any case
tliinK. fit to impose, the appellate authority may, if it thinks fit, suspend
the order appealed against pending die decision of the appeal.
Display of Notices (S. 108). (1) In addition to the notices required to
be displayed in any factory by or under this Act, tliere shall be displayed
in every factory a notice containing such abstracts of this Act and of tlie
rules made thereunder as may be prescribed and also the name and^ ad-
dress of the Inspector and die certifying surgeon.
(2) All notices required by or under this Act to be displayed in a
factory shall be in English and in a language understood by the majority
of the workers in the factory, and shall be displayed at some conspicuous
Jind. convenient place at- or near the main entrance to the factory, and
shall be maintained in a clean and legible condition.
(3) The Chief Lispecto,r may, by order in writing served on the
manager of any factory, require that t^ere shall be disjilfed in the factory
anyotder," noiicb or poster relating to tlie health^-satetf or welfare of the
workers in the factory.
Returns and Secyiees of Notices (Ss. 109 and 110). The State Govern-
ment may make r u i d ^ ) prescribing tlie manner of service of Orders under
this Act on owners, occupiers or managers of laaorles; (b) requiring
696 MERCANTILE LAW
owners, occupiers or managers of factories ^to submit such rctiiins occasional
or periodical, as may in its opinion be required for the purpose of this
Act.
Obligations of Wotkcrs (S. 111). This new section lays down certain
obligations for the workers, the contravention of which is punishable as
provided below. The Act lays down (1) that no worker in a factory (a)
shall wilfully interfere with or misuse any appliance, convenience or other
thing provided in a-factory for the purposes of securing the health, safety
or welfare of die workers therein; (b) shall wilfully and without reasonable
cause do anything likely to endanger himsdf or others; and (c) shall wil-
fully neglect to make use of any appliance or other thing provided in the
factory for the purposes of securing the health or safety of the workers
therein.
(2) If any worker employed iri a 'factory contravenes any of the" pro-
visions of this Section or of any rule or order made thereunder, he shall
be punishable with imprisonment for a term wjiich may extend to three
jonths, or with fine which may extend to Rs. 100, or with both.
General Power to make Rules (S. 1.12). This is a new Section and
empowers the State Government to make rules providing for any matter
which under any of the provisions of tfiis Act, is to be or may be prescribed or
which may be considered expedient in order to give effect to tlie purposes
of this .Act.
Poivfer of Centre to Give Directions (S. 113). This also is a new Sec-
tion and empowers the Central Government to give directions to a State
Government for the execution of the provisions of this Act.
No Charge for Facilities and Conveniences ,(S. 114). This js aljp a
new Section and lays down that subject to Section 46 no fee or charge shall
be realised from any worker in respect of any arrangements or facilities
to be provided, or any equipments or appliances to be supplied by the
occupier under the provisions of this Act. Section 46 requires the pi-ovis-
ion of a canteen or canteens in a factory where more than 250 workers are
ordinarily employed for supplying foodstuffs on payment to the workers.
This is the only charge that can be realised from the workers.
Section 115 piovides. that all rules made under this Act shall be pub-
lished irj the Official Gazette. Section 116 lays down that unless other-
wise provided, this Act shall apply to factories belonging to the Central
Government. Section 117 provides that no suit, prosecution or other legal
proceedings shall lie against any person for anything which is in good faith
done-or intended to be done under this Act. Section 118, which is a new
provision, has been introduced for preserving the trade secrets of various
manufacturing processes. It lays down that no Inspector shall, while' in
service or after leaving the service, disclose otherwise than in connection
with the execution, or for the purpose, of this Act any information relating
to any manufacturing or commercial business or any working process which
may come to his knowledge in the course of his official duties. If the In-
spector discloses in coatravention of this provision any informait'on he
shall be punishable with imprisonment for a term which may extend to six
months, or with fine which may extend to Rs. 1,000, or with both. He
may, however, disclose with impunity any such information wiUi previous
consent in writing of the owner of such business or process or for the pur-
poses of any legal proceeding (including arbitration) pursuant to the Act
or of any legal proceeding which may fje taken, whether pursuant to this
Act or otherwise, or for the purposes of any report of such porceedings
as aforesaid.
 Chapter XXI

The Workmen's Compensation

Act 1923
(No. VIII of 1923)

TJie Workmen's Compensation Act aims to correct the evils that

existed under the Common Law. Prior to the Act if an employee in a
factory was" injured or killed on account of accident due to his employment
he or his dependa"hts could file a suit for damages, and could recover
them only if the injury or death could be attributed to the negligence of
the employei.
The position was hardly equitable as the claims could easily be de-
feated on othei grounds, such as (1) the doctrine of "Common employ-
. ment", (2) Volenti nou fit injuria, i.e., the defence of "assumed risk", and
(3) the principle of "contributory negligence". According to the doctrhie
of common employment, if a workman suffered injury or death through
the act or omission of a fellow-worker the employer was held not liable,
as the same could not be attributed to his negligence. T h e defence of the
"assumed risk"' was based upon the idea that the employee assumed the
risk knowing full well the dangers of employment. It was said that ^vhen
he knew of the dangers of employment, the workman was himself responsi-
ble for tlie calamity when it arose out of such employment. The econo-
mic theory upon which this principle was based may be stated thus: The
wages of jjie workman represent a compensation for the labour he expends
and the danger of the employment. These two—the price of the labour
and the price of the risk that he voluntarily assumes in doing the w o r k -
pass into the price of the product sold by the employer, thereby trans-
ferring the burden to the consumer. Since die -workman does not bear
the burden of die risk, but is rather paid for it, he has no right to claim
any compensation for any injury arising out of his employment. The
principle was so rigidly applied that even where some person to whojn the
employer had delegated the duty of supplying reasonably safe appliances,
and such person neglected his duty and thus caused tlie casualty, the em-
ployer could escape liability by pleading that the employee had assumed
the urtnecessary risk -voluntarily.
T h e third principle xvas often used to escape liability, because even
in a case like the above, the employer could plead that the injury was
the result wholly or partly of the injured workman's own contributory
698 MERCANTILE LAW
negligerice. In oiher words, if tlie worker had been cartful the accident
•would not have taken place. The defences oCien resulted in ^ e a t injustices
to the worker. But under the old system, the employer also many a time
suffered a great deal. Sometimes heavy djmages, half of whidi was llie
opposing Counsel's booty, were awarded against him. The Compensation
Act is in a way a compromise between the employer and the employee.
The employer is given only a limited and fixed liability, and ilie worker
is sure of getting something without litigation, Tlie principle on which
tlie Compensation Act works is tliat injuries to employees "are no longer
the result of fault or negligence, but they are the product of the industry
itself." Therefore there should be indemnity in every case where casualty
is incidental to the employment, unless indeed the casualty is brouglu about
by the injured person's own wilful negligence. T h e workman is not to
bear tlie pecuniary .burden, even where the casualty is the result ot the
negligence of the workman or his fellow-workers, as accidents are an es-
sential feature of industrial undertakings, and the effective force in creat-
ing and managing the employment is the employer. Moreover, the ivork
is undertaken primarily in the interest of the employer, and ultimately
for the public, and the compensation he has to pay can easily be trans-
ferred by him to the consumer, thus placing the burden of the workman's
disablement or death upon the society. Therefore, the employer must
pay for an accident arising out ot and in course of employment.
The Workmen's Compensation Act performs a great service to botn
the employer and the employee, by providing a very simple procedure
for the recovery of compensation.' It is cheap, prompt and both the
parties know how much is to be paid, as schediJes for different types of
casualties are provided in the Act. It must, however, be remembered
that the Compensation Act does not take away the employee's Common
Law right to claim damages whicli may be quite substantial, if he can
prove negligence or breach of duty on the part of the employer. The
workman or his dependants are at liberty to eidier file a suit for damages
against tlie employer, and run the risk of the employer's escape from
liability on any of the diree defences, or be fxjntent with the compen-
sation awarded under the Workmen's Compensation Act. Both remedies
are in no case open to the workman or his tlescendants. They must
make their choice one wav or the ether.
Another very important Act—the Employer's Liahility Act was passed
in "1938. This Act declare; that the defences of "common employment"
and "assumed risk" cannot be raised by employers in suits for damages.
Contracting out of employer's liability is also void. Sec. 3 bars defence
of common employment; the new Sec. 3A makes void any agreement con-
cluding or limiting employer's liability; and Sec. 4 bars the- defencc'Saf as-
sumed risk. The three sections are reproduced below.
"3. Wliere personal injury is caused to a workman—
(a) by reason of the omission of the employer to maintain in'.good-
and safe condition any way, works, machinery or plant connect-
ed with or used irv his trade or business, or by reason of any
like omission on the part of any person in the service of the
employer With the duty of seeing that such way, works, raacliinery
or plant are in good and safe condition: or
WORKMEN'S COMPENSATION 699

(b) by reason of tJie negligence oi any person in the service of the

employer -A-ho has any superintendence entrusted to him, whilst
in the exercise^ of sucli superintendence; or
(c) by reason of the negligence of any pefbon in the service of the
employer to whose orders or directions the workman at the time
of the injury was bound to conform and did conform where the
injury resulted from his having so conformed; or
(d) by reason of tlie act or omission of any person in the service of
the employer done or made (1) in the normal performance of
fhe duties of that person; or (ii) in obedience to any rule or bye-
law of the employer; or (iii) in obedience to particular instruc-
tions given by any other person to whom the empl6yer has de-
legated authority in that behalf;
a suit for damages in respect of the injury ihstituted by the workman or
by any person entitled in case of his death shall not fail by reason only
of the fact that the workman was at ilie time of the injury a workman of,
or in the service of, or engaged in the work of, the employer.
3A, Any provision contained in a contract of service or apprentice-
ship, or in an agreement collateial thereto, shall be void in so far as it
would have the effect of excluding or limiting any liability of die em-
ployer in respect of personal injuries caused to the person employed or
apprenticed by the negligence of persons in common employment with
him,
4. In any such suit for damages, the workman shall not be deemed
to have undertaken ^ n y lisk attaching to the employment unless the em-
ployer proves diat the risk was fully explained to and undertook by tlie
workman and diat die workman voluntarily undertook the same.

Nattire and Scope of the Act

The Workmen's Compensation Act is the first mea§ur,e of social
security introduced in this coimtry on an all-India basis. T h e Act is in-
tended to promote the public v/elfaie, but it does not concern itself with
measures of preventive nature. This is left to die Factories Act. T h e
underlying principle, as said ibove, is tliat compensation is not a remedy
for negligence on the part of die employer, but it is rather in the n;iture
of insurance of the workman against certain risks of accident. T h e Act
is so drafted that under it men without any expert legal knowledge, die
employer and his workmen, will be able to decide for themselves whetner
in any particular compensation is due and if so, what that compensation
amounts to.

DEFINITIONS
Section 2 ^ays down that in this Act, unless fnere is anything repug-
nant in the subject or context:—
1. Dependant means any of the following relatives of a deceased
workman, namely:
(i) a widow, a minor legitimate son, unmarried legitimate daughter
or a widowed mother; and
700 MLRCANTILE LAW
(ii) if wholly dependent on the earnings of the -vvoikman at the
time of his death, a son or a daughter who has attained the age
of 18 years and who is infirm;
(iii) if wholly or in part dependent on the earnings of the workman
at the time of his death, a widower, a parent other than a
widowed mother, a minor illegitimate son, an immarried illegi-
timate daughter, a daughter legitimate or illegitimate if married
and a minor, or if widowed and a minor, a minor brother, an
unmarried sister or a widowed sister if a minor, a widowed
daughter-in-law, a minor child ol a pre-deceased son, a minor
child of a predeceased daughter where no parent of the child
is alive, or, where no parent of- the worl^man i? alive, a paterna"
grandparent. '
2. Minor means a person,who has not attained the age of 18 years.
3. Partial disablement means, wheie the disablement is of a tempo-
ral y nature such disablement as reduces the earning capacity ot a work-
man in any employment in which he was engaged at the time of the
accident resulting in the disablement, and where the disablement is. of a
permanent nature, such disablement as reduces his earning capacity in
every employment which he was capable of undertaking at that time; pro-
vided that every injury specified in Part II ot Table II (p. 655) shall be
deemed to result in permanent partial disablement.
A distinction is made in the definitions between partial temporal)
disablement and partial permanent disablement. By disableinent is
meant a loss or recltiction of earning power of "incapacity foi; work", and
includes inability to get work if that be the result of the accidental in-
jury So, where .the loss or diminution of earning capacity is caused in
I elation to the employment in which he was engaged at the time of the
accident, there is a partial temporary disablement. Where such loss or
reduction in earning capacity is caused in relation to every kind of em-
ployment which he v/as capable of doing at the time of the accident there
is partial permanent disablement. IE the injury happens to be one from
amongst those specified in Table II (p. 655), the disablement will be par-
tial permanent
4. Total disablement means such disablement, whether of a tempo-
rary or permanent nature, as incapacitates a workman tor all work which
he was capable of performing at the time of the accident resulting in such
disablement provided that permanent total disablement shall be deemed
to result from Part II of every injury specified in Part I of Table II
(p. 655) or from any combination of injuries specified in Part II of Table
II where the aggregate percentage of the loss of earning capacity, as
specified in Part II of ihat Table against those i;ijuries, amounts to 100%
or more, In order to constitute total disablement, it must be of such a
character that the peison concerned is unable to do any work and not
merely the work which he was performing at the time of the accident
(General Manager, G.I.P. Rly. v. Shanker, 1950 Nag. 201).
i\l.so, if, after a partial permanent disablement, a workman becomes
physically fit to resume his former employment and earn his former wage.
WORKMEN'S COMPENSATION 701
but fails to secure a job because of such a disablement, he will be deemed
to Be totally disabled and will get compensation on the basis of total dis-
ablement, A miner was permanently blinded in die right eye as a result
of an accident, but was physically fit to do his foimer job. In spite of all
his efforts he failed to secure a job either as a miner or a quarry man.
He was awarded compensation on the basis of total disablement ITonnoch
V. Brownieside "Coal Co. Ltd. (1929) A.C. o42].
5. Wages mclude any privilege or benefit which is capable of-being
estimated in money, other tiian a travelling allowance or the value of amy
travelling concession or a contribution paid by the employer of a work-
man towards any person or provident fund or a sum paid to a workman
to cover any special expenses entailed on him by the nature of his em-
ployment.
The wages or earnings of a workman are whatever he receives fiom
his employer in return for his services which include not only actual cash
but also money's worth. In computing wages it ivill be necessary to esti-
mate the value of any concessions in such matters as house-rent, food or
clotliing given by the employer. It will include all those sources of extra
income which are recognised by the custom of the trade or the usage and
practice of the particular employment. Thus, "tips'] -may be included if
they were received by the workman with the knowledge of the employer.
Dearness allowance and profit sharing bonus are also included- in wages
(Chitru Tanti v. Tata Co., 1946 Pat. 437; Godavri Sugar Mills Ltd. v.
Shakuntala, 1948 Bom. 154).
6. Workman means any person (other than a person whose employ-
ment is of a casual nature AND who is employed otherwise than for the
purposes of the employer's trade or business) who is—
(i) a railway" servant as defined in Section 3 of the Indian Railways
Act, 1890 (IX of 1890), i.e., persons who are employed by tlie
railway administration in .connection with the service of a rail-
way, not permanently employed in any administrative, district
or sub-divisional office of a railway and not employed in any
such capacity as is specified in Scliedule II, or
(ii) employed on monthly wages not exceeding Rs. 500, in any such
capacity as is specified in Schedule II,
whether the contract of employment was made before or after tlie passing
of this Act and whether such contract is expressed or implied, oral or in
writing; but does not include any person working in the capacity of a
member of naval, military or air force; and any reference to a workman
who has been injured shall, where the workman is dead, include a refer-
ence to his dependants or any of them.
The expression "monthly wages not exceeding Rs. 500" means that
the employment must be at such rate of wages as on a monthly basis
would not amount to more than Rs. 500. This, only fixes the financial
tipper limit to means of finding the monthly wages. It woyld not matter
if the workman is paid daily, weekly, monthly or even yearly. Thus, a
workman ernployed on 50 P. a day is employed on mondily wages not ex-
ceeding Rs. 500 (Bachia Mistri v. Shanti, 1946 All. 473).
Schedule II further elaborates the above definition. It does not limit
 702 MERCANTILE LAW
the scope of the definition of "workman", but merely illustrates it by say-
ing that the following persons would fall within the meaning of tlie term
' workman, that is to say, any person who is—
(i) employed, otherwise than in a clerical capacity or on a raihvay,
in connection witli the operation or maintenance of a lift or
vehicle propelled by steam or other mechanical power or by
electricity or in connection witli the loading or unloading of any
such vehicle; or
(ii) employed otherwise than in a clerical capacity in any preinises
wherein, or in the precincts whereof, manufacturing process, as
defined in clause (k) of Section 2 of the Factories Act, 1948; or
(iii) employed for the purpose of making, altering, repairing, orna-
menting, finishing or otherwise adapting for use, transport or sale
any article or part of an article in any premises wherein or with-
in the precincts whereof, on any one day of the preceding fvyelve
months, 20 or more persons have been so employed;
For the purposes of this clause, persons employed outside such pre-
mises or precincts but in any wo'k incidental to, or connected
with, the work relating to making, altering, repairing, orna-
menting, finishing or otherwise adopting for use,' transport or,
sale any article or part of an art'cle shall be deemed to be em-
ployed within such premises or precincts; or
(fv) etnployed in the manufactuie or handling of explosives in con-
nection with the employer's trade or business; or
(v) employed in a mine as defined in clause (j) of Section 2 otr the
Mines Act, 1952, in any minrng operation, or any kind of work,
other than clerical work incidental to or connected with any
mining operation or witli the mineral obtained, or in any kind
of work whatsoever below ground; or
(vi) employed as the master or as a seaman of (a) any ship which is
propelled wholly or in part by steam or other mechanical power
or by electricity or which is towed or intended to be towed by a
ship so propelled, or (b) any ship not included in sub-clause (a)
of 25 ,tons net tonnage or over; or (c) any sea-going ship not in-
cluded '"n (a) or (b'j; or
(vji) employed for the puJpose of (a) loading, unloading, fuelling,
construction, repairing, demolishing, cleaning or painting any
sliip of which he is not the master or a member of the crew, oi
in the handling or transport within the limits of any part sub
ject to the Indian Ports Act, 1908, goods which have been dis
charged from or aie to be loaded into any vessel; or (b) warping
( a ship through tlie lock; or (c) mooring and unmooring ships at
harbour wall berths or in pier; or (d) removing or replacing dry
dock caissons when vessels are entering or leaving dry docks; or
(e) the docking or undocking of any vessels during an emergency;
or (f) preparing splicing coir springs and check wires, painting
-depth marks on lock-sides, removing or replacing fenders when-
ever necessary, landing or gangways, maintaining life-buoys up to
standard or any other maintenance work of a like nature; or (g)
any work on jolly-boats for bringing a ship's line to the whaif;
or
(viii) employed in the construction, repair, or demolition of (a) any
building which is designed to be or is or has been more than one
WORKMEN'S COMPENSATION 703

storey in height above the ground or 12 feet or more from the

ground level to the apex of the roof; or (b)aTiy dam or embank-
ment whicli is 12 feet or more in height from its lowest to its
highest point, or (c) any road, bridge, or tunnel, or (d) any wharf,
quay, seawell, or marine work including any moorings of ships; or
(ix) employed-in setting up, repairing, maintaining or taking down
any telegraph or telephone line or post or any overhead electric
line or cable or post or standard-or'fittings and fixtures for the
same; or
(x) employed, otherwibe than m a clerical capacity, in the construc-
tion, working, repair or demolition of any aerial ropeway, canal,
pipeline, sewer; or
(xi) employed in the service of any fire brigade; or
(xii) employed upon a railway as defined in clause (4) of Section 3,
and sub-section (1) of Section 148 of Indian Railways Act, 1890,
either directly or through a sub-contractor, by a person fulfilling
a contract with-^the railway administration;
(xiii) employed as an inspector, mail guard, sorter or van peon in the
Railway Mail Service, or as a telegraphist or as a postal or rail-
way signaller, or employed in any occupation ordinarily inv^olv-
ing outdoor work in the Indian Posts and Telegraphs Depart-
ment; or
(xiv) employed, otherwise than in a clerical capacity, in connection
with operations for winning natural petroleum or natural gas;
or
(xv) employed in any occupation involving blasting operations; or
(xvi) employed in the making of any excavation in which on any one
day of the preceding twelve months more than 25 persons have
been employed or explosives have been used, or whose depth,
from its highest to its lowest point exceeds 12 feet; or
(xvii) employed in the operation of any ferry boats capable of canning
more than 10 persons; or
(xviii) employed, otherwise than in a clerical capacity, on any estate
which is maintained for the purpose of growing cardamom,
cinchona, coffee, rubber or tea and on which on any one day in
the preceding twelve montlis 25.^r more persons have been so
employed; or
(xix) employed, otherwise than in a clerical capacity, in the generat-
ing, transforming, or supplying of elefctrical energy or in the
"generating or supplying of gas; or
(xx) employed in a'liglitliouse as defined in clause (d) of Section 2 of
the Indian Lighthouse Act, 1927; or
(xxi) employing in producing cinematograph pictures intended for
public exliibition or in exhibiting such pictures; or
(xxit) employed in the training, keeping, or working of elephants or
wild animals; or
Cxxiii) employed in tlie tapping of palm-trees or the felling or logging
oE trees, or the transport of timber by inland waters, or the con-
trol or extinguishing of forest hres; or
(xxiv) employed in operations for the catching or hunting of elephants
or other wild animals; or
(xxv) employed as a diver- or
704 MERCANTILE LAW
(xKvi) employed m the handling or transport of goods in, or within
the precincts of —
(a) any warehouse or other place in which goods are stored, and
in which on any one day of tlie pieceding twelve months 10
or more peisons have been so employed, or
(b) any maiket m which on any one day of the preceding tivehe
months 50 or more persons have been so emplpyed, or
(wvii) emplo)ed in any occupation involving the handling and mani-
pulation of radium or X-ray apparatus, or contact with radio
active substance, or ''
(wviii) employed in or m connection with construction, erection, dis-
mantling, operation or maintenance of an aircraft as defined m
S 2 of the Indian Auciaft Act, 1934, or
(xxix) employed in faiming by tiactors or other contrnances ariven by
steam or other mechanical power or electricity, or
(xxx) employed, otherwise than m a clerical capacity, in the construc-
tion, woiking, lepan or maintenance of a tube well, or
(xxKi) employed in the maintenance, repair or renewal of electric
fittings in any building, or
(\xxii) employed m a circus
Explanation. In this Schedule "the preceding twelve months" relates
m any pauicular case to the twelve months ending with the day on which
the accident in such case occurred
Theie has been a great deal of controversy as to who is an 'employee'
or 'woikman' within the meaning of Workmen's Compensation Act With
out going into contro\ersial points, we may state the cardinal rule that
there must be the relationshio of master and servant A sen ant is a per
son subject to the contiol and command of his master as to the man-
ner in which he shall do his work, and there is a contract of employment
between the two Therefore, an independent contiactoi is not a worl
man, even where his remuneration is based upon the amount of woik/
done But a casual worker, employed for the purpose of the trade or bus:-
licss of the employer, is a workman

WORKMEN'S COMPENSATION
Employer's Liability
Section 3 provides that if personal injury is caused to a workman by
accident arising out of AND in the course of his employment, his em-
ployer shall be liable to j^ay compensation Besides bodily injury, the
Section provides for employei's liability to pay compensation to an em
ployee of his if the employee contracts any of the following occupational
diseases.—
Anthrax, compressed air illness oi its sequelae, lead poisoning or its
sequelae, poisoning by lead tetia ethyl, poisoning by nitious fumes, phos
phorus poisoning oi its sequelae, mercuiy poisoning or its sequeleae,
Doisoning by benzene anpl its homologues or its sequelae, chiome ulceiation
and Its sequelae, arsenical poisoning or its sequelae, pathological manifes
tations due to ladium or othei radioactive substances or Xrays, primary
epitbehomatous cancer of the skin, poisoning by haligenated hydiocarbons
 \VORKMEN'S COMPENSATION 705

of the aliphatic series; poisoning by carbon diiulphide or its sequelae; oc-

cupational cataract due to infra-red radiations; telegraphists' cramp; silicosis;
coalminer"s pneumoconiosis; asbestosis; and begassosis; poisoning by man-
ganese or a compound of manganese, or its sequelae. For the purpose of
the Act contracting of these diseases is deemed to tie an injury by accident
aiising out of and in the course of employment.
We have seen above that the Workmen's Compensation Act has
abolished the Common Law doctrines of negligence, contributory negli-
gence, assumption of lisk and common employment. The employee is de-
clared to be entitled to the benefits of the Statute regardless of negligence,
actual or imputed, on the part of the employer, and also notwithstanding
the fact that he himself might have been guilty of negligence. Under the
Act, the issue is as to whether the injury was accidental and arose out of
and m the course of his employment. If the injury (1) was accidental AND
(2) arose out of and in the course of his employment, he would be entitled
to get compensation, otherwise not.

Meaning of Accident'
The word accident is used in the Act in the popular and ordinary
sense as denoting an unlooked-for mishap or an untoward event which is
not expected or designed. The word is employed in contradistinction to
the expression ''wilful misconduct" or "wilful disobedience". Therefore,
an "injury by accident" includes any injury not expected or designed by
the injured workman himself, irrespective of whether or not it was brought
about by the wilful act of someone else. The Statute contemplates in-
juries not expected or designed by the workman himself. It should be
noted that the language of the Act is not "personal injury by an accident"
but "personal injury by accident". This means "personal injury not by
design, but accident, by some mishap unforeseen and unexpected: acci-
dental personal injury".

Arising out of and in the Coiurse of the Employment

Probably, no other expression has received so much judicial consider-
ation as the phrase "arising out of and in the coiurse of the employment".
Several Judges have, with more or less success, offered explanations. A
few of the explanations by eminent Judges are stated here to give an idea
of the meaning of the phrase. Before, however, discussing the meaning
of the expression it may be emphasized that the injury must not only
arise "in the course of" but also "out of" the employment. Proof of the
one without the other will not make the employer liable to pay compen-
sation. While an accident arising out of an employment almost neces-
sarily occurs in the course of it, the converse does not follow. An-injury
which occurs in the course of the employment will ordinarily arise/out of
the employment; but not necessarily so. To bring tlie case within the
Compensation Act the employee must show that he was at the time of the
injury engaged in the employer's business, or in furthering that business,
Tind was not doing something for his own benefit or accommodation. As
to whether an accident arose out of his employment or not would depend
on the following test laid down by Lord Summer in , Lancashire and
Yorkshire Rly. Co. v. Highley (1917) A.C. 352. The test is: Was it part
of the injured person's employment to hazard, to suffer, or to do that v/hich
706 MERCANTILE LAW
caused his injury? If yes, the accident arose out of his employment. If
no, it did not, because what was not part of the employment to hazard,
to suffer, or to do cannot well be tlie cause of an accident arising out of
the eijiployment. "The decision," says Lord Atkinson, "must turn " on
whether the workman was, when the accident which injured him occurred,
in the course of performing some duty arising out of his contract of ser-
vice which he owed to his employer." (See also Tobacco Mfrs. v. Stewart,
1950 Cal. 164.) In a recent English case of unusual character the • same
point was emphasised.' Mrs. S. sued as tlie widow of S, an employee of
the Coal Board, who was killed in a collision with T, another employee
of the Board. T had finished his day's work and was bicycling across the
Board's premises to collect his wages at the Board's pay office. He made a
detour across a bus park on those premises and when riding between two
buses knocked down the deceased, who died from the injuries he ilien re-
ceived. Held, the Coal Board was liable, because when the' employee was
actually on his employer's premises going to the place which the employer
had said was the place to which he was required to come in order to
draw his wages, it would be a very unreal and strange state of affairs if he
was no longer in the course of his employment [Mrs. Staton v. National
Coal Board (1957) 2 All. E.R. 667].
A railway employee was ordered to travel to a certain station and re-
pair a watermain. After finishing his work he was hurrying across the
platform to catch his train, when he slipped and died as a result of the
fall. Held, the injuries arose out of and in the course of the employ-
ment. Also, if a man is engaged in doing work, and as part of that work
and in the course of it does something which he might do outside, but
which, nonetheless, happens in the coiu'se of and arising out of his work,
and it injures him or causes his death, the accident has arisen out of and
in the course of employment. A wqrkman was engaged in the dock in
loading and discharging cargo from ships. He left' his home for work at
5 a.m. in a perfect state of health to all appearances. At 6 a.m. he began
work of loading china clay. At 9 a.m. after taking his breakfast he was!
lifting his hand above his head to fasten a hook to a bag for dragging it
when he fell down and died. He had heart disease, but there was nothing
to show that without die work this man was engaged on he would have
died of this heart disease. The case fell within the Act (Falmouth Doclt
and Engineering Co. Ltd. v. Treloar [1933] A.C. 481). Again, if a work-
man does, in a negligent way, an act which is within the scope of his em-
ployment and sustains injuries, he is entitled to compensation. But if ,he
does an act which, from its nature, is .outside the scope of his employment
altogether, he takes upon himself an added risk and is not entitled to
compensation for injuries sustained. The deceased was a workman in the
employ of the defendant railway company. He was sent on an errand
from Bombay to Ka-lyan, and from Kalyan back to Bombay. On his way
back he v/as travelling by the defendant company's electric train, and stood
•in the open doorway. The train, going on a bridge received a jerk, and,
as a result of that he fell down on the lines and was killed. The com-*
pany pleaded, among other things, negligence and disobedience on the
part of the deceased, as, according to them, he had ignored the warning
notice which stated "Don't stana near the door". The Court held other-
•vii'ic and awarded compensation, on the grounds (a) that the notice was
WORKMEN'S COMPENSATION 707
for securing safety of passengers in general, and not for that of work-
men, (b) that the accident was in tlie course of and arose out of the em-
ployment of the deceased and he did not take greater risk tlian an ordinary
traveller would do while travelling on one of these electric trains (G.I.P.
RIy. V. KashiDath Cbimnaji, 1928 Bom. 1).
On the other hand, where a boy employed in a boot-making business
took home contrary to the orders of authorities a pair of boots for repair-
ing them and thus to improve his own skill and while doing the repairs
at home, he injured an eye with an awl, and it had to be removed, it was-
held tliai the injury did not arise out of and in the course of employment
(Borley v. Ockenden [1923] 2 K.B. 825). The applicant who was a piecer
in a cotton mill, went out of his work and interfered with tin rollers while
in motion and his dhoti having been caught he put out his hand to pull
it and got his hand crushed. It was held that he was not entitled to
compeniation (Gouri Kinkar Bhakat v. Radha Kishan Cotton Mills, Cal.
220). T o conclude, it may I)e stated that an accident arises out of and
in tlie course of employment when a casual connection fxists between the
employment and the accident.
In Saurashtra Salt Affg. Co. v. Bai Valu Raja, 1958 SC 881, the
Supreme Court has laid down a rule of law relating to the theory of
national extension, i.e., the liability or otherwise of the employer for in-
jury to his workman away from the works. It was observed in this case
that "as a rule, the employment of a workman does not commence until
he has reached the place of employment and does not continue when he
has left the place of employment, the journey to and from the place of em-
ployment being excluded. It is now well-settled, however, that this is
subject to the theory of national extension of the employer's premises so
as to include an area which the workman passes and repasses in going
to and in leaving the actual place of work. There may be some reason-
able extension in both time and place and a workman may be regarded
as in the course of his employment dven though he had not reached or had
left his employer's premises. The facts and circumstances of each case
will have to be examined very carefully in order to determine whether
the accident arose out and in the course of the employment of a work-
tnan, keeping in view at all times this theory of national extension "
In this case, R was employed as a workman in the salt works. While
returning home after finishing his work he, along with other workers, had
to go by a public path, then through a sandy area open to the public and
filially acioss a creek through a ferry boat. R, while crossing the creek in
a public ferry boat, which capsized due to bad weather, was drowned. On
a claim for compensation, it was held, on the facts of the case, that the
accident could not be said to have arisen out of and in the course of em-
ployment while crossing tiie creek inasmuch as the theory of national ex-
tension could not extend to the point where the boat capsized. It was
.said that "when a workman is on a public road or a public place or on a
public transport he is there as any other member of the public and is not
there in the course of his employment unless the very nature of his em-
ployment makes it necessary for him to be there. A workman is not in
the course of his employment from the moment he leaves his home and is
on his way to his work. He certainly is in die course of his employment
708 MERCANTILE LAW
if he reaches the place of work or a point or an area which comes wiiliin
the theory of national extension, outside of which the employer is not
liable to pay compensation for any accident happening to him."
Employe not Liable
The employer shall not be liable to pay compensation:
(a) if the incapacity or disablement does not last for more than
three days; or
(b) if the injury, not resulting in death, is caused by an accident
which is directly attributable to—
(i) the workman having been at the time of the accident under
the influence of drink or drugs, or
(ii) the wilful disobedience of the workman to an order expressly
given, or to a rule expressly framed for the purpose of secur-
ing the safety of workmen; or
(iii) the wilful removal or disregard by the workman of any safety
guard or other device whjch he knew to have been provided
for the purpose of securing the saiety oi workmen; or
(c) if the accident causing the injury to or deatlr of a workman did
not arise botli out of and in the course of Kis employment; or
(d) if the workman has instituted in a Civil Court a suit for damages
in respect of the injury against the employer or any other
person.
A disablement lasting for a period of 3 days or less is considered
trivial and is excluded to check workers from staying away for a day or so
at intervals and also claiming compensation on account of minor injuries,
Where the injury is directly attributable to the influence of drink or
drugs, the employer is saved from liability. This is because the workman
by his own drunkenness is deemed to add a peril to his employment and
the effective cause of the accident is said to be his state of drunkenness.
He is, therefore, deemed to be the cause of the injury.
Wilful disobedience is not negligence, contributory negligence or care-
lessness, "Wilful" imports that disobedience or misconduct is deliberate
and intentional and not a thoughtless act on the spur of the moment.
Even a reckless or a rash act does not save the employer from liability.
Again, wilful disobedience must be of a rule or order, expressly framed
for the safety of workmen by the employer, and the accident must be the
direct result of such wilful disobedience.
Wilful removal or disregard by the workman of any safety appliance
is now an offence under tlie Factories Act, 1948, and the Compensation
Act deprives him of the worker's right to compensation.
Alternative rights of election of remedies are given to the workman
un'der the Act. He cannot recover both damages and compensation. If
he is injured by the personal negligence or wilful act of the employer
or his agent, the worker mky either claim compensation or claim damages "
under his right at Common Law. Therefore, it is proyided daat if in
exercise of his right at Common Law, he files a suit for damages in a
Civil Court, he has made his choice and cannot claim compensation from
his employer under this Act.
WORKMEN'S COMPENSATION 709
Amount of Compensation (S. 4)
The amount o£ compensation payable depends on the nature of tlie
accident and the amount of average monthly wages of the worker con-
cerned. Under the Act compensation is payable for (1) Death; (2) Perma-
nent total disablement; (3) Permanent partial disablement; and (4) Tem-
porary disablement according to Scliedule IV which is Reproduced on page
710 as Table I.
The Workmen's Compensation (Amendment) Act, 1959, has introduc-
ed important changes regarding compensation and has abolished the dis-
tinction between an adult and a minor with respect to the amount of com-
pensation. The result is that every worker, whetlier adult or minor, is
entitled to the same compensation for personal injury or death.

Permanent Partial Disablement

Where • permanent partial disablement results from the injury—
(a) in the case of an injury specified in Table II below, such per-
centage of compensation which would have been payable in case
of permanent total disablement as is specified therein as being
the percentage of the loss of earning capacity caused by that
injury. In other words compensation will be calculated on the
basis of percentage of loss of earning capacity as laid down in
Table II below;
(b) in the case o£ an injury not specified in Table II such percent-
age of the compensation payable in the case of permanent total
disablement as is proportionate to the loss of earning capacity
permanently caused by the injury.
Explanation. Where more injuries tlian one are caused by the same
accident the amount of compensation shall be aggregated but not so in
any case as to exceed the amount which would have been payable if perma-
nent disablement had resulted from the injuries.

Temporary Disablement
Where temporary disablement, whether total or partial, results from
an injury a half monthly payment payable on the sixteenth day (i) from
the date of the disablement, wherte such disablement lasts for a period of
28 days or more, or (ii) after the expiry of a waiting period of 3 days from
the date of the disablement, where such disablement lasts for a period of less
than 28 days, and thereafter half-monthly during the disablement or during
a period of five years, whichever period is shorter:
Provided that—
(a) there shall be deducted from any "lump sum or half-monthly
payments to which the workman is entitled the amount of any
payment or allowance which the workman has received from
the employer or by way of compensation during the period of
disablement prior to the receipt of such lump sum or of tire
first half-monthly payment, as the case may be; and
(b) no half-monthly payment shall in any case exceed the amount,
if any, by which half the amount of monthly wages of the work-
 710 MERCANTILE LAW
man before the accident exceeds half the amount of such wages
which he is earning after the accident.
Any payment or allowance which the workman has received from the
employer towards his medical treatment shall not be "deemed to be a pay-
ment or allowance received by him by way of compensation within tlie
meaning of clause (a) of the proviso.
If the disablement ceases before the date on which any half-monthly
payment falls due, then a sum proportionate to the duration of the dis-
ablement in that half-month sliall be paid to the v;orkman.
By virtue of. the new Section 4A,^ the compensation must be paid as
soon as it falls due. Where the employer accepts only partial liability, he
must make a provisional payment to the extent of the liability he accepts,
and the workman will be entitled to make any further claim. Where an
employer is in default in paying the compensation due under this Act
within one month from tlie date it fell due, the Commissioner may direct
the payment of the compenration plus simple interest at the rate of 6
per cent per annum, together with a further sum not exceeding 50 per
cent of such amount as a penalty.
TABLE ! •
Showing compensation payable in certain cases
Monthly Amount of compensation for
wages of the Half-monthly payment as
vjorkjnan Permanenl total compensation for
injured Denthf disablementf temporary disablement
2 3 4
1
More But not
than more
than
Es. Rs. Rfl.' Ba. Ra. P.
0 10 i.roo 1,400 Half his monthly wages
10 13 1,100 1,540 -do-
13 18 1,200 1.6*0 6 SO
18 21 1,26') !,7R4 7 00
iil 24 1.440 2,016 8 60
24 27 l,fl-20 s.sea 8 50
27 30 J,800 2;520 9/ SO
SO 35 2,100 3,940 9 SO
35 40 2,400 !!,360 30 00
40 45 2,700 3.780 13 00
45 60 3,000 4.200 13 00
3) 60 3,600 5,040 18 50
CO 70 4,2(0 5,880 IS 50
70 80 4,800 6,720 20 00
80 100 8,000 8,401 21 00
100 160 7,000 9,8'~0 37 50
150 200 7,ono 9,800 52 50
200 300 8,oro n,;oo 60 CO
300 iQO g.f'oo 12,fO0 73 00
400 10,000 14.000 S7 50

•Substituted by the 196 2 Act. '

•j-For adult as well as t [le minor as per ! 959 Act.

1. Inserted by the 1959 Act.

WORKMEN'S COMPENSATION 711
TABLE m
[See S. 2 (1) and 4]
PART I
List of injuries deemed to result in permanent total disablement

Percentage
Description of Injvry of loss of
earning
capacity

Loss of both hands or amputation a t higher aitoa 103

Loss of a hand and a foot 100
Double amputation through leg or thigh, or amputation
through leg or thigh on one side and loss of other foot 100
Loss of sight to such an extent aa to render t h e claimant
unable to perform any work for which eyesight is essential 100
Very severe facial disfigurement 100
Absolute deafness 100
PART 11
Lie.1 of injuries aeemed to result in permat'ent partial disablement
Amputation Oases—Upper limbs (either arm)
Amputation through shoulder ]ovat 90
Amputatiot} below shoulder with gtump less then 8 " from
tip of acromion 80
Amputation from 8'' from tip of acromion to less thanr W
below tip of olecranon 70
Loss of a h a n d or of the t h u m b and four fingers of one hand
or amputation from iY below tip of olecranon ••a 60
Loss of t h u m b 30
Loss of t h u m b and its metacarpal bone *.. 40
Loss of four fingers of one hand •.. 50
Loss of three fingers of one h a n d • •• 30
Loss of two fingers of one h a n d ... 20
Loss of terminal phalanx of t h u m b ... 2J
Amputation Cases—lower limbs
Amputadon of both feet resulting in end bearing stumps ... 90
Amputation through both feet proximal to the metatarso-
phalangeal joint ... 80
Loss of all toes of both feet through the metatarsophalangeal
joint 40
Loss of all toes of both feet proximal to t h e proximal inter- .
phala'ngeal joint ... 3D
Loss of all toes of both feet distal to the proximal to inter-
phalangeal joint ' ... ^0
Amputation a t hip 90
Amputation below hip with s t u m p n o t exceeding 5 " in
length measured from tip of great trenohanter • • 80
Amputation below hip wifh s t u m p exoesflin? 5 " in length
measured from tip of great trenohanter b u t n o t beyond
middle thigh 70
Amputation below middle thigh to 3J-" below knee •• 60
Amputation below knee with s t u m p esceeding 3J^" b u t not
exceeding 5" ., SO
Amputation below knee with stump exee'edins fl" .. iO
Amputation of one foot resulting in end-bearing 30
Amputation of one foot proximal to the metatarso-phaUn- ••
geal j o i n t ' ,^ • 30
1. Substituted by 1959 Act for the original schedule.
 712 MERCANTILE LAW

Percentage
Description of Ivjury of las'! of
earning
' apacity

Loss of all toes of one foot through the metatarso-phalangeal

joint 20
Other Injuries
-Loss of one eye, without complications, the other being
normal,
Loss ef vision of one eye, without complications or disfigure- 40
m e n t of eye-ball, t h e other being normal
30
Loss of—

A.—Fingers of right or left hand

Index Finger
Whole ;4.
Two phalanges 11
One phalanx 9
Guillotine a m p u t a t i o n of tip without loss of bone'

Middle Finger
Whole 12
Two phalanges 0
One phalanx 7
Guillotine amputation of tip without loss of bone 4
Ring or Little Finger
Whole,
Two phalanges
One phalanx
Guillotine a m p u t a t i o n of tip without loss of bone

B.—Toes ol right or left foot

Great toe
Through metatarso-phalangeal joint 14
. P a r t , with some loss of bone 3
Any other toe
Through metatarso-phalangeal joint
P a r t , with some loss of bone

Two loee of one foot, excluding great toe

Through metatarso-phalangeal joint
P a r t , with some loss of bone

Three toes of one foot, excluding great toe

Through metatareo-phalangeal joint
P a r t , with some loss of bone

Four toes of one foot, excluding great toe

Through metatarso-phalangeal joint
P a r t , with some loss of bone

N o t e . C o m p l e t e a n d p e r m a n e n t loss of the use of any l i m b o r m e m -

b e r referred to in this T a b l e shall be d e e m e d to be the e q u i v a l e n t of t h e
ioss ot that limb o r m e m b e r .
 WORKMEN'S COMPENSATION 713
Calculation of Monthly Wages (S. 5)
Tlie amount payable to the injured employee is to be deteimined from
the amount of his average monthly wages. What constitutes such wages
is a question of fact that requiies consideration to be given to numerous
circumstances: such as absence from work, duration and continuity ot em-
ployment, remuneration in addition to regular wages, and the existence
of concurrent employments. Specihc methods for ascertaining such average
monthly wages are prescribed in Section 5, as follows.
The expression "monthly wages" means the amount ot wages deemed
to be payable for a month's service (whether the wages are payable by the
month or by whatever other period or at piece rates), and are calculated
as follows:—
"(a) where the workman has, during a continuous period of not less
than twelve months immediately preceding the accident, been in
the service of the employer who is liable to pay compensation,
the monthly wages of the workman shall be one-twelfth of the
total wages which have fallen due for payment to him by the
employer in the last twelve months of that period;
(b) where the whole of the continuous period of service immediate-
ly preceding the accident during which the workman was in the
service of the employer who is liable to pay the compensation was
less than one month, the monthly wages of the workman shall
be deemed to be the average monthly amount which, during the
twelve months immediately preceding the accident, was being
earned by a workman employed on the same work by the same
employer, or, if there was no workman so employed, by a work-
man employed on similar work in the same locality;
(c) in other cases, the monthly wages shall be 30 times the total wages
earned in respect of the last continuous period of service im-
mediately preceding the accident from the employer who is liable
to pay compensation, divided by the number of days comprising
such period.
Explanation. A period of service shall be deemed to be continuous
which has not been interrupted by a period of absence from work exceed-
ing 14 days.

Comjjutation of Half-monthly Payment (S. 7)

Any right to receive half-monthly payments may, by agreement bet-
ween the parties or if the parties cannot agree and the payments have
been continued for not less than six months, on the application of either
party to the Commissioner be redeemed by the payment of a lump sum
of such an amount as may be agreed to by the parties or determined by
the Comtaissioner, as the case may be.
T h e Commissioner, on the application either of the employer or of
the workman accompanied by the certificate of a qualified medical practi-
tioner tliat there has been a change in the condition of the workman, may
review any half-monthly payment agreed to by the parties or fixed by
 714 MERCANTILE LAW
rhe Commissioner. On such review the half-monthly payment may be
continued, increased, decreased, or ended, or if the accident is found to
ha\e resulted in permanent disablement, be converted to the lump sum
to wliich the workman is entitled less any amount which he has already
recei\cd by way of half-montlily payments (S. 6).

Distribution of Compensation (S. 8)

IV'here an adult male worker has been totally or partially disabled by
an injury, the employer may either pay the compensation to the, worker
or deposit it with the Commissioner, who will then pay to the worker.
•Where the compensation is payable—
(a) in respect of death of a workman, or
(b) in lump sum to a woman or a person under legal disability, it
must be deposited witli the Commissioner, and not paid" direct-
ly to the dependants of the deceased workman or to a woman
or a person under, legal disability, as the case may be. Provis-
ion, Jiowever, is made for small payments out oi the compensation
amount by the employer to the deceased workman's dependants
as (i) advances not exceeding Rs. 100 in the aggregate, or (ii)
for workman's funeral expenses not exceeding Rs. 50.
On the deposit of the compensation money, the Commissioner shall
distribute it among the dependants of the deceased workman in any pro-
portion as he thinks fit, or may even allot it to any one dependant. If he is
satisfied tliat no dependant exists, the Commissioner shall repay the money
to the employer by whom it was deposited. Where the amount is payable
to a woman or a person under a legal disability, such sum may be invest-
ed or otherwise dealt with for the benefit of such woman or person under
legal disability.
For the purpose of protecting workmen from money-lenders and
others. Section 9 provides that no lump-sum or half-monthly payment pay-
able as compensation shall in any way be capable of being assigned or
charged or be liable to attachment or pass to any person other than the
workman by operation of law, nor shall any claim be set off against the
same.
Notice and Claim (S. 10)
T h e Commissioner sjiall not entertain any claim for compensation
unless a notice of the accident has been given to the employer or someone
on his behalf as soon as practicable after the happening thereof, and un-
less tlie claim is preferred before him (Commissioner) within two years of
the occurrence of the accident or, in the case of death, within two years
from the date of the death: provided that the Commissioner may entertain
the claim if he is satisfied that the failure or delay to give notice or prefer
the claim was due to sufficient cause. The notice must give the name and
address of the person injured and state in ordinary simple language the
•cause of the injury and tlie date on which the accident happened.
As the notice is meant for the benefit of the employer, it will not be
necessary if the accident happened to the knowledge of tlie employer or
 WORKMEN'S COMPENSATION 715

any person responsible to the employer for management, or if he waives

it, or if the delay or failure does not prejudice the employer.

Fatal or Serious Accidents

Section lOA and lOB ^provide that all cases of fatal accidents or
serioi\s bodily injury should be brought to the notice of the Commissioner
within 7 days of the death or the serious bodily injury and the circum-
stances attending the death. Default to give notice is punishable with fine
up to Rs. 500. Where a Commissioner reccix'es information from any
source that a fatal accident has occurred, he may require, by means of a
registered postal notice, the deceased workman's employer to submit, with-
in 30 days of the service of the notice, a statement giving circumstances
attending the death, and indicating whether or not the employer considers
himself liable to deposit compensation. If he admits liability, the em-
ployer must make the deposit within 30 days of the notice, and if he
denies it, he must state the grounds for disclaiming liability. If the em-
ployer disclaims liability, the Commissioner may inform any of the de-
pendants of, the deceased that it is open to them to prefer a claim, and
may give them such other further information as he thinks fit.

Medical Examination (S. 11)

A workman who has given notice of accident must, if the employer
wislies, submit himself for medical examination by a duly qualified medi-
cal man provided and paid for by the employer. If he refuses to do so,
or obitructs the examination, his right to receive compensation or to take
proceedings to recover it are suspended until he complies. T h e exercise
of this right of the employer to ask the workman to submit to medical
examination is not limited to one occasion or to any period of time, so long
as the exercise is not unreasonable. Whilst • receiving half-monthly pay-
r ment of compensation the workman must also submit to medical examin-
ation from time to time at the request of the employer, and if he refuses
or obstructs, the examination such periodical payments may be suspended.
T h e medical man so examining the workman will issue a certificate as to
the workman's condition and fitness for employment, specifying, i£ neces-
sarj', the kind of employment for which he is fit. His right to compensation
shall al.'o be suspended if he voluntarily leaves widiout having been so
examined the vicinity of the place of his employment. If a workman whose
payment of compensation was suspended dies before such medical examin-
ation, the Commissioner may direct the payment to the dependants of the
deceased workman. If an injured workman has refused to be attended
by a qualified medical practitioner whose services have been offered to him
by the employer free of charge or having accepted such offer has deliber-
ately disregarded the instructions of such medical man, then, unless the
workman has been. regularly attended by a medical practitioner, and the
injury has been aggravated thereby, the injury and resulting disablement
shall be deemed to be of the same nature and duration as they might re-
asonably have been expected to be if the workman had been regularly
attended by a qualified medical man whose instructions he had followed,
and compensation i! any shall be payable accordingly.
716 MERCANTILE LAW
Contracting Out (S. 17)
Any contract or agreement whether made before or after the com-
mencement oE this Act, •whereby a workman relinquishes any right of com-
pensation from the employer for personal injury arising out of and in the
course of the employment shall be null and void in so far as it purports
to remove or reduce the liability of any person to pay compensation under
this Act. ,
Section 13 provides that where a third party was responsible for the
accident the employer may recover from that third party any compensation
he has paid to his workman, in addition to any other damages he may be
able to claim.
Where an employer, who has insured his liability for compensation
under the Act, becomes an insolvent, or if the employer being a company
has gone into liquidation, the rights of the employer against the insurers
shall pass t o ' t h e workman; and if the insurers' liability is less than the
liability of the employer to the workman, the workman can prove for the
balance in the insolvency proceedings or liquidation. Any breach of the
contract by the employer shall not operate against the workman, so long
as the premia have been regularly paid (S. 14).

COMMISSIONER
T h e Act is administered on a State basis by the Commissioners for
Workmen's Compensation appointed by the State Governments. In
Madras, West Bengal and Bihar the duties of the Commissioners are being
discharged by Labour Commissioners. The Government of Maharashtra
has appointed one Commissioner of the more important areas and for
other areas it has declared Sub-Judges to be ex-officio Commissioners. In
other States either the District Magistrates or the District and Sessions
Judges discharge the duties of the Commissioners under the Act.
T h e duties of the Commissioner include the settlement of disputed
claims, disposal of compensation in cases where injury results in deatli, or
where deposit is made because the claimant is a woman or a person under
legal disaljility, and the revision of periodical payments.
An appeal shall lie to the High Court from tl-:e orders of a Com-
missioner,
 Chapter XXII

The Indian Trade Unions Act, 1926

(No. XVI of 1926)

Definition
Section 2 (n) defines a Trade Union as any combination, -wliether
temporary or permanent, formed primarily for the purpose of regulating
the relations between workmen and employers or between workmen and
workmen, or between employer or employers, or for imposing restrictive
conditions on the conduct of any trade or business, and includes any
Federation of two or more Trade Unions. It will be noticed that the
terminology of tlie definition is very vague and its scope very wide. Ac-
cording to it, even influential and wealthy associations of employers,' like
the Indian Jute Mills Association, with funds amounting to lakhs of
rupees, can register themselves as Trade Unions, creating thereby a false
impression in the mind of the casual observer. Even merchants' associa-
tions, friendly societies or the combinations, of intellectuals can register
themselves as Trade Unions, and, with different aims arid constitutions,
pass off as Trade Unions. Strictly speaking, the term ^'Trade Union"
should refer pply to workers' organisation, as has been emphasised by
N. M. Joshi in his Trade Union Movement in India, p. 1, "A Trade
Union is essentially an organisation of employees, not of employers, nor
of independent workers."

REGISTRATION
The registration of Trade Unions is optional under the Act, but the
advantages are available only to registered Trade Unions. Any seven or
more persons may subscribe their names to the rules of the Trade Union
and apply to the Registrar appointed by the appropriate Government for
registration of the Trade Union; but before they can be granted a certi-
ficate of registration, they must comply with certain requirements in re-
gard to rules as laid down in Section 6 of the Act (Ss. 3, 4).
An application for registration must be accompanied by a copy of
the rules of the Trade Union and must also give the following particulars:—
(a) the names, occupations and addresses of the members making
the application;
(b) the name of the Trade Union and the address of its Head
Office; and
•'IS ^ MERCANTILE L.-U\^
(c) the titles, names, age, addresses and occupations of the officers
of the Trade Union.
In the case of ri Trade Union in existence for more than a year before
application, a statement of its assets and liaijiliiies must also accompany
the application for registration (S. 5).
The registration will be granted only if at least one-half of tlie total
number of its oHice-bearers are persons actually engaged or emplo>ed in
the industry with which the Union is concerned unless exemption is grant-
ed by the appropriate Co-iernment, and the rules of the Union provide
for the following matters:
1. T h e name of the Trade Union.
2. The whole of the objects for which the Trade Union has been
established.
3. The whole of the purposes for which the general funds of the
Trade Union shall be applicable, all of which purposes shall be purposes
to which such funds are all fully applicable under this Act.
4. The admission of ordinary members who shall be persons actually
engaged or employed in an industry with which the Trade Union is con-
nected, and also the admission of the number of honorary or temporary
members as officers required under Section. 22 to form the executive of the
Trade Union.
5. The maintenance o£ a list of members of the Trade Union and
adequate facilities for the inspection thereof by the officers and members
of the Trade Union.
fi. The payment of a subscription by members o£ the Trade Union
which shall be not less than 25 Paise per month per member.
7. T h e conditions under which any member shall be entitled to anv
benefit assured by the rules and under which any fine or forfeiture may
be imposed on the members.
8. The manner in which the rules shall be amended, varied or res-
cinded.
9. The manner in which the members o£ the executive and tlie offi-
cers of the Trade Union shall be appointed and removed.
10. The safe custody of the funds of the Trade Union, and-annual
audit in such manner as may be prescribed, of 'the accounts thereof, and
adequate facilities for the inspection of the account books by the officeis
and members of the Trade Union.
H. The manner in which the Trade Union mi.) be dissolved (S. 6).
Name
T h e iiame to be adopted and registered must not be similar to that
of any existing Trade Union (S. 7). Any Trade Union may, with the
consent of not less than two-thirds of the total number of its members,
change its name (S. 23). Notice in writing of every change of name, sign-
ed by the Secretary and by seven members of the Trade Union changing ,
its name, shall be sent to the Registrar, who will register the chanee if
TRADE UNIONS 719

the proposed name is neither identical nor resembles with the name of
any existing Trade Union (S. 25).

Certificate o£ Registration
T h e Registrar, on being satisfied that the Trade Union has complied
with all the requirements of the Act in regard to registration, shall regis-
ter the Trade Union (S. 8). On registering the Trade Union, the Regis-
trar shall issue a certificate of registration in the prescribed form which' will
be a conclusive evidence of the fact that the said Trade Union has been
duly registered (S. 9).

Cancellation of Registration
The Registrar of Trade Unions is autliorised to withdraw or cancel
registration of a Trade Union on the application of the Union itself, or
if he is satisfied that a certificate has been obtained by fraud or mistake,
or the Trade Union has ceased to exist or if any Union has wilfully and
^ t e r notice from the Registrar contravened any provision of the Act, or
allowed any rule to continue in force which is inconsistent with any such
provision, or has rescinded any rule which is required by the Act. But
before the cancellation of registration, on grounds other than application
of die Union itself, the Registrar is required to give two months' previous
notice stating grounds for proposed cancellation (S. 10).
Appeal
Any person aggrieved by any refusal of the Registrar to register a
Union, or by cancellation of certificate can prefer an appeal to the High
Court if the head office of the Union is in a Presidency Town, or to such
Court as the appropriate Governments may appoint in other cases. T h e
final appellate authority is the High Court in all cases (S. 11).

Minor Members
Any person who has attained the age of fifteen years may be a member
of a registered Trade Union subject to any rules of the Trade Union to
the contrary, and may, subject as aforesaid, enjoy all the rights of a mem-
ber and execute all instruments and give all acquittances necessary to be
executed or given under the rules. But no person who has not attained
the age of eighteen years shall be an officer of any Trade Union (S. 21).
Officers
Not less than one-h"aIf of the total number of the officers of every
registered Trade Union shall be persons actually <fngaged or employed in
an industry with which ^he Trade Union is connected. The appropriate
Government may, however, by special or general order, exempt any Trade
Union or class of Trade Unions fi'om the application of this rule (S. 22).

Registered Office
All conmaunications and notices to a registered Trade Union may be
addressed to its registered office. Any change in tlie-address of the head
office must be communicated within 14 days of such change to the Regis-
trar, who will record it in the register maintained by him (S. 12).
720 MERCANTILE LAW
Incorporation
E\ery registeicd Trade Union shall be a body coroorate by the name
under whidi it is legistered, and shall have perpetual succession and a com-
mon seal with power to acquire and hold bodi movable and immovable
property and to contract, and shall by the said name sue and be sued
(S. 13). ,

RIGHTS AND PRIVILEGES OE A REGISTERED TRADE UNION

The Act grants immunity to officers and members of a registered Trade

Union against criminal proceedings in respect of any agreements for the
purpose of furthering any legal objects of the Union (S. 17). Immunity
has also been granted from civil suits in respect of any act done in con-
templation or furtherance of a trade dispute on the ground that such act
induces some other persons to break a contract of employment or that it
is an interference with the trade, business or employment of some other
person.
A registered Union cannot be sued in respect of any tortuous acts of
its agents if committed without the knowledge of, or contrary to the ex-
press instructions given by the executive of the Union (S. 18).
An agreement between the members of a registered Trade Union is
not void or voidable merely by reason of the fact tliat any of the objects
of the agreement is in restraint of trade. But this does not apply to an
agreement between members of a Trade Union for the sale of goods, busi-
ness transactions, work, or employment {S. 19).
Minors, who have attained the age of 15 years are eligible to become
members of a Trade Union, unless its rules prohibit their entrance; but
they cannot become officers in any case. T o become an officer of a Trade
Union a person must have attained the age of 18 years (S. 21).

FUNDS OF T H E TRADE UNION

The Act limits the expenditure of general funds of a registered Trade
Union to objects specified in Section 15, namely:—
(a) the payment of salaries, allowances and expenses to officers of
the Trade Union;
(b) the payment of expenses for the administration of the Trade
Union, including audit of the accounts of the general funds of
the Union;
(c) the prosecution or defence of any legal proceedings to whicli the
Union or any member thereof is a party, when such prosecution
or defence is undertaken for the purposes of securing or pro-
tecting any right of the Trade Union as such or any right aris-
ing out of die relations of any member with his employer or
with a person whom the member employs;
(d) the conduct of trade disputes ori behalf of the Trade Union or
any member thereof;
TRADE UNIONS 721

{e) the compensation ol members for loss arising out of trade dis-
putes;
([) allowances to members or their dependants on account of death,
old age, sickness, accidents or unemployment of such members;
(g) the issue of, or the undertaking of liability under policies of
assurance on tlie lives of members, or under policies insuring
members against sickness, accident or unemployment;
(h) the provision of educational, social or religious benefits for
members (including the payment of the expenses of funeral or
religious ceremonies for deceased members) or for the depend-
ants of members;
(i) the upkeep of a periodical published mainly for the purpose of
discussing questions affecting employers or workmen as sut'.j;
(j) the payment, in furtherance of any of the objects on which the
general funds of the Trade Union may be spent, or contribu-
tions to any cause intended to benefit workmen in general: pro-
vided that the expenditure in respect ot such contributions in
any financial year shall not at any time during that year be in
excess of one-fourth of the combined total of the gross income
which has up to that time accrued to the general tunds of tlie
Trade Union during that vear and of the balance at the credit
of those funds at the commencement of the year; and
(k) subject to any condition contained in the notification, any other
object notified by the appropriate Government in tlie Official
Gazette.

SEPARATE FUND FOR POLITICAL PURPOSES

Section 16 provides that a registered Trade Union may constitute a
separate fund, from contributions separately levied for or made to that
fund, from which payments may be made, for the promotion of the civic
and political interests of its members, in furtherance of any of the objects
specified below, namely:—
(a) the payment of any expenses incurred, either directly or in-
directly, by a candidate or prospective candidate for election as
a member of any legislative body constituted under the Constitu-
tion of India, or of any local authority, before, during or after
the election in connection with his candidature or election; or
(b) ilie holding of any meeting or the distribution of any literature
or documents in support of any such candidate or prospective
candidate; or
(c) the maintenance of any peison whp is a member of any legisla-
tive body constituted imder the Constitution of India, or of any
local authority; or
(d) the regisinuion of electors or the selection of a candidate for
any legislative body constituted imder tlie Constitution of India
or for any local authority; or
722 JMERCANTILE LAW

(e) ihc holding of political nicciings of any kind, or the distribution

of political literature or political documents of any kind.
No member shall be compelled to contribute to the fund constituted
tor political, purposes; and a member who docs not contribute to the said,
fund shall not be excluded from any benelits of the Trade Union, or
I)lated in any reSpect either directly or indirectly under any disability or at
any disatlvantage as compared with other members of the 'frade Unioij
(except in relation to the control or management of the said fund) by rea-
son of his not contributing to the said fund and contribution to the said
fund shall not be made a condition for admission to the 'I'rade Union.

A.MALGAMAT10N OF TRADE UiNION.S

Any two or more registered Trade Unions may become amalgamated
togctiiti as one Trade Union with or without dissolution or division of
the fluids of such Trade Unions or cither or any of them; provided that
the votes ol at least one-half of the members of each or every such Trade
Union entitled to vote arc recorded, and that at least CO per cent of die
votes recordetl are in favovir of the proposal. Notice in writing, signed by
the Secretary and by seven members of each and every I r a d e Union <vhich
is party thereto, shall be sent to the licgistrar, and where the head oilicc
of the amalganiafed 'Irade Union is situated in a different State, to the
Registrar of such State. The Registrar of the State in which tlie head
oHice of the amalgamated Trade Union is situated shall, if lie is satisfied
that the provisions of this "Act in respect of amalgamation lia\e been com-
plied with, register the Trade Union and the amalgamation shall have
effect from the date of such registration. An amalgamation of two or
more registered 'f'rade Unions .shall not prejudice any right of any of such
Trade Unions or any right of a creditor of any of them (Ss. 21-20).

BOOKS AND R E I U R N S
The books of account of a registered Trade Union and its list of
members shall be open to inspection by any ofliccr or member of the
Trade Union at such times as may be provided for in the rules. A state-
ment, audited in the prescribed manner, of all receipts and e.vpcnditure
during the (year ending on the 31st day of March shall be sent annually to
the Registrar. Any changes made in the rules of the Trade Union dur-
ing the year and all changes of officers during this period must also accom-
pany this statement. A copy of every alteration made in the rules must
be sent to the Registrar within 15 days of such alteration (S. 28).

PENALTIES
Failure to Submit Returns (S, SI)
(1) If default is made on the part of any registered or recognised Trade
Union in giving any notice or sending any statement, return or other docu-
ment as required by or under•^any provision of this Act, every officer or
other person bound by the rules of the Trade Union to give or send the
same or, if there is no"such officer or person, every member of the evefi.-
tive of the Trade Union, shall be punishable with fine whicli may extend
 TRADE UNIONS 723

to Rs. 5 and, in the case of a continuing default, with an additional fine

*which may extend to Rs. 5 for each week after the first during which the
default continues: provided t i e aggregate fine shall not exceed R.s. 50.
(2) Any person who wilfully makes of causes to be made, any false
entry in, or ^ any omission from the general statement required Fjy Section
28, or in or from any copy of ruks or of alteration'o£ rules sent to the
Registrar under that Section or in or from any return referred to in Sec-
tion 281 shall be punishable with fine which may extend to Rs. 500.
(3) Section ^32 provides that any person who with intent to deceive,
gives to any member of a registered Trade Union or to any person intend-
ing or applying to become a member-of-'such Trade Union any document
purporting to be a copy of the rules of the Trade Union or of any altera-
tions to the same which he knows, or has reason to believe, is not a correct
copy of such rules or alterations as are for the time being in force, or any
person who with the like intent, gives a copy of any rules of an unregis-
~ tered Trade Union to any person on the pretence that such rules are the
rules of a registered Trade Union, shall be punishable with fine which may
extend to Rs. 200.
Section 33 provides that no Court inferior to that of a Presidency
Magistrate or a Magistrate of the first class shall try any offence under this
Act.

DISSOLUTION
(1) When a registered Trade Union is dissolved, notice of the dissolu-
tion signed by seven members and by the Secretary of the Trade Union
shall, within 14 days of the dissolution, be sent to the Registrar, and shall
be registered by him it he is satisfied that the dissolution has been effected
in accordance with the rules oftlie Trade Union, and the dissolution shall
Aave effect from tiie date of such registration.
(2) Where the dissolution of a registered Trade Union has been regis-
tered and the rules of the Union do not provide for the distribution of
funds of the Union on dissolution, the Registrar shall divide the funds
amongst tlie members in such manner as may be prescribed.
 Chapter XXIII

The Payment of Wages Act, 1936

(No. IV of 1936)

Application and Scope (S. I)

The Act applies only 'to the payment of wages to persons receiving
less than Rs. 400 per mensem. It applies to the payment of wages to
persons employed in any factory and to persons employed (otherwise than
in a factory) on any railway by a railway administration or either directly
or through a sub-contractor, by a person fulfilling a contract with a rail-
way administration to coal-mines and plantations, as well as to establish-
ments in which work relating to the construction, development or mainten-
ance of buildings, roads, bridges, canals, or relating to operations connect-
ed with navigation, irrigation or the supply of water, or relating to genera-
tion, transmission and distribution of electricity or any other form of power
is carried on. The'State Governments are, however, authorised to extend
all or any of the provisions of the Act to any industrial establishment.

Pefinitions (S. 2)
For the purpose of this Act—
(a) industrial establishment means any tramway or motor omnibus
service; dock, wharf or jetty, inland vessel mechanically propel-
*led; mine, quarry or oilfield; plantation; workshop or other es-
tablishment in which articles are produced, adapted oi manu-
factured with a view to their use, transport or sale; establish-
ment in which any work relating to (he construction, develop-
ment or maintenance of buildings, roads, bridges or canals, or
relating to ojierations connected with navigation, iirigation or
the supply of water, or relating to the generation, transmission
and distribution of electricity or any other form of power is
being carried on;

(b) wages means all remunerations (whether Ijy way of salary, allow- -'
ances or otiienvisc) expressed in terms of money or capable of
being so expressed which would, if the terms of eni))loyinent.
express or- implied, were fulfilled, be payable to a person, en)-
ployed in respect of his employment or of woik done in such
 PAV^r£NT OF ^VAGES 725

employment, and include—

(a) any remuneration payable under any award or settlement bet-
ween the parties or order of a Court;
(b) any remuneration to which the person employed is entitled in
respect of overtime work or holidays or any leave period;
(c) any additional remuneiation payable under the terms of em-
ployment (whether called a bonus or by any other name);
(d) any sum by reason of the termination of employment of the
person employed is payable under any law, contract or instru-
ment which provides for the payment of such sum, whether with
or without deductions, but does not provide for the time within
which the payment is to be made;
(e) any sum to which the person employed is entitled under any
scheme framed under any law for the time being in force;
but does not include—
(1) any bonus (whether under a scheme of profit sharing or other-
v/jse) which does not form part of the remuneration payable
under terms of employment or which is not payable under any
award or settlement between the parties or order cf a Court;
(2) the value of any house accommodation, or of the supply of light,
water, medical attendance or other amenity or of any service ex-
cluded from the computation of wages by a general or special
order of the State Government;
(3) any contrilpution paid by the employer to any pension or provi-
dent fund, and the interest which may have accrued thereon-,
(4) any travelling allov/ance or the value of any travelling Con-
cession;
(5) any sum paid to the employed person to defray special expenses
entailed on him by the nature of his employment; or
(C) any gratuity payable on the determination of employment in
cases other than those specified in sub-clause (d).
Resjjonsibility for Payment of Wages (S. 3)
The responsibility for payment of wages to workmen is primarily that
of the employer. In the case of factories, the manager; in industrial es-
tablishments, the person responsible to employer for supervision and con-
trol of the establishment; and upon railways, the person nominated by the
railway administration on this behalf for the local area, shall be respon-
sible for such payment. In respect of contractors, the intention of the
Act is that the contractor should be responsible for payment where he
undertakes actual work for the principal employer, and is in charge of
the labour and that the principal employer or his manager shall be res-
ponsible where the contractor merely contracts for the .supply of labour
. to the employer.

^Vage-periods (S. 4)
Every person responsible for the payment of wages must fix w.ige-
periods in respect of which wages shall be payable, and see that no wage-
72G MERCANTILE LAW
period exceeds one month in any case. The penalty for contravention of
this provision is fine extending to Rs. 200.

Time of Jayment of Wages (Ss. 5, 6)

In regard to the time of payment of wages the following rules must
be observed:—
1. In the case of undertakings employing less than one thousand
persons wages must be paid before the expiry of the seventh day, and in
other cases before tlie expiry of tlie tentli day, after tlie last day of the
wage-period in respect of wliich the wages are payable.
2. A discharged worker must be jiaid his wages before the expiry of
the second working day from the day on which his employment is termi-
nated.
3. All payments of wages must be made on a working day (S.- 5).
Penalty for contravention is fine up to Rs. 500. ^
4. All wages must be paid in current coin or currency notes or in
both (S. 6). Penalty for contravention is fine up to Rs. 200.

Deductions which may be made from Wages (S. 7)

It is laid down in this Section that notwithstanding the provisions of
S. 47 (2) of the Indian Railways Act, 1890, the wage? of an employed per-
son shall be paid to him without deduction of any kind except those autho-
rised by or under this Act. Section 47 (2) of the Indian Railways Act
provides for fine or forfeiture of one month's pay for breach of rules made
under that Section. According to Section 7 of the present Act, no such,
deduction can be made in respect of any railway worker whose monthly
wages do not amount to Rs. '400 or more.
The Act permits only the following deductions from wages namely;
(1) fines; (2) lor absence fiom duty; (3)-for damages or loss; (4) for housef
accommodation; (5) for amenities and services; (6) on account of advances
which the employer is compelled to make; (7) on account of payments to
certain provident funds, co-operative societies and premia for life insur-
ance; (8) for impositions-'of punishment under service rules. T h e penalty
for the contravention of any of the provisions of Section 7 is a fine which
- may extend to Rs. 500.^

Fines (S. 8)
The following rujes apply to deductions by way of fines:—
(1) Fines can be imposed only for acts and omissions specified in
notices appioved by the State Government, or the Chief Inspec-
tor of Factories, in the case of factoiies, or the Supervisor in other
cases.
(2) No fine .can be imposed on any employed person unless he ha^
been given an opportunity of showing cause against the fine.

1. Deductions for contribution to National Defence Fund or any De-

fence Savings Scheme can be made if desired by the workman,
PAYAFENT OF USAGES ' 727

(3) No fine cnn be iinjiosed on any enijiloyed person who is iinder

the age of 15 years.
(4) Tlie total anionnt of fine which may l)e imposed in any wage-
period on an employed person must not exceed an amount equal
to half-ananna in the rupee of the wages payalile to him in res-
pect of that wage-period.
(5) TJie fine sliall be deemed to ha^'e been imposed on the day of
the act or omission in respect of which it was imposed and oin-
not be lecovcred from the pcison by instalments or after the
ex])iry of GO days Irom the day on which it was imposed.
(6) All the fines so recovered or realised must be recorded in a pres-
cribed register and must be credited to a fine fund.
(7) The proceeds of the fine fund must be utilised only for such
purposes beneficial to the workers of the factory or the estab-
lishment as are approved by the prescribed autliority. Penalty
for contravention of any of these rules is fine up to Rs. 500.

Deductions for Absence from Duty (S. 9)

Deductions for absence from duty are j^ermitted but the amount of
such deductions cannot exceed the "sum which the person would have
been entitled to if he had worked the same number of days for which the
deduction is made; provided that, subject to any rules made in this behalf
by the State Government, if ten or more employed persons acting in con-
cert absent themselves, without due notice and without reasonable cause,
such deduction from any such person may include such amount not exceed-
ing his wages for 8 days as may by any such terms be due to the employer
in lieu of the due notice. By an amending Act of 1937 employers are
permitted to withhold wages in the case of "stay-in" strikes. Penalty for
contravention is fine up to Rs. 500.

Deductions for Damages or Loss (S. 10)

Deductions for damage to or loss of goods expressly entrusted to the
employed person for custody, or for loss of money for whidi he is required
to account are permitted only where such damage or loss is directly attri-
butable to his neglect or default, and only after he has been given an op-
portunity of showing cause against the deduction. Such deductions are not
to exceed the amount of the damage or loss to the employer and must be
recorded in a prescribed register. Penalty for contravention is 'fine up to
R s . BOO.

Deduction for Sei-vices Rendered (S. II)

Deductions for house accommodation and for amenities and services
rendered by the employer are permitted, but only when an employed per-
son has accepted the house accommodation, amenity or service as term of
employment or otherwise, and shall not exceed an amount equivalent to
their value. Furthennore, the deductions in respect of amenities and ser-
vices can be made subject only to tiie following conditions:
(1) The appioval of the Chief Inspector of Factories shall be ob-
728 MERCANTILE LAW
tained in writing to all compulsory or general deductions from
wages for any amenities or se:vices provided by the employer.
(2) The kind and standaid of sei-vicei and amenities provided shall
be subject to the approval of the Chief Inspector of "Factories.
(3) The maximum deduction shall not exceed half the wages at any
period. ^ ^
Penalty for the contravention of any provisions of this Section is fine
up to Rs. 500. '
The house accommodation, for which deductions are now allowed,
may be supplied by the employer or by Government or by any housing
board set up under law, e.g., under the Subsidised Industrial Housing
Scheme (whether the Government or the board is the employer or not or
any other authority engaged in the business of subsidising house-accommod-
ation.

Deductions for Recovery of Advances (S. 12)

Deductions for recovery of advances or for adjustment of over-pay-
ments of wages can be made only on the following conditions:—
(1) An advance of money made before employment must be re-
covered from the first payment of wages, but advances given for
travelling expenses ca'n in no case be recovered.
(2) Advances of wages not alieady earned are subject to rules made
by State Governments, which are as follows:—
(i) an advance of wages not already earned shall not, without the
previous permission of an Inspector, exceed an amount equi-
valent to the wages earned by the employed person during the
preceding two (Bombay four) calendar months, or if he has
not been employed for that period, twice the wages he is likely
to earn during the two (Bombay four) subsequent calendar
months; ,
(ii) the advance may be recovered in instalments by deductions
from wages spread over not more than twelve (Bombay eigh-
teen) months. No instalment'shall exceed one-third, ^r wheie
the wages of any wage-period are not more than twenty rupees,
one-fourth of the wages for the wage-period in respect of which
the deduction is'made;
(iii) the amounts of all advances sanctioned and the payments
thereof shall be entered in a prescribed register;
(iv) (Bombay only) the rate of interest charged for advances grant-
ed' shall not exceed 6 per cent per annum.
Penalty for contravention is fine up to Rs. 500.

Other Deduction;) Permitted by the Act (S. 13)

The Act also permits the following deductions from the wages of an
employee;
' (1) deductions of income-tax payable by the employed person;
PAYMENT OF WAGES 729
(2) deductions required to be made by order of a Court or other
competent authority;
(3) deductions for contribution to and repayment of ad\ances from
any recognised or approved provident fund;
(4) deductions, made with the written authorisation of the employee
for payment of any premium on his life insurance policy to the
Life Insurance Corporation of India, or for the purchase of
securities of the Government of India or of any State Govern-
ment or for being deposited in any Post Office Savings Bank in
furtherance of any savings scheme of any such Government.
Penalty for contravention is fine up to Rs. 500.
The administration and enforcement of the Act is the responsibility
of the State Inspectors of Factories in the case of factories within their
local limits, and that of the Chief Labour Commissioner (Central) in the
case of persons employed on railways (other than in railway factories).
The Inspector or the Labour Commissioner may, at all reasonable hours,
enter on any premises, and make such examination of register or document
relating to-the calculation and payment of wages, and take on the spot
otherwise such evidence of any person, and exercise such other powers of
inspection, as he may deem necessary for carrying out the purposes of this
Act (S. 14).

Claims for Wrongful Deductions (S. 15)

The State Government may either appoint a Commissioner for Work-
men's Compensation or other Officer with judicial experience (Civil Judge
or Magistrate) to hear and decide all claims arising out of deductions fiom
the wages, and delay in payment of wages. /
Where any wrongful deductions have been made from the wages of a
person, or any payment of wages has been delayed, such person himself,
or any legal practitioner or any official of a-registered trade union author-
ised in writing to "act on his behalf, or any Inspector under this Act, or
any other person acting with the permission or the authority may, within
six months of the date of deduction or the date on which the payment of
wages was due, apply to the authority for a direction. An application
presented after the expiry of six months may be admitted by the authority
for sufficient cause.
On admitting the application, the authority will give an opportunity
to the applicant and the employer or any person responsible for the pay-
ment of wages to be heard, and on being satisfied, direct the employer or
the other person to pay to the claimant the amount wrongfully withheld
plus compensation up to ten times that sum in the case of deduction, and
not exceeding Rs. 10 per head in the case of delay. But the payment of
compensation for delayed wages will not be ordered if the delay was due
to-
(a) bona fide error or bona fide dispute- as to the amount payable to
the employee; or
(b) the occurrence of an emergency or the existence of exceptional
730 MERCANTILE LA^V

circumstances, such that the person responsible for the payment

of the wages was unable, though exercising reasonable diligence,
to make prompt payment; or
(c) the failure of the employed person to apply for or accept pay-
ment.
To safeguard the interests of the workers, the authority may order
conditional attachment of the property of the employei or other person
responsible foi the payhient of wages, pending the disposal of the applica-
tion, unless the employer or other person deposits with the authority an
amount sufficient to satisfy the claim or gives security for the like amount.
The authority may refuse to entertain the application, if after giving
the applicant an opportunity to be hqard, the authority is satisfied that—
(a) (be applicant is not entitled to present an application; or
(b) the delay in payment of wages was excusable, as provided above;
or
(c) the applicant shows no sufficient cause for making a direction
for payment; or
(d) the application is insufficiently stamped oi is otherwise incom-
plete.
If the authority heating the application is satisfied that it was either
malicious or vexatious, the authority may direct the applicant to pay a
penalty not exceeding Rs. 50 to the employer.
An appeal, against an order or direction of tlie ,authority, can be
preferred within 30 days of such order before a court of Small Causes in
a Presidency town, and before the District Court elsewhere.
Section 22 provides that persons coming under the Act shall be limit-
ed to its procedure in respect of the recovery of unpaid wages or wrong-
ful deductions. In consequence, no Court shall entertain any suit for the
recovery of wages or of any deduction from wages, a claim for which
could be jnade under Section 15 of this Act.
The Act piohibits contracting out agreements. Section 23 provides
that any contract _pr agreement, whether made before or after the com-
mencement of this Act, whereby an employed person relinquishes any
right conferred by this Act shall be null and void in so far as it purports
to deprive him of such right.
Section 25 provides "that the person responsible for the payment of
wages to persons employed in a factory shall cause to be displayed in such
factory a notice containing such abstracts of this Act and of the rules
made thereunder in English and in the language of the majority of the
persons employed in the factory, as may be prescribed. Penalty for con-
travention of this Section is fine extending to Rs. 200.
The Act provides penalties for the contravention of its various pro-
visions, but Section 21 lays down that no prosecution can be instituted
unless a successful claim has been made un,der the Act or unless the
authority or the appellate Court consideis a prosecution to be warranted.
 Chapter XXIV

The Industrial Disputes Act, 1947

The Act came into force on April 1, 1947, and extends to the whole
of India: provided that it shall not apply to the State of Jammu and
Kashmir to the extent to which the provisions of the Act relate to indus-
trial disputes concerning workmen employed under the Government of
India.

Definitions (S. 2)
In this Act, unless there is anything repugnant in the subject or con-
text,—
(1) appropriate Government means—
(i) in relation to any industrial dispute concerning any industry carried
on by or under the authority of the Central Government, by
the Railway Administration, or by a railway company operating
a railway or in relation to an industrial dispute concerning 'a
banking or an insurance company, a mine, an oilfield or a major
port, the Central Government, and '
(ii) in relation to any other industrial dispute, the State Go\ em-
men t;
(2) average pay means the average of the wages payable to a work-
man— •
(i) in the case of monthly paid workman, in the three complete
' calendar months,
(ii) in the case of weekly paid workman, in the four complete weeks,
(iii) in the case of daily paid workman, in the twelve full 'working
days, preceding the date on which the average' pay becomes pay-
able if tlie workman had worked for three complete calendar
months or four complete weeks or twelve full working days, as
the case may be and where such calculation cannot be made, the
average pay shall be calculated as tlie average of the wages pay
able to a workman, during tlie period he actually worked;
(3) award means an interim or a final determination of any industrial
dispute or of any question relating thereto by any Labour C'ourf, Indus-
trial Tribunal or National Industrial Tribunal and includes an arbitration
award made under Sec. lOA;
(4) banking company means a banking company a? defined in Sec. 5
732 MERCANTILE LAW
of,the Banking Companies Act, 1949, having blanches or otlicr establish-
ments in more tiian one State, and includes the State Bank of India ami
the Reserve Bank of India;
(5) Board means a Board of Conciliation constituted unde this Act;
(6) Conciliation officer means a conciliation officer, appointed under
this Act; "•
(7) continuous service means uninterrupted service, and includes ser-
vices which may be interrupted merely on account of sickness or authoris-
ed leave or an accident or strike which is not illegal or lock-out, or a
cessatfon of work which is not due to any fault on the part of the work-
man;
(8) Court means a Court of Inquiry constituted under this Act;
(9) employer means—
(i) in relation to an industry carried on by or under the authority
of any department of Central Government or a State Govern-
ment, the authority prescribed in this behalf, or where no au-
thority is prescribed, the head of the department;
(ii) in relation to an industry carried on by or on behalf of a local
authority, the Chief Executive Officer of that-authority;
(10) industry means any business, trade, undertaking, manufacture or
calling of employers and includes any calling, service, employment, handi-
craft, or industrial occupation or avocation of workmen;
(11) insurance company means a company defined in Sec. 2 of the
Insurance Act, 1938, having branches or other establishments in more than
one State;
(12) industrial dispute means any dispute or difference between em-
ployer and employee or employees, or between employers and workmen, or
between workmen and workmen, which is connected with the employment
or non-employment or the terms of employment or with the conditions of
labour, of any person;
(13) Labour Court means a Labour Court constituted under Sec. 7 of
the Act;
(H) lay-off (with its grammatical variations and cognate expressions)
means the failure, refusal or inability of an employer on account of short-
age of coal, pov/er or raw materials or the accumulation of stocks or the
breakdown of machinery or for any other reasons to give employment lo a
v/orkman whose name is borne on the muster rolls of his industrial estab-
lishment and who has not been retrenched.
Explanation'. Every' workman whose name is borne on the muster
rolls of the industrial establishment and who presents himself for work at
the establishment at the-time appointed for the purpose during normal
working hours on any day and is not given employment by the employer
within two hours of his so presenting himself shall'be deemed to have been
laid off for that day within the meaning of this claOse:
Provided that it the workman instead of being given employment at
the commencement of any shift for any day is asked to present himself for
the purpose during the second half of the shift for 'the day and is given
employment then he shall be deemed to have been laid off only for one-
half of that day:
INDUSTRIAL DISPUTES 733

Provided further that if he is not given any such employment even

after so presenting himself, he shall not be deemed to have been laid off
for the second half of the shift for the day and shall be entitled to full
basic v/ages and dea^;ness allowances for that part of the day;
(15) lock-out means the closing of a place of employment, or the sus-
pension of work, or the refusal by an employer to continue to employ any
number of persons employed by him;
(16) National Tribunal means a National Industrial Tribunal consti-
tuted under Section 7B;
(17) Public utility service means—
(i) any section of an industrial establishment, on the working of
which the safety of the establishment or the workmen employed
therein depends;
(ii) any postal, telegraph or telephone service;
(iii) any industry which supplies power, light or water to the public;
(iv) any system of public conservancy or sanitation;
(v) any of the scheduled industries, namely. Transport (other than
railways) for the carriage of passengers or goods, by land, water
or air; Banking; Cement; Coal; Cotton Textile; Foodstuffs; Iron
and Steel: Defence establishment; Service in hospitals and dis-
pensaries; Fire Bridge service, which the appropriate Govern-
ment may, if satisfied that public emergency or public interest
requires, by notification in the Official Ga/ette declare to be a
public utility service for the purposes of this Act, for such period
as may be specified in the notification;
(18) retrenchment means the termination by the employer of the ser-
vices of a workman for any reason whatsoever, otherwise than as a
punishment inflicted by way of disciplinary action, but does not include—
(i) voluntary retirement of the workman; or
(ii) retirement of the workman on reaching the age of superannu-
ation if the contract of employment between the employer and
the workman concerned contains a stipulation in that behalf; or
(iii) termination of the service of a workman on the ground of con-
tinued ill-health;
(19) settlement means a settlement arrived at in Uie course of con-
ciliation proceeding and includes a witten agreement between the em-
ployer and the workmen arrived at otherwise than in the course of con-
ciliation proceeding where such agreement has been signed by the parties
tliereto in such mannei as may be prescriii^ed and a copy thereof has been
sent lo tlie appro])riale Government and the conciliation officer;
(20) strike means a cessation of work by a body of persons employed
in any industry acting in combination, or a concerted refusal, or a refusal
under a common understanding, of any number of persons who are or
lia\e Ijecn so emjiloycd to continue lo work or to accept employment,
(21) Tiibunal means an Industrial Tribunal consiituted under Sec-
don 7 \ and includes an Industiial Tribimal constituted before the lOth
day ol Maich. 1957, under this Act;
(22) wage means all remuneiation capable of being expressed in terms
73-i, MERCAiNTILE LAW
of money, which would, if the teiins of employment, express or implied;
were fulfilled, be payable to a workman in respect of his employment or
of work done in such employment and includes (i) such allowances (in-
cluding deaniess allowance) as the workman is for the time being entitled
to; (ii) the value of any house accommodation, or of supply of light,
water, medical attendance or other amenity or of any service or of any
concessional supply of foodgrains or other articles; (iii) any travelling con-
cession; but does not include (a) any bonus; (b) any contribution paid or
payable by the employer to any pension fund or provident fund for the
benefit of the workman under any law for the time being in force; (c)
any gratuity payable on the termination of his service;
(23) workman means any person (including an apprentice) employed
in any industry to do any skilled or unskilled manual, supervisory, tech-
nical or clerical work for hire or reward, whether the terms of employ-
ment be exjjress or implied, and for the purposes of any proceeding under
this Act in relation to an industrial dispute, includes any such person who
has been dismissed, discharged or retrenched in connection with, or , as a
consequence of that dispute, or whose dismissal, discharge or retrench-
ment has led to that dispute, but does not include any such person—
(i) who is subject to the Army Act, 1950, or the Air Force Act, 1950,
or the Navy (Discipline) Act, 1934; or
(ii) who is employed in the police service' or as an officer or other
employee of a prison; or
(iii) who is employed mainly in a managerial or administrative cap-
acity; or
(iv) who is being employed mainly in a supervisory capacity, draws
wages exceeding Rs. 600 i)er mensem or exercises, either by the
nature of the duties attached to the office or by reason of the
powers vested in him, functions mainly of a managerial nature.

AUTHORITIES UNDER T H E ACT

Works Committee (S. 3)
In the case ol an indlistrial establishment in which 100 or more work-
men are employed or have been employed on any day in the preceding
12 monilis, the appropriate Government may by general or special order
reipiire the employer to constitute a Works Committee consisting of repre-
sentatives ol employers and workmen engaged in the establishment, the
number of representatives of workmen not being less than that of the rep-
resentatives of the employers, and the lepresentatives of the workmen to
be chosen from among the workmen engaged in the establishment and in
consultation with their trade union, if any. The duties of tlie Works
Committee arc to promote measures for securing and preserving amity
and good relations between the employer and workmen and to comment
upon matters of tlieir interest or concern, and to endeavour to compose
any material difference of opinion in respect to such matters.

Conciliation Officers (S. 4)

The apiJiojiriate Government may by notification in the Olficinl
Gazette appoint conciliation officers for any specified area or for one .or
more specified industries, either permanently or for a limited period.
INDUSTRIAL DISPUTES 735

Conciliation officers are charged wilh the duty of holding conciliatory

•proceedings for tlie purpose of bringing about a fair and amicable settle-
ment of any industrial dispute.

Boards of Conciliation (S. 5)

The appropriate Government may, as occasion arises, by notification
in the Olhcial Gazette, constitute a Board of Conciliation for promoting
the seitlc-incnt of an industrial dispute. A Board shall consist of a Chair-
man and two or lour ""other members. The Chairman shall be an inde-
pendent person and the other members shall represent in equal number
the parties to the dispute; and shall be appointed on the recommendation
of the party they represent. The quorum for a meeting is two where the
total, number is three, and three where tlie number is five. A Board,
liaving a quorum, may act notwithstanding the absence of the Chairman
or any of its members, or any vacancy in its number. But if the Govern-
ment informs- the Board that the services of the Chairman or any other
member have ceased to be available, the Board' must not act until a new
Chairman or member has been appointed.

Courts of Jnf|uiry (S, 6)

'I'he appropriate Government may, as occasion arises, by notification
in the Ollicial Gazette, constitute a Court of Inquiry for inquiring into
any maiicr appearing to be connected with or relevant to an industrial
dispute. Such a Court may consist of one or more independent persons,
according as the Government may appoint. Where it consists of more
than one member, one of them shall, be appointed .the .Chairman. The
conn having the • prescribed quoVum may act even if the Chairman or a
member is absent; but not if the services of the Chairman have ceased^ to
be available, and no other Chairman has been appointed. 'Ihe Court
shall inquire into tlie matters referred to it and report thereon to the
appropriate Government within 6 months from the commencement of the
inquiry.

Labour Courts (S. 7)

The appropriate Government may, by notification in • the Official
Ga/ctte, coiisiiiutc one or more Labour Courts for the adjudication of
industrial th'sjjtitcs relating to any of tlie following matters or for per-
forming such oilier functions as may be assigned to them under the Act.
'I'he Labour Coiirismay adjudicate on a dispute relating to—
(i) the propriety or legality of an order passed by an employer
under standing orders;
(ii) the application and interpretation of standing orders;
(iii) disciiargc or dismissal of workmen including re-instatement of,
- or grant of relief to, workmen wrongfully dimissed;
(iv) withdrawal of any customary concession or privilege;
(v) illegality or otherwise of a strike or lock-out; and
(\ il all matters other than those reserved for the' Industrial Tribu-
nals.
?36 .MERCANTILE LAW

A Labour Court shall consist of one person only to be appointed by

the appropriate Government. A person to be so appointed must have
held a judicial office in India for seven or more years, or has been the^
presiding officer of a Labour Court under any Provincial or State Act {or
5 or more years.

Industrial Tribunals (7A)

The appropriate Government may, by notification in the Official
Gazette, constitute one or more Industrial Tribunals for the- adjudication
of industrial disputes relating to any matters specified above as in the
case of Labour Courts, or the following matters, namely,—
(i) Wages, including the period and mode of payment;
(ii) Compensatory and other allowances;
(iii) Hours of work and rest intervals;
(iv) Leave with wages and holidays;
(v) Bonus, profit sharing, provident fund and gratuity;
(vi) Shift working otherwise than in accordance with standinj;
orders;
(vii) Classification by grades;
(viii) Rules of discipline;
(ix) Rationalisation; •
(x) Retrenchment of workmen and closure of establishment; and
(xi) Any other matter that may be prescribed.
A Tribunal shall consist of one person only to be appointed by the
appropriate Government. A person to be appointed a presiding officer
of a Tribunal must be, or must have beenl a Judge of a High Court; or
must have held the office of the Chairman or any other member of the
Labour Appellate Court, or of any Tribunal, for a period of not less than
two years. The appropriate Government- may also, if it so .thinks fit,
appoint two persons as assessors to advise the Tribunal in the proceeding
before it.

National Tribunals (7fi)

The Central Government may, by notification in the Official Ga/.ctie,
constitute one or more National Industrial Tribunals for the adjudication
of industrial disputes which,, in the opinion of the Central Government,
involve (p\estions of national in)\^ortance or are of such a nature that in-
dustrial establishments situated in more than on State are likely to be
interested in, or affected by, such disputes. ,.A National Tribunal shall
consist of one person only to be appointed by the Central Government.
To he ([uaiified for ajipointment as a presiding officer of a National Tri-
bunal, a person must be, or must have Ijeen, a Judge of a High Court, o r '
must have held the oflicc of ilie Chairman or any other member of the
Labour /Vppellate Tribunal for at least 2 years. The Central Govern-
ment may appoint two assessors to advise the National Tribunal.
I N D U S I R U L DlSPUlJbS 737
IBisquahhcations (7C)
No person shall be appointed to, or continue in, the ofhce of the pre
siding ofhcer of a Labour Court, Industrial Tribunal or National Tnbu
nal, if (a) he is not an independent person, or (h) he has attained the age
ol bD years
Tilling of Vacancies (S 8) Jf, for any reason a \acancy (other than
a temporary absence) occurs in tlie office of the presiding ofhcer of a Lab
our Couit, Tiibunal oi National Tribunal or in tlie ollice ol the Cliaiiman
or any other membei of a Ijoard or Couit, then in the case of a National
1 ribiuial, the Central Go\crnmcnt and in any other case, the appiopnate
Government, shall apjjoint anothci peison m accoi dance with the provi
sions of this \ci to hll the vacancy, and the proceedings may be continued
before the Labour Court, 1 ribunal, National Tribunal, Board or Court,
as the case may be, fiom the stage at which die vacancy is filled
Section 9 provides that no order of the appropriate Goveri.ment or
fof the Central Government appointing any person as the Chaiiman or
'any other member of a Board or Court or as the presiding officer of a
Labour Court, J ribunal or National Tribunal shall be called in question
\u vny manner, and no aci or proceeding before any Boaid or Couii bhall
be called in question in an) mannei on the ground merely of the exist-
ence of any vacancy in or defect in the constitution of, such Board or
Couit Also no settlement arrived at in the course of a conciliation pro-
ceeding sh^U be invalid by reason only of the fact that such settlement
was arrived at after the expiry of the period fixed by the Act for submit
ting the report And where the leport of any settlement arrived at in
the course of conciliation proceeding before a Board is signed by the
Chairman and all the other members of the Board, no such settlement
shall be invalid by reason only of the casual or unforseen absence of any
of the members (including the Chairman) of the Board during any stage
of the proceeding
Notice of Change (9A) Under this new provision, no employer, wJio
t^ioposes to effect any change in the .conditions of seivice ajjplicable to
any vsoikman in lespect of the matters specified below, shall effect such
change (a) without giving lo the workman likely to be affected by such
change a notice in the piescribed manner of the nature of the change to
be effected, or (b) within 21 days of giving such notice piovided that no
such notice ^li ill be retjuiied for effecting any such change (i) where the
change is effected in pursuance of any settlement, award oi decision of
the Lilioui Appellite l u b u n a l , oi (ii) when the workmen likely to be
affected by ilie change are persons to whom the Fundamental and Sup
plemciitnv Rules, Civil Services ( CLissihcation, Contiol and Appeal)
1-lules Cnil Sen ices (lemporar) Sci vices) Rules, Revised Leave Rules
Cnil Seivices l^egulations, Civilians in Defence Services (Classification,
Control and Appc il) Rules oi the Indian Railway Establishment Code or
appiopnate Govcinment in the Official Gazette, apply
Section 9B, hovvevei piovides that where the appiopnate Govern-
.mciit IS of opinion that the application of the provisions of Sec 9A to
Tiiy class of industrial cstablishmenta oi to any class of workmen employ-
ed thciein alfeet tlie employers in relation thereto so j>rejudicially that
such application mav cause serious repercussion on the industry concern-
ed and that public inteiest so requires, the appropiiate Government may,
by noiification in the Ofiicial Gazette, exempt that industrial establish
ment oi uoikeis fiom the application of the piovisions
 738 MERCANTILE LAW
REFERENCE OF DISPUTES T O BOARDS, COURTS
OR TRIBUNALS
Section 10 lays down: (I) Where the appropriate Government is of
opinion tl^t any industrial dispute exists or is apprehended, it' may at
• any time by order in writing,—
(a) refer the dispute to a Board for promoting a settlement there-
of; or
(b) refer to any matter appearing to be connected with or relevant
to the dispute to a Court of Inquiry; or
(c) refer to a Labour Court for adjudication of the dispute or any
matter appearing to be connected with or relevant to the dis-
pute, if it relates to any of the following matters:
(i) the propriety or legality of an order passed by an employer
under the standing orders;
(ii) the application and interpretation of standing orders;
(iii) discharge or dismissal of workmen including re-instatement *
of, or grant of relief to workmen wrongfully dismissed;
(iv) withdrawal of any customary concession or privilege;
(v) illegality or otherwise of a strike or lock-out;
(vi) all matters other than those specified'to be adjudicated by In-
dustrial Tribunals;
(d) refer to a Tribunal for adjudication of the-dispute or any mat-
ter appearing to be connected with or relevant to the dispute,
whether it relates to any matter specified above in (c) or to any
matters given hereafter, viz.,
(i) wages, including the period and mode of payment;
(ii) compensatory or other allowances;
(iii) hours of work and rest intervals;
(iv) leave with wages and holidays;
(v) bonus, profit sharing, provident fund and gratuity;
(vi) shift working otherwise than in accordance with standing
orders;
(vii) classification of gi'ades;
(viii) rules of discipline;
(ix) rationalisation;
(x) retrenchment of workmen and closure bf establishment: and
(xi) any other matter that may be presented:
Pro\ided that when ihe dispute relates to any of the above matters
and is not likely to affect more than 100 workmen, the appropriate Gov-
ernment may make the reference to a Labour Court:
Provided further tliat when the dispute relates to a public utility ser-
vice and notice under Sec. 22 has been given, the appropriate Govern-
ment shall, unless it considers that the notice has been frivolously or vek-
atiously given or that it would be inexpedient so to do, may make a re-
INDUSTRIAL DISPUTES 739

ference, notwithstanding that any other proceedings under this Act in res-
pect of the dispute may have commenced.
(lA) When the Central Gos'ernment is of opinion that any industrial
dispute exists or is appiehended and the dispute involves any question of
national importance or is of such a nature that the industrial establish-
ments situated in more than one State are likely to bfe interested in or
affected by such dispute and that the dispute should be adjudicated by- a
National Tribunal, then the Central Government may (whether or not it
is the appropriate Govei-nment in relation to that dispute) at any time, by
order in writing, refer the dispute or any matter appearing to be connect-
ed with, dr relevant to, die dispute, whether it relates to any of the mat-
ters specified in (c) or (d) above, to a National Tribunal for adjudication.
(2) Where the parties to an industrial dispute apply in the prescrib-
ed manner, 'whether jointly or separately, for a reference of the dispute to
a Board, Court, Labour Court, 'I ribunal or National Tribunal, the appro-
priate Government may, if satisfied tliat the persons applying represent
liiat majority of each party, shall make the reference accordingly.
(3) Where an industrial dispute has been referred to a Board or the
Laboui Court or the Tribunal or tlie National Tribunal under this Sec-
tion, the appropriate Government may by order prohibit the continuance
of any strike or lock-out in connection with such dispute which may be
in existence on the date of the reference.
(4) Where in an order referring an industrial dispute to a Labour
Court, Triblmal or National Tribunal under this section or in a subse-
quent Older, the appropriate Government has specified the points of dis-
pute for adjudication, tlie Labour Court or the Tribunal or the National •
Tribunal, as the case may be, shall confine its adjudication to those points.
(5) Where a dispute concerning any establishment or establishments
has been, or is to be, lefcrred to a Labour Court, Tribunal or National
Tribunal under this section and the appiopriate Government is of opinion,
whetlier on an application made to it in this behalf or otherwise, that the
dispute is of such a nature that any other establishment, group or class
of establishments of a similar nature is likely to be interested in, or affect-
ed by such dispute, the appropriate Government may at the time of mak-
ing the reference or at any time thereafter but • before submission of the
award, by order in writing include in that reference such establishments,
whether or not at the time of such inclusion any dispute exists or is appre-
hended in any of those establishments.
(6) Where any reference has been made under sub-section (lA) to a
National Tribunal, then notwithstanding anything contained in this Act,
no Labour Court or Tribunal shall have jurisdiction to adjudicate upon
any matter which is under adjudication before the National Tribunal,
and accordingly—
(a) if the matter under adjudication before the National Tribunal
is pending in a proceeding before a Labour Court or Tribunal,
the proceeding before the Labour Court or the Tribunal, as
the case may be, in so far as it relates to sudi matter, shall be
deemed to have been quashed on such reference to the National
Tribunal; and
(b) it shall not be lawful for the appropriate Government to refer
tJie matter under adjudication before the National Tribunal to
740 MERCANTILE LA^V
any Labour Court or Tribunal for adjudication during tlie pen-
dency of tlie proceeding in relation to such matter before the
National Tribunal.
(7) Where any industrial dispute, in relation to which the Central
Governinent is not the appropriate Government, is referred to a National
Tribunal, dien notwithstanding anything contained in tliis Act, any refer-
ence in Sections 15, 17, 19, 33A, 33B and 36A to the appropriate Government
in relation to such dispute shall be construed as a reference to the Central
Government but, save as aforesaid and as otherwise expressly provided in
this Act, any reference in any other provision of this Act to the appropri-
ate Government in relation to that dispute shall mean a reference to the
State Government.

Voluntai-y reference to arbitration (lOA)

(\) \Vhere any industrial dispute exists or is apprehended ^nd the
employer and the workmen agree to refer the dispute to arbitration, they
may, at the time before the dispute has been referred under Section 10
to a Labour Court or Tribunal or National Tribunal, by a written agree-
ment, reier die dispute to arbitration and tlie reference shall be to such
person or persons (including the presiding officer of a Labour Court or
Tribunal or National Tribunal) as an arbitrator or arbitrators as may be
specified in the arbitration agreement.
(2) An arbitration agreement referred to in sub-section (I) shall be
in such form and shall be signed by the parties thereto in such manner as
may be prescribed..
(3) A copy of the arbitration agreement shall be forwarded to the ap-
propriate Government and the conciliation officer and the appropriate
Government shall, within 14 days from the date of the receipt of sudi
copy, publish the same in the Official Gazette. ^
(4) The arbitrator or arbitrators sliall investigate tlie dispute and sub-'
mit to the appropriate Government the arbitration award signed by the
aibitrator or all the arbitrators, as the case may be.
(5) Nothing in the Arbitration Act, 1940, shall apply to arbitrations
under this section.

PROCEDURE AND POWERS OF AUTHORITIES

Section It lays down the procedure and powers of the different auth-
orities, as under—
(1) Subject to any rules that miiy be'made in this behalf, an arbitra-
tor, a Board, Court, Labour Court, Tribunal or National Tribunal shall
follow such procedure as the aibitrator or other authority concerned may
think fit.
(2) A Conciliation Officer or a member of a Board or Court or the
presiding officer of a Labour Court, Tribunal or National Tribunal may^
for the purpose of inquiry into any existing or apprehended industrial
dispute, after giving reasonable notice, enter the premises occupied by any
establishment to which the dispute relates.
(3) E\eiy Board, Coint, Labour Court, Tribunal and National Tri-
bunal shall have the same powers as are vested in a Civil Court under
INDUSTRIAL DISPUTES 741

C.P.C, 1908, when ti7ing a suit, in respect of (lie following matters, viz.,
—(a) enforcing the attendance of any person and examining iiini on oath;
(b) compelling the production of documents and material oljjecis; (c) .issu-
ing commissions for the examination of witnesses; (d) in respect of such
other matters as may be prescribed; and every inquiry by a Board, Court,
Labour Court, Tribunal or National Tribunal shall be deemed to be a
judicial proceeding within the meaning of Sections T9'i and 228 of the
Indian Penal Code.
(4) A Conciliation Officer may call for and inspect any document
which he has ground for considering to be relevant to the industrial dis-
pute or to be necessai7 for the purpose of verifying the implementation
of any award or carrying out any duty imposed on him imder this Act
and for die aforesaid purposes, the Conciliation Officer shall have the
same powers as are vested in a Civil Com-t in respect of compelling the
production of documents.
(5) A Court, Labour Court, Tribunal or National Tribunal may, if
it so thinks fit, appoint one or more persons having special knowledge of
the matter under consideration as assessor or assessors to advise it in the
proceeding before it.
(G) All Conciliation Officers, members of a Board or Court and the
presiding officers of a Labour Court, Tribunal or National' Tribunal shall
be deemed to be public servants within the meaning of Section 21 of the
Indian F%aJ .Code.
(7) Subject to any rules made under this Act, the co^ts of, and inci-
dental to, any proceeding before' a Labour Court, Tribunal' or .National
Tribunal shall be in tlie diiection of that Labour Court, Tribunal or
National Tribunal, and tlie Laboiu' Court, Tribunal or National Tribu-
nal, as the case may be, shall have full power to determine by and to
whom and to what extent and subject to what conditions, if' any, such
costs arc to be paid, and to give all necessary directions for the ])urposes
aforesaid and such costs may, on application made to the appropriate
Government by the person entitled, be recovered Ijy the Government in
the same manner as an arrear of land revenue. |
(8) Every Labour Court, Tribunal or National Tribunal shall be
deemed to be a Court for the purpose of Sections 480 and 482 of the
Criminal Procedure Code, 1948.
Duties of Conciliation Officers (S. 12). For the purpose of bringing
about fair and amicable settlement of an industrial dispute the Concili-
ation Officer is required to discharge the following duties:—
(1) VV'lierc any industrial dispute exists or is apprehended, the Con-
ciliation Officer may, or wjiere the dispute relates to a jjublic- utility ser-
vice and a notice under ^Section 22 has been gi\en, shall Iiold conciliation
proceedings. He'will in,teryiew both the employer and tlic workmen con-
cerned witli the /d'ispute and ''endeavour to bring about settlement.
(2) The Conciliation Officer shall, for-the purpose of bringing about
a settlement of the dispute,'without delay investigate die dispute and all
liiaiters affecting the merits and the right settlement thereof and may do
all sucli diings as he thinks fit for the purpose of inducing the parties to
come to a fair and amicable settlement of the dispute.
(3) If a settlement of the dispute or of any of the matters in dispute
is arrived at in die course of the conciliation proceedings the Conciliation
Officer shall send a report thereof to the ajjpropriate Government toge-
ther with a memorandum of the settlement signed by the j^arties to dispute.
742 MERCANTILE L \ W
(4) If no such settlement is arrived at, the Conciliation Officer shall,
as soon as practicable after the close of ilie investigation, send to the ap-
propriate Government a full icpoit setting foitli the steps taken ijy htm
for ascertaining the facts and circumstances ielating to the dispute and
for bringing about a settlement thereof, together with a full statement
of E'.ich facts and circumstances, and the reasons on account of which, in
his opinion, a settlement could not be arrived at.
(5) The report must be submitted ivitliin M days of the commerice-
ment of the conciliation proceedings or within such shorter period as may
be fixed by the appropriate Government: provided that the time for the
lubmibsion of the report may be extended by such period as may be agreed
upon in writing by all the parties to the dispute.
(6) If, oii^a consideration of the report in resjiect of failure of settle-
ment, the appropriate Government is satisfied that there is a case for refer-
ence to Board, Labour Court, Tribunal or National Tribimal, it may
make such reference. Where the Government docs make such a lefer-
ence, it shall record and communicate to the parties concerned its reasons
therefor.
Duties of Boards (S. 13). The duties of the Boards are similar to
those of Conciliation Officers, and reference should be made to those. It
has to endeavour to bring about a settlement of a dispute referred to it
and to do anything to induce the parties to come to a fair and amicalile
settlement. Where a settlement is reached a similar report and a memo-
randum of settlement have to be submitted to the appropriate Govern-
ment. But in case of failure, the Board, apart from furnishing all the
details as required in the case of a report by a Conciliation Officer, is also
required to give in its report its recommendations for the determination
of the dispute. The time limit prescribed for submission of such reports
is 2 months of the date on which the dispute was refericd to it or witliin
such shorter period as may be fixed by the appropriate Government or
extended by it for not more than 2 months. All the parties to the dis-
pute may, however, further extend the period by agreement in writing.
Where a dispute, in which the Board has failed to biing about a settle-
ment, relates to a public utility service and the Government does not refei
it to a Labour Court, Tribunal or National Tribimal, thougli it may if
it so desires, it must inform the panics concerned hs reasons for not do-
ing so.
Duties of Courts (S. 14). The Court of Inquiry shall iiKjuire into
the matters referred to it a n 4 report thereon to the appropriate Govern-
ment ordinarily within a period of 6 months from tlic commencement of
its'inquiry.
Duties of Labour, Courts, Tribunals and National Tribunal. Whcic
an industrial dispute has been referred to Labour Court, Tiil)unal or
National Tiibunal for adjudication, it shall hold iis jjiocccdings expedi-
tiously and shall, as soon as it is practicable on the conclusion tlicrcof,
submit its award to the appropriate Government (S 15).
T h e report of a Board or Court shall be in wilting and shall be sign-
ed by all the memliers of tlie Board or Couit, as the case may be: pro-
vided that a member may record a minute of dissent. Tiie award of a
L.iljoiir ('ourt or Tiibmial or National Tiil)unal shall l)e in wiiting .ind
shall be signed by its presiding officer (.S 10).
 INDUSTRIAL DISPUTES 743

Every report of a Board or Court together with any minute o£ dissent

^'i^fcorded therewith, every arbitration award and every award of Labour
Court, Tribunal or National Tribunal shall within a period of 30 days
from the date of its receipt by the appropriate Government, he published
in such manner as the appropriate Government thinks fit. And subject
to the provisions of Sec. 17A, the award published as stated above shall
be final and shall not be called in question by any' Court in any manner
whatsoever (S. 17).
Commencement of the Award (S. 17A). (1) An award (including; an
arbitration award) shall become enforceable on the expiry of 30 days from
the date of its publication under Sec. 17; provided that (a) if -the appro-
priate Go\ernment is of opinion, in any case where the award has been
given by a Labour Court or Tribunal in relation to an industrial dispute
to which it is a parly; or (b) if the Central Government is of opinion, in
any case where the award has been given by a National Tribunal, that it
sliall be inexpedient on public grounds affecting national economy or
social justice to give effect to the whole or any part of the award, the ap-
,propriate Government, or as the case may be, th'e CJehtral Government
may, by notification in the Official Gazette, declare that the award shall
nor become enforceable on the expiry of the said period of 30 days.
(2) Wliere any declaration has been made in relation to an award
under the proviso to Sub-Sec. (1), the appropriate Government or the
Central Government may, within 90 days from the date of publication of
the award under Sec. 17, make an order rejecting or modifying the award,
and shall, on the first available opportunity, lay the award togedier with
a copy of the order before the Legislature of the State, if the order has
been made by the State Government, or before Parliament if the order
has been made by the Central Government.
(3) ^Vhere an award as rejected or modified by an order made under
Sub-Sec. (2) is la'id before a Legislature of a State or before Parliament,
sucli award shall become enforceable on the expiry of 15 days from the
date on which it is so laid; and where no order under Sub-Sec. (2) is made
|r^in pursuance of a declaration under the proviso to Sub-Sec. (1) the award
shall become enforceable on the expiry of the period of 90 days from the
date on which it is so laid.
{'!) Sublet to the provisions of Sub-Sec. (I) and Sub-Sec. (3) regaid-
iiig the enforceability of an award, the award shall come into operation
with effect from such date as may be specified therein, but where no date
is specified, it shall come into operation on the date when the award be-
comes enfoiceable under Sub-Sec. (1) or Sub-Sec. (3), as the case may be.
Person on whom settlements and awards are binding (S. 18). (1) A
settlement arrived at by agreement between the employer and workman
otherwise than in the course of conciliation proceedings shall be binding
nil the parties to the agreement.
(2) .\n arbitration award which has become enforceable shall be bind-
ing on the parties to the arbitration agreement.
(3) A settlement arrived at in the course of conciliation proceedings
iindcr tliis .^ct or an award of a LaI)oiu- Court. Tribunal or National Tri-
bmial wliicli is declared by the appropriate Government to be binding
Uiall be liindiiig on— ^
(a) all parties to the industrial dispute; (h) all other parties summon-
ed to appear in the proceedings as parties to the dispute, imless the
7-14 MERCANTILE LA^V

Board, Laljoiir Court, Tribunal or National Tiiixinal, as the case may he,
reconls the opinion that they were, so summoned without pioper cause;'
(c) where a party referred to in clause (a) or clause (b) is an employer,
his heirs, successors or assigns in respect of ihe estaljlishment to v/hich
the dispute relates; (d) where a party referred to in clauses (a) or (i)) is
composed of workmen, all persons wlio were employed in the establisli-
ment or part of the establishment as the case may be, to which the dis-
pute relates on the date of the dispute and aH persons who subsequently
become employed in that establishment or part.
Period of operation of settlements and awards (S. 19). A settlement
shall jcome into operation on such date as is agreed upon by the parties
to the dispute, and if no date is agreed upon, on the date on which the
merjiorandum of the settlement is' signed by the parties to the dispute.
.Such .settlement shall be binding for such period as is agreed upon I)y the
parties, and if no such period is agrccti upon, for a lieriod of 6 months
from the date on which the memorandiuu of settlement is signed by the
parlies to the dispute, and shall continue to lie binding on the parties
after the expiry of the periods aforesaid, until the e.xi:)iry of 2 months,
from the date on wiiich a notice in writing of an intention to terminate
the settlement is given I)y one of the parties to llie other party or parties
to the settlement. .An award shall remain in operation for one year from
the date on wliicli it becomes enforccaI)le imder Sec. 17A, unless the ap-
propriate Goveinmcnt fixes a shorter period, or extends its operation for
a year at a time up to a maximum of 3 years from the date when it catne
into operation. If, however, any material change in the circumstances on
which the award was based has taken place, the appropriate Government
may refer the award to a Labour Comt, if it was the Labour Court's
award, or to a Tribunal if it was that of a Triljunal or of a National Tri-
bunal for decision whether or not tiie award should cea.se to4)C in opera-
tion before tiie period so fixed.

.STRIKES AND LOCK-OUTS

Prohibition of Strikes and Lock-outs (S. 22)
(1) No person employed in a public utility service shall go on strike
in breach of contract—
(a) witliout giving to tlie employer notice of strike, as hereinafter
provided, within 6 weeks .before striking; or
(b) within 14 days of giving such notice; or
(c) before the expiry of the date of .strike specified in any such
notice as aforesaid; or
(d) during the pe-ndency of any conciliation proceedings before a
conciliation officer and 7 days after the conclusion of such pro-
ceedings.
(2) No employer carrying on any public utility service shall lock-out
any of his workmen without complying with the conditions as specifiedi-
in Sub-Sec. (1).
(3) But notice of a strike or lock-out will not be necessary where tliere
is' already in existence a strike or lock-out in the public utility service.
The employer in such' a case must notify such authority as may be ap-
INDUSTRIAL DISPUTES 745

pointed by tlie appropriate Government of the declaration of a strike or

•inoo[ioj

General Prohibition of Strikes and Lock-outs (S. 23)

_ No workman who is employed in any industrial establishment shall
go on strike in breach of contract and no employer of any such workman
shall declaie a lock-out—
(a) during the pendency of conciliation proceedings before a Board
and 7 days after the conclusion thereof;
(b) during the pendency of proceedings before a Labour Court,
Tribunal or National Tribunal and 2 months after the conclus-
ion thereof;
(c) during the period in which a settlement or award is m operation
in resjject of any of the matters covered by it.

Illegal Strikes and Lock-outs (S. 24)

A strike or a lock-out shall be illegal if (a) it is commenced or de-
clared in contiavcniion of Section 22 or 23; or (b), is continued in con-
travention of the prohibitory order of the Government after the dispute
has been referred inider Sec. 10. Hut where a strike or a lock-out in pur-
suance of an industrial dispute has already commenced and is in existepce
at the time of the reference of the dispute to a Board, a Labour Court,
Tribunal or National Tribunal, the continuance of such strike or lockout
shall not be illegal, if it was rot originally illegal. A lock-out declared in
conse(|uence of an illegal strike or a strike in consec]uence of an dlegal
lock-out shall not be deemed to be illegal. Section 25 ])rohibits the spend-
ing or ajjplicaiion of any money by any one in furtherance or support of
any illegal strike or lock-out.

LAY-OFF AND R E T R E N C H M E N T
One Year of Continuous Service (S. 25 B)
A workman, who dining a ])eriod of 12 calendar months, has actually
worked in an industry for not less than 240 days shall be deemed to have
completed one year of continuous service in the industry. He will be
deemed to have actually worked on days on which he has been laid-off, or
been on leave with full wages earned in the previous yean and the female
worker has been on maternity leave for not more rlian '12 weeks in the
aggregate. , I

Right of Workman Laid-oll for Com})ensiUion (S. 25 C)

Whenever a workman (other than a badli workman or a casual work-
man) whose name is borne on the muster rolls of a perennial industrial
establishment employing not less than 50 woikers per working day in the
prc\ ions calcndai month and who has completed not less than one year
of continuous service un<lei an em|)loyer is laid-off. excejjt for such week-
1) holitlays as may intervene, shall be paid com]jensation which shall be
e(]ual to 50 per cent of the total' of the basic w.iges and dcarncss allow-
74(5 MERCy\NTlLE LAW
ance that would have been payable to him had he not been so laid-off:
provided that—
(a) the compensation payable to a woikman during any period of
12 months shall not be for more than 45 days, except as stated
below;
(b) it during any period of 12 monthS; a workman has been paid
compcnjntion for 45 days and during the same period of 12
months lie is again laid-off for further continuous periods of
more than one week at a time, he shall, unless there is any
agreement to the contrary between him and the employer, be
paid for all the days during such subsequent period of lay-off
compensation at the rate specified in this section. But it will
be lawful for the employer to retrench the workman, any com-
pensation paid to the workman for having been laid-off during
the preceding 12 months being set off against the compensation
payable for retrenchment.
Section 25D requires the employer to maintain a muster roll and
allow workmen to make entries thereon when they present themselves for
work at the establishment, even wheic workmen have been laid-off.

Workmen Laid off not Entitled to Comjiensation (.S. 25 E)

No compensation shall be paid to a workman who has been laid-off—
(i) if he refuses to accept any alternative employment in the same'
establishment fiom which he has been laid-off, or in any other
establishment belonging to the same employer situated in the
same town or village oi situated within a i.idius of 5 miles fiom
the establishment to which he belongs, if, in tiie opinion of the
employer, such alternative does not call for any special skill o\
previous experience and can be done by the workman, provid-
ed that the wages which would noinially have been paid to the
workman are offered for the alternaii\e employment also; or
(ii) if he does not present himself foi woik at the establishment at
the ajjpointed time during noimal working hows at least once
a day; or
(iii) if such laying-off is due to a stiike or slowing-down of pi educ-
tion on the part of workmen in another part of their establish-
ment.

Conditions of Retrenchment (S. 23 F)

No workman employed in any industry who has been in continuous
service for not less tiian one year under an cniployei sliall be retienched
by that employer until— ^
(a) the workman has been ghcn one month's notice in writing in-
dicating the leasons for retrenchment and the period of notice
has expired, or the workman has been paid in lieu of such
notice, w.igcs for ilie period of the notice: provided that no
notice shall be neccssaiy if the retrenchment is under an agree-
ment which specifies a date for the termination of service;
INDUSTRIAL DISPUTES 747

(b) the workman has been paid, at the time of retrencliment, com-
pensation which shall be equivalent to 15 days' average pay for
every completed year of seivice or any pan thereof in excess of
6 months; and
(c) notice in the prescribed manner is served on the appropriate
Government.
Section 25FF* provides that where the ownership or management of
an mideriaking is transferred whether by agreement or by operation of
law, from the employer in relation to that undcrtnkinp; to a new employer,
every workman who has been in continuous service for not less than one
year in that undertaking immediately before such transfer shall bo en-
titled to notice and compensation in accordance with tlie provisions of
•S. 2'^V. as if (he workman had been retrenched: Provided that nothinpf
ill this Section shall apply to a workman in any case where there has been
a change of employers by reason of the transfer, if— -
(a] the service of the workman has not been interrupted by such
transfer;
(1)) the terms and conditions of service applicable to the workman
after such transfer are not in any way less favourable to the
workman than those applicable to him immediately before the
transfer; and
(c) tiie new employer is, under the terms of such transfer or other-
wise, leffally liable to pay to the workman, in the event of his
letrencliment, compensation on the basis that his service has
been coVitinuous and has not been interrupted by the transfei.
Section 25FFF* provides: (1) Where an tmdertaking is closed down
bv any reason whatsoevor, every workman who has been in continuous
seivicc for not le'^s than one year in that tuidertaking iinmcdiately before
such closure, subject to the provisions of sub-section (2V be entitled to
notire and compensation in accoi dance with the provisions of Section 25F,
as if the workman had been retrenched: Pro^'ided that where the under-
taking is clo'-ed down on accoimt of una\oidablc circumstances beyond the
contiol of the employer, the compensation to be paid to the workman
imder clause (b) of S. 25F shall not exceed his a\'cr.TG;c pav for 3 months
Explanation. An undertakintr which is closed down by reason mere-
ly of financial difTiculties (including financial losses) or accimndation of
imdisposcd stocks shall not be deemed to have been closed down on ac-
count of tmavoidable circumstances beyond the control of the employer
within the meaning of the provi.so to this Sub-Section.
(2) ^VIlcre any undertaking set-up for the construction of buildings,
bridges, loads, canals, dams or other constiuction xvork is closed down on
account of the completion of ilie work within 2 years fiom the date on
which the underi.iking has been set up, no woikman employed therein
shall be entitled to any compensation tuider clause (b) of S. 25F. but if
the constnicfion work is not so completed within 2 vears he shall be en-
titled to notice and compensation under that Section for every completed
year of service or any part thereof in excess of 6 months.

Procedure for Uelrenrhment (S. 25 G)

Where any workman in an industrial eslabli'^hnieiit, who is a citizen

Inserted by the Industiial Disputes (Amendment) .\ct, 1957.

718 MERCANTILE LA^V

of India, is to be rcirendied and lie belongs to a particular category of

workmen in that establishment, in the absence of any agreement between
the employer and the workman in this behalf, the employer shall or-
dinarily retrench the workman who was the last person to be employed
in that category, unless for reasons to be recorded the employer retrenclies
arty other workman.

Re-employment of Retrenched Workmen (S. 25 H)

Where any workmen are retrenched and the employer proposes to
take into his employ.any persons, he shall, in such manner as may be pres-
cribed, give an opportunity to the retrenched workmen to offer themselves
for re-employment, and • the retrenched workmen who offer themselves for
re-employment shall have preference over others.

PENALTIES
Any workman who commences, continues, or otherwise acts in "fur-
therance of an illegal strike is punishable with imprisonment up to one
month, or fine up to Rs. 50, or with both. Any employer who does the
same as above in connection with an illegal lock-out shall be punishrble
with imprisonment up to one month, or fine up to Rs. 1,000, or with both
(.S. 26). Any person who instigates or incites others to take part in, or
otherwise acts in furtherance of, an illegal strike or an illegal lock-out
shall he punishable with imprisonment up to 6 months, or fine up to
Rs. 1,000, or -with both (S. 27). Any person who knowingly gives finan-
cial aid to illegal strikes and lock-outs shall be punishable in like manner
as specified in Section 27 (S. 28). Any person who commits a breach of
any term of any settlement or axvard, wliich is binding on him under this
Act, shall be punishable with imprisonment up to 6 months, or with fine,
or with both, and the court trying the offence, if it fines the offender, may
direct that the whole or any part of the fine realised from him shall be
paid, by way of compensation, to any person who, in its opinion, has been
injured by such breach (S. 29). Any employer who in contravention of
the provisions of Sec. 33 alters conditions of service .shall be punishable
with imprisonment up to 6 months, or fine up to Rs. 1,000 or with both
(S-. 31).

MISCELLANEOUS
Offences by Companies (S. 32). Where a person committing an
offence under this Act is a company, or other feody corporate, or an asso-
ciation of persons (whether incorporated or not), every director, manager,
secretary, agent or othe'r officer or person concerned with the management
thereof shall, unless he proves that the offence was committed without his
knowledge or consent, be deemed to be guilty of such offence.
Conditions of Service, etc., to Remain Unchanged during Pendency,
of Proceedings (S. 33). (1) During the pendency of any conciliation pro-
ceeding before a Conciliation Officer or a Board or of any proceeding be-
fore a Labour Court or Triljunal or National Tribunal in respect of an
industrial dispute, an employer shall,—
(a) in regard to any matter connected with the dispute, alter, to
the nrojudice of the workmen concerned in stich dispute, the
conditions of ,sci\'ice ,Tj)|)Iicab!c lo them immediately before ihe
tonnneiKcincnl of such piocccdings; or
INDUSTRIAL DISPUTES 749

(b) for any misconduct connected. with the dispute, discharge or

jDunish, whether by dismissal or otherwise, any workman con-
cerned in this dispute, save witli the express permission in writ-
ing of the authority before which the proceeding is pending.
(2) During the pendency of such proceeding in respect of an indus-
trial dispute, the employer may, in accordance with the standing orders
applicable to a workman concerned in such dispute,—
(a) alter, in regard to any matter not connected with the dispute,
the conditions of service applicable to that workman immedi-
ately before the commencement of sucli proceeding; or
(b) for any m.isconduct not connected with the .dispute, discharge
or punish, whether by dismissal or otherwise, that workman:
provided that no such workman shall be discharged or dismiss-
ed, unless he has been paid wages for one month and an appli-
cation has befen made by the employer to the authority before
which the proceeding is pending for approval of the action
taken by the employer
(3) Not^v'ithstanding anything contained in Sub-Sec. (2), no employer
shall, during the pendency of any sucli proceeding in respect of an indus-
trial dispute, take an action against any protected workman concerned
in such dispute,—
(a) by altering, to the prejudice of such protected workman, the
conditions of service applicable to him immediately before the
commencement of such proceedings; or
(b) by discharging or punishing, whether by dismissal or otherwise,
such protected workman, save with the express permission in
writing of the authority before which the proceeding is pend-
ing.
Explanation. For the purposes of this Sub-Sec. a protected workman,
in relation to an establishment, means a workman, who, beiijg an officer
of a registered trade union connected with the establishment, is recognis-
ed as such in accordance with rules made in tliis behalf.
(4) In every establishment, the number of workmen to be recognised
as protected workmen for the purposes of Sub-Section (3) shall be one
.per cent of the total number of workmen employed therein subject to a
minimum of 5 protected workmen and a maximum number of 100 pro-
tected workmen and for the aforesaid purpose, the appropriate Go\er!i-
ment may make rules providing for the distribution of such protected
workmen among various trade unions, if any, connected with the estab-
lishment and tlie manner in which the workmen may be chosen and re-
cognised as protected workmen.
(5) Where an employer makes an application to a 'Conciliation Officer,
Board, Labour Court, Tribunal or National Tribunal under the proviso
to Sub-Sec. (2) for approval of the action taken by him, the authority con-
cerned shall, v.'ithout delay, hear such application and pass, as expedi-
tiously as possible, such order in relation tliereto as it deems fit.
Section 33A provides that if an employer contravenes the provisions
of Sec. 33, any employee aggrieved by such contravention may make a
complaint in writing, to the Labour Court, Tribunal or National Tiibu-
nal, and the latter shall adjudicate upon the complaint as if it were a dis-
pute.
Section 33B empowers the appropriate Government to withdraw, by
order in writing for reasons to be stated dierein, any proceeding pending
750 MERCANTILE LAW
before a Labour Court, Tribunal or National Tribunal and to transfer
the same to another Labour Court, Tribunal or National Tribunal, as the
case may be, for tlie disposal of the proceeding. A Tribunal or Nation;tl
Tribunal is also authorised to transfer to a Labour Court any proceeding
before itself. •
Recovery of Money Due from an Employer (S. 33C). Where any
money is due to a workman from'an employer under a settlement or an
award or for lay-oil or retrCndiment, the workman may, without prejudice
to any other mode of recovery, make an application to tlie appropriate
Government for the recovery of money due to him, and if the appropriate
Government is satisfied that any money is due to him, it shall issue a cer-
tihcate for that amount to the Collector who shall proceed to recover the
same in the same manner as an arrear of land revenue. Where any work-
man is entitled to receive from the employer any benefit which is capable
of being computed in terms of money, the amount may be determined by
the specified Labour Court and may be recovered in tlie same manner as
stated above.
No person refusing to take part^ or to continue to take part in any
strike or lock-out whicn is illegal under this Act shall, by reason of such
refusal or by reason of any step taken by him, be subject to expulsion
from any trade union or society or to any fine or penalty, or to depriva-
tion of any riglit or benefit to which he or his legal representatives would
otherwise be entitled, or be liable to be placed in any respect, either
(^irectly or indirectly, under any disability or at any disadvantage as pom-
pared witli other members of the union or society, anything to the con-
trary in the rules of a trade union or society notwitlistanding (S. 35).
A Workman who is a party to an industrial dispute shall be entitled
to be represented in any proceedings under this Act by an officer of a
registered trade union, and any employer who is a party to any industrial
dispute shall be entitled to be represented by an olficer of an association
of employers. No party to an industrial dispute shall be entitled to be
represented by a legal practitioner in any conciliation proceeding, but
such representation is permitted before a Labour Court, 'I'ribunal or Na-
tional Tribunal, if the other party has no objection to such representation
(S. 36). By virtue of 36A, the appropriate Government may, if in its
opinion any difficulty or doubt arises as to the interpretation of any pro-
vision of an award or settlement, refer the question to sucli Labour Couri.,
Tribunal or National Tribunal as it may think fit. The Labour Court,
Tribunal or Nationa^ Tribunal shall, after giving the parties an opportu-
nity of being heard, decide such question and its decision shall be final
and binding on all such parties. Section 37 provides that no suit, prose-
cution or other legal proceeding shall lie against any person for anything
which is in good faith done- or intended to be done in pursuance of this
Act or anyTules made thereunder.

REPEAL OF T H E INDUSTRIAL DISPUTES ,

(APPELLATE TRIBUNAL) ACT (No. 48 of 1950)
l u e above Act has been repealed by the Industrial Disputes (Amend-
ment and Miscellaneous Provisions) Act, 1956, and consequently the
Labour Appellate Tribunal has been abolished. The abolition of the Ap-
pellate Tribunal is expected to save time in the disposal of cases and also
to save about Rs. 6 lakhs in expenditure.
 Chapter XXV

The Minimum Wages Act, 1948

(No. XI of 1948)

The Minimum Wages Act, 1948, as amended by the Amending Acts

of 1950, 1951, 1954, 1956 and 1957 empowers the Central or State Gov-
ernment to fix minimum rates of wages in respect of scheduled employ-
ments, after due enquiries. T h e present schedule includes employments
in (1) any woollen carpet-making or shawl weaving establishment; (2) any
rice mill, flour mill or dal mill; (3) tobacco (including bidi-making) manu-
factory; (4) plantation, i.e., any estate maintained for the purpose of grow-
ing cinchona, tea or cofEee; (5) oil mill; (6) under any local autliority; (7)
on tlie construction or maintenance of roads or in building operations;
(8) stone breaking or stone-crushing; (9) lac manufactory; (10) mica works;
(11) public motor transport; (12) tanneries and leather manufactory; and (13)
agriculture including farming, dairy, horticulture, poultry, forestry br
timber operations. Section 27 empowers tlie appropriate Government to
add to the sdiedule any employment in respect of which it is of opinion
that minimum rates of wages sliould be fixed under this Act.'
Minimum rates of ivages in respect of scheduled industries excepting
agricultute were to be fixed within two years from the date of the commence-
ment of the Act, and in tlie case of agriculture it was to be done within
three years. The minimum rate of wages includes a basic rate and a
special allowance adjusted to accord witli the variation in the cost of living
index number. The procedure for fixing minimum rates of wages is to
appoint a committee to liold enquiries and publish its proposals for rates
to be paid, giving two months' time for filing objections or making re-
presentations. The rate so fixed may be reviewed or revised, if necessary.
Provision has been made to set up a machinery to decide claims arising
out of payment of less than the minimum rates of wages. Infringement
by tlie employer of certain provisions of the Act has been made punish-
able witli imprisonment or fine or with both.

Interpretation (S. 2)
In this Act, unless there is anytliing repugnant in the subject or con-
text,—
(a) adult, adolescent and child have the meanings respectively assign-
ed to them in Section 2 of the Factories Act;
752 WERGAN TILE LAW
J y

(b) appropriate Goveniineiu in i elation to any sclieduled employ-

ment has the meaning assigned to it in Section 2 (a) of the In-
dustrial Dispute!, Act, 1947;
(c) competent authority means the authority appointed hy tlie ap-
propriate Government by notification in its Ollirial Ga/ette to
asceitnin lioiii time to lime the cost of Jiving index luimber
applicable to the employees cmplo}ed in the schedided employ-
ments specified in such notification; '
(d) cost of living index nuinber in relation to employees in any
sclicduled employment in respect ol which minimum rates of
wages lia\e been fixed, means tlie index numljer asceitained
-and declared by the competent authority by notification in the
OHicial Ga/xtte to be the cost ol living index number applic-
able to employees in such employment;
(e) employer in relation to any scheduled employment has the
meaning assigned to it in die Factories Act and the Industrial
Disputes Act;
(f) wages in relation to scheduled employment has the meaning
assigned to it in Section 2 (vi) of the Payment of Wages Act,
1936;
(g) employee means any person who is employed foi hire or reward
to do any work, skilled or unskilled, manual or clerical, in a
scheduled employment in respect of which minimum rates of
wages have been fixed; and includes an out-worker to whom
any articles or materials are given out by another person to be
made up, cleaned, washed, altered, ornamented, finished, re-
paired, adapted or otherwise processed for sale for the purposes
of the trade or business of that other person where the process
is to be carried out either in the home of the out-worker or in
some other premises not being premises under the control and
management of that other person; and also includes any em-
ployee declared to be an employee by the appropriate Govern-
ment; but does not include any member of the armed forces
of the Indian Republic.
?ixing of Minimum Rates ol Wages (S. 3)
(1) The appropriate Government shall, in the manner hereinafter
Drovided,—
(a) fix the minimum rates of wages payable to employees employed—
(i) in an employment specified in Part 1 of the Schedule at the
commencement of this Act, before December 31, 1959;
(ii) in an employment specified in Part II of the Schedule at the
commencement of this Act, before December 31, 1959: provid-
ed that the appropriate Government may instead of fixing
minimum rates of wages under this sub-clause for the whole
State, fix such rates for a part of the State or for any specified
class or classes of such employment in the whole State or part
thereof; and
(iii) in an employment added to Part I or Part II of the Schedule
 MINIMUM WAGES 753

^ by notification under Sec. 27, before the expiry of one year

Iroin the date of notihcation;
(b) icview u such intenais as it may think fit, sucli intervals not
exceeding J )eaT), the minimum lates of wages so fixed and revise
(lie minimum lates, if necebsaiy. Piovided that where foi any
reason the appiojjiiate Government has not reviewed the mini-
nuim rates ol wages fixed by it in respect of any scheduled em-
ployment within any inteival of 5 years, nothing contained in
this clause shall lie deemed to pi event it from leviewing the
minimum rates after the expiiy of the said peiiod of 5 years and
levismg them, if necessary, and until they aie so revised the
minimum rates in force immediately before the expiry of tlie
said period of 5 years shall continue in force ^
(I \.) Notwithstanding anything contained in Sub Sec. (1), the appro-
^ piiate Government may lefrain from hxing minimum rates of wages in
respect of any sciieduled employment in which theie aie in the whole
State less than 1,000 employees engaged in such employment, but i£ at
any time whether befoie or after the expuy of any time limit specified
in Sub Sec (I), tlie appiopnate Goveinment comes to a finding ' aftei
such inquiiy as it may make or cause to l^e made m this behalf ,tl) if the
luimbei of employees in any scheduled employment in lespect of wh.ch
It has lefraiued fiom fixing minimum rates of wages has lisen to 1,000
or moie, it shall fix minimum lates of wages payable to employees m such
ein]jIovment within one yeai fiom the date of conung to such findino;
(2) The appropriate Government may fix (a) minimum time rate;
(b) a minimum piece rate; (c) a guaianteed time rate; (d) overtime r.yic
(3) In fixing or revising minimum rates of wages under this section
differenf minimum rates of wages may be fixed for (i) different scheduled
* cmplovments (u) different classes of work in the same scheduled employ
j'.ent (I'l) adults, adolescents, children and apprentices, (iv) difleren
localities Minimum rates of wages may' be fixed by any one or more of
the fo'lowing wage periods; by the hour, by the day, by the month, or by
anv larger wage period as may be prescribed; and where sucli rates are
fixed by the, day or bv the month, the manner of calculating wages foi a
month 01 for a day, as the case may be, may be indicated.

Minimum Rates of Wages (S. 4)

(1) Any minimum rate of wages fixed or revised by the appropriate
Government in respect of scheduled employments under Section 3 may
colli ist of—
(i) a basic rate of wages and a special allowance at a rate to be ad-
justed at such intervals and in such manner as the appropri.'tc
Goveinment may diiect, to accord as nearly as practicable with
the variation in the cost of living index number applicable to
such v^orkers (hereinafter referred to as the "cost of living a\
lovvance"), or

1. Inseited by the Minimum Wages (Afnendment) Act, 195'

75 i MERCANTILE LAW
(fi) a baste rate of wages with or without ilie cost of living allo^v-
ance, and the cash value of the concessions in respect of sup-
plies of essential commodities at concession rates, where so au-
thorised;
(iii) an all-inclusive rate allowing for the basic rate, the cost ot li^•ing
allowance and the cash value of the concession, if any.
(2) The cost of living allowance and the cash \alue of the concessions
in respect of supplies of essential commodities at concession rates shall be
computed by die competent authority at such intervals and in accordance
U'ith such directions as may be specified or given by the appropriate Gov-
ernment.

Procedure for Fi.ving Wages (S. 5)

(1) In fixing minimum rates of wages in respect of any scheduled em-
ployment for the first time under this Act or in revising minimum rates
of wages so fixed, the appropriate Government shall either—
(a) appoint as many committees and sub-committees as it considers
necessary to ^ hold enquiries and advise i^ in respect of' such fix-
ation or revision, as the case may be, or
(b) by notification in die Official Gazette, publish its proposals
for the information of persons likely to be affected thereby and
specify a date, not less than two months from the date of the
notification, on which the proposal will be taken into consider-
ation.
(2) After considering the advice of the committee appointed under
clause (a) of Sub-Section (1), or as the case may be, all representations re-
ceived by it before the date specified in the notification under clause (b)
of tlie sub-section, the appropriate Government shall, by notification in die
Official Gazette, fix, or, as the case may be, revise the minimum rates of
wages in respect of each scheduled employment, and unless such noti
fication othenvise provides, it shall come into force on the expiry of three
months from the date of its issue: Provided that where the appropriate Gov-
ernment proposes to revise the minimum rates of wages by the mode speci-
fied in clause (b) of Sub-Sec. (1), the appropriate Government >^ha]l, con-
sult the Advisory Board also.*

Committees and Advisory ' Boards (Ss. 7-9)

For the purpose of co-ordinating the work of committees and sub-
committees appointed under Section 5 and advising the appropriate Gov-
ernment generally in_the matter of fixing and revising minimum lates of
wages, the appropriate Government shall appoint an Advisoiry Board (S.
7). For the purpose of advising the Central and State Governments in
the matters of the -fixation and the revision of minimum rates of ivages
and other matters under this Act and for co-ordinating the work of the^
Advisory Boards, the Central Gdyernment shall appoint a Central Advisory
Board, which shall consist of persons to be nominated by the Central Gov-

•Tnserted bv Amendment Act of 1957.

.MINIMUM WAGES 755

tnirnent leiJic^'jiiting employers and employees in tlie scheduled employ

me'.if,, who shall he equal in number, and independent peisoas no. ex-
ceeding one-lhird ol iis total numhcr ot members. One of such indepen-
dent persons siiall he apijointed the Chainnan o f t l i e Board by the Gen-
ual Go\ernnient (S. 8). Each of the Committees, Sub-Gommittees and
the AcKi'ory Boartl iliall consist of persons to be nominated by the ap-
l)iopriaie Government in the same manner as for the Gentral Advisory
IJoard (,S. 9).
Section 10 p!o\i(les that the appropriate Government may, at any
time, by notihcation in the Ofhcial Gazette, correct clerical or arithmeti-
cal mistakes in any order fixing or revising minimum rates of wages under
this Act, or errors arising therein from any accidental slip or omission,
E\cry such notilication, after it is issued, shall be placed before the Advisory
ISoard for information.*

Wages in Kind (S. 11)

Mittimvvm vjAges jvi'/iUle undev ihis Act ave t-O be paid in cabU, but
wliere it has been the custom to pay wages wholly or partly in kind, the
appropriate Government may allow the continuance of this method of pay-
ment. The appropriate Government may also authorise the supply of
essential commodities at concession rates, if it is of the opinion that it
should be done in the interest of the employees. This cash value of wages
in kind and of concessions in respect of supplies shall be estimated in the
prescribed manner.

Payment of Minimum Wages (S. 12)

The employer must pay to every employee engaged in a scheduled
employment tmder him ivages at a rate not less tlian the minimum rate
of wages fixed by notification for that class of employees in that employ-
ment without any deductions except ^s may be authorised by the appro-
priate Government. This provision will not, however, affect the provis-
ions of the Payment of Wages Act, 1936.
Section 13 (1) empowers the appropriatfe Gove'rnment to fix the num-
ber of hours of work which shall constitute a normal working day, in-
clu.sive of one or more specified intervals, and provide for a day of rest
in every, period of seven days and for the payment of remuneration in
respect of such days of rest. If an employee is required to work on a rest
dav he must be paid the overtime rate, and such a rate must be paid even
wjiere a worker is requiied to work overtime for any length of time. If
an employee, whose minimum rate of wages has been- fixed, under this Act
bv the (lay, works on any day for a period less than the reputed number
of hours constituting a normal working day, he shall be entitled to re-
rcivc wages in respect of work done by him on that day as if he had work-
ed for a full normal working day: provided that he shall not be entitled
(o receive wages for the full day, if he was unwilling to work and the em-
])io\er was ready to give him tlie work, or if there were such other circum-
blances which warranted such non-payment.
(2) The provisions of Sub-Sec. (1) shall, in relation to the following

'Inserted by Amendment Act of 1957.

756 MERCANTILE LAW
classes o£ employees, apply only LU suui exceat and subject to such con-
ditions as may be prescribed;
(a) employees engaged on urgent work, or in any emergency which
could rfct have been foreseen or prevented;
(b) employees engaged in work in the nature ot preparatory or com-
plementary work whidi must necessarily be carried on outside the limits
laid down for the general working in the employment concerned;
(c) "employees whose employment is essentially intermittent;
(d) employees engaged in any work which for technical reasons has
to be completed before the duty is over;
(e) employees engaged in a work which could not be carried on ex-
cept at times dependent on the irregular action of natural forces.
(3) An employment is intermittent when it is declared to be so by
the appropriate Government on the ground that the daily hours of duty ••
of the employee, the hours of duty, normally include periods of inaction
during which the employee may be on duty but is not calIed'4jpon to dis-
play either physical activity or suttained attention. I
Where an employee does two or more classes of work to each of
which a different minimum rate of wages is applicable; the employer shall
pay to such employee in respect of the time respectively occupied in each
such class ot work, wages at not less than the minimum rate in force in
respect of each such class (S. 16). Where an employee is employed on
jjiece-work for which minimum time rate' and not a minimum piece-rate
has been fixed imder this Act, the employer shall pay to such employee
wages at not less than the minimum time rate (S. 17).
Register and Records (S. 18) Every employer shall maintain such
registers ' and records ' giving such particulars of employees employed by
him, the work performed by them, the wages paid to them, the receipts
given by them and such other particulars and in such form as may be^
prescribed. He shall also keep exhibited in the factory, workshop or
place where the employees in the scheduled employment may be employ-
ed, or in the case ot out-workers, in such factory, workshop or place as
may be used for giving out work to them, notices in the prescribed form
containihg prescribed particulars. The appropriate Government may pro-
vide for tlie issue of wage books or wage slips to employees ernployed in
any scheduled employment in respect ot which minimum ratej* of wages
have been fixed and prescribe the manner in which entries shall be made
and authenticated in such, wage books or wage slips by the employer or
his agent.
Inspectors (S. 19). The appropriate Government may, by notification
in the Official Gazette, appoint such persons as it thinks fit to be Inspec-
tors for the purposes of this Act, and define the local limits within which
they shall exercise their functions. Subject to any rules made in this be-
half, an Inspector may within his local limits (a) enter, at all reasonable
hours, with such assistants, it any, as he thinks fit, any premises or place
where employee? are employed or work is given out to o'ut-workers in any
scheduled employment in respect of which minimum rates of wages have
been fixed, for the purpose of examining any register, record of wages or
notices and require the production thereof for inspection; (b) examine
any employee; (c) require ;iny_person giving out-work and any out-workers,
to give any information with regard to the work and tlie payments made
 MINIMUM WAGES 757

notices or portions thereof as he may consider relevant in respect of any

offence under this Act which he has reason to believe has been committed
--by an employer; and (e) exercise such other power as may be prescribed.
Claims (S. 20). The appropriate Government may, by notification in
the Official Gazette, appoint any Commissioner for Workmen's Compen-
sation or any officer of the Central Government exercising functions as a
Labour Commissioner for any region, or any officer of the'Stale Govern-
ment not below the rank of Labour Commissioner or any Judge of a
Ci\il Court or a Magistrate to be the Authority to hear and decide for
any specified area all claims arising out of payment of less than the mini-
mimi rates of wages or in respect of lemuneration for,.days of rest or for
work done on such days under S. 13 or of wages at the overtime rate
under S. 14 to employees employed or paid in that area.
(2) Where an employee has any claim 'of the nature referred to in
(1) the employee himself, or any legal practitioner or any official of regis-
tered trade union authorised in writing to act on his behalf, or any In-
spector, or any person acting with the permission of the Authority, may
apply to such Authority for a direction under Sub-Section (3): provided
that every such application shall be presented within six months from the
date on which the minimum wages or other amount became payable, un-
less the Auilioxiiy admits an application aher this period on suificieni
cause being shown.
(3) When an application under Sub-Section (2) is entertained, the
Authority shall hear the applicant and the employer or give them an op-
portunity of being heard, and after such further enquiiy, if any, as it may
consider necessary may, without prejudice to any other penalty to which
the employer may be liable imder this Act, direct (i) in the case of a claim
aiising out of payment of less than the minimum rates of wages, the pay-
ment to the employee of the amount by wliicli the minimum • wages pay-
able to him ^exceed the amount actually paid, together with the payment
of such compensation as the Authority may think fit, not exceeding ten
times the amount of such excess in any other case, the payment of the
amoimt due to the employee, together with the payment of such compen-
sation as the .\uthoiity may think fit. not exceeding ten rupees, and the
Authoiity may direct' payment of such compensation in'cases where the
excess or the amount due is paid by tlie employer to ihh employee befoie
die disposal oL d\e application.
(4) If the Authoiity heaiing any application is satisfied that it was
cither malicious or vexatious, it may direct the applicant to pay to die
empioyer a ])enalty not exceeding Rs. 50. Every, direction of the Autli-
oiily under this section shall be final. ^
Section 21 provides that subject to such rules as may be prescribed,
a single application may be presented under Section 20 on behalf or in
ic'pect of any ni-ml^er of employees employed in die scheduled employ-
ment in respect of which minimum rates of wages have been fixed and in
such cases the maximum compensation which may" be awarded shall not
exceed ten times the aggregate amount of such excess or ten rupees per
head, as the case may be. The Authority may deal with any number of
separate applications as a single application.
Penalties and Procedure (S. 22). (1) Any employer who pa)s to any
employee less than the minimum rates of I'l'ages fixed for tliat employee's
class of work, or'less than the amount due to liim under ilie provisions of
this Act or contravenes any ouler or rule made under Section 13 shall be
 758 MERCANTILE L \ W
punisJiable wilh imprisonment for a term wliicli may extend lo six monUis,
or Willi fine whith may extend to Ri. 500, or with botli. In imposing
any fine, tlie Court shall take inlo consideration the amount of any com-
pensation already awarded against the accused in any proceedings taken
under Section '2(3.
Section 22A* provides that an employer who contravenes any pro\ i-
sion of iliis Act or of any rule or order made thereunder shall, i£ no oiher
pdnalty is pro\ided for such contravention by this Act, be punishable witii
fine up to Rs. 500.
Section 22B* lays down that no Court shall take cognizance of a com-
plaint against any person for an offence (a) under S. 22 for paying less
ihan the minimum rate of wages unless an a])plication under S. 20 has
been granted wholly or in part, and the appropriate Government or an
official authorised by it in this behalf has sanctioned the making of the
complaint, or (b) for not complying with rules or order under S. 13 or
under S. 22A, except on a complaint made by, or with the sanction of,
an Iii'-perior. The complaint under S. 22A must lie made within 6
months of the date of the offence and in other cases within one month
of the 'olTence.
Section 22C* says that if the person committing any offence under this
Act is a company, every person who at the time the offence was commit-
ted, was in diarge of, and was responsible lo, the company for the con-
duct ol the business of the company as well as the company shall be deem-
ed lo be guilty of tiie offence and shall be liable to be proceeded against
and ijuiiished accordingly: provided that he shall not be liable if he
])roves that the offence was committed without iiis knowledge or he had
exercised due diligence lo jircvent the commission of tiic offence. If an
offence by a company has been committed wilh the consent or connivance
of. or is atiiibuiable to any neglect on the part of any directoi, managci,
secretarv oi other odicer of the company, then such person shall- also l)c
guilts of thai olIcMice .tnd liaf)le to l)e punished. A company includes
any Ijody cor[)Oiatc, ii firm or oilier a.ssociatioii of individuals and a diicc-
tor includes a jwrtiier. '
Section 221)* provitles that all amounts payMe bv an employer to
an employee under this Act must be deposited with the prescribed auth-
ority to be dealt with, if the employee has died or cannot be traced.
Section 22E* exempts from attachment any amount deposited by an
employer with the appiopiiate Government as security for the due perfor-
mance of any contract oi any amount due to the employer from the Gov-
ernmeiu in resiiert of such contract shall not be liable to attachment under
anv decree or order of any Court in respect of any debt or liability of the
cm])loyer oilier than any debt or liability towards any em])loyee employed
in connection with the contract aforesaid.
Seriion 22F* emiiowcrs the appropriate Government, to direct by noti-
fication ihai any or all of the provisions of the Payment of Wages Act,
lO.'if), v.'ill apply to the wages payable to employees in such scheduled cm-
plounents as may be specified in the notification; and the Inspector cm-
ploved under this .\ct .shall be deemed to be the iifspefioVi for the pur-
])0S(- of the enforcement of those prosisions.
Exemption of Employer from Liability (S 23). Where an employer
is charged wilh an offence again-it this Aci^ he_sJiall be entitled, upon <om-

• Iiisc'iied i)v .Amendment Act of 1957.

MINIMUM WAGES , 759
plaint duly made by him to have any other person, whom he charges as
the actual offender, brought before the Court at the time appointed for
hearing- the chaige; and if, after the commission of the offence has been
proved, the employer j^roves to the satisfaction of the Court
(a) that he has used due diligence to enforce tlie execution of this
Act, and
(b) that the said other person committed the offence in question
without his knowledge, consent or connivance,
that other person shall be convicted of the offence and shall be liable to
the like punishment as if he were the employer and the employer shall he
discharged. The employer will be liable to be examined on oath and the
evidence of the employer or his witness shall be subject to cross-examin-
ation by the other person so charged and by tlie prosecution.
Section 24 bars the institution of any suit for the recovery of wages
which can be or could be recovered under Section 20 of this Act. Section
25 prohibits contracting out agreements in respect of minimum rate of
wages payable under this Act.
Exemptions and Exceptions (S. 26). , (1) The appropriate Government
may, subject to such conditions if any as it may think fit to impose, direct
that the provisions of this Act shall not apply in relation to the wages
payable to disabled eniployees.
(2) The appropriate "Government may, if for special reasons it thinks
bo fit, Iiy notification in the/ Official Gazette, direct that subject to such
conditions and for buch period as it may specify the provisions of this Act
or anv of them --Iiall not apply to all or any class of employees employed
in any scheduled cmi^Ioymcnt or to any localily where there is carried on
a .'xhcduled employment.
(2.\) The appropiiate Government may, if it is of opinion that, ha\nig
leg.nd to the term<v and conditions of service applicable to any \;lass of
employees in a .stheduled employment'generally or in a scheduled employ-
ment in a local area, or to any esiabJishment or a part of any establishment
in a scheduled employment it is not necess'ary to fix minimum wages in
rcspe( I of such emjjloy'ees of that class or in respect of employees in such
establi-hnicni oi such pan of any establishment as aie in receipt ot wages
exceeding such limit as may be -prescribed in this behalf, direct, Ijy iioii-
licatiou in the Official Ga/elte^add subject to such conditions, if any. as it
may tiiink fit to imjjose, tliat tljc^provLsions of this .-Xct or any of them sliall
not apply in relation to such employees.
(3) Nothing in iliis .\ci shall apply to the wages payable by an em-
ployer to a member of his family who is living with him and is dependent
on him.
Exjilanation. In this SubScction a member of the employer's family
shall be deemed to include liis »r her spouse or child or parent or brother
or sister. -^
Section-STT/niiiower.s the appiopriate Government to add to the schedul-
ed em])lovmen'i any other cmpIo)ment, whereupon die schedule shall in
its ajjpflcation to the Stale be deemed to be amended accordingly. Section
28 empowcis 'the Clential Government to give directions to a Slate Go\cin-
meiu ,is 10 the earning into execution of this Act in the State. Sectioit '19
ijrovidcs that the C:cntral Government may by notification in the Official
Ga/etie make rules picscribing the term of office of tlie members, tlie ]3ro-
 760 MERCANTILE LA^^
ceduie to be followed in the conduct of business, the method of voting,
the manner of filling up casual vacancies in the membeiship -and the
quorum necessary for the transaction of business of the Central Ad\isoiv
Board. Section 30 empowers the appropriate Government to make similar
rules in respect of committees, sub-committees, and the Advisory Board:
and in relation to other cases. Section 31 (I) em]3owers an appropriate
Government to validate the fixation of certain minimum rates of iva.qes a r l
provides that where during the peiiod commencing on. the 1st A])ril, H)52.
ami ending with the commencement ol the Amendinp; Act of 1951, mini-
mum rates of wages^ have been fixed by an appropriate Government as
being payable to employees employed in any employment specified in
Part I of the Schedule in the belief or purported belief that such rates wore
being fixed under Sec. 3 (1) (a) (ij^ such rates sliall be deemed lo ha\e
been fixed in accordance with law, and sliall not he questioned in an\
Court on the ground merely of the expiry of the time: provided that nothing
contained in this section shall extend, or be construed to extend to affect
any person with any punishment or penalty whatsoever by icason ol tlie
payment by him by way of wages to any of his cmplovces during ilie period
specified in, this section an amount \vhich is less than the minimum rates
of wages referred to in this section or by reason of non-compliance dining
. t h e period aforesaid with any order or rule issued under .Section 13.
(2)* The provisions pf Sub-Sec. (I) shall apply in relation to minimum
rates of wages fixed by an appropriate Government during the ))eiiod com-
mencing on the 31st day of December, 1954, and ending witli the date of
the commencement,of the Minimum Wages (Amendment) Act, 1957, as
Ihey apply in relation to minimum rates of wages fixed I)y an appropriate
Government during the period commencing on the 1st day of April, 1952.
and ending with the date of commencement of Minimum Wages (,\mend-
ment) Act, 1954, subject to the modification that for the words, hgiues,
brackets and letter "employment specified in Part I of the Schedule in" the
belief or purported belief that such rates were being fixed under sub-cl. (i) of
tl. (a) of Sulj-Sec. (.1,) of Sec. 3", the words, figures, brackets and letter
"employment specified in Part I or Part II of the Schedule in the belief or
purported belief that such rates were being fixed nndcr sub-cl. (i) or sub-
cl- (ii) of cl. (a) Sub-Sec. (1) of Sec. 3" sh,ill be substituted.

T H E SCHEDULE
[Se^ §s. 2 (g) and 27] ,
PART I
1. Employment in any -wooHen carpet-niaking or shawl weaving estab-
l>-shment
2. Erriployment in any rice mill, floisr mill and dal mill.
3. Employment in any tobacco (including bidi-making) manufactory.
•1 Employment in any plantation, that is to say, any estate which is
maintained for the purpose of growing cinchona, rubber, tea or coffee.
5. Employment in any oil miil.
C. Employment under any local authority.
7. Employment on the construction or maintenance of roads or in
building operations.

•The Act made applicable later.

MINI^IU^^ W A G E S 76I

8 Employment in stone-breaking or stone-crushing.

<J Employment in any lac manufactory.
10 Employment in any mica works.
1! Emjjloyment in public motor transpoit.
12 Employment in tanneries and leather manufactory.
Employment in glass industry.
Employment in cement industry.
'15 Employment in potteries.

PART II
1. Employment in agriculture, that is to say, in any form of farming,
including the culti\ation and tillage of the soil, dairy farming, the produc-
tion, cultivation, growing and harvesting of any agricultural or horticultural
commodity, the raising of livestock, bees or poultry and any practice per-
formed by a farmer or on a farm as incidental to or in conjunction with
farm operations (including any forestry or timbering operations and the
preparation for market and delivery to storage or to market or to carriage
Jor iraniporration to market of farm produce).

.\Lt made applicable •at-jr.

 Appendix I

The Indian Contract Act, 1872

[25th April. 1872]

(ACT No. IX of 1872)

Whereas-h is expedient to define and amend certain parts of the law

relating to contracts; it is hereby enacted as followi>:
Preliminaiy
1. Short title, extent and commencement. This Act may be called
llie Indian Contiact Act, 1872.
It extends to [the whole of India] except the State of Jammu and
Kai,hmir; and it sliall come into force on the Inst day of September, 1872.
Nothing herein contained shall affect the piovisions of any Statute,
Act oi Regulation not hereby expressly repealed, nor any usage oi custom
oL Hade, nor any incident of any contract, not inconsistent with the pro-
\ isions ol tiiis Act.
2. Jnterjjretation-clause. In this Act tlie following words and expres-
^ions are used in tlie following senses, unless a contrary intention appeals
Iiom the context:—
(a) When one person signifies to another his ivillingness to do or to
alwtain from doing anything, with a ^iew to obtaining the assent
of that other to such act or abstincixce, he is said to make a
pi oposal;
(b) When the peison to whom the proposal is made signifies his
assent tliereto, the jjroposal is said to' be accei^ted. A proposal,
when accepted, becomes a promise; ,
(c) Tiie person making the proposal is called the "promisor", and
the peison accepting the pioposal is called the "promisee";
(d) Wlien, at the desiie of the promisor, the promisee or any other,
jjcrson has done or abstained from doing, or does or abstains
iiom doing or pioniises to do or to aljstam from doing, somc-
tliing, sudi act or aljstinencc or piomise is called a consideiation
for iJie promise;
(c) E\eiy piomise and every set of promises, forming the consider-
ation lor each otiier, is an agrec'ment;
(f) Piomises which foim the consideration or part of the consider-
ation for each other are called reciprocal promises;
(g) An agieement not enforceable by law is said to be void;
']-Hi: I X n i \N C O N l RACT ACT, 1872 763

{li) An a<;icement enforceable by law is a contract;

(i) An agicemcnt wliich is enfoiceable by law at the option of one
or moie ol the parties thereto, but not at the option of the
oilier or others, is a voidable contract;
(j) A tontiact which ceases to be enforceable by law b-jcomes Toid
when it ceases to be enforceable.

CHAPTER I
Of the Communication, Acceptance and Revocation of Proposals
3. Communication, acceptance and revocation of proposals. The com-
munication of proposals, the acceptance of pioposals, and the revocation
of proposals and acceptances, respectively, are deemed to be made by any
act or omission of the party proposing, accepting or revoking by which
he intends to communicate such proposal, acceptance or revocation or
which has the effect of communicating it.
4. Communication when complete. The communication of a proposal
is complete when it comes to the • knowledge of the person to whom it is
made.
The communication of an acceptance is complete,—
as against the proposer, when it is put in a course of transmission
lo him, so as to be out of the power of the acceptor;
as against the acceptor, when it comes to the jknowledge of the pro-
poser.
T h e (ommunication of a revocation is c o m p l e t e -
as again.st the peison 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 hisjtnow-
ledge.

Illustrations
(a) A proposes, by letter, to sell a jiouse to B at a certain price.
Tlic communication of the proposal is complete when B receives tlie
letter. - • ^ ,
(b) B accepts A's proposal by a leitcr jcnt by post.
The communication of tlie proposal is comp^leie when B receives the
letter, as against A, wiien the letter is posted, as against B, when the leitcr
is received by A.
(c) A revokes his pioposal by telegram.
The revocation is complete as against A, when the telegram is dcs-
jj.itched. It is complete as against B, when B receives it.
B re\okes his acceptance by telegram. B's revocation is complete as
ng.iin'-t B, when tiie telegram is despatched, and as against A, wlien it
1 caches him.
5. Revocation of j)roj)osaIs and acceptance. A proposal may be rc-
^okcd at an) time l)efore tiic commiwiication of its acceptance is complete
as against the proposer, Init not aficiwards.
An acceptance may be revoked at any time before the communication
•s)f the acceptance is complete as against the acceptor, but not .iftciw.nils.
7G4 MERCANTILE LAW
Illustrations
A proposes, by a letter sent by post, to sell his house to B.
B accepts the proposal by a letter sent by post.
A may revoke his proposal at any time before or at the moment when
B posts his letter of acceptance, but not afterwards.
B may re\oke his acceptance at any time before or at the moment
when the letter communicating it jeaches A, but not afterwards.
6. Revocation how made. A proposal is i evoked—
(1) by the communication of notice of revocation by the proposer to
the other party;
(2) by the lapse of the lime prescribed in such proposal for its
acceptance or, if no time is so prescribed, by tlie lapse of a
leasonable time, without communication of the acceptance;
(3) by the failure of the acceptor to fulfil a condition precedent to
acceptance; or
(4) by the death or insanity of the, proposer, if the faa of his death
or insanity comes to the knowledge of the acceptor before ac-
ceptance.
7. Acceptance must be absolute. In order to convert a proposal into
a promise, the acceptance must—
(1) be absolute and unqualified;
(2) be exjDressed in some usual and reasonable manner, unless the
proposal prescribes the manner in which,it is to be accepted.
If the proposal prescribes a manner in which it is to be accept-
ed, and the acceptance is not made in such manner, the pro-
poser may, within a reasonable time after the acceptance is
communicated to him, insist that his proposal shall be accepted
in the prescribed manner, and not otherwise; but if he fails to
do so, he accepts 'the acceptance.
8. Acceptance by perfonning conditions, or receiving consideration.
Performance of the conditions of a proposal, or the acceptance of any
con'.ideration for a reciprocal promise wliich may be offered ivitli a pro-
posal, is an acceptance of the proposal.
9. Promises, eispress and implied. In so far as the proposal or ac-
ceptance of any promise is made in words, the promise is said to be ex-
presi. In so far as such proposal or acceptance is made otherwise tlian in
words, the promise is said to be implied.

CHAPTER II
Of Contracts, Voidable Contracts and Void Agi-eements
10. What agreements are contracts? All agreements are contracts if
thev are made by the free consent of parties competent to contract, for a
lawful consideration and with a lawful object, and are not hereby ex-
pressly declared to be void.
Nothing herein contained shall affect any law in force in India and
not hereby expressly repealed, by which any contract is required to b e -
made in writing or in the presence of witnesses, or any law relating to the
registration of documents.
11. Who are competent to contract? Every person is competent to
contract who is of the age of majority according to the law to wJiich he is.
T H E INDIAN CONTRACT ACT. 1872 765
subject, and who is of sound mind, and is not disqualified from contract-
in» by any law to which he is subject.
12. What is a sound mind for the purposes of contracting? 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 form-
ir.g a rational judgment 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 of unsound mind.

Illustrations
(a) A patient in a lunatic asylum, who is at intervals'of sound mind
may contract during those intervals.
(b) A sane man, who is delirious from fever ot who is so drunk that
he cannot understand the terms of a contract or form a rational judgment
as to its effect on his interest, cannot contract whilst such delirium or
drunkenness lasts.
13. "Consent" defined. Two or more persons are said to consent
when they agree upon the same thing in the same sense.
14. "Free consent" defined. Consent is said to be free when it is
not caused by—
(1) coercion, as defined in Section 15, or
(2) undue influence as de;fi.ned in Section 16, or
(3) fraud, as defined in Section 17, or
(4) misrepresentation as defined in,Section 18, or
(5) mistake, subject to tlie provisions of Sections 20, 21 and 22
Consent is said to be so caused when it would not have been given
but for the existence of such coercion, undue influence, misrepresentation
or mistake.
15. "Coercion'' defined. '•Coercion" is the committing, or threaten-
ing to commit, any act forbidden by the Indian Penal Code (XLV of 1860),
or the unlawful detaining, or threatening to detain, any property, to the
prejudice of any person %vhatever, with the intention of cau^ng any per-
son to enter into an agreement.
Explanation. It is immaterial whether the Indian Penal Code (XLV
of 1860) is or is not in force in the place where the. coercion is employed.

Illustrations
A on board an English ship on the high seas, cailses B to enter into
an agreement by an act amounting to criminal intimidation under the
Indian Penal Code (XLV of 1860).
A afterwards sues B for breach of contract at Calcutta.
A has employed coercion, although his act is not an offence by the
law of England, and aldiough Section 566 of the Indian Penal Code (XLV
of 1860) was not in force at the time or place where the act was done.
16. "Undue influence" defined. (1) A contract is said to be induced
by "undue influence" where the relations subsisting between the parties
aie 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.
7C(i , MERCANTILE LAW"
(2) In parlicular and without prejudice to the generaliiy ol the loie-
go'i!,^ piiiiciple, a pertoii is deemed to be in a position to dominate tlie
iviil ol anoUier—
(a) wheie lie Jiolds a leal or apparent authority over tlie other, or
where he stands in a fiduciary relation to the other; ot
(b) wheie Jie makes a contract witlt a person wliose mental capacity
is tempoiarily "or peimanently affected by reason of age, illness,
or men Lai or bodily distress.
(o) \Vhere a pel son who is in a position to domniate the will of an-
other enters into a contract with him, and the tiansaction appears, on the
lace ot it or on tlie evidence adduced, to be unconscionable, the burden ol
proving that sudi contract was not induced Ijy undue influence shall lie
ujjon tlie person in a position to dominate the will of tlie o'ther.
Nothing in this sub-section shall affect the provisions ol Section III
o( the Indian Evidence Act, 1872 (I of 1872).

Illustrations
(a) A having advanced money to hh son B, during- Jiis mmomy, upon
B's coming of age obtains, by misuse of parental influence, a bond from B
,for V greater amount than the sum due in respect of the advance. A em-
ploys undue influence.
(1)) ,-\, a man enfeebled by diseasc'or age, is induced by B's infltience
over him as his medical attendant to agree to pay P an unreasonable sum
tor his professional services. B employs undue influence.
(c) A, being in debt to B, the money-lender ot his village, contracts on
a fresh loan on terms which appear to be unconscionable. It lies on B
to prove that the contract was not induced by undue influence.
(d) A applies to a banker for a loan at a time when there is stringency
in the money market. The banker declines to make the loan except at an
unusually high rate of interest. A accepts tlie loan on these terms. Tiiis
is a transaction in the ordinary course of business, and the contiact is not
induced by undue influence.
17. "Fraud" defined. "Fraud" means and includes any of the follow-
ing acts committed by a paity to a contract, or with his connivance or by
his agent, with intent to deceive another party thereto oi his agent; or to
inouce him to enter into the contract:— i
(1) the suggestion, as a fact, of that which is not true by one who
does not believe it to be true;
(2) the active concealment of a fact by one having knowledge or
belief of tne fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be
fraudulent.
E-:i)lanation. Mere silence as to facts likely to affect the willingness
of a person to enter into a contiact is not fraud, unless the ciicumstances
of the ca^e are such that, regard "being had to them, it is the duty of the
person keeping silence to speak, or unless his silence is, in itself, equivalent
to speech. 1
Illustrations
in\ A spll<i Iw auction to B. a horse which A knows to be unjound. A
T H E INDIAN CONTRACT ACT, 1872 767

s.vys noiliing to B about the hoise's unsoundness. This is> not fraud in
A.
(D) B is A's daughter and has just come of age. Heie the relation
between th-j parties would make it A's duty to tell B if the horse is un-
sound.
(c) B-says to A—"If you do not deny it, I shall assume that the horse
is sound". A says nothing. Here A's silence is equivalent to speech.
(d) A and B being traders, enter upon a contract. A has private in-
formation of a chapge in price which would affect B's willingness to
proceed with the contract. A is not bound to inform B.
18. "Misrepresentation" defined. "Misrepresentation" means and in-
c'udes:—
(1) the positive assertion, in a manner not warranted by the infor-
mation of the person making it, of that which is not true,
though he believes it to be true;
(2) any breach of duty which, without an intent to deceive, gains
an advantage to the person committing it, or any one, ^ claim-
ing under him, by misleading another to his prejudice or to the
prejudice of any one claiming under him;
(S) causing however innocently, a party to an agreement to make a
mistake as to the substance of the thing which is the subject
of the agreement.
19. Voidability of agreements without free consent. When consent to
an agreement is caused by toercion * * » * fraud or misrepresentation the
agreement is a contract voidable at the option of the party whose consent
was so caused.
A party to a contract, whose consent was caused by fraud or misre-
presentation, ^may, if he thinks fit, insist that the contract shall be per-
formed^ and that he shall be put in the position in which he would have
been if the representations made had been true.
Exception. If such consent was caused by misrepresentation or by
silence fraudulent within the meaning of Section 17, the contract, neverthe-
less, is not voidable, if the party whose consent was so caused had the
means of discovering the truth with ordinary diligence.
Explanation. A fraud or misrepresentation which did not cause the
consent to a contract of the party on whom such fraud was practised, or to
whom such misrepresentation was made, does not render a contract void-
able.
Illustrations
(a) A, intending to deceive B, falsely represents. that five hundred
maunds of indigo are made annually at A's factory, and thereby induces B
to buy the factory. The contract is voidable at the option of B.
(b) A, by a misrepresentation, leads B erroneously to believe that five
hundred maunds of indigo are made annually at A's factory. B examines
the accounts of tlie factory, which show that only four hundred maunds
of indigo ha\'e been made. After this B buys the factory. The contract
is not voidable on account of A's misrepresentation.
(c) ^ fraudulently informs -B that A's estate is free from encumbrance.
B thereupon buys the estate. The estate is subject to a mortgage. B
may either avoid the contract, or may insist on its being carried out and
tlie mortgage-debt redeemed.
768 MERCANTILE LAW
(d) B, having discovered a vein of ore on the estate o£ A, adopts
means to conceal, and does conceal, the existence of the ore from A.
Through A's ignorance B' is enabled to buy the estate at an undcr-\aliie.
The contract is voidable at the option of A.
(e) A is entitled to succeed at the death of B. B dies; C, having re-
ceived intelligence of B's death, prevents the intelligence reaching A and
thus induces A to sell him his interest in the' estate. The sale is voidable
at the option of A.
19-A. Power to set aside contract induced by undue influence. AVhen
consent to an agreement is caused by undue influence, the agreement is a
contract voidable at the option of the paiiy whose consent was so caused.
Any such contraa may be set aside either al)solutely or. if the party
who was entitled to avoid it has received any benefit thereunder, upon
such terms and conditions as to the Court may seem just.

Illustrations
(a) A's ion has forged B's name to a promissory note. B, under tiireat
of prosecuting A'i son obtains a bond Irom A !or the amoimt o[ the
forged note. If B sues on this bond, the Court may set the bond aside.
(b) A, a money-lender, advances Rs. 100 to B, an agriculturist, and by
undue influence, induces B to execute a bond for Rs. 200 with interest ai 6
per cent per month. . T h e Court may set the bond aside, ordeiing B to
repay the Rs. 100 with such interest as may seem just. '
20. Agreement void where both parties are under mistake as to matter
of fact. ^Vhere both the parties to an agreement are under a mistake as
to a matter of fact essential to the agreement, the agreement is void.
Explanation. An erroneous opinion as to the value of the thing which
forms the subject-matter of the agreement is not to be deemed a mistake
as to a matter of fact.

Illustration.^
(a) A agrees to sell to B a specific cargo of goods supposed to be on
its way from England to Bombay. It turns out that before the day of the
bargain, the ship conveying the cargo had been cast away and the goods
lost. Neither party was aware of the facts. The agreement is void.
(b) .\ agrees to buy from B a certain horse. It turns out that the
horse was dead at the time of the bargain, thoqgh neither party was aware
of the fact. The agreement is void.
(c) A, being entitled to an estate for the life of B, agrees to sell' it to
C, B was dead at the time of the agreement, but both parties were ignorant
of the fact. The agreement is void.
21. Effect of mistakes as to law. A contract is not voidable because
it was caused by a mistake as to any law in force in [India]; but a mistake
as to a laiv not in force in [India] has the same effect as a mistake of fact,
Illustration «•'
A and B make a contract gioimded on the erroneous belief that a par-
ticular debt is barred by the Indian Law ot Limitation; the contiact is
not voidable.
22. Contract caused by mistake of one party as to matter of fact. A
contract is not voidable merely because it \\as caused by one of the pnuies
to it bema under a mistake as to a matter of fact.
 T H E INDIAN CONTRACT ACT, 1872 769

, 23. What considerations and objects are lawful and what not? The
consideration or object of an agreement is lawful, unless—
it is forbidden by law; or
is of such a nature that, if permitted, it would defeat the provisions
of any law; or
is fraudulent; or
involves or implies injury to the person or property of another; or
die Court regards it as immoral, or opposed to pviblic policy.
In each of these cases, the consideration or object of an agreement
is said to be unlawful. tEvery agreement of which the object or consider-
ation is unlawful is void.
Illustrations
(a) A agrees to sell his house to B for 10,000 rupees. Here B's pio-
mise to pay the sum of 10,000 rupees is the consideration for A's promise
I to sell the house, and A \ promise to sell the house is the consideration for
B's promise to pay the 10,000 rupees. These are lawful considerations.
(b) A promises to pay B 100 rupees at the end of six months, if C,
who owes that sum to B, fails to p a y j t . B promises to grant time to C
accordingly. Here the promise of each party is the consideration for the
promise of the other party and they are lawful considerations.
(c) A promises, for a certain sum paid to him by B, to make good
to B the value of his ship if it is wrecked on a certain voyage. Here A's
promise is the consideration for B's payment, and B's payment is the con-
sideration for A's promise and these are lawful considerations. ,
(d) A promises to maintain B's child and B promises to pay A 1,000
rupees yearly for the purpose. Here the promise of each party is tlie
consideration for the promise of the other party. They are lawful con-
siderations.
(e) A, B and C enter into an agreement for the division among them
of gains acquired or to be acquired, by thtfm by fraud. The agreement
^is void as its object is unlawful.
(f) A promises to obtain for B an employment in the public service,
and B promises to pay 1,000 rupees to A. The agreement is void, as tlie
consideration for it is unlawful.
(g) A, being agent for a landed proprietor, agrees for money, without
the knowledge of his principal, to obtain for B a lease of land belonging
to his principal. The agreement between A and B is void, as it implies
'a fraud by concealment by A, on his principal.
(h) A promises B to drop a piosecution which he has instituted against
B for robbery, and B promises to restore the value of tlie things taken.
The agreement is void, as its object is unlawful.
(i) A's estate is sold for arrears of revenue under the provisions of
an Act of the Legislature, by which the defaulter is proliibited from pui-
cliasing tlie estate. B, upon an understanding with A, becomes die pur-
cliaser, and agrees to conevy the estate to A upon receiving from liim tJie
^price which B has paid. The agreement is void, so it renders the trans-
action, in effect, a purchase by the defiuker, and would .so defeat tJie
object of the law.
(j) A, who IS B's miikhtar, promises to exercise his influence, as such,
with B in fa^ou^ of C and C promises to pay 1,000 rupees to A. U i e
agreement is void, because it is immoral.
7^0 MERCANTILE LAW

(k) A agrees to let her daughter to B for concubinage. The agree- ^

ment is void, because it is immoral, though the letting may not be pun-
ishable unter the In-dian Penal Code (XLV of 1860).

Void Agreements
24. Agreements void, if considerations and objects unlawful in part.
If any part: of a single consideration for one or more objects, or any one
or any part of any one of several considerations for a single object, is un-
lawful the agreement is void.

Illustration
A promises to supermtend, on behalf of B, a legal manufacture of
Indigo, and an illegal traffic in other articles. B promises to pay to A
a salary of 10,000 rupees a year. The agreement is void, the object of
A's piomise and the consideration for B's promise being in part unlav/ful.
25. Agreement without consideration void, unless it is in writing
and registered, or is a promise to compensate for something done, or is
a promise to pay a debt, barred by lunitation law. An agreement made
without consideration is void unless—
(1) it is expressed in writipg and registered under'the law for tlie
time being in ''force for the registration of [documents], and is
made on account of natural love and affecition between parties
standing in a near relation to each other, or unless
(2) it is a promise to compensate, wholly or in part, a person who
has already voluntarily done something for the promisor, or
something whicli the promisor was legally compellable to do,
or unless
(3) it is a promise, made in writing and signed by the person to
be charged therewith, or by his agent generally or specially
authorised in that behalf, to pay wholly or in part a debt of
which the creditor might have enforced payment but for tlie
law for the limitation of suits.
In any of these cases, such an agreement is a contract.
Explanation 1. Nothing i a this section shall affect the validity as
between the donor and donee, of any gift actually made.
Explanation 2. An agreement to which the consent of the promisor
is freely given is not void nuerely because tlie consideration is inadequate;
but the inadequacy of the consideration may be taken into account by
tire Court in determining the question whether the consent of the pro-
misor was freely given.

Illustrations
(a) A pioraises, for no consideration, to give to B Rs. 1,000. This
is a void agreement.
(b) A, for natural love and affection, promises to give his son B Rs. 1,000.
A puts his jjromise to B into writing and registers it. This is a contract.
(c) A finds B's purse and gives it to him. B promises to give A Rs. 50.
This is a contract.
(d) A supports B's infant son. B promises to pay A's expenses m so
doing. This is a contract.
(e) A owes B Rs. 1,000, but the debt is barred by the Limitation Act.
 T H E INDIAN CONTRACT ACT, 1872 ill

A signs a written promise to pay B Rs. 500 on account of the debt. This
*- is a contract, i
(f) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A's consent
•to the agreement was freely given. T h e agreement is a contract notwith-
standing the inadequacy of the consideration. '
(g) A agrees to sell a horse worth Rs. 1,000 for Rs. IQ. A denies
that his consent to the agreement was fieely given.
The inadequacy of the consideration is a fact which the Court should
take into. account in considering whether or not A's consent was freely
given.
26. Agreement in restraint of marriage void. Every agreement in
restraint of the marriage of any person, other than a minor, is void.
27. Agreement in restraint of trade void. Every agreement by
whiclr any one is restrained from exercising a lawful profession, trade or
business of any kind, is to tliat extent void.
Exception 1. Siiving of agreement not to carjry on business of which
goodwill is sold. One who sells the good-will of a business may agree
with the buyer to refrain from carrying on a similar business, within
specified local limits, so long as the buyer, or any person deriving title
to tlie goodwill from him, carries on a like business therein: Provided
that such limits appear to the Court reasonable, regard being had to the
nature of the business.
28. Agreements in restraint of legal proceedings void. Every agree-
ment, by whicli any party thereto is restricted absolutely from enforcing
his rights under or in respect of any contract, by the usual-legal proceed-
ings in the ordinary tribunals, or which limits the time within which he
may thus enforce his rights, is void to that extent.
Exception I. Savings of contract to refer to arbitration dispute that
may arise. This section shall not render illegal a contract by which two
or more persons agree that any dispute w.hich may arise between them in
respect of any subject or class of subjects shall be referred to arbitration,
^ and that only the amount awarded in such arbitration shall be recoverable
in respect of the dispute so referred.
Suits barred by such contracts. When such a contract has been made,
a suit may be brought for its specific performance ,and if a suit, other
than for such specific performance, or for the recovery of the amount so
awarded, is brought by one party to such contract against any other such
party in respect of any subject which they have so agreed to refer, the
e.xistence of such contract shall be a bar to the suit.
Exception 2. Saving of contract to refer questions that have already
arisen. Nor shall this section render illegal any contract in writing, by
whicli two or more persons agree to refer to arbitration any question
between them which has already arisen, or affect any provision of any
law in force for the time being as to references to arbitration.
29. Agreements void for uncertainty. Agreements, the meaning of
vi'lijch is not certain, or capable of being made certain, are void.
"A Illustrations
(a) A agrees to bell to B "a hundred tons of oil". There is nothing
whatever to show what kind of oil was intended. Tlie agreement is void
for uncertainty.
772 MERCANTILE LAW

(b) A agrees to sell to B one hundred tons of oil at a specified des-

cription, known as an article of commerce, There is no uncertainty here
to make agreement void.
(c) A, •v^o is a dealer in conconut oil only, agrees to sell to B, "one
hundred tons of oil". The nature of A's trade affords an indication of
the meaning of the words, and A has entered into a contract for the sale
of one hundred tons of coconut oil.
(d) A agrees to sell to B "all the grain in pay granary at Ramnagar".
There is no uncertainty here to make the agreement void.
(e) A agrees to sell to B "one thousand maunds of rice at a price to
be fixed by C". As the price is capable of being made certain, there is
no uncertainty here to make the agreement void. ^ \
(f) A agrees to sell to B "my white horse for rupees five hundred
or rupees one thousand". There is nothing to show which of the two
prices was to be given. The agreement is void.
30. Agreements by way of wager void. Agreements by way of wager
are void; and no suit shall be brought for recovering anything alleged to
be won on any wager, or entrusted to any person to abide the result of any
game of other uncertain event on which any wager is made.
Exception in favour of certain prizes for horse racing. This section
shall not be deemed to render unlawful a subscription, or contribution, or
agreement to subscribe or contribute, made or entered into for or toward
any plate.i prize or sum of money, of the value or amount of five hundred
rupees or upwards, to be awarded to the winner or winners of any horse-
race.
Section 294-A of the Indian Penal • Code not afifected. Nothing in
this section shall be deemed to legalize any transaction connected with
horse-racing, to which the provisions of Section 294-A of the Indian Penal
Code (XLV of 1860) apply.

CHAPTER III
Of contingent contracts
31. "Contingent contract" defined. 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. .

Illustration
A contracts to pay B Rs. 10,000 if B's house is burnt. This is a contin-
gent contract. ,
32. Enforcement of contracts contingent on an event happening.
Contingent contracts to do or not to do anything if an uncertain future
even,t happens cannot be enforced by law unless and until'' that event has
happened.
If the event becomes impossible such contracts become void.

Illustrations
(a) A makes a contract with B to buy B's horse if A survives C. This
contract cannot be enforced by law unless and until C dies in A's life-
time.
 T H E INDIAN CONTRACT ACT. 1872 773

(b) A makes a contract with B to sell a horse to B at a specified price

if C, to whom the horse has been offered, refuses to buy him. The con-
tract cannot be enforced by law unless and until C refuses to buy the
horse.
(c) A contracts to pay B a sum of money when B marries C, C dies
without being married to B. The contract becomes void.
33. Enforcement of c«ntracts contingent on aji event not happening.
Contingent contracts to do or not to do anything if an uncertain future
event does not happen can be enforced when the happening of that event
becomes impossible, and not before.
Illustration
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.
34. When event on which contract is contingent to be deemed im-
possibK;, if it is the ftiture conduct of a living person. If the future event
on which a contract is contingent is the way in which 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 centin-
gencies.-
niustration
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 im-
possible, although it is possible that D may die and that C may afterwards
marry B.
35. When contracts become void which are contingent on happen-
ing of specified event within fixed time. Contingent contracts to do or
not to do anything if a specified uncertain event happens within a fixed
time become void if, at the expiration of the time fixed, such event has
not happened, or if, before the time fixed, such event becomes impossible.
When contracts may be enforced which are contingent on specified
event not haj)pening within fixed time. Contingent contracts to do or
not to do anything if a specified uncertain event does not happen within a
fixed lime may be enforced by law when the time fixed has expired and such
event has not happened, or, before the time fixed expired, if it becomes
certain that such event will not happen.

Illustrations
(a) A promises to pay B a sum of money if a certain ship returns with-
in 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.
(I)) A promises to pay B a sum of money if a certain ship does not
return within a year. The contract may be enforced if the ship does not
return within We year, or is burnt within the year.
36. Agreement contingent on impossible events void. Contingent
igreements to do or not to do anything, if an impossible event happens,
are void, whether the imrtossibility of the event is known or not to the
parties to the agreement at the time when it is made.
Illustrations
(a) A a,grees to pay B 1,000 rupees if two straight lines should enclose
1 space. The agi cement is void.
 774 MERCANTILE LAW
, (b) A agrees to pay B 1,000 rupees i f B will marry A's daughter C.
C was dead at tlie time of tlie agreement. Tlie agreement is void. ^^

CHAPTER IV
OF T H E PERFORMANCE OF CONTRACTS
" Contracts which must be performed
37. Obligation of parties i.o contracts. The parties to a contract
must either perform, or offer to perform tlieir respective promises, unjess
sucli performance is dispensed witii or excused under the provisions of
this Act, or of any other law.
Promises bind the representatives o£ the promisors in case of the death
of such promisors before performance, unless a contrary intention appears
from the contract.

Illustrations
(a) A promises to deliver goods to B on a certain day,on payment i
of Rs. 1,000. A dies before that day. A's representatives are bound to
deliver the goods to B, and B is bound to pay the Rs. 1,000 to A's represen-
tatives, v^
(b) A promises to paint a picture for B by a certain day, at a certain
price. A dies before the day. The contract cannot be enforced either
by A's representatives or by B.
38. Effect of refusal to accept offer of performance. Where a pro-
misor has made an offer of performance to the promisee, and the offer has
not been acccjjtcd, liie j>romisor is not responsible for non-performance,
nor does he thereby lose liis rigiits under the contract.
Every such offer must fulfil the following conditions:—
(1) it must be unconditional;
(2) it must be made at proper time and place, and under such cir-
cumstances that the pcison to whom it is made may liave a re-
asonable opportunity of ascertaining that the person by whomT
it is made is able and willing there and" then to do the" whole of
wJiat he is bound by his promise to do;
(3) if the offer is an offer to deliver anything to the promisee the
promisee must have a reasonable opportunity of seeing that the
thing offered is the thing which the promisor is bound by his
promise to deliver.
An offer to one of several joint promises has the same legal conse-
^uiences as an offer to all of them.

Illustration
A contracts to deliver to B at his warehouse, on tlie first Afarch, 1873,
100 bales of cotton of a particular (quality. In order to make an offer of
a performance witii the effect stated in this section, A must bring the
cotton to B's warelio\ise, on the appointed day, under such circumstances
that B may have a reasonable op])ornmity of satisfying liimself that theA^
thing ofiered is cotton of the (jiiality contracted for, and that there are
100 bales.
30. Effect of refusal of party \.o perfonn promise wholly. When a
party to contract has refused to perform or disabled himself from perform-
ing his promise In its ciuiiecy, tlic promisee may put an cud to the con-
THE INDIAN CONTRACT ACT, 1872 . 775

tract, unless he has signified by words or conduct, his.acquiescence in its

continuance.
Illustrations
(a) A, a singer, enters into a contract with B, the manager of a theatre,
to sing at his theatre two nights in every week during the next two months,
and B engages to pay her 100 rupees for each night's performance. On
the sixth night A wilfully absents herself from the theatre. B is at liberty
to put an end to the contract.
(b) A, a singer, enters into a contracl with B, thf manager of a theatre,
to sing at his theatre two nights in every week during the next two months,
and B engages to pay her at the rate of 100 rupees for each night. On
the sixth night A wilfully absents hetself. With the assent of B, A sings
on the seventh night. B has signified his acquiescence in the continu-
ance of the contract, and cannot now put an end to it but is entitled to
compensation for damage sustained by him through A's failure to sing on
the sixth night.
By whom Contracts must be performed
40. Person by whom promise is to be performed. If it appears from
the nature of the case that it was the intention of the parties to any
contract that any promise contained in it should be performed by the
promisor himself, such promise must be performed by tlie promisor. In
other cases, the promisor or his representative may employ a competent
person to perform it.
Illustrations
(a) A promises to pay B a sum of money. A may perform this pro-
mise, either by personally paying the money to B or by causing it to be
paid to B by anotlier; and if A dies before the time appointed for pay-
ment, his representatives must perform the promise, or employ some pro-
per person to do so. ' '
(b) A promises to paint a picture for B. A must perform this pio-
mise personally.
41. Effect of accepting performance from the third person. When a
promisee accepts performance of the promise from a third person, he can-
not afterwards enforce it against the promisor.
42. Devolution of joint liabilities. When two or more persons have
made a joint promise, then unless a contrary int'ntion appears by the
contract, all such persons, during their joint lives, and after the death of
any of them, his representative jointly with the survivor, or survivors,
and after the death of the last survivor, the representatives of all jointly,
must fulfil the promise.
43." Any one of joint proipisors may be compelled to perform. When
two or more persons make a joint promise, the promisee may, in the ab-
sence of express agreement to the contrary, compel any [one or more] of
such joint promisors to perform the whole of the promise.
Each promisor may compel contribution. Each of two or more joint
promisors may compel every other joint promisor to contribute equally
with himself to the performance of the promise, unless a contrary inten-
tion appears from the contract. I
Sharing of loss by default in contribution. If any one of two or more
joint promisors makes default in such contribution, the remaining joint
promisors must bear the loss' arising from such default in equal shares.
776 MERCANTILE LAW

Ex])lanation. Nothing in this section shall prevent a surety from re-

covering fiom his principal, ])ayments made by the surety on behalf of the -
principal, or entitle the principal to recover anything from the surety on
account of payments made by the principal.

Illustrations
(a) A, R and C jointly promise to pay D, 3,000 rupees. D may com-
pel either\\ or B or C to pay him 3,000 uipees.
(b) A, n and C jointly promise to pay D the sum of 3,000 rupees. C
is compelled to jiay the whole. A is insolvent, but his assets are sufficient
to pay one-half of^his debts. C is entitled to receive 500 rupees from A's
estate, and 1,250 rupees from B.
(c) A, B and C are under-a joint promise to pay D, 3,000 rupees. C
is unable to pay anything, and .\ is compelled to pay the whole. A is en-
titled to receive 1,500 rupees from B.
^d) A, B and C are untier a joint promise to pay D, 3,000 rupees. A
and B being only suretics-for C, C fails to pay. A and B are compelled
to pay the whole sum. They are entitled to recover it from C.
, 44. Effect of release of one joint promisor. Where two or more
persons have nlade a joint promise, a release of one of such joint promisors
by the promisee docs not discharge the other joint promisor or joint pro-
misors; neither does it free the joint promisor so released from responsi-
bility to the other joint promisor or joint promisors.
45. Devolution of joint rights. When a person has made a ]5romise
to two or more persons jointly, then, unless a contrary intention appears
fiom the contract, the jight to claim performance rests, as between him
and them, with them during their joint lives, and after the death of any
of them, with the representative of such deceased person jointly with the
survivor or survivors, and, after the death of the last survivor, with the
representatives of all jointly.

Illustration
A, in consideration of 5.000 rupca lent to him by B and C, promises
B and C jointIv to repay them that sum with interest on a day specified.
B dies. TJjc Tigiii to rJaim pcrlormnnrc rests with B's representative joint-
Iv with C during C's life, and after the death of C with the representatives
of B and C jointly

Time and place for j>erformance

10. TioiC for performance of promise where no application is to be
made and no time is specified. Where by tjie contract, a promisor is to
perform his promise williout application by the promisee, and no time for
peiformnnce is specified, the engagement must be performed within a
reasonable time.
Explanation. The question "what is a reasonable time" is. in each
particular case, a (juestion o[ fact.
47 Time and i)Iace for performance of promise, where time is speci-
fied and no ap]>Iiration to be made. Where a promise is to be perform-
ed on a certain day and the promisor h,is undertaken to peiform it with-
out applir.-ition by the |)romisee, the promisor may perform it at any time
(tuiinfr the usuai houis of business on such day and at the pface at which
the pron)isc oiigiit to be performed.
I I I E INDI \N CONTRACT ACT, 1872 *?''

Illustration
A promises to deliver goods at B's warehouse on the first faniiar}.
On that day A brings the goods at B's warehouse, but after the usual
hour for closing it. and they are not received. A has not performed his
promise.
48. Application for performance on certain day to be at a proper
time and place. Where a promise is to be performed on a certain day,
and the promisor has not undertaken to perform it without application
by the promisee, it is the duty of the promisee to apply for performance
a* a proper place and within the usual hours of business.
Explanation. The question "what is a proper time and place" is,
in each particular case, a question of fact.
49. Place for performance of promise where no application to be
made and no place fixed for performance. When a promise is to be per-
formed without application by the promisee, and no place is fixed for the
j)erformance of it, it is the duty of the promisor to apply to the promisee
to appoint a reasonable place for the performance of the promise, and to
perform it at such place.

Illustration
A undertakes to deliver a thousand maunds of jute to B on a fixed
day. A must apply to B to appoint a reasonable place for the purpose
of receiving it, and must deliver it to him at such place.
f 0. Performance in -manner or at time prescribed or sanctioned by
promisee. The performance of any promise may be made in any manner,
or at any time whicii the promisee prescribes or sanctions.

Illustrations ,_^
(a) B owes A 2,000 rupees. A desires B to pay the amount to A's
account with C, a banker. B, who also banks with C, orders the amount
to be transferred from his account to A's credit, and this is done byvC.
,'\fterwards, and before A knows of the transfer, C fails. There has been
a good payment by B. ,
(1)) A and B are mutually indebted. A and B settle an account by
setting off one* item against another, and B pays A the balance found to be
due from him upon such settlement. This amounts to a payment by A
and B respectively, of the sums which thej' owed to each other.
(c) A owes B 2,000 rupees. B accepts some of A's goods in deduction
of tiie debt. Tlie delivery of the goods operates as a part payment.
(d) A desires B, who owes him Rs. 100, to send him a note for Rs. 100
by j)ost. Tlie debt is discharged as soon as B puts into tlie post a letter
contiining the note duly addressed to A.

Performance "of Recijirocal Promises

51. Promisor not bound to perform, unless reciprocal promisee ready
and willing to perform. When a contract consists of reciprocal proiniscs
to be simultaneously performed, no promisor need perform his promise
unless ilie promisee is ready and willing to perform his reciprocal piomise.
Illustrations
(a) \ and B contiact that A shall deliver goods to R to be paid for
by B on delivery.
778 MERCANTILE LAW

A need not deliver the goods, unless B is ready and willing to pay
for the goods on delivery.
B need not pay for the goods unless A is ready and -willing to deliver
them on payment.
(b) A and B contract that A shall deliver goods to B at a price to be
paid by instalments, the first instalment to be paid on delivery.
A need not deliver, unless B is ready and willing to pay the first in-
stalment on delivery.
B need not pay the first instalment, unless A is ready and willing to
deliver the goods on payment of the first instalment.
5.?. Order of performance of reciprocal promises. Where the order
in vhich reciprocal promises are to be performed is expressly fixed by
the contract, they shall be performed in that order; and, wliere the order
is not expressly fixed by the contract, they shall be performed in that order
which the nature of tlie transaction requires.

•Illustrations
(a) A and B contract that A shall build a house for B at a fixed price.
A's promise to build the house must be performed before B's promise to
pay for it.
(b) A and B contract that A shall make over hk stock-in-trade to B
at a fixed price, and B promises to give security for the payment of the
money. A's promise need not be performed until the security is given,
for the nature of the transaction requires that A should have security
before he delivers up his stock.
53. Liability of party preventing event on which the contract is to
take effect. When a contract contains reciprocal promises, and one party
to the contract prevents the other from performing his promise,^ the con-
tract becomes voidable at the option of the parly so prevented, and he is
entitled to compensation from the other party for any loss which he may
sustain in consequence of the non-performance of the contract.

Illustration
A and B contract that B shall execute certain work for A for a
thousand rupees. B is ready and willing to execute the work according-
ly, but A prevents him from doing so. The contract is voidable at the
option of B; if he elects to rescind it, he is entitled to recover from A
compensation for any loss which he has incurred by its non-performance.
54. Effect of default as to that promise which should be first per-
foi-med, in contract consisting of reciprocal promises. When a contract
consists of reciprocal promises, such that onfe of them cannot be performed,
or that its performance cannot be claimed till the other has been perform-
ed, and the promisor of the promise last mentioned fails to perform it
such promisor cannot claim the reciprocal promise, and, must make com-
pensation to the other party to the contract for any loss whjch such other
party may sustain by the non-performance of the contract.

Illustrations
(a) A hires B's ship to take in and convey, from Calcutta to the
Mauritius, a cargo to be provided by A, B receiving a certain freight for
its conveyance. A docs not provide any cargo ,for the ship. A cannot
claim ilie performance of B's jiromise, and must make compensation to B
for the loss which B sustains by non-peiformnnce of the contract.
T H E INDIAN CONTRACT ACT, 1872 779

(b) A contracts with B to execute certain builder's work for a fixed

price, B supplying the scaffolding and timber necessary for tlie -,vork. B
refuses to furnish any scaffolding or timber, and the work cannot be ex-
ecuted. A need not execute the work, and B is bound to make com-
pensation to A for any loss caused to him by the non-performance of the
contract.
(c) A contracts with B to deliver to him, at a specified price, certain
merchandise on board a ship which cannot arrive for a month, and B
engages to pay for the merchandise within a week from the date of the
contract. B does not pay within the week. A's promise to deliver need not
be performed, and B must make compensation.
(d) A promises B to sell him one hundred bales of merchandise, to
be delivered next day and B promises A to pay for them within a month.
A does not deliver according to his promise, B's promise to pay need not
be performed, and A must make compensation.
55. Effect of failure to perform at fixed time in contract in which
time is essential. When a party to a contract promises to do a certain
thing at or before a specified time, or certain things at or before specified
times, and fails to do any such thing at or before the specified time, the
contract, or so much of it as h^s not been performed, becomes voidable
at the option of the promisee, if the intention of the parties was that
time should be of the essence of the contract.
Effect of such failure when time is not essential. If it was not the
intention of the parties that time sliould be of the essence of tiie contract,
the contract does not become voidable by the failure to do such thing at
or before the specified time; I>ut the promisee is entitled to compensation
from the promisor for any loss occasioned to him by such failure.
Effect of acceptance of performance at time other than that agreed
uj5on. If, in case of contract voidable on account of the promisor's failure
to perform his promise at the time agreed, the promisee accepts perfor-
mance of such promise at any time other than that agreed, the promisee
cannot claim compensation for any loss occasioned by the non-performance
of the promise at the time agreed, unless, at the time of such acceptance,
he gives notice to the promisor of his intention to do so.
56. Agreement to do impossible act. An agreement to do an act im-
possible m itself is void.
Contract to do act afterwards becoming impossible or unlawful. A
contract to do an act which, after the contract is made, becomes imp>ossi-
blc, or by reason of some event which the promisor could not prevent, un-
lawful, becomes void when the act becomes impossible or unlawful.
Compensation for loss through non-performance of act known to be
impossible or unlawful. Where one person has promised to do something
which he knew, or, with reasonable diligence, might have known, -and
which the promisee did not know to be impossible or unlawful, such pro-
misor must make compensation lo such promisee for any loss which such
promisee sustains through the non-performance of the promise.

Illustrations
(a) A agrees with B to discover treasure by magic. The agreement is
void.
(bj A and B contract to marry each other. Before the time fixed "for
the marriage, A goes mad. The contract becomes void.
(c) A contracts to marry B being already mari-ied to C, and being
780 MERCANTILE LAW

forbidden by the law to which he is subject to practise polygamy. A must

make compensation to B for the loss caused to her by the non-perfoimance
ol his promise.
(d) A contracts to take in car^o for B at a foreign port. A's Govern-
ment afterwards declares war against the country in which the port is
situated. The contract becomes void when .war is declared.
(e) A contracts to act at a theatre for six months in consideration of
a sum paid in advance by B. On several occasions A is too ill to act.
The contract to act on those occasions becomes void.
57. Reciprocal promise to do things legal, and also other things
illegal. Where persons reciprocally promise, firstly, to do pertain things
which are legal, and, secondly, under specified circumstances to do certain
other things which are illegal, the first set of promises is a contract, but
the second is a void agreement.

Illustration
A and B agree that A shall sell B a house for 10,000 rupees, but that,
if B uses it as a gambling house, he shall pay A 50,000 rupees for it.
The first set of reciprocal promises, namely, to sell the house and pay
10,000 rupees for it is a contract.
The second set is for an unlawful object, that B may use the house
as a gambling house and is a void agreement.
58. Alternative promise, one branch being illegal. In the case of
an alternative promise, one branch of which is legal and the other illegal,
the legal branch alone'can be enforced.

Illustration ^
A and B agree that A shall pay 1,000 rupees, for which B shall after-
wards deliver to A either rice or smuggled opium.
This is a valid contract to deliver rice and a void agreement as to the
opium.

Appropriation of Payments
59. Application of payment where debt to be discharged is indicat-
ed. Where a debtor owing several distinct debts to one person, makes a
payment to him, either with express intimation, or under circumstances
implying tliat the payment is to be applied to the discbarge of some par-.
ticular debt, the payment, if accepted, must be applied accordingly.

Illustrations
(a) A owes B, among other debts, 1,000 rupees upon a promissory
note which falls due on tlie first June. He owes B no other debt of that
amount. On the first June A pays to B 1,000 rupees. The payment is
to be applied to the discharge of the promissory note.
(b) 'A owes to B among other debts, the sum of 567 rupees. B writes
to A and demands payment of this sum. A sends to B 567 rupees. This
payment is to be applied to the discharge of the debt of which B had
t.'emand?"d payment.
CO. Ai>plication of payment where debt to be discharged is not in-
dicated. Where tlie debtor has omitted to intimate and there aie no
oilier circumstances indicating ,to wljich debt the payment is to be applied,
tlie crcditoi may apply it at his discretion to any lawful debt actually due
T H E INDIAN CONTRACT ACT, 1672 781

and payable to him from the debtor, whether its recovery is or is not
barred by the law in force for the time being as to the limitation of suits
61. Application of payment where neither party appropriates.
Where neither party makes any appropriation the payment shall be ap-
plied in discharge of the debts in order of time, whether they are or are
not barred by the law in force for the time being as to the limitation of
suits. If the debts are of equal standing, the payment shall be applied in
discharge of eacli proportionably.

Contracts which need not be performed

62. Effect of novation, rescision and alteration of contract. If the
parties to a contract agree to substitute a new contract for it or to rescind
or alter it, the original contract need not be performed.

Illustrations
(a) A owes money to B under- a contract. It is agreed between A,
B and C that JB shall thenceforth 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) A owes B 10,000 rupees. A enters into an arrangement with B,
and gives B a mortgage of his (A's) estate for 5,000 rupees in place of the
debt of 10,000 rupees. This is a new contract and extinguishes the old.
(c) A owes B 1,000 rupees under a contract. B owes C 1,000 rupees.
B orders A to credit C with 1,000 rupees in his books but C does not
assent to the arrangement. B still owes C 1,000 rupees, and no new con-
tract has been entered into.
63. Promisee may dispense with or remit performance of promise.
Every promisee may dispense with or remit, wholly or in part, the per-
formance of the promise .made to him, or may extend the time for such
performance, or may accept instead of it any satisfaction which he thinks
fit.

lUustrafions
(a) A promises to paint a pi<!ture for B. B afterwards forbids him
to do so. 'A is no longer bound to perform the promise.
(b) A owes B 5,000 rupees. A pays to B and B accepts in satisfaction
of the whole debt 2,000 rupees paid at the time and plqce at which the
^,000 rupees were payable. The whole debt is discharged.
(c) A owes B 5,000 rupees. C pays to B 1,000 rupees and B accepts
tliem, in satrsfaction of his claim on A- This payment is a discharge of
the whole claim.
(d) A owes B, under a contract, a sum of money, the amount of
which has not been ascertained. A without - ascertaining the amount
gives to B, and B, in satisfaction thereof, accepts the sum of 2,000 rupees.
This is a discharge of the whole debt, whatever may be its amounts.
(e) A owes B 2,000 rupees, and is also indebted to other creditors.
A makes an jirrangement with his creditors, including B to pay them a
[composition] of 50 paise in the rupee upon their respective demands.
Pa) men t to B of 1,000 rupees is a discharge of B's demand.
61. Consequences of rescision of voidable contract. When a person
at whose option a contract is voidable rescinds n, the other party thereto
need not pel form any promise therein contained in which he is promisor.
782 MERCANTILE LAW

The party rescinding a voidable contract shall, if he has received any

benefit thereunder from another party to such contract, restore such bene-
fit, so far as may be, to the person from whom it was received.
65. Obligation of person who has received advantage under void
agreement or contract that becomes void. When an agreement is dis-
covered to be void or when a contract becomes void, any person who has
received any advantage under sucli agreement or contract is bound to
restore it, or to\ make compensation for it to the person from whom he
received it.
Illustrations
(a) A pays B 1,000 rupees in consideration of B's promising to marry
C, A's daughter. C is dead at the time of tlie promise. The agreement
is void, but B' must repay A the 1,000 rupees.
(b) A contracts with B to deliver to him 250 maunds of rice before
the first of May. A delivers 130 maunds only before that day, and none
alter, B retains the 130 maunds after the first of May. He is bound to
pay A for them.
(c) A, a singer, contracts with B, the manager of a theatre, to sing
at his theatre for two nights every week during the next two montlis, and
B engages to pay her a hu;idied rupees for each night's performance.
On the sixth night, A wilfully absents herself from the theatre, and B,
in consequence, rescinds the contract. B must pay A for the five nights
on which she had sung.
(d) A contracts to sing for B at a concert for 1,000 rupees, which are
paid in advance. A is too ill to sing. A is not bound to make compen-
sation to B for the loss of the profits which B would have made if A had
been able to sing, but must refund to B the 1,000 rupees paid in advance.
66. Mode of communicating or revoking rescision of voidable con-
tract. The rescision of a voidable contract may be communicated or
revoked in the same manner, and subject to the same rules, as apply to
the communication or revocation of a proposal.
67. Effect of neglect of promisee to afford promisor reasonable faci-
lities for performance. If any proiiiisee neglects or refuses to afford the
promisor reasonable facilities for the performance of his promise, the
promisor is excused by such neglect or refusal as to any non-performance
caused thereby.
Illustration
"A contracts witli B to repair B's house.
B neglects or refuses to point out to A tiie places in which his house
requires repair.
A is excused for the non-performance of the contract if it is caused
by such neglect or refusal.
CHAPTER V
Of certain relations resembling those created by contract
68. Claim for necessaries supplied to person incapable of contracting
or on his account. If a person, incapable, of entering into a contract,
or any one whom he is legally bound to support is supplied by another
person with necessaries suited to his condition in life, the person who
furnished such supplies is entitled to be reimbursed from the property of
such incapable person.
T H E INDIAN CONTRACT ACT, 1872 783

Illustrations
(a) A supplies B, a lunatic, with necessaries suitable to his condition
in life. A is entitled to be reimbuised from B's property.
(b) A supplies the wife and children of B, a lunatic, with necessaries
suitable to tlieir condition in life. A is entitled to be reimbursed from
B's property.
69. Reimbui-sement of person paying money due by another in pay-
ment of which he is interested. A person who is interested in tlie pay-
ment, of 4aoney which another is bound by law to pay, and who therefore
pays it, is- entitled to be reimbursed by the other.

Illustration
" B holds land in Bengal, on a lease granted by A, the /amindar. The
revenue payable by A to the Government being in arrear, his land is ad-
vertised tor sale by the Government. Under die revenue law, the con-
sequence of such sale will b'e die annulment of B's lease. B, to prevent
the sale and the consequent annulment of his own lease, pays to tlie Gov-
ernment the sum due from A. A is bound to make good to B the amount
so paid.
70. Obligation of person enjoying benefit, of non-gratuitous act.
Where a person lawfully does anything for another person, or delivers
anything to him, not intending to do so gratuitously, and sucii other perr
son enjoys tlie benefit thereof, die latter is bound to make compensation
to the former in respect of, or to restore, the thing so done or delivered.

Illustrations
(a) A, a tradesman, leaves goods at B's house by mistake. B treats
the goods as his own. He is bound to pay A lor them.
(b) A saves B's property from fire. A is not entitled to compensation
from 15, if the circumstances show that he intended to act gratuitously.
71. ResponsibiHty of finder of goods. A person who finds goods
belonging to another and takes them into his custody, is subject to the
same responsibility as a bailee.
72. Liability of persons to whom money is paid, or thing delivered
by mistake or under coercion. A person to whom money has been paid,
or anytliing delivered by mistake or under coercion, i»ust repay or return
it.

Illustrations
(a) A and B jointly owe 100 rupees to C. A alone pays the'amount
to C, and B, not knowing this fact, pays 100 rupees over again to C. C
is bound to repay the amount to B.
(b) A railway company refuses to deliver up certain goods to the con-
signee except upon tlie payment of an illegal charge for carriage. T h e
consignee pays die sum charged in order to obtain the goods. He is en-
titled to recover so much of the. charge as was illegally excessive.

CHAPTER VI
Of the Consequences of Breach of Contract
73. Compensation for loss or damage caused by breach of contract.
When a contract has been broken, the party who suffers by such breach
784 MERCANTILE LAW
is entitled to receive, from the party who has broken the contract, com-
pensation for any loss or damage caused to him thereby, which naturally
arose in the usual course of things from such breach, or which the pai ties
knew, when they made the contract, to be likely to result from the breach
ot it.
Such compensation is not to be given for any remote and indirect-
loss or damage sustained by reason of the breach.
Compensation -tor failure to discharge obligation resembling those
Created by contract. When an obligation resembling those created by
contract has been incurred and has not been discharged, any person in-
jured by the failure to discharge it is entitled to receive the same compen-
sation from the party in default, as if such person 'had contf-acted to dis-
charge it and had broken his contract.
Explanation. In estimating the loss or damage arising from a breach
of contract', the_ means which existed of remedying the inconvenience
caused by the-non-performance of the contract must be taken into account.

Illustrations
(a) A contracts to sell and deliver 50 maunds of saltpetre to B, at a
certain price to be paid on delivery. A breaks his promise. - B is entitled
to receive from A, by way of compensation, die sum, if any, by which the
contract price falls short of the price for which B might have obtained
50 maunds of saltpetre of like quality at the time when the saltpetre
ought to have been delivered.
(b) A hires B's ship to go to Boinbay, and there takes on board, on
the first January a cargo which A is to provide and to bring it to Cal-
cutta, the freight to be paid when earned. B's sliip does not go 'to Bom-
bay, but A has opportunities of procuring suitable conveyance for the
cargo upon terms as advantageous as those on which he liad chartered
the ship. A avails himself of those opportunities, but is put to trouble
and expense in doing so. A is entitled to receive compensation from B
in respect of such trouble and expense.
(c) A contracts to buy of B, at a stated price, 50- maunds of rice, no
time being fixed for delivery. A afterwards informs B that, he will not
accept the rice if tendered to him. B is entitled to receive from A, by
way of compensation, the amount, if any, by which the contract price
exceeds that which B can obtain for the rice at the time when A informs
B that he will not accept it.
(d) A contracts to buy B's ship for 60,000 rupees, but breaks his pro-
mise. A must pay to B, by way of compensation, the excess, if any, of
the contract price which B can obtain lor the sliip at the time of the
breach of promise.
(e) A, the owner of a boat, contracts with B to take a cargo of jute
to Mirzapur, for sale at that place, starting on a specified day. The boat,
owing to some avoidable cause, does not start at the time appointed,
whereby the arrival ot the cargo at Mirzapur delayed beyond the time
when it would Iiave arrived if forwarded in due course, and its market
price at the time and before the arrival of the cargo, the price of jute
falls. The measure of the compensation payable to B by A is the dif-
ference between the price ^vhich B could have obtained for the cargo at
Mir/apur at the time when it would have arrived if the boat had sailed
according to the contract. After that date, when it actually arrived.
(f) A contracts to repair B's house in a certain manner, and receives
T H E INDIAN CONTRACT ACT, 1872 " 785

payment in advance. A repairs the house, but not according to contract.

E is entitled to recover from A.the cost of making the repairs conform to
•the, contract.
(g) A contracts to let his ship to B for a year, from the first of
January, for a certain price. Freights rise, and on the first of January,
die hire obtainable for the ship is higher than the contract price; A
breaks liis promise. He must pay to B, by vvfay of compensation, a sum
equal to tiie difference between the contract price and the price for which
B could hire a similar ship for a year on and from the first of January.
(h) A contracts to supply B with a certain qua.ntity of iron at a fixed
price, being a higher price than that for which A could procure and de-
liver the iron. B wrongfully refuses to receive the iron. B must pay to
A, by way of compensation, the difference between die contract price of
the iion and the sum for which A could have obtained and delivered it.
(i) A delivers to B, a common carrier; a machine to be conveyed,
•without delay, to A's mill, informing B that his mill is stopped lor want
of the machine. B unreasonably delays the delivery of the machine, and
A in consequence, loses a profitable contract with the Government. A is
entitled to receive from B, by way of compensation, the average amount
of piofit which would have been made by the working of the mill during
the time that delivery of it was delayed, but not the loss sustained through
the loss of the Government contract.
(j) A, having contracted with B to supply B with 1,000 tons of iron
at 100 rupees a ton, to be delivered at a stated time, contracts with C
for the purchase of 1,000 tons of iron at 80 rupees a ton, telling C that
he does so for the purpose of performing his contract with B. C fails to
perform his contract with A, who cannot procure other iron, and B, in
consequence, rescinds the contract, C must pay to A 20,000 rupees, being
the profit which A would have made by the performance of his contract
with B.
(k) A contracts with B to make and deliver to B, by a fixed day, for a
specified price a certain piece of machinery. A does not deliver the piece
of macliinery at the time specified, and, in consequence of this, B is
obliged to procure another at a higher price than that which he was to
have naid to A, and is prevented from performing a contract -which B had
made with a third person at tlie time of his contract with A (but which
had been then communicated to A), and is compelled to make compen-
sation for breach of that contract. A must pay to B, by ivay of compen-
sation, the difference between the contract price of the piece of machinery
and the sum paid by B for another, but not the sum paid by B to the third
person by way of compensation.
(1) A, a builder, contracts to erect and finish a house 'by the first 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 first of January, it falls
down avd 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 compen-
sation to C for tiie breach of his contract. A must make compensation to
B for the cost of rebuilding the house, for the rent lost, and for tlie com-
pensation made to C. _
(m) A sells certain merchandise to B, warranting it to be of a parti-
cular quality, and B, in reliance upon this'warranty, sells it to C with a
similar wairanty. The goods prove to be not according to the warranty.
 786 MERCANTILE LAW
and B becomes liable to pay C a sum of money by way of compensation.
B is entitled to be reimbursed this sum by A.
(n) A contracts to pay a sum of money to B on a day specified. A
does not pay the money on that day;'B, in consequence of not leceiving
the money on thai day, is unable to pay Jiis debts, and is totally ruined.
A is not liable to make good to B anything e.Kcept the principal sum he
contracted to pay, together with interest up to the day of payment.
(o) A contracts to deliver 50' maunds of saltpetre to B on the first
of January, at a certain price. B afterwards, before the first of January,
contracts to sell the saltpetre to C at a price higher than the market price
of the first of January. A breaks his promise. In estimating the compen-
sation payable by A to B, the market price of the first of January, and not
the profit which would have arisen to B from the sale to C, is to be taken
into account.
(p) A contracts to sell and deliver 500 bales of cotton to B on a fixed
day. A knows nothing of B's mode of conducting his business. A breaks
his promise, and B, having no cotton, is obliged to close his mill. A
is not lesponsible ix) B for the loss caused to B by the closing of the
mill.
(q) A contracts to sell and deliver' to B, on the first of January, cer-
tain cloth which B intends to manufacture into caps of a particular kind,
for "which there is no demand, except, at that season. T h e cloth is not de-
livered _till after the appointed time, and too late to be used that year in
making caps. B is entitled to receive from A, by way of compensation,
the difference betwe'en the contract price of the cloth and its market price
at the time of delivery, but not the profits which he expected to obtain by
making caps, nor Uie expenses which he has been put to in making pre-
paration for tlie manufacture.
(r) A, a shipowner, contracts with B to convey him from Calcutta to
Sydney in A's- ship, sailing on the first of January, and B pays to A, by
way of deposit, one-half of his passage-money. The ship does not sail on
the first of January, and B, after being, in consequence, detained in
Calcutta for some time, and thereby put to some expense, proceeds to
Sydney in another vessel and, iri consequence, arriving too late in Sydney,
loses a sum of money. A is liable to repay to B his deposit, with interest,
and the expense to which he is put by his detention in Calcutta, and the
excess, if any, of the passage-money paid for the second ship over that
agreed upon for the first, but-not the sum of money which B lost by arriv-
ing in Sydney too late. /
74. Compensation icn> breach of conduct where penalty stipulated
for. When a" contract has been broken, if a sum is-named in the con-
tract as the amount to be paid in case of such breach, or if the contract
contains any other stipulation by way of penalty, the party complaining
of the breach is entitled, whetlier or not actual damage or loss is proved
to h.ave been caused thereby, to receive from the party who has broken
the contract, reasonable (Compensation not exceeding the amount so named
or, as the case may be, the penalty stipulated for.^'
tvplanation. A stipulation for increased interest from the date of
detank may be a stipulation by way of penalty.
Exception. When any person enters into any bail-bond, recognizance or
othec instrument of the-same nature, or, under the provisions, of any
law, or under the orders of die Central Government or of any State Gov-
ernment, gives any bond for the performance of any public duty or act in
wliich die public are interested, he shall be liable, upon breach of the
T H E INDIAN CONTRACT ACT, 1872 787
condition o£ any such instrument, to pay the whole sum mentioned there-
in.
Explanation. A person who enters into a contract with Government,
does not necessarily thereby undertake any pubbc duty, or promise to do'
an act in which the public are imerested.

Iliustrations
{a)-A contracts with B to pay B Rs. 1,000 if he fails to pay B Rs. 500
on a given day. A fails to pay B Rs. 500 on that day. B is entitled to
recover from A such compensation, not exceeding Rs. 1,000, as the Court
considers rea.sonable.
(b) A contracts-with B that if A practises as a Surgeon witliin Calcutta,
he will pay B Rs. 5,000. A practises as a Surgeon in Calcutta. B is en-
titled to such compensation, not exceedkig Ks. 5,000, as tire Coiat con-
siders reasonable.
(c) A gives a recognizance binding him in a penalty of Rs. 500 t o '
appear in Court on a certain day. He forfeits his recognizance. He is
liable to pay the whole penalty.
(d) A gives B a bond for the repayment of Rs. 1,000 with interest
at 12 per cent, at the end of six montiis, with a stipulation that in case
of default, interest shall be payable at the rate of 75 per cent, from the
date of default. This is a stipulation by way ot penalty, and B is only
entitled to recover from A suclr compensation as the Court considers
reasonable.
(e) A, who owes money to B, a money-Ienxier, undertakes to repay
him by delivering to him 10 maimds of grain on a certain date, and
stipulates that in the event of his not delivering the stipulated amount
by the stipulated date, he shall be liable to deliver 20 maunds. This is a
stipulation by way of penalty and B is only entitled to reasonable com-
pe'nsation in case of breach,
(f) A undertakes to r e p ^ B a loan of Rs. 1,000 by five equah month-
ly instalments with a stipulation that, in default of payment of any in-
Ftalment, the whole shall become due. This stipulation is not by way of
penalty, and the contract may be enforced according to its terms.
(g) A borrows Rs. TOO from B and gives him a bond for Rs. 200 pay-
able by five yearly instalments of Rs. 40, with a stipulation that, in de-
fault of payment of any instalment, the whole shall become due. This is
a stipulation by way of penalty.
75. Party rightfully rescinding contract entitled to compensation. A
person who rightfully rescinds a contract is entitled to compensation for
any damage which he has sustained through the non-fulfilment of the con-
tract.

Ulustration
A, a singer, contracts with B, the manager of a theatre, to sing at his
theatre ior two nights in every week during the next two months,
and B engages to pay her 100 rupees for each night's performance. On
the sixth night, A wilfully absents herself from tire theatre, and B, in con-
sequence, rescirids the contract. B is entitled lOjtelaiia compensation for
the damage which he, has sustained through the non-fulfilment of the
ccntract.
788 ^ MERCANTILE LAW
CHAPTER VII
Sale of Goods
Secj. 76-123 R.epealed by the Indian Sale of Goods Act, 1930
{III of 1930), s. 65

CHAPTER VIII
Of Indemnity and Guarantee
124. "Contract of indemnity" defined. A contract by whicli one
party promises to save the other from loss caused to him by the conduct
of the piomisor himself, or by the conduct of any other person, is called
a: "contract of indemnity".

Illustration
A contracts to indemnify B against the consequences of any proceed-
ings which C may take against B in respect of a certain sum of 200
rupees. This is a contract of indemnity.
125. Rights of indemnity-holder when sued. The promisee in a con-
tract of indemnity, acting within the scope of his authority is entitled
to recover from the promisor—
'(1) all damages which he may be compelled to pay in any such suit
in respect of any matter to -which the piomise to indemnify
applies;
(2) all costs which he may be compelled to pay in any sucli suit if,
in bringing or defending it, he did not contravene the order
of the promisor, and acted as it would have been prudent for
him to act in the absence of any contract of indemnity, or it
the promisor authoiised him to bring or defend the suit;
(3) all sums which he may have paid under the terms of any com-
promise of any such suit, if the compromise was not contrary to
tlie orders of the promisor, and was one which it would have
been prudent for the promisee-to make in the absence of any
contract of indeminitv. or if the promisor authorized him to com-
promise the suit. *
126. "Contract of guarantee", "surety'', "principal' debtor" and
"creditor". A "contract of guarantee", is a contract to perform the ^ pro-
mise, or discharge the liability, of a third person in case of his default.
T h e person who gives the guarantee is called the "surety", the person in
respect of whose default the guarantee is given is called die "principal
debtor", and the person to whom the guarantee is given is called the
"creditor". A guarantee may be either oral or written.
127. Consideration for guarantee. Anything done, or any promise
n a d e for the benefit of the principal debtor may be a sufficient consider-
ation to the surety for giving the guarantee.

' Illustrations
(a) B requests A to sell and deliver to him- goods on.-credit. A agrees
to do so, provided C will guarantee the payment of the goods. C pro-
mises to guarantee the payment in consideration of A's promise to deliver
the goods. This is a sufficient consideration lor C's promise.
(b) A sells and delivers goods to B. C afterwards requests A to for-
bear to sue B for the debt foi a year and promises that if he does so, C
T H E INDIAN CONTRACT ACT, 187? 789
will pay for them in default of payment by A. A .agrees to forbear as
requeitecl. This is a sufficient consideration for C's promise.
(c) A sells and delivers goods to B. C afterwards, without consider-
ation, agrees to "pa^ for tliem in default of B. The agreement is void.
128. Surety's liability. T h e liability of the surety is co-extensive
with that of die principal debtor, unless it is orhenvise provided by the
contract.
/
Illustration
^i guarantees to B the payment of a bill of exchange by C, the acceptor
The bill is dishonoured by C. A is liable not only for the amount of the
bill but also for any interest and charges which may have become due to
it.
129. "Continuing guarantee". A guarantee which extends to a
series of transactions is called a "continuing guarantee".

Illustrations
(a) A, in consideration that B will employ C in collecting the rents
of B's zamindari, promises B to be responsible, to the amount of 5,000
rupees, for the due collection and payment by C of those rents. This is a
continuing guaiantee.
(b) A guarantees payment to B, a tea-dealer, to tlie amount of £100,
for any tea he may from time to time supply to C. B supplies C with tea
to the above value £100, and C pays B for it. Afterwards B supplies C
with tea to tire value of £200. C fails to pay. T h e guarantee given by
A was a continuing guarantee, and he is, accordingly liable to B to the -
extent of £100.
(c) A guarantees payment to B of the price of five sacks of flour
to be delivered by B to C and-to be paid for in a month. B delivers five
sacks to C. C pays for them. Afterwards B delivers four sacks to C, which
C does not pay for. The guarantee given by A was not a continuing
guarantee, and accordingly he is not liable for the price of the four sacks.
130. Revocation of continuing guarantee. A continuing guarantee
may at any^time be revoked by the surety, as to ^^uture transactions^ by
notice to the creditor.

Illustrations
(a) A, in consideration of B's discounting, at A's request, bills of ex-
change for C guarantees to B, for twelve months, the due payment of all
such bills to the extent of^ 5,000 rupees. B discounts bills for C to the
extent of 2,000 rupees. Afterwards at the end of three months, A re-
vokes the guarantee. This revocation discharges.A from all liability to B
for any subsequent discount. But A is liable to B for the 2,000 rupees,
on default of C,
(b) A guarantees to B, to the ex>ent of 10,000 rupees, tliat C shall
pay all die bills that B shall draw, upon him. B draws upon C. C ac-
cepts the bill. A gives notice of revocation. C dishonours the bill at
maturity. A is liable upon his gudrantee.
131. Revocation of continuing guarantee by, surety's death. The
death of the surety operates, in the absence of ttiy ..Centract to the contrary,
as a revocation of a continuing guarantee, so far as regards future transac-
tions.
7*) MERCANTILE LAW

132. Liability of Urn persons primarily liable, not affected by arrange-

ment between them tliat one shall be surety on other's default. Where
two persons contract with a tliird person to undertake a certain liability,
and also contract with each other that one of them shall be liable only on
tlie default of the other, the third person not being a party to such con-
tract, the liability of each of such two persons to the third person under
the first contract is not affected by the existence of the second contract,
although such tliird persoVi may have been aware of its existence.

Illustration
A and B make a joint and several promissory note to C. A makes it,
in fact as surety for B, and C knows this at the time when the note is
made. T h e fact that^A, to the knowledge' of C, made the note as surety
for B, is no answer to a suit by C against A upon the note.
133. Discharge of surety by variance in teniis of contract. Any vari-
ance, made without .the surety's consent, in the terms of the contract
betrt'een the principaF debtor and the creditor, discharges tlie surety as to
transactions subsetjiient to the variance.

Illustrations
(a) A becomes sur'ety to C for B's conduct as a manager in C's "bank.
Afterwards, B and C contract, without A's consent, that B's salary shall be
raised; and that he shall become liable for one-fourtli of the losses on over-
drafts. B allows -a customer to overdraw, and the bank loses a sum of
money. A is discharged from his suretyship by the variance made without
bis consent, and |s not liable to make good this loss.
(b) A guarantees C against the misconduct of B in an office to which
B is appointedTby C, and of which tlie duties are defined by an Act of the
Legislature.. By a consequent Act, the nature of the office is materially
altered. ' After^vards, B misconducts himself. A is discharged by the change
from future liabdity under his guarantee, though the misconduct of B is
in respect of a duty not affected by the late Act.
(c) C agrees to appoint B as his clerk to sell goods at yearly salary,
upon A's becoming surety to C for B's duly accounting for moneys receiv-
ed by him as such clerk. Afterwaids, without A's knowledge or consent,
C and B agree that B should be paid by a commission on the goods sold
by him and not by a fixed salary. A is not liable for subsequent miscon-
duct of B.
(d) A gives to C a continuing guarantee to the extent of 3,000 rupees
for any oil sitpplied by C to B on credit. Afterwards B becomes embarras-
sed, and, without the knojvledge of A, B and C contract that C shall conti-
nue to supply B with oil for ready money, and, that the payments shall be
applied to the then existing debts between B and C. A is not liable on
his glialantee for any goods supplied after this new arrangement.
(c) C contracts to lend B 5,000 rupees on the 1st March. A guarantees
repayment. A pays the 5,000 rupees to_ B on the 1st January. A is dis-
chaiged from his liability, as the contract has been varied inasmuch as C
might sue B for the money before the 1st of Marcli.
134. Discharge of surety by release or discharge of principal debtor.
The surety is discharg»l by any contract between the creditor aiTfl the
principal debtor, by wlHch the principal debtor is released, oi by any act
or omi'ision of the creditoi, the legal consequence of which is the discharge
of the principal debtor.
T H E INDIAN CONTRACT ACT, 1872 791

Illustrations
(a)vA gh-es a guarantee to C for goods to be supplied by C to B. C
supplies goods to B and afterwards B becomes embarrassed and contracts
with Ins creditors (including C) to assign to them his property in consi-
deration of their releasing him from their demands. Here A is released
from his debt by the contract with C. and A is discharged from his surety-
ship.
(b) A Lontracts with B to grow a crop of indigo on A's land and. to
deliver it to B <it a fixed rate, and C guarantees A's performance of this
contract. B diverts a stream of water which is necessary for irrigation of
A's land and thereby prevents him from raising the indigo. G is no longer
liable on his guarantee.
,(e) A contracts with B for a fixed price to build a house for A within
a 'Stipulated time, B supplying the necessary timber. C guarantees A's per-
foimance of the contract. B omits to supply the timber. C is discharged
from his suretyship.
135. Discharge of surety when creditor compounds with, gives time
to, or agrees not to sue, princiiwl debtor. A contract between the credi-
tor and the pi incipal debtor, by which the creditor makes a compqsition
with, 01 promises to give time to, or not to sue, the principal debtoi, dis-
charges the surety, imless the surety assents to such contract.
136. Surety not discharged when agreement made '^vith third person
to give time to principal debtor. Where a contract to give time to the
principal debtor is made by the creditor with a third person, and not with
tlie principal debtor, the surety is not discharged.

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.
137. Creditor's forbearance to sue does not discharge surety. Mere
forbearance on the part of the creditor to sue the principal debtor or to
enforce any other remedy against him does not, in the absence of any
proMsion in the guarantee to the contrary, discharge the surety.

Illustration
S owes to C a debt guaranteed by A. The debt becomes payable. C
does not sue B lor a year after the debt has become payable. A is not dis-
•charged from liis suretyship.
138. Release of one cosurety does not discharge others. Where
there are co-sureties a release by the creditor of one of them does not dis-
charge the others; neither does it free the surety so released from his res-
ponsibility to the other sureties.
139. Discharge of surety by creditor's act or omission impairing sure-
ty's eventual remedy. If the creditor does any act which is inconsistent
with the right of tlie surety, or omits to do any act which his duty to the
suretv requires him to do, and the eventual remedy of surety himself
against the principal debtor is thereby impaired, the surety h discharged.

Illustrations ^'<
(a) B contracts to build a ship for C for a given sum, to be paid by
fnstalments as the work reaches certain stages.' A becomes surety \& C
 792 MERCANTILE LAW

for E's due performance of ihe contract. C, without the knowledge of A,

prepays to B the last two instalments. A is discharged by this prepayment.
(b) C lends money to B on the security of a joint and several promis-
I sory note made in C's favour by B, and by A as surety for B, togethet witli
a bill of sale of B's furniture, which gives power to C to sell the, furni-
ture, and apply the proceeds in discharge of the Tiote. Subsequently, C
sells the furniture but, owing to his misconduct and wilful negligence, only
a sraall price is realized. A is discharged from liability on the note.
(c) 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 a? promised, and M embezzles.
• A is not liable to B on his guarantee.
140. Rights of surety on payment or performance. Where a guaran-
teed debt has become due, or default of the principal debtor to perform a
guaranteed duty has taken place, tlie surety, upon payment or perform-
ance of all that he is liable for, is invested with all the rights which the
creditor had against the principal debtor.
141. Surety's right to benefit of creditor's securities. A surety is en-
titled to the benefit of every security which the creditor has against the
principal debtor at the time-when the contract of suretyship is enterejl
into, whether the surety knows of the existence of such security or not;
and, if the creditor loses, or, without the consent of the surety, parts witli
such security the surety is discharged to the extent of the value of the
security.

Illustrations
(a) C advances to B, his tenant, 2,000 rupees on the guarantee of A.
C has also a further security for the 2,000 rupees by a mortgage of B's
furniture. C cantels the mortgage. B becomes insolvent, and C sues A
on his guarantee. A is discharged from iiabiiity to the amount of the
value of the furniture,
(b) C, a creditor, whose advance to B is secured by a decree, receives
also a guarantee for that advance from A. C afterwards takes B's goods in
execution under the decree, and then, without the knowledge of A, with-
draws the execution. A is not discharged.
(c) A, as surety for B, makes a bond jointly with B to C, to secure a
loan from C to B. Afterwards, C obtains from B a further security for
the same debt. Subsequently, C gives up the further security. A is not
discharged.
142. Guarantee obtained by misrepresentation invalid. Any gua-
rantee which has been obtained by means of misrepresentation made by
the creditor or with his knowledge and assent, concerning a material part
of the transaction, is invalid.
143. Guarantee obtained by concealment invalid. Any guarantee
which the creditor has obtained by means of keeping silence as to material
1 circumstances is invalid. '

Illustrations V\
(a) 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 fuinish
security for his duly Accounting. C gives his guarantee for B's duly ac-
counting.-' A does not acquaint C with B's previous conduct. B after-
wards makes default. T h e guarantee is invalid.
T H E INDIAN CONTRACT ACT, 1872 79S

'(b) A guarantees to C payment for iron to be supplied by him to B to

the amount of 2,000 tons. B and C have privately agreed that B should
pay five rupees per ton beyond the market price, such excess to be applied
in liquidation of an old debt. This agreement is concealed from A. A
is not liable as a surety.
144. Guarantee on contract that' creditor shall not act on it until
co-surety joins. Where a person gives a guarantee upon a contract that
the creditor shall not act upon it until another person has joined in it
as co-surety, the guarantee is not valid if that other person does not join.
145. Implied promise to indemnify surety. In every contract of gua-
rantee there is an implied promise by the principal debtor tp indemnify
the surety; and the surety is entitled to recover from the principal debtor
whatever sum he has rightfully paid under die guarantee, but no sums
which he has paid wrongfully.

Illustrations
(a; B is indebted to C, and A is surety for die debt. C demands pay-
ment 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. ' H e can recover from B the amount paid
by him for costs, as well as the principal debt.
(b) G lends B a sum of money, and A, at the request of B, accepts
bill of exchange drawn by B upon A to secure die amount. "C, the holder
of the bill, demands payment of it from A and, on A's refusal to pay,
sues him upon the bill. A, not having reasonable grounds for so doing,
defends the suit, and has to pay the amount of the Bill and costs. He
can recover from B the amount of the bill, but not the sum paid for costs,
as there was no real ground for defending the action.
(c) B guarantees to C, to the extent of 2,000 rupees, payment for
rice to be supplied by C to B. C supplies to B rice to a less amount
than 2,000 runees, but obtains from B payment of the sum of 2,000
lupees in respect of the rice supplied. C cannot recover from B more
than the price of the rice actually supplied.
146. Co-sureties liable to contribute equally. Where two or more
persons are co-sureties for the same debt or duty, eitlier jointly or sever-
ally, and whether under the same or different contracts, and whether with
or without the knowledge of each other, the co-sureties in the absenci
of any contract to the contrary, are liable, as between themselves, to pay
each an equal share of the whole debt, or of that part of it which remains
unpaid by the principal debtor.

Illustrations
(a) A, B and C are sureties to D for the sum of 3,000 rupees lent to
E. E makes default in payment. A, B and C are liable, as between
themselves, to pay 1,000 rupees each.
(b) A, B and C are sureties to D for the sum of 1,000 rupees lent to
E, and there is a contract between A, B and C that A is to be responsible
to the extent of one-quarter, B to the extent of one-quarter and C to the
extent of one-half. E makes default in payment. As between the sure-
ties, A is liable to pay 250 rupees, B 250 rupees apd C 500 rupees.
147. Liability of co-sureties bound in different sums. Co-sureties
who are bound in different sums are liable' to pay equally as far as the
limits of their respective obligations permit.
 794 MERCANTILE LAW

Illustrations
(a) A, B and C, as sureties for D, enter into tluee several bonds, each
in a diilerent penalty, namely, A in the penalty of 10,000 rupees, B in
that of 20,000 rupees, G in tliat of 40,000 lupees, conditioned for D's duly
accounting to E. D makes default to the ej^tent of 30,000 rupees. A, B
and C are each liable to pay 10,000 rupees.
(b) A, B and C, as sureties for D, enter three several bonds, each in
a different penalty, namely, A in the penalty of 10,000 rupees, S m ihat
of 20,000 rupees, C in that of 40,000 rupees, conditioned for D's duly
acrounting to E. D makes defaidt to the extent of 40-,000 rupees. A is
liable to pay 10,000 rupees, and B and C 15,000 rupees each.
(c) A, B and C, as sureties for D, enter into three several bonds, each -
in a different penalty, namely, A in the penalty of .10,000 rupees, B in
that of 20,000 rupees, C in that of 40,000 rupees, conditioned for D's duly
accounting to E. D makes default to the extent of 70,000 rupees. A, B
and C have to pay each the full penalty of his bond,

CHAPTER IX
Of Bailment
118. "Bailment," "bailor" and "bailee" defined. 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 accoidmg to the directions of the person deliver-
ing diem. T h e person delivering the goods is called the "bailor". T h e
pel son to whom they are delivered is called the "bailee".
Explanation. If a person already in possession of the goods of an-
othei -contracts to hold them as a bailee, he thereby becomes the bailee,
and the owner becomes the bailor, of such goods although they may not
have been delivered by way of bailment.
149. Delivery to bailee how made. The delivery to the bailee may
be made by doing anything _which has th^ effect ot putting the goods in
the possession of the intended bailee or any person audiorised to hold
them on his behalf.
150. Bailor's duty to disclose faults in goods bailed. T h e bailor ii
' b o u n d to disclose to the bailee faults in the goods bailed, of which the
bailor is aware and which materially interfere with the use of them or
expose the bailee to extraordinary risks; and, if he docs not make such
disclosure, he is responsible for damage arising to die bailee directly from,
such faults.
If the goods are bailed for hire, the bailor is responsible tor such
damage whether he was or was not aware of the existence of such faults
in the goods bailed.

Illustrations
(a) A lends a horse, which he knows to be vicious, to B. He does
not disclose the fict that the horse is vicious. T h e horse runs away. B
is thrown and injured. A is responsible to B for damage sustained.
(b) A hires a carriage of B. The carriage is unsafe, though B is not
awaie of it, and A is Injured. B is responsible to A-for the injury.
151. Care to be taken by bailee. In all cases of bailment the bailee
is bound to take as much care of the goods bailed to him as a man of
 T H E INDIAN C O N T R A C r ACT, 1872 795

ordinary prudence would under similar circumstances take of his own

( goods of the same bulk, quality and value as the goods bailed.
152. Bailee when . not liable for loss, etc., of thing bailed. T h e
•bailee, in tlie absence of any special contract, is not responsible for the
loss, destruction or deterioration of the thing bailed, if he has taken the
•amount of care of it described in section 151.
153. Termination of bailment by bailee's act inconsistent with con-
ditions. A contract of bailment is avoidable at the optiori of the bailor
if the bailee does any act with regard to the goods bailed, inconsistent
with the conditions of the bailment.

Illustration
A let to B, for hire, a horse for his own riding.- B drives the horse
in his carriage. This is, at the option of A,- a termination of the bail-
ment. "-
154. Liability of bailee making unauthorized use of goods bailed.
If the Bailee makes any use of the goods bailed, which is not according
to the conditions of the bailment, he is liable to make compensation lo
the bailor for any damage arising to the goods from or during sucli use
of them.

Illustrations 1
(a) A lends a horse to B for his .own riding only. B allows C, a
member of his family, to ride the horse. C rides with care, but the horse
accidentally falls and is injured. A is liable to make compensation to B
for The injury done to the horse.
(b) A hires a horse in Calcutta from B expressly to march to Benares.
A rides witli due care, but mardres to Cuttack. instead. The horse acci-
dentally falls and is injured. B is liable to make compensation to A for
the injuiy to the horse. -
155. Effect of mixture, with bailor's consent, of his goods with
•bailee's. If the bailee, with the consent of the bailor, mixes the goods
of the bailor witlr his own goods, the bailor and the bailee shall have an
interest, in proportion to their respective shares, in the mixture thus pro-
duced.
156. Effect of mixture v/ithout bailor's consent, when the goods can
be separated. If the bailee, without tlie consent of the bailor, mixes- the
goods of the bailor with his' own goods, and the goods can be separated
or divided, the property in the goods rem'ains in the parties respectively;
but the bailee is bound to bear the expense of separation or division, and
any damage arising from the mixture.

Illustrations
A bails 100 bales of cotton marked with a particular mark to B. B,
without A's consent mixes the 100 bales with other bales of his own,
bearing a different mark. A is entitled to have his 100 bales returned,
and B is bound to bear all tlie expense incurred in the separation of the
bales and any other incidental damage.
157. Effect of mixture, without bailor's conseiK, when the goods can-
not be separated. If the bailee, without the c o n ^ t of the bailor, mixes
the goods of the bailor with his o^v^n goods, in such a manner thai it is
i.Tipossible to separate the goods bailed from the other goods and deliver
 796 MERCANTILE LAW
them back the bailor is entitled to be compensated by the bailee for the
lass of (he 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.
158. Repayment by bailee of necessary expenses. Where, by the
conditions of the bailment, the goods are to be kept or to be canied, or
to have work done upon them by the bailee for the bailor and the bailee
is to receive no remuneration, the bailor shall repay to the bailee the
necessary expenses incurred by him for the purpose of, the bailment.
159. Restoration of goods lent gratuitously. The lender of a thing
for use may at any time require its return, if the loan was gratuitous
even tliough he lent it for a specified time or purpose. But, on the faith
of such loan made for a specified time or purpose, the borrower has acted
in such a manner that the return of the thing lent before the time agreed
upon would cause him loss exceeding the benefit derived by him Irom
the loan, the lender must, if he compels the return, indemnify the bor-
rowet for the amoimt in which the loss so occasioned exceeds the benefit
so derived,
160. Retunr of goods bailed on expiration of time or accomplish-
ment of purpose. It is the duty of the I bailee to return, or deliver ac-
cording to the bailor's directions the goods bailed, without demand, as
soon as the time for which they were bailed has expired, or the purpose
for which they were bailed has been accomplished.
161. Bailee's responsibility when goods are not duly returned. .If
by the default of the bailee, the goods are not returned, delivered or
tendered at the proper time, he is responsible to the bailor for any loss,
destruction or deterioration of the goods from that time.
' 162. Termination of gratuitous bailment by death. A gratuitous
bailment is terminated by the death either of the bailor or of the bailee.
163. Bailor entitled to increase or profit from goods bailed. In the
absence of any contract to the contrary, the bailee is bound to deliver
to the bailor, or according to his dii'ections, any increase or profit whicli
may have accrued from the goods bailed.

Illustration
A leaves a cow in the custody of B to be taken care s>L The cow
has a calf. B is bound to deliver the calf as well as the cow to A.
164. Bailor's responsibility to bailee. T h e bailor is responsible to
the bailee" for any loss which the bailee may sustain by reason that the
bailor was not ept'itled to make the bailment, or-to receive back the goods
or to give directions respecting them.
165. Bailment by several joint owners. If several joint owners of
goods bail them, the bailee may deliver them back to, or according to the
directions of one joint owner without the consent of all, in the absence
of any agreement to the contrary.
166. Bailee not responsible on re-delivery to bailpr without title. If
the bailor has no titleHo the goods, and the iailee, in good faith, delivers
them back to, or according to the directions of, the bailor, tlie bailee is
not responsible to tlie owner in respect of such delivery.
T H E INDIAN CONTRACT ACT, 1872 797
167. Right of third pei-son claiming goods bailed. If a person,
other than the bailor, claims goods bailed, he may apply to the Court to
stop the delivery o£ the goods to the bailor, and to decide the title to the
goods.
'' 168. Right of finder of goods: may sue for speciiic reward offered.
T h e finder of goods has no right to sue die owner for compensation for'
tiouble and expense voluntarily incurred by liim to preserve tlie goods
and to find out the owner; but he may retain the goods against tlie owner
until he receives such compensation; and, •where the owner has oflered
a specific reward for the return of goods lost, the finder may sue for such
reward, and may letain the goods until he receives it.
169. When finder of thing commonly on sale may sell it. When a
thing which is commonly tlie subject of sale is lost, if the owner cannot
with reasonable diligence be found or if he refuses, upon demand, to
pay the lawful charges of tlie finder, the finder may sell it—
(1) "When the thing is in danger of perishing or of losing the greater
part of its value, or/'
(2) \Vhen the lawful chaiges of the finder in respect of the tiling
found, amount to two-thirds of its value.
170. Bailee's particular lien. Where 'the bailee has, in accordance
iviih die purpose of the bailment, rendered any sen'ice involving tlie
exercise of labour or skill in respect of the goods bailed, he has, in the
absence of a contract to the contrary, a right to retain such goods until
he receives due remuneration for the services he has rendered in respect
of them.

Illustrations
(a) A delivers a rough diamond to B, a jeweller, to be cut and polish-
ed, which is accordingly done. B is entitled to retain the stone till he
is paid for the services he has rendered.
(b) A gives cloth to B, a tailor, to make into a coat. B promises A
to deliver the coat as soon as it is finished, and to give three montlis'
credit for the price. B is not entitled to retain coat until he is paid.
171. General lien of bankers, factors, wharfingers, attorneys and
policy-brokers. Bankers, factors, wharfingers, attorneys of a High Court
and policy-brokers may, in the absence of a contract to the contrary, re-
tain, as a security for a general balance of account, any goods bailed to
ihem; but no otlier persons have a right to retain as a security for such
balance, goods bailed to them, unless tliere is an express contract to that
effect.

Bailments of Pledges
172. "Pledge", "pawnor" and "pawnee" defined. The bailment of
good.'i as security for payment of a debt-or performance of a promise, is
called "pledge". The bailor is in this case called the "pawnor". The
bailee is called the "pawnee".
173. Pawnee's right of retainer. T h e pawnee may retain the goods
pledged, not only for payment of the debt or the performance of the pro-
mise, but for the interest of the debt, and all necessary expenses incurred
by him in respect of the possession or l o r tlie preservation of the goods
pledged.
174. Pawnee not to retain for debt or promise other than that tot
whicli goods pledged. Presimiption in case of subseaiient advanrps Thp-
798 ^ MERCANTILE LAW

pawnee shall not, in die absence o£ a contract to that effect, retain the
goods pledged for any debt or promise other than the debt or promise
for which they are pledged; but such contract, in the absence of anything
to the contrary, shall be presumed in regatd to subsequent advances njade
by the pawnee.
175. Pawnee's right as to extraordinary expenses incurred. T h e
pawnee is entitled to leceive from the _pawno^ extraordinary expenses in-
curred by him for the preservation of the goods pledged.
176. Pawnee's right where pawnor makes default. If the pawnor
makes default in. payment of the debt, or performance, at the stipulated
time of the promise, in respect of which the goods were pledged, the
pawnee may bring a suit against the pawnor upon the debt^or promise,
and retain the goods pledged as a collateral security; or he may sell the
thing pledged on giving the pawnor reasonable notice of the sale.
If the proceeds of such sale are less than the amount due in respect
of the debt or promise, the 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 surplus to the pawnor.
177. Defaulting pairaor's right to redeem If a time is stipulaied
for tJie payment of the deht^ or performance of the promise, for wljich the
pledge is made, and the pawnor makes default in'payment of the debt or
performance of the promise at the stipulated time, he may redeem the
goods pledged at any subsequent time before the actual sale of them; b u t
he must, in that case, pay, in addition, any expenses whicit have arisen
from his default.
178. Pledge by mercantile agent. Where a mercantile agent is, viith.
the consent of the owner, in possession of goods or the documents of title
to goods, any pledge made fay him, when acting in the ordinary course
of business of a mercantile agent, shall be as valid as if he were expressly
authorised by the owner of the goods to make the same; provided that the
pawnee acts in good faith and has not at the time o£ \the pSedge noticed
that pawnor has no authority to pledge.
Explanation. In ^ this section, the expression 'mercantile agent' and
'documents of title' shall have the meanings assigned to them in tlie Indian
Sale of Goods Act, 1930 (III of 1930).
178-A. Pledges by person in possession under voidable contraci.
When the pawnor has obtained possession of the goods pledged by him
under a contract voidable under section 19 or section 19-A, but the con-
tract has not been rescinded at the time of the pledge, the pawnee ac-
quires a good title to the goods, provided he acts in good faitli and with-
out notice of the pawnor's delect of title.
179. Pledge where pawnor has only a limited interest. ^Vhere a
person pledges goods in whicli he has only a limited inteie->t, the pledge
is valid to die extent of that interest.

Suits by Bailees oi Bailors against Wrong-doers

180. Suit by bailor or bailee against wrong-doer. If a third person
wrongfully deprives the bailee of the use or possession of the goods bailed,
er does ttiera any inj^ary, the bailee is entitled to use such remedies as the
owner might have usi^'in tlie like case if no bailment had been made; and
»ithcr t!ie bailor or tlie bailee may. bring a suit against a ihird person for
iuch deprivation or injury.
101 A„„^.»»,-™,.m<»r.t 'nf riAief or idoini>ensatiaia obtained by inch suits.
T H E INDIAN CONTRACT ACT. 1872 ^ 799
Whatever is obtained by way of relief or compensation in any such suit
shall, as between the bailor and tlie bailee, be dealt with according to their
respective interests.

CHAPTER. X
Agency
Appointinent and Authority of Agents
182. "Agent" and "principal" defined. An "agent" is a person em-
ployed to do any act for another or to represent another in dealing with
third persons. The person for whom such act is done, or who 'is so re-
presented, is called the "principal".
183. Who may employ agent. Any person who is of the age of
majority according to the law to whicli he is subject, ajid who is of sound
tnind, may employ an agent.
184. Who may be an agent. As between the principal and third
persons any person may becortie an agent, but no person who is not of the
age of majority and of sound mind can become an agent, so as to be
responsible to his principal according to the provisions in that behalf here-
in contained.
185. Consideratjon not necessary. No consideration is necessary to
create an agency.
186. Agent's authority may be expressed or implied. The authority
of an agent may be expressed or implied.
187. Definitions of express and implied authority. An authority is
said to be express when it is given by words spoken or written. An au-
tliority is said to be implied when it is to be inferred from the circum-
stances of the case; and things spoken or' written, or the ordinary course
of dealing may be accounted circumstances of the case.

Illustration
A owns a shop in Serampur, living himself in Calcutta, and visiting
the shop occasionally. T h e shop is managed by B, and he is in the habit
of ordering goods from C in the name of A for the purposes 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 o f A for
the, purposes of the shop.
188. Extent of agent's authority. An agent having an authority to
do an act has authority to do every lawful thing whiclr is necessary in
order to do sudi act.
An agent having an authority to carry on a business has authority to
do every lawful thing necessary for the purpose, or usually done in the
course o£ conducting such business.

Illustration
(a) A is employed by B, residing in London, to recover at Bombay ^.
debt due to B, A may adopt any legal process necessary for the purpose
of recovering the debt and may give a valid discharge for the same.
(b) A constitutes B his agent to carry on his business of a shipbuilder.
B may purchase timber and other materials, and Iiire workmen, for the
purposes of carrying on the business.
189. Agent's ^ t h o r i t y in an emergency. An Agent has authority, in
800 MERCANTILE LAW

an emergency, to do all such acts for the purpose of protecting his princi-
pal from loss as would be done by a person of ordinary 'prudence in his
own case, under similar circumstances.

Illustrations
(a) An agent for sale may have goods repaired if it be necessary.
(b) A consigns provisions to B at Calcutta, with directions to send
them immediately to C at Cuttack. B may sell tlae provisions at Calcutta,
if they will not bear jourijey to Cuttack witiaout spoiling.

Sub-Agents
190. When agent cannot delegate. An agent cannot lawfully em-
ploy another to perform acts whidi he has expressly or impliedly under-
taken to ijerfoim personally, unless by the ordinary custom of trade a sub-
agent may, or from the nature of the agency, a sub-agent must, be employed.
191. "Sub-agent" defined. A "sub-agent" is a person employed by,
d.nd acting under the control of, the original agent in the business of the
agency.
192. Representation of principal by sub-agent properly appointed.
^Vheie a sub-agent is properly appointed the principal is, so far as regards
third persons, represented by the sub-agent and is bound by and responsible
for his acts as if he were an agent originally appointed by the principal.
Agent's responsibility for sub-agents. The agent is responsible to (lie
principal for the acts of the sub-agent.
Sub-Agent's responsibility. T h e sub-agent is responsible for his a a s to
the agent, but not to the principal, except in case of fraud or wilful wrong.
193. Agent's responsibility for sub-agent appointed without authority.
Where an agent, without having authority to do so, has appointed a per-
son to act as a sub-agent, the agent stands towards such person in the
relation of a principal to an agent, and is responsible for his acts botli to
tire principal and to third persons, the principal is not represented by or
responsible for the acts of the person so employed, nor is that person res-
ponsible to the principal.
194. Relation between principal and person duly appointed by Agent
to act in business of agency. Where i n agent, holding an express or implied
authority to name another person to act for the principal in the business"
of the agency, has named another person accordingly, such person is not a
sub-agent but an agent of the principal for sucla part of the business of
the agency as is entrusted to him.

•^ Illustrationo-
(a) A directs B, his solicitor, to sell his estate by auction, ~and to em-
ploy an auctioneer for the purpose. B names C, an auctioneer, to conduct
the sale. C is not a sub-agent, but is A's agent foi the conduct of the
sale.
(b) A authorises B, a merchant in Calcutta, to recover the moneys due
to A from C Sc Co. A instructs D, a solicitor, to take proceedings against
C k Co., for the recovery of the money. D is not a sub-agent but is
solicitor for A.
195. Agent's duty in naming^ sucli person. In selecting such agent
for his principal, an agent is bound to exercise tlie same_ amount of discre-
 I H E INDIAN CJONTRACT ACT, 1872 801

tioii as a man ol oulinaiy pnulcnce would exeiciiC iii his own case; and
it he (Iocs this he is not responsible to the principal for the acts or negli-
t^ence ol the a[;eiu io selected.

Illustraiions
(a) A instincts B, a merchant, to buy ^i ship for him. B. employs a
bhip surveyor ol good reputation to choose a .ship fdr A. The surveyor-
makes the choice negligently and the shij) tinns out to be unseaworiliy and
is Jost. P is not, but the surveyor is resjionsihle to A.
(b) A consigns goods- to B, a merchant, lor sale. B in due course,
' employs an auctioned in good credit to sell the goods ol A, and allows
the auctioneer to recci\e the proceeds of the sale. The auctioneer after-
wards becomes insolvent without ha\ing acLouiued tor the proceeds. B
is responsible to .\ lot the proceeds. - >

Ratification
196. Right of j)erson as to acts done lor him without his authority.
Effect of ratification. Where acts are done by one person on behalf of an-
other, but withom his knowledge or authority, he m.iy elect to ratify or to
disown such acts. If he ratifies them, the same efTccis will follow as if
the; had been performed by his anthority.
197. Ratification may be expressed or implied. Ratification may be
expressed or may be implied in the conduct of the pei'son on who,se behalf
the acts are done.

Illustrations
(a) \ , without authority, buys goods, for B. Aftci^vards B sells them
to C on his own account; B's conduct implies a ratification of the pur-
LJiase made for him by A.
(b) A, widiont B's authority, lends B's money to C. Afterwards B
accepts interest on the money from C. B's conduct implies a ratification
ol the loan.
198. Knowledge requisite for valid ratification. No valid ratificatioj]
can be made )jy a person, wliose knowledge of the facts of the case is
materially defective.
199. Effect of ratifying unauthorized act forming part of a trans-
action. A person ratifying any imauthorized act done on his belialf ratifies
the whole of the transaction of which sucli act formed a part.
200. Ratification of unauthorized act cannot injure third {)erson.
An act done by one person on behalf of another, without such, other
person's authoiity wliich, if done, with aiithority, would have the effect
of subjecting a third person to damages, or of terminating any right or
interest of a third person, cannot, by ratification, be made to have such
elect.

Illustrations
(a) A, not being aiuhorized tliereto by E, demands on behalf of B,
'die delivery of a chattel, the property of B, from C, who is in possession
of it. This demand cannot be ratified by B, so as to make C liable
for damages for his refusal to deliver.
(b) A holds a lease from B, terminable on the three months' notice,
C, an unauthori.ied person, gives notice of termination to A. The notice
cannot be ratified by B, so as to be binding on A.
81)2 iMERCANTlLE LAW

Revocation ot authoiity
201. Termination o! agency. An agency ii terminated by the princi-
pal 1 evoking Ins authoiity; or by the agent renouncing the business of tiie
agency; or uy fiie business of the agency being completed; or by either the
pnncipai or agent dying or becoming of unsound mind; oi by the princi-
pal bemg adjudicated an insolvent under the provisions ot any Act tor the
time in iorce ioi the relief of insolvent debtors.
202. "lennination ot agency where agent has an interest in subject
matter. Wliere ilic ugem has himself an interest in the property whiA
lorms die subject matter of the agency the agency cannot, in the absence
ot an express contract, be terminated to the prejudice of such interer>t.

Illustrations
(a) A give's authority to B to- sell A's land, and to pay himself, out of
the proceeds, the debts due te him from A. A cannot re^'oke this au-
thoiity, nor can it be terminated by his insanity or death.
(b) A consigns 1,000 bales ot cotton to B, who has made advances, to
him on such cotton, arid desires B to sell tlie tottbn, and to repay him-self
out of the price, the amount of his own advances. A cannot revoke this
authority, noi is it .terminated by iiij, insanity or death.
203. When principal may revoke agent's authority. The principal
may, save as is otherwise provided by the last preceding section, revoke the
autiiority given to his agent Ut any time belore the .authority has been
exercised so as lo bind the principal.
204. Kevocation where authority has been partly exercised. The
principal cannot revoke the autliority' given to his agent after the autliority
iias been pauly exercised so far as regards such acts and obligations as
arise from acts already done in the agency.

illustrations
(a) A autliorises B to buy 1,000 bales ol cotton on account of A, and
to pay for it out of. A's money remaining in B's hands. B bi^ys 1,000 bales
of cotton in his own name, so as to make himself personally liable for the
price. A cannot revoke B's authority so far as regards payment for the
cotton.
(b) A aiiihorises B to buy 1,000 bales of cotton on account of A, and
to pay for it out of A's money remaining in B's hands. B buys 1,000 bales
of cotton in A's name and so as not to render himself personally liable
tor the price. A cannot revoke B's authority to pay for the cotton.
205. -Compenwuion lor revocation' by principal, or renunciation by
agent. WJiere there is an express or implied contract that the agency
should be continued for any period of time, the principal must make com-
pensation to the agent, or the agent to the principal as the case may be,
for any previous revocation or renunciation of the agency without sufTicient
cause.
206. Notice of revocation or renunciation. Reasonable notice must
be given of such revocation or renunciation; otherwise tlie damage thereby
resulting to the principal or the agent, as <the case may be, must be made
good to the one by the other,
207. Revocation and renunciation may i>e expressed or implied. Re-
vocation and renunciation may be expressed or may be implied in the
conduct of the piincipal or agent respectively.
 T H E INDIAN CONTRACT ACT, 1872 803

Illxistiation
A empowers B to let A's house. Afterwaids A lets it himself. This
is an implied revocation o£ B's authority.
208. When termination o£ agent's authority takes effect as to agent,
aatj as to third persons. The termination of tiie autiionty of an agent
does not, so far as regards the agent, take effect before it becomes known
to him, or so far as regards third .persons, be£oi;e it becomes known to
them.

Iliustrations
(a) A directs B to sell goods for him, and agrees to give B\{ive per
cent commission on the price fetched by tlie gogds. . A afterwards, by letter,
revokes B's authoiity. B, after tlie letter is sent, but before he receives
it, sells the goodj for 100 rupees. The sale is binding on A, and B is en-
titled to five rupees as his commission.
(b) A, at Madras, by letter directs B to sell for him some cotton lying
in a waiehouse in Bombay, and afterwards, by letter, revokes his authority
to sell, and directs B to send the cotton to Madras. B, after receiving
the second letter, enters into a coniiact witli C, who knows of the first
t letter, but not of the second, for the sale to him of the cotton. C pays
B the money, with which B absconds. C's payment is good as against A.
(c) A directs B, his agent, to pay certain money to C.^ A dies, and
D takes out prob.ite to his will. B, after A's death, but before hearing of
it, pays the money to C. Tlie payment is good as against D, the executor.
209. Agent's duty on termination of agency by principal's death or
insanity. When an agency is terminated by the principal dying or becom-
ing of unsound piind, the agent is bound to take, on .behalf of the re-
presentatives of his late principal, all leasonabie steps for the protection
and preservation of the interests entrusted to him.
210. Termination of sub-agent's authority. The termination of the
authority of an agent causes the termination (subject to the rules herein
contained regarding tlie termination of an agent's authority) of the au-
thority of all sub-agents appoinrprf i>y him.

Agent's Duty to Principal

211. Agent's duty in conducting principal's business. An agent is
bound to conduct the bu-iiness of his principal according to the directions
given by the principal, or in the absence of any such directions, according
to the custom wliicii ]>!evails in doing business of the same kind at the
place where th,c agent conduct.i such business. When die agent acts other-
wise, if any loss be sustained, he muSt make it good to his principal and, if
any profit accrues, he must account for it.

Illustrations
(a) 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 moneys which inay
be in hand, omits to make such investmei;rt. .\ must make good to B the
interest usually obtained by such investment.
(b) B, a broker, in whose business it is not the custom to sell on credit,
sells goods of A on credit to C, whose credit at the time -was very high.
C. before payment, becomes insolvent B must make good the loss to A.
804 MERCANTILE LAW

212. Skill and diligence "required irom agent. An agent is bound

to conduct tlie business of the agency with as much skill as is generally
possessed b)« persons engaged in similar business, unless the principal has
no"tiee-Qf his want of skill. The agent is always bound to act with reason-
able diligelice, and to use sucli skill as he possesses; and to make compen-
sation to his principal in respect of tlie direct consequences of his own
neglect; want of skill or'misconduct, but not In respect of loss or damage
w'licli are indirectly or remotely caused by such neglect, want of skill oi
misconduct.

Illustrations
(a) A, a merchant in' Calcutta, has an agent B,'in London to whom
a sum of money is paid on A's account, witJi orders to remit. B retains
the money for a considerable time- A, in consequence of not receiving
the money, becomes insolvent. B is liable for the money and interest
from the day on which it ought ;- have been paid, according to the usual
rate, and for any furdier direct loss—u», e.g., by variation of rate of ex-
change—but not further.
(b) A, an agent for the sale ot goods, having authority to sell on
credit, sells to B on credit, witliout making the proper and "usual enquiries
as to the solvency of B. B, at the time of such sale, is insolvent. A must
make compensation to his principal in respect of any loss thereby sus-
tained.
(c) A, an insurance broker, employed by B to eftect an insurance on
a ship, omits to see that the usual clauses are inserted in the policy. The
ship is afterwards lost. In consequence of the omission of ,the clauses
nothing can be recovered from the underwriters. B is bound to make
good the loss to A.
(d) A, a merchant in England, directs B, his agent at Bombay, who
accepts the agency, to send him 100 bales of cotton, by a certain ship.
B, having it in his power to send the cotton, omits to do so. The ship
arrives safely in England. Soon after arrival the price of cotton rises.
B is b6und to make good to A the profit which he might have made by
the 100 bales of cotton at the time the ship' arrived; but not any profat
he might have made by the subsequent rise.
213. Agent's accounts. An agent is bound to render proper aceounts
to his principal on demand.
214. Agent's duty to commimicate/(vith principal. It is the duty of
an agent, in case of difficulty, to use all reasonable diligence in communi-
cating with his principal, and in seeking to obtain his instruction.
215. Right of principal when agent deals, on his own account iin
business of agency without principal's consent. If an agent deals on his
own account in the business of the agency, without first' obtaining the
consent of his principal and acquainting him with all material circum--
stances which have come to his own knowledge on the subject, the prin-.
cipal may repudiate the transaction, if the case sh6ws either, that any
material fact has been dishonestly concealed from him by the agent or
that the dealings of the agent have been disadvantageous to him.

Illustrations
(a) A directs B to sell A's estate. B buys the estate for himself in
die name of C. A, on discovering that B has bought the estate for him-
self, may repudiate the sale, if he can show that B has dishonestly,con-
T H E INDIAN CONTRACT ACT, 1872 805

cealed any material fact, or tliat the sale has been" disadvantageous to
him.
(b) A directs B to sell A's estate. B, on looking over tlie estate be-
fore selling it. finds a mine on the estate which is unknown to A. B in-
forms A that he wishes to buy the estate for himself, but conceals.'the dis-
covery of the mine. A allows B to buy, in ignorance o f the existence
of the mine. A, on di.scovering that B knew of the mine at the time he
bought the estate, may either repudiate or adopt the sale at his option.
Note:—The Law as to the principal's light of repudiation imder
S. 215 can be summed up thus:—'Have-been disad\antageous' means 'dis-
advantageous in fact'. 102 I C 366. The burden of pioving that the
transaction is not disadvantageous to tlie principal is on the agent. 110
IC 6.
216. Princii)ars right to benefit gained by agent dealing on his own
account in business of agency. If an agent, without the knowledge of his
principal, deals in the business of the agency on his own account instead
of on account of his principal, the principal is entitled to claim from the
agent any benefit wiiich may ha-ic resulted to him from the transaction.

Illustration
A directs B, his agent, to buy a certain house for him. B tells ,\ it
cannoi be bought and buys the house for himself. A may, on discover-
ing that B has Iiought the house, compel Iiim to sell it to A at the price
he gave for it.
217. Agent's right of retainer out of sums received on principal's
account. An agent may retain, out of any sums received on account of
tlic principal in the business of the agency, all moneys due to himself in
icspect of ad\ances made or expenses properly incurred, by him in con-
ducting such business and also such remuneration as may be payable to
him for acting as agent.
218. A!E;ent's dutv to pay sums received for principal. Subject to
sudi deductions, the agent is bound to pay to his principal all sums re-
ceived on his account.
219. When agent's remuneration becomes due. In the absence of
a'ly special contract, payment for the performance of any act is not due
to the agent until the completion of such Act, but aa agent may detain
moneys received by him on account of goods sold, although the whole of
the goods consigned to him for sale may have not been sold, or although
tlic .sale may not be actually complete.
?20. Agent not entitled to remuneration for business misconducted.
An agent who is guilty of misconduct in the business of the agency is not
entitled to any remuneratmn in respect of that part of the business which
has been misconducted.

Illustrations
(a) A employs B to recover 1.00,000 rupees from C, and to lay it out
on good securhv. B recovers the 1.00.000 rupees and lavs out 90.000
iiipees on good security, but lavs out 10,000 rupees on security which he
ought to have known to be bad. whereby A loses 2,000 rupees. B is en-
titled to remuneration for recovering (he 1.00.000 rupees and for invest-
ing the 90;000 rupees. He is not entitled to anv remuneration for in-
vesting'the 10,000 lupees and he must make good the 2.000 rupees to A.
(1)) A emplo%s B to recover 1.000 rupees from C. Through B's mis-
806 MERCANTILE LAW

conduct the money is not recovered. B is entitled to no remuneration

'or his services, and must make good the loss.
221. Agent's lien on jmncipal's property. In the absence of any
contract to the contrary, a^ent is entitled to retain goods, papers and
other property, whether movable or immovable, of the principal received
by him, until the amount due to himself for commission, disbursements
and services in respect of the same has been paid oi accounted for to him.
Principal's Duty to Agent
222. Agent to be indemnified against consequences of lawful acts.
The ejmployer of an agent is bound to indemnify him against the conse-
quences of all lawful acts done by such agent in exercise of authority
conferred upon him.
Illustrationg
(a) B, at Snigapore, under instructions from A of Calcutta, contiacts
with C to deliver certain goods to him. A does not send the goods to
B, and C sues B for breadh of contract. B informs A of the suit, and
A authorises him to deiend the suit. B defends the suit, and is com-
pelled to pay damages and costs, and incurs expenses. A is liable to B "*
foi such damages, costs and expenses.
(b) B, a broker at Calcutta, by the orders of A, a .merchant there,
contracts with C for the purchase of 10 i?asks of oil for A. Afterwards
A refuses to receive the oil, and B sues C. B informs A, who repudiates
tlie coniract altogetfier. B defends, but unsuccessfully, and has to pay
damages and costs and incurs expenses. A is liable to B for such damages,
costs and expenses. i
223. Agent to be indemnified against consequences of acts done in
good faith. Where one person employs another to do an act, and the
agent does the act in good faith, the employer is liable to indemnify the
agent against the consequences of that act, though it causes an injury to
the rights of third persons.
Illustrations
(a) A, a decree-holder and entitled to execution of B's goods, requiies
the officer of the Court to seize certain goods, representing them to be
the goods of B. The officer seizes the goods, and is sued by C, the true
owner of the goods. A is liable to indemnify the officer for th^ sum
which he is compelled to pay to C, in consequence of obeying A's direc-
tions.
(b) B, at the request of "A, sells goods in the possession of A, but
whicli A had no right to dispose of B does not know this, and hands
over the proceeds of the sale to A. Afterwards C, the true owner of the
goocjs, sues B and recovers, the value of the goods and costs. A is liable ,
to indemnify B for what he has been compelled to pay to C and for B's
own expenses.
224. Non-liability of employer of agent to do a anjninal act. Where
one pEtrson employs another to do an aM which is criminal, the employer
is not liable to the agent, either upon an express or an implied promise,
to indemnif)' him against the consequences of that act.
Illustrations
(a) A employs B to beat C, and agrees to indemnify him against all
consequences, of tJie act. B theieupon beats C, and has to pay damages
to C for so doing. A is rsot liable to indemnify B for those damages.
 THE INDIAN CONTRACT ACT, 1872 807

(b) B, the iJioprietoi- of ia newspaper, publishes, at A's request, a

libel (defamation in writing) upon- C in the paper, and A agiees to in-
demnify B against the coniequcnces of the publication, and all costs and
damages of any action in respect thereof. B is sued by C and has to pay
damages and also incurs expenses. A is not lial)lc to i upon the indem-
nity.
225. Compensation to agent for injury caused by i)unci|)al's neglect.
The principal must make compensation to his agent in respect of injury
caused to. such agent by the principal's neglect or want of skill.

Illustrations
A employs B as a biicklayer in building' a house, and jjuts up the
scaffolding himself. The scafToUliiig is unskilfidly put up, and B is in
consequence hurt. A must make compens.ition to B.

Effect of agency on contract with thiid persons

226. Enforcement and consequences of Agent's contract. Contract
entered into through an agent, and obligations arising fiom .icts done
by an agent, may be enforced in the same manner and will have the same
legal consequences, as if the contracts had been entered into and the acts
done by the principal in person.

Illustrations
(a) A buys goods fiom B, knowing that he is an agent for their sale,
but .not knowing who is the principal. B*s principal is the person entitl-
ed to claim from A the price of the goods, and A cann<f)t, in a suit by the
principal, set-off against that claim a debt due to himself from B.
(b) A, being B's agent witJi authority to receive money on his behalf,
receives from C a sum of money due to B. C is discharged of his obliga-
tion to pay the sum in question to B.
227. Principal how far bound, when agent exceeds authority. When
' an agent does more than he is authoriyed to do, and when the part of
'^what he does, which is within his authority, can be separated from the
part which is beyond his authority, so much only o£ what he does as is
within his authority, is binding as between him and his principal.

Ulastration
A, being owner of a ship and cargo, authorises B to procure an in-
surance for 4,000 rupees on the ship. B procures a policy of 4,000 rupees
on the ship, and another for the like sum on die cargo. A is bound to
pay the premium for the policy on the ship, but not the premium for
the policy on the cargo.
228. Principal not bound when excess of agent's authority is not
separable. Where an agent does more than he is authorised to do, and
what he does beyond the scope of his authority cannot be separated from
what is within it; the principal is not bound to recognise the transaction.

Illustration
A authorises B to buy 500 sheep for him. B buys 500 sheep and 200
lambs for one sum of 6,000 rupees. A may repudiate the whole trans-
action.
808 . MERC \ N I ILE L \\\'
229. Co!iSe{|ueiices of noiito given lo agenl. Vny notice ^hen lo oi
infoimation obiiiiiicd by tho aytni. pioxided it be given oi al)t:iiiie<i in
the course of ihe business nans.uicd ))\ liini toi ilie piincipa). sli.iil as
betwen the principal and ihiul p.irties, li>i\e ilu- same legal conse(nicnccs
as ifNx had been given (o or obtained b y the jjrintijjal.
lllu-stnuions
(a) A is euiployed by B to buy fioiii C ceri.un i;oods ol wiiicli C. is
the apparent owner and buys them .iccoidingly. In tiie coiiise ol the
treaty for the sale, A learns that the goods really belonged lo I), l>ui^I}
is ignorant of that lact. B is not entitled lo set-off a debt ownig to liim
fiont C against the price of the goods.
(b) A is employed by H to buy fioni C gooils of w h i c h C is the apjj.n-
ent owner. -/\. was, before he was so emjiloycd. a ser\ant ol C, and then
learnt that.the goods leally beloiigcd to D, Init H is ignoiani of that fact.
In si)ite of the knowledge ol his agent, fi may set-oil against the pi ice of
the goods a debt owing to him fiom (;.
230. Agenl cannot persoifially enforce, nor be bound by, coiiiracts
on behalf of principal. In the absence of any contract to that effect, an
agent cannot personall) enforce contraits cntcicd mio by him on bcliall
of his principal, nor is he peisonally bound b\ iluui
Presumption of comracl to contrary. Sucii a couuacL sl\all he pic-
sumed to exist in the following cases:— ^
(i) wheie the contract is made by an .igcni loi the sale oi pui-
chase of goods--for a meichani lesident abioad:
(2) where the agent does not disclose the n.niic of his prnuii)al
(3) where the principal, tiiough disclosed, cannot be sued.
231. Rights of parties to a contiact made by agent not disdoscd.
If an agent nKi'ces a contract with a peison who neither knows, nor lias
reason to suspect, that he is an agent, his piincipal may require the per-
formance •of tJie contract; but the othei contracting party has, as against
the principal, the same rights as he would have had us against the agent
if the agent- had^ been jirincipal.
If the principal disclo.ses himself befoie ihe-contiact is (oini)letcd.
the other contracting paiiyMnay refuse to fulfil the contiact, il he can
show that if he had known who uas the principal in the contract, or if
he had known that the agent was not a principal, he would not have
entered into the contract.
2S2. Perforniance of contract with agent sui)posed to be ]>rincipal.
Where one man makes .i contiact with anothei, neither knowing nor
having reasonable ground lo suspeti thai ihe oilier is an .igeiu, the priii-
cijjul, if lie 'retiuires the jjerformance o( the conn act, can only obtain
such performance sul))eci to the rights and oliligations subsisting between
ihe agent and the other party to the contract.
Illustration
.A, who owes 500 tupees lo 15, sells 1,0(10 iiijx-es' worth of lice to B.
A is acting a? agent for C. m ,ihe tran.s.-iciion, but B has no knowledge
nor reasonable gTOund of sus]>icion ih.u sutli is the case. C cannot com-
IH'l B to take the rice without allowing him to setoff A's debt
233. Right of person dealing with agent (lersonally liable. In cases
where the agent is personally liable, a person dealing with him may hoUl
either hjm or his princi|>:il, oi both ol them liable.
lUustiatioii
A enters inio .i roninici wiih 15 to <M.'!I him 100 bales ol cotton, and
•IfIE INDIAN CONTRACT ACT, 1872 800

aftci\v;iid!> clisto\cr'> thai B was acting as agent for (.. A '""'V ''"'^ either
B or C;, or both, for the price of the cotton.
23 f. Coniequence of inducing agent or psincipal lo act on belief
iljat |>rincipal or agent will be held excluMvciy liable. When a person
who has made a contiad witii an agent induces the agent to act upon the
belief that the piincip.il only will be held liable, or induces the principal
to act upon the belief that the agent onlv will be held Ijalile, he cannoi
aficnvards. hold liable the agent or piincipai icspeciivcly.
235. Liability of pretended agent. A pcison untiiih lepieseniiiig
Iiinisolf to be the authorise^ agent of another, and theieby inducing a
third prison 'lo deal ivith him as such agent, is liable, if his alleged eni-
ployci <loes nor ratify his acts, lo make (ompcnsation to tlic otlici in
resjjctt of any loss oi damage which he has inclined by so dealing.
2^K. Person falsclv contracting as. agent not entitled to peiformance.
A pei>oii with whom a contract has been enieied in ihc cbiiiactcr of ageni
is not entitled to letpiiie the performance ol it il he was in leality acting,
n^t as agent, but on hij. own account.
237. Liability of principal inducing belief that agent's imauthot ised
acts were authori.sed. When an agent has, wiiiiout .luthority, done acts
or inclined obligations to a third peison on behall of his jirincipal. the
principal is bound by such acts or obligations if lie has liy his wotds or
conduct induced such third' ])ersons to believe that such acts and obliga-
tions were within the scope of the agent's authority.
Illustrations
(a) A consigns goods to B for sale, and gives him insliuction, not to
sell under a fixed price. C, being ignotant of B's insti uctions, enters into
a contract with B to buy the goods at a jjrice lower than the reserved
price. A is hound by the contract.
(b) A entrusts B with negotiable instruments ciulorsed in blank. B
sells them to C in \iolation of private oiders from A. Tiie- sale is good.
238. Effect, on agreement, of misrepresentation or fraud by agent.
Mi.srepresentalions made, or frauds committed, by ygents acting in the
course of their business foi their principals, have the same effect on agiee-
mcnts "fnade by such agents as if such misrepresentations or frauds had
been made or committed by the principals: but misrepresentations made,
or frauds committed, by agents in matters whidi do not fall within their
.luthority, do not affect their princiiJals. '
Illustrations
(a) A being B's agent lor the .sale of goods, induces CJ to buy them by
a misrepresentation, which he was not authorised by B to make. The
contract is voidable, as between B and C at the option of C
(b) A, the captain of B's ship, signs bills of lading without having re-
ceived on board the goods mentioned therein. The bills of lading are void
as between B and the pretended consignor,
CH/VPTER XI
Of Partnership
Sections 239-2((() Repealed bv the Indian Partnership Act, 1932 (IX
of I!)32), s. 73 and Schedule I I . '
SCHEDULE
Enactments Repealed
[Repealed b\ », 3 and Schedule II of the Repealing anil Amending
Act, 1914 (X ol 19U~i]
 Appendix IL

The Indian Partnership Act

(\c.i No. IX of 1932)-

Whereas it is expedient to define and amend the law relating to part-

nership: it is hereby enacted at follows:—

CHAPTER I
JPielinaiaary
I Short title, extent and commencement. (!) This Act may be
called the Indian Partnership Act, 1932.
(2) It extends to the whole of India.
(3) 'It shall come into foice on the 1st day of October, 1932, excepi
section 69, which shall come into force on the 1st day of October, 1933.
2. Definitions. In this Act, unless theie is anything repugnant in
the subject or context,—
(a) an "act of firm" means, any act or omi.ssion by all the partners,
* or by any partner or agent of the firm which gives rise to a
right enforceable by or against the firm;
(b) "busihess" includes every trade, occupation and profession;
(c) "prescribed" means prescribed by rules made under this Aa;
(d) "third party" used in relation t o ' a firm or to a partner therein
means any person who is not a partner in the firm; and
(e) expressions-used but not defined in this Act and defined in tlie
Indian Contract Act, 1872 (IX of 1872), shaM have the tneanings
assigned to them in that Act.
3. Application of provisions of Act IX of 1872. The unrepealed pro-
visions of the Indian Contract Act, 1872 (IX of 1872), save in so far as
tliey are inconsistent with the express provisions of this Act, shall continue
to apply to firms.
CHAPTER II
T h e nature of Paitnership
4. Befinition of "partnership", "partner", "firm" and "firm name".
"Partnership" is the relation between persons who have agreed to
share the profits of a business cairied on by all or any of them acting for
all.
Persons v/ho •ha\e entered into partnership witli one another are
called individually "paitners" and collectively "a iirra", and the name
under which theit bnsiners is carried on is called the "firm name".
PARTNERSHIP 811

5. Partnership noi created by status. The relation of partnership

arises from contract and not from status, and, m particular, the members
of a Hindu undivided family carrying on a family business as such, or a
Burmese Buddhist husband and wife carrying on business as suth are not
partners in such business.
6. Mode of determining existence of partnership. In determining
whether a group of persons is or is not a firm, or whether a person is or
is not a partner in a fnm, regard shall be had to the real relation between
the parties, as shown by all relevant facts taken together.
Explanation 1. The sharing of piotits or of gross returns arising from
property by persons holding a joint or common interest in that property
does not of itself make such persons partners ^
Explanation 2. The receipt by a person of a share of the profits of a
business, or of a payment contingent upon the earning of profits or vaiying
with the profits earned by a business, does not of itself make him a partner
with the persons carrying on the busine.«; and, in particular, the receipt of
such share or payment—
(a) by a lender of money to persons engageti or about to engage in
any business,
(b) by a servant or agent as remuneialion,
(c) by the widow or child of a deceased partner, as annuity, or
(d) by a previous owner or part owner of the business, as consider-
ation for the sale of the goodwill or share thereof,
does not of itself make the receiver a partner with the person carrying
on ihe business.
7. Partnership at will. Where no provision is made by contract' bet-
ween the partners for the duration of their partnership, or for the deter-
mination of their partnership, the partnership is "partnership at will".
8. Particular partnership. A person may become a partner with an-
other person in particular adventures or undertakings.

CHAPTER HI
Relations of partners to one another
9. General duties of partners. Partners are bound to carry on the
business of the firm to the greatest common advantage, to be just and
faithful to each other, and to render true accounts and fvill information of
all things affecting the firm to any partner or his legal' representative.
10. Duty to indemnify for loss caused by fraud. Every partner shall
indemnify the firm for any loss caused to it by his fraud in the conduct of
the business of the firm.
11. Determination of rights and duties of partners by contract bet-
ween the partners. (1) Subject to the provisions of this Act, the mutual
rights and duties of the partners of a firm may be determined by contract
between the partners, and such contract may be expressed or may be im-
plied by a course of dealing.
Such contract may be carried by consent of all the partners, and such
consent may be expressed or may be implied by a course of dealing.
(2) Agreement in restraint of trade. Notwithstanding anything con-
tained in section 27 of tlie Indian Contract Act, 1872 (IX of 1872), such
contracts may provide that a partner shall not carry on any business other
'than diat of the firm while be is a psrener.
812 MERCANTILE LAW

12. The conduct of the business. Subject to contract between the

p;ii liiers,—
(a) o\eiy partner has a right to take part in the conduct of the
business;
(I)) e\ery paitncr i.s hound to attend dilisently to his duties in the
conduct of (lie business;
(c) any ditfeicncc arising as to ordinary matteis connected with <he
business may be decided by a majority of the partners, and evei7
partner shall iiave the right to express his 'opinion before tlie
matter is decided, but no change may be made in the nature of
the business without the consent of all the partners; and
(d) every partner lias a riglit to liave access lo and to inspect and
ropy anv of the hooks of the firm.
13. ^Mutual rights and liabilities. .Subject lo contract between tlic
partners.—
(a) a partner is not entitled to receiAC remuneration for taking part
in the conduct of the hnsine«s; '
(I)) ihc partncis are entitled to shaie eciually in tlie urofiis earned, .
and sliall contribute eciiially to the losses sustained by the firm;
(c) where a partner is entitled lo interest on the capital .subscribed
by him such interest .shall be payable onlv out of profits;
(d) a partner making for the pmposcs of the business any payment
or advance beyond the amount of capital he has agreed to SUIJ-
scribe. is entitled lo inieicsi thereon at the late of sis. per
cent per annum;
(e) the firm shall indemnify a partner in respect of payment made
and liabilities incurred by him—
(i) in the ordinary and proper conduct of the business, and
(ii) in doing such act, in an emergency, for the piirpo.se of pro-
tecting the firm from loss, as would be done by a person of or-
dinary prudence, in his own case, under similar circumstances;
(f) a partner shall indemnify tfic fiini for any loss caused to it bv
In's wilful neglect in the conduct of the business of the firm.
14. The ))ropertv of the firm. .Subicct lo contiact between thcj part-
ners, the property of the firm includes all ])roi)ertv and rights and intere.sts
in property originally brought into the stock of the firm, or acduired, bv
purchase or otherwise, bv ov for the firm, or for the purposes nnd in the
business of the firm, and includes also the goodwill of the business.
Unless the contrary intention appears, property and rights and in-
terests in properiv acauired with money belonging to the firm are deemed
(o have been acduired for the firm.
15. Application of the propertv of the firm, .Subiect to contract bet-
ween the partners, the property of tlie firm 4ir\l\ be held and used by the
paitners e\clus!velv for the purposes of the bu.siness.
16. Personal profits earned by ])artners. .Subject to contract between
(he partners.—
(a) if a partner deii\es .ui\ profits for himself from anv transaction
of the firm, or from ihe use of the protJCVty or business con-
nection .of the firm or the fiim name, he shall account for thai
profit and pay it lo the firm;
(b) if a pamier caviies on nny husines-. of (he s;imc nature as and
PARINERSHIP 813

competing with thui ol the farm, he .sluU account lot and pay
to tiie faim dll profats made by him in that businebs.
17. Rights and duties of partners alter a change in the firm, after
the expiry ot the term of the firm, aud where additional undertakings are
carried out. Subject to contract between the partners,—
(a) where a cliange occurs in the constitution ol a him, the mutual
rights and^ duties of the partners in die reconstituted hrm re-
main the same as they were immediately betore the change, as
far as may be;
(b) where a hrm, constituted lor a hxed term continues to carry on
busHiess after the expiry of that term the mutual rights and
duties ol the partners remain the same as they were belore the
expiry, so lar as they may be consistent with the incidents ol
partnership at will; and
(c) where a farm constituted to carry out one or more adventmes oi
undertakings carries out other adventures or undertakings the
mutual rights and duties of the paitners in respect of the other
adventures or undertakings are the same as those in respect ol
the original adventures or undertakings.

CHAPTER IV
Relations of partners to third parties
18. Partners to be agent of the firm. Subject to tlie provisions ol
this Act, a partner is tlie agent of the farm for tlie purposes ot the business
ol the firm.
19. Implied authority of partner as agent 6f the firm. (1) Subject to
the provision of section 2^, the act of a partner which is done to cairy on,
in tne usual way, business of the kind carried on by die farm, binds the
farm.
The authority of a partner to bind the firm conferred by this section
is called his "implied authority".
(2) In the absence of usage or custom of trade to tlie contrary, the
implied authority of a partner does not empower him to—
(a) submit a dispute relating to tlie business of the farm to arbitra-
tion,
(b) open a banking account on behalf of the firm in his own name,
(c) compromise or relinquish any claim or portion of a claim by
the firsa,
(d) withdraw a suit or proceeding filed on behalf ot 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.
20. Extension and restriction of partner's implied authority. The
partners in a firm may, by conu'act between the partners, extend or restrict
the implied authority of any partner.
Notwitlistajiding any sudi restriction, any act done by a partner on
behalf of the firm which falls within his implied authority binds the firm,
unless the person vwith whom he is dealing knows of the restriction or does
not know or believe that partner to be a partner.
.814 MERCANTILE LAW
21. Partner's auihority in an emergency. A partner has authority, in
an emergency, to do all such acts for tiie 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, and such acts bind the firm.
22. Mode of doing act to bind firm. In 'order to bind a firm, an act
or instrument done or executed by a partner or other person on behalf
of the firm shall be done or executed in the fiim name, or in any other
manner expressing or implying an intention to bind the firm. '
23. Effect of admissions by partner. An admission or representation
made by a partner concerning the affairs of the firm is evidence against
the firm, if it is made in the ordinary course of business.
24. Effect of notice to acting partner. Notice to a partner who
habitually acts in the business of the firm of any matter relating lo the
affiiirs of tlie firm operates as notice to the firm, except in the case of a
fraud on the hrm committed by or with the consent of that partner.
Ih-. Liability of a partner for acts of the firm. Every partner is liable
jointly with all die other partners and also severally, for all acts of the
ttrm done while he is a partner.
26. Liability of the firm for wrongful acts of a partner. Where by
the wrongful act or omission of a partner in the ordinary course of the
business of a firm or with the audiority 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.
27. Liability of firm for misapplication by partners. Where—
(a) a partner acting within his apparent authority receives money
or property from a third .party and misapplies it, or
(b) a firni in the course of its business receives money or property
from a third party, and the money or property is misapplied by
any of the partners while it is in the custody of the firm,
the finn is liable to make good the loss.
28. Holding out- (1) Any one who by words spoken or written or by
conduct represents himself, or knowingly permits himself' to be represent-
ed, to be a partner in a firm, is liable as a partner in that firm, to any
o^ie who has on the faith of any such' representation given credit to the
firm whether the person representing himself or represented to be a partner
does or does not know tiiat the representation has reached the person so
giving credit.
(2) Where after a partner's death the business is continued in the
old firm name, the continued use of that name or of the deceased partner's
name as a part thereof shall not of itself make his legal representative or
his estate liable for any act of the firm done after hit death.
29. Rights of transferee of a partner's interest.. (1) A transfer by a
partner of his interest in "the firm, either absolute or by mortgage, or Ijy
the creation by him of :\ charge on such interest, does not entitle the trans-
feree, during the continuance of the firm, to interfere in the conduct of
the business, or to require accounts, or to inspect the books of tiie firm,
but entitles the transferee only to receive the share of profits of die trans-
ferring partner, and the transferee shall accept the account of profit agreed,^
to by the partners.
(2) If the firm is dissolved or if the transferring partner ceases to be
a partner, the transferee is entitled as against the remaining partners to
receive the share of the assets of the firm to which the transferring partner
PARTNERSHIP 815

IS entitled, and, lor the purpose of ascertaining tiiat share, to an account

as from the date of dissolution.
30. Minors admittei} to the benefits of partnership. (1) A person
who is a minor according to the law to wliich he is subject may not be a
partner in a firm, but, with tiie consent of all the partners for the time
being, he may be admitted to the benefits of partnership.
(2) Sucli minor has a right to such share ,of the property and of the
profits of the firm as may be agreed upon, and he may have access to and
inspect and copy any of the accounts of the firm.
(S) Such minor's share is liable for the acts of tlie firm, but the minor
is not personally liable for any such act.
(4) Such minor may not sue tlie partners for an account or payment
of his share of the property or profits of the firm, save when severing his
connection with the firm, and in such case the amount of his share shall
be determined by a valuation made as. far as possible in accordance with
the rules contained in section 48:
Provided that all the partners acting together or any partner entitled
to dissolve the firm upon notice to other partners may elect in such suit to
di.wolve the firm, and thereupon the Ckmrt shall proceed with' the suit
as one for dissolution and for settling accounts between the partners, and
the-amount of the share of the minor shall be determined along with the
share of the partners. ^
(5) At any time within .six months of his attaining majority, or of his
obtaining knowledge that he Jiad been admitted to the benefits of part-
nership, whid^ver date is later, such person may give public notice that he
has elected to become or t h a t ' h e has elected not to become a partner in
tlie firps, and such notice shall determine his position as regards the
firm:
Provided that, if he fails to give such notice, he shall become a partner
in the-fimt on the expiry of the said six months. ^
(6) Where any person has been admitted as a minor to the benefits
of partnership in a firm, the burden of proving the fact that such person
had no knowledge oi such admission until a particular date after the ex-
piry of six months of his attasnjng majority, shall lie on the person assert-
ing tliat fact.
(7) Wheie sudi person becomes a partner,—
(a) his rights and liabilitieg as a mjnor continue u p to the date on
which he becomes .i partner, but he also becomes personally
liable to third parties for, all acts of the firm done since he was
admitted to the benefits of partnership, and \
(b) his share in the property and profits of the firm shall be the
share to which he was entitled as a minor.
(8^ Where such person elects not to become a partner,—
(a) his rights and liabilitict shall continue to be those of a ininor
under this section up to tlie date on which he gives public
notice,
(b) his share shill not be liable for any acts of the firm done after
the date of the notice, and
(c) he shall be entitled to sue the partners for his share of the pro-
perty and profits in accordance witJi sub-section (4).
(9) Nothing in sub-sections (1) and. (8) shall affect the provisions of
iection .28.
 816 MERCANTILE LAW

CHAPTER X
Incoming and outgoing 2)artners
3L Introduction ot a partner. (1) Subject to tlie contract between
the jjanners and to the piovisions of section 30, no person shall be in-
troduced as a partner, into a hrm without the consent of all the existing
partners.
(2) Subject to the provisions of section 30, a person who is intioduc-
ed as a partner into a lirm does not thereljy become liable for any act of
the firm done 1)Cfore he became a partner.
32. Retirement of ja partner. (1) A partner may retire—
(a) witii (he consent of all the other partners,
(b) i!i accoi dance with an express agreement by tlie'partners, or
(c) where the partnership is at will, by giving notice in writing to
all the olhei partners of his intention to retire.
• (2) .A. retiring partner may be discharged from any liability to ariy
third party for acts of the firm done belore his retnement by an agreement
made by him with sucii third party and the partners of ilie leconstituted
film, and such agreement may be implied by a course of dealing between
such third paiiy and ilic reconstituted firm after he had knowletlge of the
retirement.
(3) Notivii)isi,iiHling the retiiement of a p.uuier from a firm, he and
the partners contmiie to be liable as partneis to tliiid parties for any act
done by any of them which would have been an act of the firm if done
before the retirement, imtil public notice is gi\en of tlie retirement:
Provided tliat a retired paitnei is not liable to any third-party who
deals with the firm without knowing that he was a partner.
(4) Notices under sub-section (3) may be given by the letired partner
or by any partner of the reconstituted firm.
33. Expulsion of partner. (1) A paitner may not be expelled from
a firm by any majority of the partners, sa\'e in die exercise in good laith
ot powers conferred by contract between the partners.
(2) The provisions of sub-sections (2), (3) and (4) of section 32 shall
apply to an expelled paitner as if he were a retired partner.
34. Insolvency of partner. (1) Where a partner in a firm is adjudi-
cated an insolvent he ceases to be a partner on the date on which the
order of adjudication is made, v/hether or not the firm is thereby dissolved.
(2) Where under a contract between the partners the firm is not dis-
solved by the adjudication of a partner as an insolvent, the estate of a
partner so adjudicated is not liable foi any act of the firm and tiie firm
is not liable for any act of the insolvent, done after the date on which
the orcler of adjudication is made.
35. Liability of estate of deceased partner. Where under a contract
between the partners the firm is not dissolved by the death of a partner,
the estate of a deceased partner is not liable for any act of the firm done
after his death.
36. Rights of outgoing partner to carry on competing business. (1)
As outgoing partner may carry on a busine.ss competing with that of the ^
firm and he may advertise such business, but subject to contract to the
contrary, he may not—
(a) use the firm name,
(b) represent himself as carrying on the business of the firm, or
 PARTNERSHIP 8]7

(c) solicit the custom of persons who were dealing wifh tlie farm
before he ceased to be a partner.
(2) Agreements in restraint of trade. A partner may make an agree-
ment \^ith liis partners that on ceasing to be a partner he will not cairy
on any business similar to Chat of the firm within a specified period or
within specified local limits; and, notwitlistanding anything contained in
section 27 of the .Indian Contract Act, 1872 (IX of 187^2), such agreement
shall be vahd if the lestrictions imposed are reasonablef
37. Right of outgoing partner in certain cases to share subsequent
profit. Where any member of a firm has died or otherwise ceased to be a
partner, and the surviving or continuing partners carry on the business
ol the firm with the property of the firm without any final settlement ol
accounts as between them and the outgoing partner or his estate, then,
in the absence of a contract to the contrary, the outgoing partner or his
estate is entitled at the option of himself or his representatives to such
share of the profits made since he ceased to be a partner as may be attri-
butable to the use of his share of the property of the firm or to interest at
the rate of six per cent per annum on the amount of his share in the
property of the firm:
Provided that where by contract between the partners an option is
given to surviving or continuing partners to purchase the interest of a
deceased or outgoing partner, and the option is duly exercised, the estate
of the deceased partner, or the outgoing partner or his estate, as thjS case
may be, is not entitled to any further or other share of profits; but if any
partner assuming to act in exercise of the option does not in all material
respects comply with the terms thereof, he is liable to account imder the
foregoing provisions of this section.
38. Revocation of continuing guarantee by change in firm. A con-
tinuing guarantee given to- a firm, or to a third party in respect of the
tiansactions of a firm, is, in tlie absence of agreement to the contrary, re-
voked as to future transaction from the date of any change in the con-
stitution of the firm.

.CHAPTER VI
Dissolution of a htm
39. Dissolution of a firm. The dissolution of partnership between
all the partners of a firm is called-the "dissolution of the firm".
40. Dissolution by agreement. A firm may be dissolved with the
consent of all the partners or in accordance with a contract between the
partners.
41. Compulsory dissolution. A firm is dissolved—
(a) by the adjudication of all the partners or of all the partners
but one as insolvent, or
(b) by the happening of any event which makes it unlawful for the
business ol the firm to be carried on or for the partners to carry
it on in partnership: _-
Provided that, where more than one separate adventure or undertak-
ing is carried on by the firm, the illegality of one or more .shall not of itself
cause the dissolution of the firm in respect of its la\vful adventures and
undertakings.
42. Dissolution on the happening of certain contingencies. Subject
to contract between the partners a firm is dissolved—
 818 MERCANTILE LAAV
(a) i£ constituted for a fixed term, by tlie expiry of that term;
(b) if conitituted to carry out one oi more adventures oi undertak-
ings, by the completion thereof;
(c) b y the death of a partner; and
(d) by the adjudication of a partner as an insolvent.
^3. Dissolution by notice of partnership at will. (]) Where die "
partnership is at will the Inm may be dissolved by any partner giving
notice in writing to all the other partners of his intention to dissolve the
Inm.
1(2) 'I'he firm is dissolved as from the date mentioned in the'notice as
the date of dissolution or, if no date is so Ineiitioned, as lioni the date ol
the cOmmunicatioli of the notice.-
44. Dissolution by the Court. At the suit ol a paitner, the Couii
may dissolve a linn on any of the lollowing giounds, namely:—
(a) that a paitner has become of unsound mind, in whicli case the
suit may be brought as well by the next friend of the partnei
who has become of unsound mind as by any other partner;
(b) that a partner, other than the paitnei suing, has become in
any way peinianently incapable of peifoiming his duties as
partner;
(c) that a partner, othei than the partner suing, is guilty of con-
duct which is likely to allect prejudicially the carryhig on ol
the business, regard being had to the nature ol the business;
(d) that a partner, otlier than the partner suing, wilfully or pei-
sistcntly commits breach ol agreements i elating to tlie manage-
ment ol the atfaiis of the hrm or the conduct of its'business, oi
otherwise so conducts himselt m matters relating to the business
that it is not leasonably practicable for the otiiei_ partners to
carry on the business in parineiship with him;
(e) that a partner, other than the paitner suing, has in any way
transferred the whole of his interest in the-firm to a third p'arty,
or has allowed his shaie to be charged under the provisions ol
rule 4!) ol Order XXI of the First Schedule to the Code of Civil
Proceduie, 1908 (V of 1008), or has allowed it to be sold in the
recoveiy of arreais of land-revenue or of any duties recoverable
as arrears of land-revenue due by the partner;
(f) that the business ol the firm cannot be carried on save at a loss,
or
(g) on any other ground which lenders it just and equitable that
the firm should be dissolved.
45. Liability for acts of partners done after dissolution, (f) Not-
withstanding the dissolution of a firm, the partners continue to be liable
as such fo third parties for any act done by any of them which would have
been an act of the firm if done before the dissolution, until public notice
IS given of tlie dissolution:
Provided thai the estate of a partner who dies, or who is adjudicated
an insolvent or of a paitner who, not having Ijeen known to the person
vlealing with the In in to be a partner, letircs Irom the hrm is not liable
under this section Ipr acts done after the date on which he ceases to be a
partner. '
(li) Notices iiiidei sub-section (1) may be given by any paitner
PARTNERSHIP' 819

46. Right of partners to hP've business wound up after dissolution.

On the dissolution of a linn every partner or his i-epresentative is entitled,
as against all tlie other partners or their representatives, to have the pro-
perty of the firm applied in payment o£ the debts and liabilities of the
hrm, and to have the surplus distributed among the partners or their re-
piesentatives according to their rights.
47. Continuing authority of partners for purposes of winding up.
.After the dissolution of a firm tlie authority of eadi partner to bind the
firm, and the other mutual rights and obligations of the partners, continue
notwithstanding the dissolution, so far as may be necessary to wind up the
affairs of the hrm and to complete transactions begun but unfinished at'
the time of the dissolution, but not otherwise:
Provided that the firm is in no case bound by the act ot a partner
who has been adjudicated insolvent; but tliis proviso does not aftect the
liability of any person who has after the adjudication represented himselt
or knowingly permitted himself to be represented as a partner of the in-
solvent.
48. Mode of settlement of accounts between partners. In settling the
account^ of a firm after dissolution, tlie following rules shall, subject to
agreement by the partners, be observed:—
(a) -Losses, including deficiefflcies of capital, shall be paid first out
of profits, next (9ut of capital, and, lastly, it necessary, by tlie partners in-
dividually in the proportion in which they were entitled to share profits.
(b) The assets o£ the firm, including any sums contributed by the
partners to make up deficiencies of capital, shall be applied in the follow-
ing manner and order:—
(i) in paying the debts of the firm to third parties;
(ii) in paying to each partner rateably what is due 'to him from the
firm for advances as distinguished from capital;
(iii) in paying to each partner rateably what is due to h'im on account
of capital; and
(iv) the residue, if any, shall be divided among the partners in the
proportions in which they were entitled to share profit,
id. Payment of firm debts and of separate debts. Where there are
joint debts due fi'om the firm, and also separate debts due from- any
partner, the property of the' firm shall .be applied in the first instance in
payment of the debts of the firm, and if there is any surplus, then the
share o£ each partner shall be applied in payment of his separate debts or
paid to him. The separate property of any partner shall be applied first
in the payment of his separate debts, and the surplus (if any) in the pay-
ment of the debts of the firm.
50. Personal profits earned after dissolution. Subject to Contract bet-
ween the partners, the provisions of clause (a) of section 16 shall apply
to transactions by any surviving partner or by the representatives of a de-
ceased partner, undertaken after the firm, is dissolved on account'of the
death of a partner and before its affairs have been completely wound up:
Provided that where any partner or his representative has bought the
goodwill of the firm, nothing in this section shall affect his right to use the
firm name.
51. Return o£ premium on premature dissolution. Where a partner
haJ paid a premium on entering into partnership for a fixed term, and
the firm is dissolved before the expiration of that term otherwise than by
the death of a partner, he shall be entitled to' repayment of tlie premium
 820 MERCANTILE LAW
Of ot bucli pail ihtTCol as may De reasojiablc, regara being jiau to the
leims upon whidi Jie became a partner and to tlie Jength ot time during
^vliich Jie was a partner, unless—
(a) the dissolution is mainly due to hh own misconduct, or
(b) the dissolution is in pursuance o£ an agreement containing jio
provision for "the return of the premium or any p a n ol it.
52. Rights %vhere purinership contract is rescinded tor fraud or mis-
representation. . Where a contract creating partnership is rescinded on the
ground of the fraud or misrepresentation of any of tlie parties thereto, the
parly entitled to rescind is, without prejudice to any other right, entitled—
(a) to a lien on, or a rigiit of retention of, the surplus or the assets
of the firm remaining aftei the debts of the firm have • been
paid, or any sum paid by_ him lor the purchase oi a shaic in
the firm and for any capital contributed by him;
(b) to rank as a creditor of the lirm in rcpect of any payment made
by him towards the debts of the hrm; and
(c) to be indemnified by the partner or partners guilty of tlie fraud
or misrepresentation against all the debts of the him.
53. Right to lestrain from use of firm name or firm properly. After-
a firm is dissohcd, every partner or his representative may, in the absence
of '4' contract lieiwccn the partners to the contrary, restrain any other
partner or his Mpreseniative from carrying on a similar business in the
arm name or from using any of tiie pioperty of the f\,rni for his own benefit
until tlie affairs of the firm, have been completely wound up:
Provided thai ^v-iiere any partner oi Iiis representative lias bought tlic
goodwill of the hini, notliing in this seciioii sliall aficci liis riglit lo use
tlie hrm name.
54. Agreements in restraint of trade. Paitners may, upon or in anti-
cipation of the' dissolution of the linn, make an agreement that .some or all
of them will not carry on a business similar to that of the firm within a
specified period oi wiihin specified local limits; and notwithstanding any-
thing contained in section 27 of the Indian (Jontract ^Vct, 1872 (iX of
1872), such agreement sliall be valid if the restrictions imposed are rea.son-
able.
55. Sale of goo<lwill after dissohition. (1) In settling the accounts ot
a firm after dissolution, goodwill shall, subject to contract between the
partners, be included in the assets, and it may be sold eithei; separately
or along with other property of^ ihe firm.
(2) Rights of buyer and seller of gooslwilS. Where the goodwill of a
firm is sold after dissolution; a partner may carry on a business competing
with that of the buyer and he may advertise such business, but, siibjett
to agieement between him and the buyer, he may not—
(a) use the fn^m name,
(b) represent-himself as carrying on the business of the firm, or
(c) solicit ilic custom of persons who were dealing with the firm
before its dissolution.
(3) Agreements in restraint of trade. Any partner may, upon the sale
of goodwill of a firm, make an agreement with the buyer thai such paitnei
will not carry oiv any business similar to that of the firm within a siiedfiedr
period or within specified local limits, and, notwithstanding anything con
lalned in section 27 of "the Indian Contract .\ci. 1872 (IX of 1872). such
.igrccmcnt shall be valid if liic rcsiriclions imposed are ic-asonal)h'
r'ARTNERSHIP 821

CHAPTER VII
Registration of finns
of) Power to exempt from ap}>Iicatioii ot tiiis Chapter. The State
Goveniment of any State may, by notification in the Official Gazette direct
that the provisions of this Chapter shall not apply 'to that State or to any
pan thereof specified in the notification.
57. Appointment of Registrars. (1) T h e State Government may
.ippoint Registiars of Firms for the puiposes of this Act, and may define
the areas within which they shall exercise their powqrs and perform their
duties.
(2) Every Registrar shall be deemed to be a public servant within^ the
meaning of section 21 of the Indian Penal Code (XLV, of I860).
58. Application for registration. (I) The registration of a firm may
he effected at any time by sending by post or delivering to the Registrar
of the area in which any place of business of tiie firm is situated or pro-
posed to be situated, a statement in the prescribed form and accompanied
Ijy the prescribed fee, stating—
(a) the firm name,
(b) the place or principal place of business of the firm,
(c) the names oi any other places where the firm carries on business,
(d) the date wjien each partner joined the firm,
(e) the names in'full and permanent addresses of the partners, and
(f) the duration of the firm.
The statement shall be signed by all tlie partners, or by their agents
specially authorised in this behalf.
(2) Each person signing the statement shall also verify it in the
manner prescribed.
(3) A firm name shall not contain anv of the following ivords, name-
ly:-
"Crown", "Emperor", "Erapiess". "Empire", "Imperial", "King",
"Queen", "Royal", or words expressing or implying the sanction, appro-
\al or patronage oP • * • - * * *, except ."when the '(State) Government
signifies" its consent to the use of such words as- part of the firm name
by order in writing "* * *.
59. Registration. When the Registrar is satisfied that the provisions
of section 58 have been duly complied with, he shall record an entry of
the statement in a register called the Register of Firms, and shall file the
statement.
60. Recording of alterations in firm name and principal place of
business. (1) When an alteration is made in the firm name or in the loca-

1. The words 'Sthe Crown or the Central Government or any Pro-

vincial Government" rep. by the A. O. 1950.
2 The words "or the Crown Representative" rep. by the A. O.
19-18.
3. Subs, bv tlic A. O. 1937 for "when the G. G. hi' C."
'!. Subs, bv the A. 0 . 1950 for "Provincial".
5. Subs, by the A. O. 1937 for "his".
6 The words "under the hand oC one of'the Secretaries of the Gov-
ernment of India" lep. h) the A. O 1937.
822 MERCANTILE LMV

tion of the principal place of business of a registered firm a statemeni

may be sent to llie Registrar accompanied by the prescribed fee specifying |
the alteration and signed ,ind verified in tlie jnanner lequired under sec-
tion 58. "
(2) ^Vhen the Regisirai is satisfied that the provisions of sub section
(I) have been duly complied with, he shall amend the entry relating to
the firm in the Register of Tirms in accordance with the statement, and
shall file it along \Mth the statement lelating to the firm filed undei sec
'ion 59.
61 Noting of closing and opening of branches. When a registered
firm discontinues business at any place or begins to carry on business at
any place such place not being jis principal place of business, any partner
or agent of the firm may send intimation thereof to the Registrar, who
shall make a note of such intimation in the entr\' relating to the film in
the Register of Firms and shall file the intimation along with the state
ment relating to the firm filed undei section 59
62 Noting of changes in name and addresses of partners. When,
any partner in a registered firm alters his name or permanent addres-r
on intimation of the alteration may be sent bv any partner or agent of
tlie firm to the Registrar, who shall de.il with it in the manner provided
in section 61
63 Recoidinp of changes in and dissolution of a firm. (I) When n
change occurs in the constitution of a registered firm any incoming, con
tinuinff or outgoing pai'tner, and when a registered firm is dissolved anv
person who wai a partner immediately before the dissolution, or the agent
of anv such partner or person specially authorised in this behalf, mav
five notice to the Registrar of such change or dissolution, specifying the
date thereof, and the Registrar shall make a record of the notice in the
entry relatinp to the firm in the Register of Firms, and shall file the notice
along with the statement relating to the firm filed under section 50
(2) Recording of withdrawal of a minor. When a minor who has
been admitted lo the benefits of partnership in a firm attains maioritv
Tud elects to become or not to become a partner and the firm is then a^-
leeistered firm he. or his agent specially authorised in this behalf, mav'»
g^ive notice to the Registrrii that he has oi has not become a partner, and
the Registrai shall deal with the notice in the manner provided in sub
section (1)
64 Rectification of mistakes. (\) The Registrar shall have power
at all times to rectify aiiy mistake in order to bring the entrv in the
Register of Firms relating "to any firm into conformity with the docu-
ments relating 'o that firm filed under the Chapter
(2) On application made by all the parties who have signed any docu
ment ielating to a firm filed under this Chapter the Registrai ma) rectify
any mistake in such document or in the record or note thereof made in
the Register of Firms
65 Amendment of Register by ordei of Court. A court deciding
any matter relating to a registered firm may direct thit the Registrar
shall make anv amendment in the entry in the Register of Fimis relating
to such firm which is consequential upon its decision: and the Registrai^,
shall amend the entr)' accordingly
66 Inspection of Register and filed documents. (1) The Register of
Firms _shill be oi^en to inspection by anv person on payment of '.ucli feu
as may be prescribed
I' \RTNERSHIP 823
(2) All statements, notices and intimations, filed under this Chapter
shall be open to inspection, subject to sucli conditions and on payment
of sucli fee as may be prescribed.
f)7. Grant of copies. The Registrar shall on application furnish to
anv person, on p.nvment of such fee as -may he prescribed, a copy, certified
under his hand, of any entry 'or portion thereof in the Register of Firms.
68. Rules of evidence. (1) Any statement, intimation or notice re-
corded or noted in the Register of Firms shall, as against any person by
u'liom or on whose behalf such statement, intimation or notice was sign-
fd, be conclusive proof of any fact therein stated.
^2)-A certified copy of an entry relating to .i firm in the Register of
Firms may be produced in proof of the fact of ilie registration of such
firm, and of the contents of any statement, intimation or notice recorded
or noted therein.
C)9. Effect of non-registration. (1) No suit to enforce a right arisiufr
fiom a contract or conferred by this Act shall be instituted in any Court
bv or on behalf of any person suing as a partner in a firm against the firm
or any person alleged to be or .to have been a partner in the firm imless
the firm is registered and the. person suing is or lias lieen shown in the
Register of Firms as a partner in the firm!
^2^ No suit to enforce a right arising^ from n rontiacf shall be institut-
ed in any Court by or on behalf of a firm against any third party unless
the firm is retri&tered and the persons suing are or have been shown in
the Register of Firms as partners in the firm.
C3) The provisions of sub-sections (\) and (2) shall apply also to a
claim of set-off or other proceeding to enforce a right arising from a con-
tract, but shall not affect—
(a) the enforcement of any right to sue for the dissolution of a
firm or for accounts of a dissolved firm, or any right or power
to realise the property of a dissolved firm, or
(b) the powers of an official assignee, receiver or Court under the
Presidency-towns Insolvency Act, 1909 (11 of 1909), or the Pro-
vincial Insolvency Act, 1920 (V of 1920), to realise the property
of an insolvent partner.
(4) This section shall not apply—
(a) to firms or to partners in firms which have no place of business
in the territories to which this Act CKtends, or whose places of
business in the said territories are situated in areas to which,
by notification under section B(i, this Chapter does not apply,
or
(b) to anv suit or claim of set-off not exceeding otic hundred rupees
in value which, in the Presidency-towns, is not of a kind speci-
fied in section 19 of the Presidency .Small Cause Courts Act,
1882 fXV of 1882), or outside the Presidencv-towns, is not of a
kind specified in the Second .Schedule lo the Provincial' Small
Cau^e Courts Acts, 1887 (IX of 1887). or to any proceeding in
execution or otlier proceeding incidental to or arising from any
sucli suit or claim.
70. Penalty for. furnishing false jiartirular.s. .Any person who signs
any statement, amending statement, notice or intimation under this Chap-
ter containing any particular which he knows to be false or does not
i)elieve to be tiuc. or containing pariiciilars which he knows to be in-
824 MERCANTILE LAW
complete or does"not believe to be complete, shall be punishable with im-
prisonment which may extend to three months, or with fine, or with both.
71. Power to make rules. (1) The State Government may make
rules f)rescribing the fees which shall accompany documents sent to the
R<2gistrar of Firms, or which shall be payable for the inspection of docu-
ments in the custody of the Registrar of Firms, or for copies from the
Register of Firms:
Provided that such fees shall not exceed the maximum fees specified
in Schedule I.
(2) The State" Government may also make rules—
(a) prescribing the form of statements submitted under section 58,
and of the verification thereof;
(b) requiring statements, intimations and notices under sections 60,
61, 62 and 63 to be in prescribed form, and prescribing the
form thereof;
(c) prescribing the form of the Register of Firms, and the mode in
which entries relating to firms are to be made therein, and the
mode in which such entries are to be amended or notes made
therein; ^
(d) regulating the procedure of the Registrar when disputes arise;
(e) regulating the filing of' documents received by the Registrar;
(f) prescribing conditions for the inspection of original documents;
(g) regulating the grant of copies;
(h) regulating the elimination of registers and documents;
(i) providing for the maintenance and form of an index to the
Register of Firms; and
(j) generally to carry out the purposes of this Chapter.
(3) All rules made under this section shall be subject to the condition
of previous publication. *

CHAPTER VIII
Supplemental
72. Mode of giving public notice. A public notice under this Act
is given—
(a) where it relates to the retirement or expulsion of a partner
from a registered firm, or- to the dissolution of a, registered
firm or to the election to become or not to become a partner
in a registered fiim by a person attaining majority ' who was
admitted as a minor to the benefits of partnership, bv notice to
the Registrar of Firms under section 63, and by publication in
the Official Gazette and in at least one vernacular newspaper
circulating -in the district -where the firm to which it relates
has its place or principal place of business, and
(b) in any otiier case, by publication in the Official Gazette and in
at least one vernacular newspaper circulating in the district
where the firm to which it relates has its place or principal
place of business.
73. [Repeals] Rep. by the Repealing Act. 1938 (I of 1938), s, 2 and
Sch
PARTNERSHIP 825
74. Savings. Nothing in this Act or any lepeal effected thereb\ siiall
•iffect or be deemed to affect—
(a) any right, title, interest, obligation or liability already actniired,
accrued or incurred before the commencement of this Act, or
(b) any legal proceeding or remedy in respect of any such right, litle.
interest, obligation or liability, or anythuig done or suffered bi
foie the commencement of this Act, or
(c) anytlring done or suffered before the commencement of this Act,
'or
(d) any enactment relating to partnership not expressly repealed by
this Act, or
(e) any rule of insoh'ency relating to partnership, or
(f) any rule of law not inconsistent with this Act.
SCHEDULE I
Maximum Fees
[See sub-section (1) of section 7]
Document or act in respect of Maximum fee
which the fee i^payable
Statement under section 58 Three rupees.
Statement under section GO One rupee,
Intimation under section 61 One rupee.
Intimation under section 62 One rupee. '
Notice under section 63 One rupee.
Application under section 64 One rupee.
Inspection of the Register of Fifty Paise for inspecting one
Firms under sub-section (1) of volume of the Register.
section 66
Inspection of documents i elating Fifty Paise for the inspection of
to a film under sub-section (2) all documents relating to one
o£ section '66 film.
Copies from the Register of Twenty-five Paise for each hundred
Fn-ms words or part thereof
SCHEDULE II. [Enactment Repealed.) Rep. by the Repealing Act,
1938 (I of 1938), s. 2 and Sch.
SALE OF GOODS 827

(9) "mercantile agent" means a mercantile agent having in the cus-

tomary course of business as such agent authority either to sell goods, oi
to consign ^goods for the purposes of sale, or to buy goods, or to raise
money on the security of goods;
(10) "price" means the money consideration foi :i sale of goods;
(11) "property" means the general properly in goods, and not merely
a special property;
(12) "quality of goods" includes theii slate or condition;
(13) "seller" means a peison who sells or agrees to sell goods;
(H) "specific goods'* ,means goods identified and agreed upon at the
time a contract of sale is made; and
(15) expressions used but not defined in this Act and defined in the
Indian Contract Act, 1872 (IX of 1872), have the meaning assigned to
them in the Act.
- 3. Application of provisions of Act IX of 1872. The unrepealed pro-
visions of the Indian Contract Act, 1872 (IX of 1872), save in so far as
they are inconsistent with the express provisions of this Act, shall con-
tinue to apply to contracts for the sale of goods.
CHAPTER II
Formation of the Contract
Contract of Sale
4. Sale and agreement to sell. (1) A contract of sale of goods is a
contract whereby the seller transfers or agrees to transfer the property in
goods to the buyer for a price. There may be a contract of sale between
one part-owner and another.
(2) A contract of sale may be absolute or conditional.
(3) Where under a contract of sale the property in the goods is trans-
ferred from the seller to the buyer, the contract is called a sale, but where
the transfer of the property in the'goods is to take place at a future time
or subject to some condition thereafter to be fulfilled, the contract is call-
ed an agreement to sell.
(4) An agreement to sell becomes a sale when the time elapses or the
conditions are fulfilled subject to which the property in the goods is to
be transferred.
Formalities of Contract
5. Contract of sale how made. (1) A contract of' sale is made by an
offer to buy or sell goods for a price and the acceptance of such offer.
The contract may provide for the immediate delivery of the goods or im-
mediate payment of the price or both, or for the delivery for payment by
instalments or that the delivery or payment or both shall be postponed.
(2) Subject to the provisions of any law for the time being in force,
a contract of sale may be made in writing or by word of mouth, or partly
in writing and partly by word of "mouth or may be implied from the con-
duct of the parties.
Subject-matter of Contract
6. Existing or future goods'. (1) The goods which form the bubject
of a contract of sale may be either existing goods, owned or possessed by
the seller, or future goods.
(2) There may be a contract for the sale of goods the acquisition of
828 MERCANTILE LAW

which by the idler dependi upon a contingency which may or may not
!)appen.
(3) Where bv a contract of sale the seller purports to effect a pre-
sent sale of future goods, the contract operates as an agreement to 'sell
the goods.
7. Goods perishing; before making of contract. Where there is a
contract for tiie sale of specific ^oods, the contract is \oid if the goods
without the knowledge of the seller have at the time when the contract
was made, perished or become so damaged as no longer to answer tq tlieii
description in, the contract.
8. Goods perishing before sale but aftei agreement to sell, Wherf
(Iiere is an agreement to sell specific goodsi and subsequently the goods
without any fault on the part of the seller or buyer peiish or become so
damaged as no longer to answer to their description in the agreement
before the risk passed to the buyer, the agieement is thereby avoided
9. Ascertainment of price. (1) The price in a contract of sale may
be fixed by the contract or may be left to be fixed in manner thereby
agreed or may be deteimined by die course of dealing between the parties.
(2) Where the price is not determined in accordance with the foie-
going provisions, the buyer shall pay the seller a reasonable price. What
is a reasonable price is a question of fact dependent on the circumstances
of each particular case.
10. Agreement to sell at valuation. (1) Where there is an agreement
to sell goods on the terms that the price is to be fixed by the valuation
of a third party ant} such third party cannot or does not m.ike such valu-
ation, the agreement is thereby avoided;
Provided that, if ,the goods or any part thereof have' been delivered
to, and appropriated by the buyer, he shall pay a reasonable price thereof
(2) Where such third party is prevented from making the valuation
by the fault of the seller or buyei, the party not in fault may maintain
a suit for damages against the party in fault.

Conditions and Warranties

11. Stipiilations a$ to time. Unless a different intention appears
from the terms of the contract stipulations as to time of payment are not
deemed to be of the essence of a contract of sale. Whether any other
stipulation as to time is of the essence of the contract or not depends on
the terms of the contract.
12. Condition and warranty. (I) A stipulation in a contract of sale
with reference to goods which are the subject thereof may be a condition
or a warranty.
(2) A condition is a stipulation essential to the main purpose of the
contract, the breach of which gives rise to a right to treat the contract
as repudiated.
(3)" A warranty is a stipulation collateral to the main purpose of the
contract, tKe breach of which gives rise to a claim for damages but not a
right to leject the goods and treat the contract as repudiated.
(4) Whether a stipulation in a contract of sale is a condition or a
warranty depends in each case on the construction of the contract. A
stipulation may be a condition, though called a warranty in the contract.
13. Wlien condition to be treated as warranty. (I) Where a con-
tract of sale is subject to any condition to be fulfilled by the seller, the
SALE OF GOODS 829

buyer may waive ilic Londuioii or elect to treat the breach of the condi-
tion as a breach ol wairanty and not as a ground tor treating the contract
as repudiated.
(2) Where a contract of sale is not severable and the buyer has ac-
cepted the gootls or part thereof, the breach of any condition to be ful-
filled by the seller can only be treated as a breach of warranty and not as
a ground for rejecting the goods and treating the contract as repudiated,
unless tliere is a leini of the contract, express or implied, to that effect.^
(3) Nothing in this section shall affect the case of any condition oi
warranty fulhlmcnt of whidi is excused by law by reason of impossibility
or otherwise.
I'l. Implied undertaking as to title, etc' In a contract of sale, un-
less the circumstances of tlie contiact' are such as to sTiow a different in-
tention there is—
(a) an implied condition on the part of the seller that, in the case
of a sale, he has a right to sell the goods and that, in the case
of an agreement to sell, he will have a right to sell the goods
at the time when the property is to pass;
(b) an implied warranty that the buyer shall have and enjoy ([uiet
possession ot the goods;
(c) an implied warranty that the goods shall be free from any
charge or encumbrance in favour of any third party not declar-
ed or known to the buyer, before or at tlie time when the con-
tract is made.
15. Sale by description. Where there is a contract for the sale of
goods by description there is an implied condition that the goods shall
correspond with the description; and, if the sale is by sample as %vell as
by description it is not sulhcient that the bulk of the goods corresponds
with the sample if the goods do not also correspond with the description.
16. Implied condition as to quality or fitness. Subject to the pro-
visions of this Act and of any other law tor the time being in force, there
is no warranty or condition as to the quality or fitness for any particular
purpose of goods supplied under a contract of sale, except as follows;—
(1) Where the buyer, expressly or by implication, makes known' to
the seller the particular purpose for which the goods are required, so as
to show that the buyer relies on the seller's skill or judgment, and the
goods are of a description which it is in the course of the seller's business
to supply (whether lie is the manufacturer or producer or not), there is
an implied condition fhat tlie goods shall be reasonably fit for such pur-
pose;
Provided that, in the case of a contract for the sale of a specified
aiticle under its patent or other trade name, there is no implied condition
as to its fitness for any particular purpose.
(2) Where goods are bought by description from a seller who deals
in goods of that description (whether he is the manufacturer or producer
or not), there is an implied condition that the goods shall be of rnerchant-
ablv.' quality:
Provided that, if the buyer has examined the. goods, there sh.dl be
no implie'd coiuUiion as regards defecis wliidi such examination ougiit to
lune revealed.
(3) ,An implied w.iir.mu oi condition as to cpudity or fitness lor a
pnilicul.ir putjiose may be annexed I>y llie usage ol. trade'.
1. .Amended by the Sale of Goods (Amendment) .\ct, I'JfiS.
 '^SO MERCANTILE LAW

(4) An express warranty or condition does n o t negative a warranty oj

c o n d i t i o n implied by this Act unless inconsistent therewith.
1. Sale by sample. (J) A contract of sale is a contract tor sale by
sample where tliere is a term in the contract, express or implied, to t h a t
effect.
(2) I n the case ol a contract for sale by sample there is an implied
condition—
(a) thai the bulk, shall correspond with the sample in quality;
(b) that the buyer shall have a reasonable opportunity o£ compar-
ing the bulk with the sample;
(c) that the goods shall be free from any defect, rendering them
unmerchantable, which would not be apparent "on reasonable
examination of the sample.

CHA1^T£R 111
Effects of the "Contract
Transfer ot property as between seller and buyer
18. Goods must jie ascertained. Where tliere is a contract for the
sale of unascertained goods, no property in the goods is transferred to tiie
buyer unless and until the goods are ascertained,
19. Property passes when intended to pass. (1), Where there is a
contract for iiie sale of specific or ascertained goods the property in them
is transferred to tlie buyer at such time as the parties to the contract in-
tend it to be transferred.
(2) For the purpose of ascertaining the intention of the^parties re-
gard shall be had to terms o£ the contract, the conduct of the parties and
the circumstances pf the case.
(3) Unless a different intention appears, the rules contained in sec-
tions 20 to 24 are rules for ascertaining the intention of the parties as to
iJ.e time at wliich the property in tii£ goods is to pass to the buyer.
20. Specific goods in a deliverable state. Where there is afi uncon-
ditional contract for the sale of specific goods in a deliverable state, the •
property in the goods passes to the buyer when the contract is made, and
It is immaterial whether the time of payment of the price or the delivery
of the goods, or both, is postponed.
21. Specific goods to be put into a deliverable state, Where there
is a contract for the sale of specific goods and the seller is bound to do
something to the goods for the purpose o£ putting them into a deliverable
state, the property does not pass until such thing is done and the buyer
has notice thereof.'
22. Specific goods in a deliverable state, when the seller has to do
anything thereto in order to ascertain price. Where there is a contract
fcr the sale of specific goods in a deliverable state, but the seller is bound
to weigh, measure, test or do some other act or thing with reference to
the goods for the purpose of ascertaining the price, the property does not
pass until such act or thing- is done and the buyer has notice thereof.
23. Sale of unascertained goods and appropriation. (1) Where there
is a contract for the sale o£ unascertained or future goods by -description
and goods of that description and in a deliverable state are uncondition-
ally appropriated to the contract, eitlier by the seller with the assent of
the buver or by the buyer with the assent of the seller, the property in
tjie "^oods thereupon passes'to the buyer. Such assent may be expressed
SALE o r GOODS 83!

01 implied, and may be given eithei befoie or after the appropriation is

made
(2) Delivery to carrier. Wheie, in piiiiuance of the contract, the
seller delners the goods to the buyei or to a cariiei or otlier bailee
(whether named by the biiyei oi not) for the purpose of tranbijiission to
the buyer, and does not ieser\e the right of disposal, he is deemed to
ha\e unconditionall) appropriated the goods to the contract
24 Goods sent on approval or "on sale or return". When goods
are deli\ered to the buyei on approval or "on sale or return" or other
similar terms, the property therein passes to the buyer—
(a) uhen he signifies his approval oi acceptance to the seller oi
does any other act adopting the transaction,
(b) if he does not signify his approval for acceptance to the seller
but retains the goods without giving notice of rejection, then
if a time has beep fixed for the return of the goods, on the e\
piration of such time, and, if no time has been fixed, on the
expiiation of a reasonable time.
25. Reservation of right of disposal. (1) Where there is a contract
for the sale of specific goods oi where goods die subsequently appiopriated
to the contract, the seller may, by the terms of the contract or appropria
tion, reserve the right of disposal of the goods until certain conditions
are fulfilled In such case, notwithstanding the delivery of the goods to
a buyer, or to a carrier or other bailee for the purpose of transaction, to
the buyer, the property in the goods does not pass to the buyer until the
conditions imposed by the seller are fulfilled
(2f Where goods are shipjjed or deliveied to a railway admmistra
tion for carnage by railway and by the bill of lading or lail
way leceipt, as the case may be, the goods are deliverable to
the order of the seller or his agent, the seller is prima facie
deemed to reserve the light of disposal.
(3) Where {he seller of goods draws on the buyer for the price and
transmits to the buyer the bill of exchange together with the
bill of lading or, as the case may be, the railway receipt, to
secure acceptance or payment of the bill of exchange, the buyer
is bound to return the bill of lading oi: the railway receipt if
he does not honour the bill of exchange, and, if he wrongfully
retains the bill of lading or the railway receipt, the property
in the goods does not pass to him.
Explanation. In this section, the expressions 'railway' and "railway
administration' shall have the meanings respectively assigned to them
under the Indian Railways Act, 1890"
26, Risk prima facie passes with property. Unless otherwise agreed,
the goods remain at the seller's risk until the property therein is trans-
ferred to the buyer, but when the proper.ty therein is transferred to the
buyer, the goods are at the buyer's risk whether delivery has been made
or not
Provided tliat, where delivery has been delayed, through the fault
of either buyer or seller, the goods a.e at the risk of the party in fault
as regards any loss winch might not have occurred but for such fault
Provided also iliat nothing in this section shall affect the duties or
liabilities of eithci scUci oi bu)ei as i bailee of the goods of the othei
party
2 Sub-stitiiKd I)v ilic Salt of Goods ( \nitiuinient) \ct. 190.^
832 MERCANTILE LAW
Transfer of Title
27. Sale by person not the owner. Subject to the provisions of this
Act and of any otlier law for the time being in force, wliere goods are
sold by a person who is not the owner thereof and who does not sell
them under the authority or v/itii the consent of the owner, the buyer
acquires no better title to the goods than the seller had unless the owner
of the' goods is by his conduct precluded from denying the seller's author-
ity to sell:
Provided that, where a mercantile agent is, ,with the consent of the
owner, in possession of the goods or of a document of title to the goods,
any jale made by him, when acting in the ordinary course ot business of
a mercantile agent, shall be as valid as if he were expressly authorised by
the owner of the goods to make the same: provided that the buyer acts
in good faith and has not at the time of the contract of sale notice that
the seller has not authority to sell.
' 28. Sale by one of joint owners. If one of several joint owners of
goods has the sole possession of them by permission ot the co-owners, the
property in die goods is transferred to any person who buys them of such
joint o%vner in good faith and has not at the time of the contract of sale
notice that the seller iias not authority to sell.
29. Sale by person in possession under voidable contract. When the
seller of goods lias obtained possession thereof under a contract voidable
under section H* or section 12A of the Indian Contract Act, 1872 (IX. of
1872), but the contract has not been resicinded at the time ol the sale, the
buyer acquires a good title to the goods, provided he buys them in good
faith and without notice ot the' seller's defect of title.
30. Seller or buyer in possession after sale. (1) Where a person,
having sold good.s, continues or is in possession of the goods or of the
documents of title to the goods the deli\ery or transfer by that peison or
by a mercantile agent acting for him, of the goods or documents of title
under any sale, pledge or other disposition thereof to any person receiv-
ing the same in good faith and without ootice of the previous sale shall
have the saine effect as if the person making the delivery or transtev were
expressly authorised by the owner of the goods to make the same.
(2)' Where a person, having bought or agreed to buy goods, obtains
with the consent of the seller, possession of the goods or the documents
of title to the goods, the delivery or transfer by that person or by a mei-
cantile agent acting for him, of the goods, or documents of title under
any sale, pledge or other disposition thereof to any penson receiving the
same in good faith and without notice of any lien or other right of the
original seller in, respect of the goods shall have effect as if such lien or
right did not exist.

CHAPTER IV
Performance o£ Contract
Si. Duties of seller and buyer. It is the duty of the seller to dc-
livtr the goods and of the buyer to accept and pay for them in accortl-
ance with the terms of the contract of sple.,
32. Payment and delivery are concurrent conditions. CJiiless otlier-
wise agreed, delivery of the goods and payment oi the price are concur-
rent conditions, that is to say, the .seller shall be ready and willing to
"ive possession ot the goods to the buyer in cKchangc for the price, :in<l
 SALE OF GOODS 833

J the buyer sliall be ready and willing to pay the price in exchange for
' poisession of the goods.
33. Delivery; Delivery of goods sold may be made by doing any-
thing which the parties agree shall be treated as delivery or which,has
the effect of putting the goods in the possession of buyer or of any person
autliorised to hold them on his behalf.
34. Effect of part delivery. A delivery of p^rt of goods, in progress
of the delivery of the whole, has the same effect, for the purpose of pass-
ing the property in such goods, as a delivery of the whole; but a delivery
of part of tlie goods, with an intention of,severing it from the whole,
does not operate as a delivery of the remainder.
35. Buyer to apply for delivery. Apart from any express contract,
the seller of goods is not bound to deliver them until the buyer applies
foi delivery.
36. Rules as to delivery. (1) Whether it is for the buyer to take
possession of the goods or for the seller to send them to the buyer is a
question depending in each case on the contract, express or implied, be-
tween the parties. Apart from any such contract, goods sold are to be
delivered at the place at which they are at the time of the sale, and goods
agrerd to be sold are to be delivered at the place at which they are at
the time of the agreement to sell, or, if not then in existence, at the place
at which they are manufactured or produced.
(2) Where under the contract of sale the seller is bound to send the
goods to the buyer, but no time for sending them is fixed, the seller is
bound to send them within a reasonable time.
(3) Where the goods at time of sale are in the possession of a third
person, there is no delivery by^seller to buyer unless and until such third
person acknowledges to the buyer that he holds the goods on his behalf:
Provided that nothing irt this section shall affect the operation of is-
sue or transfer of any document of title to goods.
(4) Demand or tender of delivery may be treated as ineffectual un-
less made at a reasonable hour. What is a reasonable hour is a question
of fact.
(5) Unless otherwise agreed, the expenses of and incidental to put-
ting the goods intb a deliverable state shall be borne by the seller.
37. Delivei7 of wrong quantity, (l) Where the seller delivers to the
buyer a quantity of goods less than he contracted to sell, the buyer may
reject them, but if the buyer accepts the goods so delivered he shall pay
for them at the contract rate.
(2) Where the seller delivers to the buyer a quantity of goods larger
than he contracted to sell, the buyei may accept the goods • included in
tiie contract and reject the rest, or he may reject tiie whole. If the buyer
acceptb the whole of the goods so delivered, he shall pay for them at the
contract rate.
(3) Where the seller delivers . -.e buyer the goods he contracted to
sell mixed with goods of a different description not included in the con-
tract the buyer may accept the goods which are in accordance with the
contract and reject the rest, or may reject the whole.
(4) The provisions of this section are subject to any usage of trade,
special -agreement or course of dealing between the parties.
38. Instalment deliveries. (1) Unless otherwise agreed, the buyer of
goods is not bound to accept delivery tliereof by instalmenu.
 834 MERCANTILE LAW
(2) Where there is a contract for the sale of goods to be delivcrecl,
by stated instalmenis wliich are to be separately paid lor, and the seller
makes no delivery or defcclive delivery in respect of one or .more instal-
ments, or the buyer neglects or refuses to take delivery of or pay lor one
or more instalments, jt is a question in each case depending on the teims
of the contract and tlte circumstances of the case, wlieiher the breach of
contract is a repudiation of the whole contract, or whetlier it is a sever-
able breach giving rise to a claim for compensation, but not to a right,
to treat the whole contract as repudiated.
39. Delivery to carrier or wharfinger. (1) Where, in pursuance of
a contract of sale, the seller is authorised or icquired to send tiie goods
to the buyer, delivery of the goods to a carrier, whether named by the
buyer or not, for the purpose of transmission to the buyer, or deliveiy of
the goods to wharfinger for safe custody,-is prima facie deemed to loe de-
livery of the goods to the buyer.
(2) Unless otherwise authorised by the buyer, the seller shall makc_,
such contract with tlie carrier or wharfinger o a behalf of the buyer as
may be reasonable having regard to the nature of the goods and the olhei
circumstances of the case. If the seller omits so to do, and the goods are
Jos-t. or damaged in coitne oE transit or whiht ia the custody of die whar-
finger, the buyer may decline to treat the delivery to tlie carrier or whar-
finger as a delivery to himself, or may hold the seller responsible in dam-
ages.
(3) Unless otherwise agieed, where goods are sent by the seller to
tlie buyer Ijy a route intohing sea U-^nsijt, in circumstances in which it
is usual to insure, the seller shall give sufch notice to the buyer as may
enable him to insure them during their sea transit, and if the seller fails
so to do, the goods shall be deemed to be at his risk during such sea
transit.
^ 40. Risk where goods delivered at distant place. Wheie the seller
of goods agrees to deliver diem at his own risk at a place other than that
where tliey are when sold, the buyer shall, nevenlieless, unless otherwise
agreed, take any risk of deterioration in the goods necessarily incident to "*
the course of transit. • ^
A\. Buyer's right of examining the goods. (1) Where goods are d e -
livered to tlie buyer which he has not previously examined, he is not
deemed to have accepted' tliem unless and until he lias liad a reasonable
opporluniiy ot examining them' for tlie purpose of ascertaining whether
they are in conformity with the contract.
(2) Unless otherwise agreed, when the seller tenders delivery of goods
to the buyei, he is bound, on request, to afford the buyer a reasonable
opportunity of examining the goods for the pin-pose of ascertailiing
whether they are in conformity with the contract. 'I
^ 42. Acreptanre. The buyer is deemed to have accepted the goods
when he intimates to the seller that lie has accepted them, or when the
goods have been delivered to him and he does any act in relation to them
which is inconsistent witii the ownership of the seller, or when, after the
lapse of a reasonable time, he retains the goods without intimating to the
seller that he has rejected them.
4.8. Buyer not bound to reiurn rejected goods. Unless otherwise
agreed, whete goods ate delivered to thc^buyer and lie refuses to accept
them, having tlie right' so to do, he is not bound to reitirn nhem to ihe
seller, but it is sufficient it he intimates to seller that he refuses to accept
them.
SALE OF GOODS 835

44. Liability of buyer for neglecting or refusing delivery of goods.

\^,Tien the seller is ready and willing to deliver the goods and lequests the
buyer to take delivery, and the buyer does not within a reasonable time
after such request take delivery of the goods, he is liable to the seller for
any loss dccasioned by his neglect or retusal to take delivery, and also for
a reasonable charge for the care and custody of the goods;
Provided that nothing in this section shall affect tlie rights of die
seller where the neglect or refusal of the buyer to take delivery amounts
to a repudiation of the contract.

CHAPTER V
Rights of unpaid/seller against the goods
45. "Unpaid seller" defined. (1) Tlie seller of goods is deemed to
be an "unpaid seller" within the meaning of this Act—
(a) when th? whole of the price has not been paid or tendered;
(b) when a bill o£ exchange or other negotiable instuiment has
been received as conditional payment, and the condition on
which it was received has not been fulfilled by reason of tlie
dishonour of tlie instrument or otherwise.
(2) In this Chapter, the term "sellei" includes any person who is in
the 2'osition of a seller, as, for instance, an agent of the seller to whom
the position ol lading has been endorsed, or a consignor or agent who has
himself paid, or is directly responsible for, tlie price.
46. Uniiaid seller's rights. (1) Subject to the provisions of this Act
and of any law for the time being in foice, notwithstanding tliat the pro-
perty in the goods may have passed to the buyer, the unpaid seller of
goods, as such, has by implication of law—
(a) a lien on the goods for the price while he is in possession of
tliem;
(b) in case of the insolvency of the buyer a right of stopping the
goods in transit after he has parted with the possession of them;
(c) a right of re-sale as limited by this Act.
(2) Where the property in goods has not passed to the buyer, the
unpaid seller has, in addition to liis other remedies, a right of withhold-
ing delivery similar to and co-extensive with his rights ot lien and stop-
page in transit where the property has passed to the buyer,

Unjjaid seller's lien

47. Seller's lien. (1) Subject to the provisions of this Act, the un-
paid seller of goods who is in possession of them is entitled to retain pos-
session c[ them until payment or tender of the price in the following
cases, namely:—
(a) wheic the goods have been sold without any stipulation as to
credit; ,
(b) where the goods have been sold on/-credit, but the term of
credit has expired; ''
(c) whcvc the luiycv becomes insolvent.
{'!) The selki ui.u c\eicise hib light of lien noiwithsiaiiding tliat he
is ill possession ol ilic goods as agent oi bailee for the bu)er.
18 P.m dcli\ci). AVliere an unpaid scllci has made part delivery
of ilic gootls, he may exercise his right of Hen on the rcmaindei. unlpss
 836 MERCANTILE LAW

such part delivery has been made under such circumstances as to show/^n
agreement to waive llie lien.
49. Termination of lien. (1) The unpaid seller of goods loses his
lieu thereon—
(a) when he deli\er5 tlie goods to a carrier or other bailee for tlie
purpose of transmission to the buyer without reserving the
right of disposal of the goods;
(b) when the buyer or his agent lawfully obtains possession of the
goods;
(c) by waiver tliereof.
(2) The unpaid seller of goods, having a lien thereon, does not lose
his lien by reason only that he has obtained a decree for the price of the
goods.

Stoppage in transit
50. Right of stoppage in transit. Subject to the provisions of tmis
Act, when tli,e buyer of goods becomes insolvent, the unpaid seller who
has parted with the i^ssession of the goods has the right oi stopping them
in transit, that is- to say, he may resume possession of the goods as long
as they are in the course of transit, and may retain them until payment
or tender of the price.
51. Duration of transit. (1) Goods are deemed to be in course of
transit fiom the time when they are delivered to a carrier or other bailee
for the purpose of transmission to the buyer, until the buyer or his agent
in that behalf takes delivery of them from such carrier or other bailee.
(2) Jf the buyer or his agent in that behalf obtains delivery of the
goods before their arrival at the appointed destination the transit is at an
end.
(3) If, after the arii\aJ of the goods at the appointed destination, the
carrier or otiier bailee acknowledges to the buyer or his agent that he hold.^
the goods on his behalf and continues in possession of them as bailee fd^
tiie buyer or iiis agent, the transit is at an end and it is immaterial that a
funiier destination for the goods may have been indiatet! by the buyer.
(1) If the goods are rejected by the buyer and the carrier or other
bailee continues in j)osscssion of them, the transit is not deemed to be at
an end even if the seller has refused to receive them back.
(5) When goocU are delivered to a ship chartered by the buyer it is a
question depending upon the cirtunistantes of the particular case, whether
they aie in the possession of the master as a carrier or as agent of the
Ijiiyer.
(6) Wheic tlie carrier or other bailee wrongfully refuses to deliver
the goods to the buyer or his agent in that belialf, the transit is deemed
to be at an end.
(7) Wliere part delivet^ of the goods has l)een made to the buyer or
his agent in tliat behalf, tlie^emainder of the goods may be stopped in
transit, unless such part delivery has been given in such circumstances a*
l o sliow an agreement to give up possession of the whole of the goods.
'^ 52. How stopage in transit is effected. (1) The unpaid seller may
^ej-ti^c his right of stoppage in transit either l)y taking actual possession
of the goods or by giving notice of Iiis claim to the earlier or other iwilee
in whose possession the goods are. Such notice may i)e given cither to the
person in^actual jjossession of the goods or to his principal. In the latter
 SALE OF GOODS 837
cjt: the notice, to l)e eirectual, slinll be given at sutii time and in such
ciicunistanceb that the piintipal, l)y the e\ercise of reasonable diligence,
may communicate it to his servant or agent in time to prevent a delivery
to the buyer.
(2) When notice of stoppage in transit is given by the seller to the
carrier or other bailee in possession of the goods, he shall re-deliver the
goods to or according to the directions of the seller, i h e expenses of such
re-delivery shall be borne by the seller.

Transfer by buyer and seller

53. EflEect of sub-sale or pledge by buyer. (1) Subject to the pro-
visions of this Act, the unpaid seller's right of lien or stoppage in transit
is not affected by any sale or other disposition of the goods which the buyer
may have made, unless the seller has assented thereto:
Provided that where a document of title to goods has been issued or
laAifuily transferred to any person as buyer or owner of the goods, and that
pifrsoH transfers the document to a.person who takes the document in good
faith and for consideration, then, if such last mentioned transfer was by
way of saie, tlie unpaid seller's.riglit of lien or stoppage in transit is de-
feated, and, if such last mentioned transfer was by way of pledge or other
disposition for value, the unpaid seller's right of lien or stopage in transit
can only be exercised subject to the right of the transferee.
(2) Where the transfer is by way of pledge, the unpaid seljer may
require tlie pledge to have the amount secured by the pledge satisfied in
the first instance, as far as possible, out of any other goods or securities
of the buyer in the hands of the pledgee and available against the buyer.
54. Sale not generally rescinded by lien or stoppage in transit. (1)
Subject to the provisions of this section, a contract of sale is not rescinded-
by the mere exercise by an unpaid seller of his right of lien or stoppage
in transit.
V. (2) Where the goods are of a perishable nature, or where the unpaid
stSier who exercised his right of lien or stoppage in transit gives notice to
the buyer of his intention to re-sell, the unpaid seller may, if the buyer
does not within a reasonable time pay or tender tlie price, resell the goods
within a reasonable time and recover from the original buyer damages for
any loss occasioned by his breach of contract, but the buyer shall not be
entitled to any profit which may occur on the re-sale. If such notice is not
given, the unpaid seller shall not be entitled to recover such damages and
the buyer shall not be entitled to the profit, if any, on the re-sale.
(3) Where an unpaid seller who exercised. his right of .lien or stop-
page in transit re-sells the goods, the buyer acquires a good title thereto
as against the original buyer notwithstanding that no notice of the resale
has been given to the original buyer.
(4) Where the seller expressly reserves a right of re-sale in case the
buyer should make default, and, on the buyer making default, resells the
/foods, the original contract of sale is thereby rescinded, but without pre-
jijdice to any claim which the seller may have for damages.

CHAPTER VI
Suits for Breach of the Contract
55. Suit for price. (1) Where under a contract of the sale the pro-
perty in the goods has passed to the buyer and the buyer wrongfully
838 ._ MERCANTILE LAW
neglects or refuses to pay for the goods according to the terms of the ctj^i-
tract, the seller may sue him for the price of the goods.
(2) Where under a contract of sale the price is payable on a c<>rtain
day irrespective of delivery and the buyer wiongfuUy neglects or refuses to
pay sudi price, the seller may sue him for the price although the property
in the goods has not passed and the goods have not been appropriated
to the contract. ',
56. Damages for non-acceptance. Where the buyer wrongfully rie-
glects or refuses to accept and pay for the goods, the seller may sue him
for damages for non-acceptance.
57. Damages for non-delivery. Where the seller wrongfully neglects
or refuses to deliver the goods to the buyer, the buyer may sue the seller
for damages for non-delivery.
58. Specific performance. Subject to the provisions of Chapter II
of the Specific Relief Act, 1877 fl of 1877), in any suit tor breach of cotit-
tract to deliver specific or ascertained goods, the Court may, if it ihiriKs
fit, on the application^of the plaintiff, by its decree direct that the contract
shall be performed specifically, without giving the defendant the option of
retaining the goods on payment of damages. The decree may be uncondi-
tional or upon such terms and conditions as to damages, payment of the
price or otherwise, as the Court may deem just, and th? application of the
plaintiff may be made at any time before the decree.
59. Remedy for breach of warranty. (1) Where there is a breach of
warranty by the seller, or where the buyer elects or is compelled to tieat
any breach of a condition on tlie part of the seller as a breach of
warranty, the buyer is not by reason only of such breach of warranty en-
titled to reject the goods; but he may—
(a) set up against the seller the breach of warranty in diminution or
extinction of the price; or
(b) sue the seller for damages for breach of warranty. ,
(2) The fact that a buyer has set up a breach of warranty in dimiml-
tion or extinction of the price does not prevent him from suing for the
same breach of warranty if he has suffered further damage.
60. Repudiation of contract before due date. Where either party to
a contract of sale repudiates the contract before the date of delivery, the
other I may either treat the contract as subsisting and wait till the date of
delivery, or he may treat the contract as rescinded and sue for damages
of the" breach.
61. Interest by way of damages and special damages. (1). Nothing
in this Act shall affect the right of the seller or the buyer to recover in-
terest or special damages in any case wliere by law interest or special
damages mny be recoverable, or to recover the money paid where the con-
sideration for the payment of it has failed.
(2) In the absence of a contract to the contrary, the Court may award
interest at such rate as it thinks fit on the amount of the price—
(a) to the seller in a suit by him for the amount of the price—froiSj
the date of the tender of the goods or from the date on which
the price -was payable;
(b) to the buyer in a suit by liim for the refund of the price in a
case of a breach of tire contract on the part of the seller—from
the d^te oi} which the payment was pi^de,
SALE OF GOODS 839

CHAPTER VII
Miscellaneous
f)2. Exclusion of implied terms and conditions. Wlieie any right,
duty or liiibility would arise iincler a contract of sale by implication of
law. it may lie negatived or varied by exjjress ag;reemcnt or by the course
of (lealiii!;; between the parties or by usage, if the usage is such as^to bind
boui panics 10 the contract.
6.S. Reasonable time a question of fact. Where in this Act any re-
fcicMcc is made to a icasonable time, the question what is a reasonable
time is a question of fact.
64. Auction sale. In the case of sale by auction—
(1) where goods are put up for sale in lots, each lot'is prima facie deem-
ed to be svibjcct of a separate contract of sale;
(2) the .sale is complete when the auctioneer announces its completion
by the fall of the hammer or in other customary manner; and, until such
announcement is made, any bidder may retract his bid;
(3) a light to bid may be reserved expressly by or on behalf of the
seller and where such right is expressly so reserved, but not otherwise, the
seller or any one person on his behalf may, subject to the provisions here-
inafter contained, bid at the auction;
('I) where the sale is not notified to be subject to a right to bid on be-
half of the seller, it shall not be lawful for the seller to bid himself or to
en^ploy any ])crson to bid at such sale, or for the auctioneer knowingly to
take any bid from the seller or any sUch person; and any sale contravening
this rule may be treated as fraudulent by the buyer;
(5) the sale may be notified to be subject to a reserved or upset price;
(fi) if the seller makes use of pretended bidding to raise the price, the
sale is voidable at the option of the buyer.
fil-A.' In contracts of sale amount of increased or decreased duty to
be added or deducted. (1) Unless a different intention appears from the
, terms of the contract, in the event of'any tax of the nature described in
stib-sec. (2) being imposed, increased, decreased or remitted in respect of
any goods after the making of any contract for the sale or purchase of
such goods without stipidation as to the payment of tax where tax was not
c/iaigeable at tlie time of making of the contract, or for the sale or purchase
of such goods tax-paid tax was chargeable at that time,—
(a) if such imposition to increase ,so takes effect that the tax or
increased tax. as the case may be, or any part of such tax is
paid or is payable, the seller may add so much to the contract
price as will be equivalent to the amount paid or payable in
respect of such tax or increase of tax, and' he shall be entitled
to be paid and to sue for and recover such addition; and
(b) if such decrease or remission so takes effect that the decreased
tax only, or no tax, as the case may be, is paid or payable, the
buyer may deduct so'much from the'contract price as will be'
equivalent to the decrease of tax or remitted tax, and he shall
not be liable to pay, or be sued for, or in respiect of, such de-
duction.
(2) The provisions of sub-sec, (1) apply to the following taxes, name-

1. Substituted by the Sale of Goods (Amendment) Act, 1963.

840 MERCANTILE LAW

(a) any duty of customs or excise on goods;

(b) any tax on the sale or purchase of goods.
65. [Reoeal. Rep. by Repealing Act, 1938 (I of 1938), s. 2 and Sch.]
66. Savings. (1) Nothing in this Act, or in any repeal effected there-
by shall affect or be deemed to affect—
(a) any right, title, interest, obligation or liability already acquired,
accrued or incurred before the commencement of this Act, or
(b) any legal proceedings or remedy in respect of any such right,
title, interest, obligation or liability, or
(c) anything done or suffered before the commencement oi this
Act, or
(d) any enactment relating to the sale of goods which is not ex-
pressly repealed by this Act, or
(e) any rule of law not inconsistent with this Act.
(2) The rules of insolvency relating to contracts for the sale of goods
shall continue to apply thereto, notwithstanding anything contained in
this Act.
(3) T h e provisions of this Act relating to contracts of sale do not
apply to any transaction in the form of a contract of sale which is in-
tended to operate by way of mortgage, pledge, charge or other security.
 Appendix IV

Test Questions

(Based upon t h e ' questions set at the B. Com. and M. Com. Examin-
ations of the various Indian Universities and the C.A. and I.A.S. Exam-
inations, and specially dratted for this book.)

CHAPTER i
1. What do you understand by the iex mercateria? Discuss fully.
2. Discuss tlie sources of Mercantile Law of England and India.
3. Comment upon the position of Mercantile Law in India before
th,2 passing of tlie Indian Contract Act.
4. What do you understand by Equity? State and explain the causes
that led • to the development of Equity.

CHAPTER II
Contracts
. 1. "An agreement enforceable by law is a contract." Discuss the
definition, bringing out clearly the essentials of a valid contract.
2. Discuss the' essential elements of contract.
3. State whether there is any contrac^ made in the following cases:
(a) A, having • accepted an invitation to dinner, fails to attend.
(b) A, the wife of a minoi", buy^ goods on credit from B.
(c) A takes a seat in an omnibus.
(d) A tells B that C has expressed ^ his willingness to marry her (B).
(e) A bids at a public auction.
(f) A puts an anna in the slot of a weighing machine.
4. How is an offer made, revoked, and accepted? Give examples.
What rules apply when aa offer is made through the Post Office?
5. (a) When is (i) a n ' offer, (ii) an acceptance, complete? When is
communication of each complete?
(b) A offers a reward to whosoever shall bring to him his lost dog.
B brings to A his lost dog. Can B claim the reward? Give reasons.
(c) A at Delhi on 1-7-S5 writes to B in Agra offering to sell his dog
for Rs. 250. B on 3-7-65 sends a telegram accepting the offer, but just
before the receipt of the telegiam A has sold the dog to C and wired to
B revoking his offer.
{d} A vaid by his advertisement in newspapers offers a reward of
Rs. 1,000 to anyone who contracts Influenza after taking his 'specific' for
R12 AfERCANTILE LAW
iliis iliscasc. R uses it acrouling to diiections and contracts Influenya.
(^ai) R recover the rowaul? Give leasons.
6. fa) "A mere mental acceptance not evidenced by wouls or con-
duct is ill the eye of Jaw no acceptance" Comment. Give examples.
Qi) "Acceptance mtist he something more than a mere mental assent."
Explain and illiistiatc.
(c) Explain the lule. "Offer determines mode of acceptance", with
special rcfeicncc to contracts by post.
7. "Acceptance is to offer what a lighted match is to a train of gun-
powder, lit produces something which cannot lie recalled or undone."

Comment.
8. ^a) "A contract is a contract from the time it is made and not
fiom the time its peiformance is due." Discuss.
(b) Is an agreement to agree in the future a contract?
(c) Is a contract by a newspaper' proprietor not to comment on the
conduct of a particular person valid or binding^
9. 'Who can enter into contracts? What is ihe effect on a contract
of incompetency to contract?
10. Discuss fully the law relating to minor's contracts.
11. (a) X, a major, executes a promissory note in favour of Y for
the nccessai ies of life sup[)Iicd by Y (i) to X, (li) X's minor wife, duiing
X's minority. Is X liable to Y on the pro-note?
(b) \ minor borrowed Tls. 1,000 on a fraudulent representation that
he was a major. Can the creditor sue for the return of the amount?
12 Explain 'Consideialion' as an element in a valid contract. .State
the exceptions to the lule that an agreement witliout consideiation is void
1.8 (a) "The paities to a contiact, in a sense, make the law for them-
selves." Discuss
(b) Should consideration always move from the promisee?
14. (a) "In many cases, the doctrine of consideration is a mere tech-
nicality, irreconcilable either with business expediency or commonsense."
Comment.
(b) "No stt anger to the consideration can take advantage of a con-
tract although made for his benefit." Explain by comparing tlie provi-
sions of English and Indian law.
15. What is (a) free consent, (b) real consent? Discuss its import-
ance in contracts.
16. Distinguish clearly between (a) void and voidable contracts, (b)
void and illegal contracts.
17. What is the difference between (a) fiaud and the making of an
innocent misiepresentation, (b) coercion and undue influence?
18 When and to what extent is a party to a contract bound to dis-
close mformatioh in his possession relating to the subject-matter of the
agreement or facts within his knowledge likely to influence the judgment
of the other party to the contract? Give examples.
19. What are contracts Uberrimae Fidci? Give at least three ex-
amples of such contracts.
20. (a) Under what circumstances does the law require relationships
to be regulat<^d by good faith? Give examples.
TEST QUESTIONS 843

(b) C knowingly induces B to act contrary to the good faith he owes

A. Has A any remedy against C or only against B?
2). Discuss the law relating to the effect of mistake on contracts.
22. Fundamental error will >not prevent a contract from coming into
evistence unless the mistake be as to the identity of the other party as
opposed to its attributes; as to the substance of the .sul)ject-matter as op-
posed to his qualities; or, as to the nature of the transaction as opposed
to its terms. Discuss.
23. "The legal effects of a contract are confined to the contracting
parties." Discuss.
24. How far is it true that an agreement without consideration is
void? State the elTect of inadequacy of consideration.
25. Discuss the remedies available for mistake, innocent misrepresen-
tation and fraud.
26. Consider with reference to agreements the following: (i) undue
influence as an element vitiating consent, (ii) mistake as an clement ex-
cluding consent.
27. Write notes on contracts which law will not enforce on the
ground of their being illegal, immoral and against public policy. Give
examples. ,
28. (a) Discuss the doctrine of public policy. Give examples of
agreements contrary to public policy. Explain the statement that the
categories of_public policy are closed.
(b) The rules of a crossword competition of a weekly published by
X Ltd., are (1) that the first prize will be awarded for the solution that
agrees most nearly with the one kept in a sealed cover; (2) that in mat-
ters arising in the competition, the editor's decision is final and legally
binding on the competitors; and (3) that at expiration of three months
from the publication of tlie prize list, X Ltd., shall not be liable to pay
any claim unless a suit for it is then pending. It is contended that Rule
1 makes the competition a wagering contract, that Rule 2 is in restraint
of legal proceedings and that Rule 3 defeats the provisions of the Limita-
tion Act. Examine the validity of the conditions.
29. What is aA agreement by way of wager? Is such an agreement
void or illegal? Is a contract of insurance a wagering contract?
A lends money to B to enable him to pay off the loss which he
has sustained in a wagering transaction with C. Can A recover the money
lent by him?
30. What is "Novation"?
A says to B, "Give C a receipt in full for the debt which he owes
you and I will pay you the amount." B agrees. Discuss what kind of
contract this is.
81. Discuss the law relating to contracts in restraint of trade. A,
a doctor practising 'in Delhi, engages B as his assistant for a period of
three years on condition that after the expiry of three years B is not to
practise in the States of Delhi and Uttar Pradesh on his own for a period
of five years. After the first three years had expired B in breach of his
agreement starts practising at Agra. A sues B to restrain him from pi'ac-
tising. Will A succeed? •
32. (a) What elements are essential to make a contract a contingent
one?
(b) Discuss the law relating to assignment of contxacts.
844 MERCANTILE LAW

33. State the \nitoirs modes in which ;i comi.ict may be disdiarged.

34. State the diffeieiit modes in vvlucii a man may be diicharged
from the obhgations of a contract.
3.", What is meant by 'Frustration of contiact'? How far are the
liabilities of the parties to a contract affected by supervening impoisibili-
113S? Is tliere any difference betv,'een impossibility of performance _ and
frustiation?
36. What are the remedies for breach of contract?
37. "If a contract is broken, the law will endeavour, so far as money
can do it, to place the injured party in the same position as if the con-
tract has been perfoimed." Discuss.
38. Explain fully/ the prmciples on which the Court would award
damages for a breach of contract.
39. Distinguish between liquidated damages and penalty.
If the parties to a contract have agreed on the amount of damages^
payable in the event of i's breach, can the Court enhance or reduce that
amount?
40 (a) What do you understand by 'Anticipatory Breach of Con-
tract'? What are tlie rights and liabilities of parties in case of an anti-
cipatoi-y breach of contract?
(b) X agrees to supply lOO tons of iron to Y on July 1, 1960, at
Rs. 50 per ton. Subsequent to the contract the price of iron rises to
Rs. 80 jSe) ton and on May i, 1960, X intimates to Y that he does not
intend to perform his ptomise. Y replies that he will hold X to his pro-
mise. On Jime !, 1960, the Government, in order to check the soaring
prices of iion, prohibits the sale of more than 10 tons of iron and fixes
the price at Rs. 60 per ton. 'Discuss the rights of X and Y on (a) May 1,
1960, and (b) July 1, 1860.
41. Write a brief ^note on implied or quasi-contracts.
42. (a) What is quantum mejuit? What are the rights and obliga-
tions of a finder ot goods?
(b) "A quantum memk, altiiough it is a quasi-contract, arises out of
a contract." Comment.
' 43. Stale the lules relating to appropriation of payment made by a
debtor to his oeditot.
44. "The Common l^iv/ does not lequire any positive intention to
create a legal obligation as an element of contract There seems n o '
reason why merely bOi.i.ii engagements should not create a contract, if the
requisites for the formation of a lontract exist." CVVilliston). Comment.
45. The lav; of co^itratts is not the whole law of agreements nor is
it the whole law of obligations. Discuss.
46. (a) Discuss ihe effect of error in consensus and error in causa in
relation to contracts.
(b) Explain 'consent' as an element of a valid contract and indicate
the exceptional !/peo ol cases where "here is only an apparent consent
but no real con-ieni
47. (a) What arc the icraedies available to an aggrieved persoij in
cases of fiaud or misrepresentation.-' ,
(b) X and Y are two tiaders and they enter into a contract. Y has
private information regarding a change in prices which would affect X's
willingness to proceed with the contract. Can the contract be enforced?
 l E S r QULSTIONS 845
(c) A and B went to the races and e<ich put an e([iial .imount on the
iame liorse, the ticket being bought in the name of B I he liorse won
and B collected the winnings but refused to pay A his half sliare A
thereupon sued B who set up the pica thai the tontiact was not enforce-
able as being a wagering agreement Discuss the rights of the parties and
st<."e how you would decide the claim in dispute
48 Discuss the rule tliat a stranger to a contract cannot sue and the
exceptions, if any, to that rule
49 (a) ' 1 he law concerning restraint of trade has ciianged from
time to time with tlie changing conditions ol trade, but tiiese changes
have on the whole been a continuous development ol a general r u l e "
(Anson). Lxamine the said development and statevthe Indian law on the
matter
(b) Liberty of tiade is not an asset which the law will permit a pei-
son to barter awa) except in special circumstances tlucidate
(c) When is an agreement m lestraint of trade valid"'
50 "Impossibility of performance is, as a lulc, not an excuse for non
performance of a contract" Discuss
51. "Ihe doctrine of frustration of con'racts is leally an aspect or part
of the law of discharge of contracts Discuss
52 (a) State and discuss the circumstances under which contiacts
need not be performed
(b) X was employed as a Managing Director of a comjjaiiy under a
written contract, but the contract was not binding on tlie company as the
directors wlio made it were not qualified Discuss if X has any remedy
against the company for work, done by him as Managing Directoi
53. "Attempt tlie following problems, giving reasons foi your answers.
(a) A, a doctor, agrees to treat B, and B makes a promise to A that
he will pay C a sum of Rs 1,000. Can A or C sue thereon?
(b) A hired B's room for a scries of lectures B discovered that the
lectures would be of seditious nature and lefused to allow A
to use the room A sued B Decide
(c) A agrWd to let his theatre to B for a shovv in connection with
Mayor's fund Befoie the date of eiucnainment the Hall vsas
destioyed by hre Advice the parties
(d) X agrees to p u n l a book for Y, not knowing thdt it contains
libellous maitci After printing a part he discovers that it con-
tains libellous matte>. Can X (i) Imfiili) refuse to print (he
rest of tlie book, (ii) sue Y for the woik done by him"-'
(e) D bought tyres from Diinlop Rubber Co, and sold them to S, a
siiljdealei, who agreed witii D not io bJl below Dunlop's list
price and to pay to Dunlop Co, £5 as <lamages on every t)re he
undersells S sold two tyies at IC'S than the list price and there-
on (he Dunlop Co sued hiin for the breich Will the Dunlop
Co succeed?
(f) A engaged B to sing at his theatre on fiily !, I'152 for Rs 500
B IS prevented fiom peiforming—(s) by an accident to his taxi-
eib on his way to the tlieatie, (ii) tiy a sudden ilhiess caused by
.11 ludiscreiion in diet, (in) by A's iheatie being buint down;
(iv) because B went to suig foi C Discuss the rights of A and
B
lv\ 1 o .1 suit on a pro note filed bv the hoUIei m due course the
'46 -^ , MERCANTILE LAW

cliunci's dcicnte ii thai he siguc-d llie 2Jro-n'ote under the im-

jjiesMoii thill it was a release deed, l l i e Court believes the
di.iucr. How should it decide the case?
(h) A iiistuicis B to enter on his behalf into a wagering transaction.
15 loses in the iiansaction and pays from his pocket. He there-
alter sues A lot le-iinbursemeut. Can A laise the plea of
wager?
(i) r , who is in no way connected with X & Co., Ltd., makes a state-
ment that the company has a monopoly ol certain government
contracts. On the strength of this repiesentation S applies lor
shdies ni X &: Co., Ltd., and the shares are allotted to lum. Soon
alter, 6 disco\crs that the statement was/false and made lecklcss-
iy by 1'. Can ij a\oid the contiact? Has he any remedies against
P Ol the company?
(j) A sent goods to B and insuied the goods with C under a policy
which aid not cover loss or damage or bzeakage. I h e goods
weic bioken duiing the course ol tne voyage and B claimed the
loss. C's <igeiu settled tlie claim, and paid B Rs. 1,200 in full
saliSlaclion ol his claim. Altcrwaids C discovered that because
the bieakages ^\eie not coveied by the teims of the policy, the
seiilement was made under a mistake. Can C claim a refund
ol the money j^aid?
(k) A, haiKlulcntly assuming the name ol a leputable meichant in
a town, buys in peiaon goods ol B. Does tlie ownership pass
lioin B to Af Will it maice any dillercnce il A haudulently le-
l)resents himself to be the brother of a lespcctable merchant and
buys goods ol B?
(1) X falsely lepieseiuing herself as the wife of a well known mil-
lionaiie lakes a ling fiom a jeweller's shop for the approval of
her husband. She pledges it with a pawnbroker who in good
laiih and without notice of the lust transaction pays her
Rs. 10,000. Can the jeweller recover the ring from tne pawn-
broker? ^
(m) A's son is ill and he calls a doctor B who, after examining tlie
paiient, says that he will cure him within three days. A and B
enter into a contract tliat it B eliects the cure within three days
he will get Rs. 100, but it he fails he will get notiiing and will
have to pay Rs. 50. Is this a wagering contract?
(n) A, who is trying to sell an unsound jiorse, forges a veterinary
surgeon's certificate, stating the hoise lo be sound and jiins it
on the stable door. B comes to examine llie horse but does not
notice the certilicate. B buys the hoise at a liigh price. Sub-
sequently the horse is found to be unsound. Wiiat aie the le-
medics ol B against A, it any? Gi\e leasons.
(o) A contracts to pay a sum of money to B on a day specified. A
does not pay the money on that dale; B in consequence of not
receiving the money on ihat day is unable to pay his debts, and
is totally ruined. What are the rights of B in such a case?
51. ^Vritc a note on "Time is the essence of tlie contiact."
If a ship does not sail on the date mentioned in the charter paity as
the dale of sailing, is the charterer at liberty to treat the contract of affieight-
ment broken?
TEST QUESTIONS 8-17

55. Attempt the following problems, giving icasous lor your aubwcrs:
(a) A, li and C enter into a coiuiact under wliith A promises botli
15 and C lliat il B iviU ilig A's garden, lie. A, will gi\e Rs. 50
to C Can C compel A to pay the money on B's digging A's
garden according to the terms oi the contiact-' Give leasons.
(L)) A owes B Rs. 5,000 which he has £ailed to pay. B piomises a
rebate ot Rs. 1,000 i£ A will pay at once. A pa)b Ks. 1,000 in
lull satislaction. Subsecpiently, B demands tlic balance of
Rs. 1,000. Advise A.
(c) I h e members ol the Diplomatic Coips, Delhi, donated sums
and instituted an 'Ambassador Gup' costing Rs. '174 to be award-;
ed to the winning jockey in that lace to be held e\ci) Jeason
111 Delhi. A, the only better on tlie iioise, won Rs. J2,000 on
31si Alaicli, 1955, which he claimed horn the Race GouibC Gom-
mittee. Gan he successlully sue the Gommittee?
(d) iVl. K. Iyer, a well-known hrm ot '62, LingliiLhetii Street, Madias,
was in me habit ol buying goods Irom ,\iessis. Nanav.ui & bons,
Bombay, on credit. One i\l. J. Ayci doing bubiness undei lus
name with the same name and style, giving his atldicss at 26,
Lmgliichetti Street, Madias, ordeied goods iiom Messis. Aaiia-
vati & Sons. I h e latter, thinking thac the oulei was lioiu well-
known hrm M. K. Iyer sent the goods to ZH, Lniginchetti Siicet,
without taking care to note the addiess, on cietiit. M. J. A)ci
sold tlie goods hnmcdiaicly on cash to one Suntlenaj.iu. .Sub-
sequently Nanavati & Sons found out. the mistake and wanted
to avoid the contract and recover the goods lioiii iiiiidaiajan.
Examine tlie rights ot all the panics ana decide the issue to the
best ends ot justice and fair play.
(e) X Owes a time-baned debt ot Rs. 5,000 to Y. X iJioiuiscs in
writing to pay Rs. 2,000 and Y agrees to accejn it in lull satis-
laction ot me debt. Alter V has accepted Rs. Z.OOO in lull baiis-
laction, pursuant to ilie agreement, X again piomiscs in writing
to pay me balance ol Rs. 3,000 to V. Can Y enlorce this
promise?
(f) X holds out. a threat, to his classmate Y that he will institute
criminal proceedings against Y tor defamation and tlicreby hi-
duces Y to agree lo sell his watch to X at one-third its value.
Discuss it X can entorce the agreement.
(g) A's son has forged B's name on a promissory note. B under
tiircat ol prosecuting A's son, obtains a bona from A for the
amount ot the forged'note. B sues A on the bond. Will he
succeed?
(h) An auctioneer advertised in the newspapers that a sale of office
furniture would be held at Delhi. A broker with a cotnmission
to buy olhce furniture came from Bombay to attend the sale, but
all the furniture was withdrawn. The broker 'iheieupon sued
the auctioneer for his loss of time and expenses. Will he
succeed?
(i) P applied for the headmastership of a school, and the Governing
Body passed a resolution appointing him. Tl>e resolution was
not communicated officially, but one of the members of die
Governing Body privately iiifouncd him of it, ' The resolution
848 ^lERCANTILE LAW

was subsequently rescinded. P claims damages. Will he

succeed?
(j) A lends a book to B and B promises to return it within a week.
On B's refusal to return the book on the expiry of tlie week,
A files a suit. B pleads absence of consideration in support of
liis promise to return the book. Decide.
(k) B owed W & G Ltd, Rs. 5,000, which he was unable to pay. He
falsely repiesented to J that he was the agent of a motor com-
pany and induced J to pay him Rs. 5,000 as a deposit for the
purchase of motor cars. This payment was made by a cheque
drawn by J in favour of W & G Ltd., who were represented by
B as being interested in the motor company. B handed the
cheque to W & G Ltd., in payment of his debt, and they re-
ceived it in good faith and in ignorance of B's fraud. Can J
recover the amount from W. & G. Ltd..'
(1) E, wiio was on the stafi of a foreign embassy, was the tenant of
M's house. iVI sued him for. arrears of rent. Advise E.
(m) S, a minor, by fraudulently representing himself to be of full
age, induced L to lend him Rs. 400. He refused to pay it and
L sued him for (i) fraudulent misrepresentation, or alternative-
ly, (ii) money had and received to L's use. Will he succeed in
his suit? •
(n) S, a minor, agreed to take 500 rupees-ten sliares in a company
and paid rupees five on each/share. He received, no dividend
on the shares. While still a minor he repudiated the contract
and brought an action (i) to recover the money he had paid,
and (ii) for declaration that he was not liable lor future calls.
Advise him.
(o) M, an old man of feeble sight, endorsed a- bill of exchange for
Rs. 3,000 thinking it was a guarantee. Is he liable to pay the
amount?
(p) B, the Managing Director of a theatre, gave instructions that a
ticket was not to be sold to S. S knew this, and asked a friend
to buy a ticket -for him. With this ticket S went lo the theatre,
but B refused to allow him to enter.^ Could B refuse admission?
(q) An auctioneer was selling tow and hemp. A lot of tow was put
up for which iM, thinking it was hemp, made a bid. The bid
was extravagant for tow, but reasonable for hemp. From the
price of the bid, tlie auctioneer knew that the bid was made
under a mistake. Was it a contract?
(r) K sued G on a contract, which K had coerced G into making
by tiircals of piosccuting G's husband for a criminal offence
wliich he had committed. Is G liable to pay under the con-
tract?
(s) A was wrongfully dismissed by G from his employment and he
claimed (i) damages from his injured feelings for ha\ing been
dismissed from his employment, and (ii) damages for the manner
of his dismissal. Is G liable to pay?
(t) L engaged W, an opera singer, to sing in his theatre for a season,
and G, knowing of this contract, induced W to break it and to
sing for him. Can L recover damages from G?
(u) .\ asked B to insure his house against fire. B did so, but so
TEST Q U E S l l O N S 849

carelessly that A could not revover upon the policy when the
house was burnt. Can A claim damages from B?
(v) The unloading of a ship was delayed beyond the date agreed
with the shipowners owing to a strike of dock labourers. On a
suit by tlie shipowners for damages, the plea of impossibility of
performance was raised. Advise the shipowners.
(w) A bought a cow of B who warranted her to be free from disease.
T h e cow was found to have been suffering at the time of the
contract from foot and mouth disease as a icsult of which not
only that cow but other cows of A died. Wliaf amount of
damages would A be entitled to?
(x) A agrees with B to give a car to B's son in consideration of
his marrying A's daughter. Can B's son sue A on the agree-
ment?
5*). .\nswer tlie following problems giving reasons for your answers:
(a) .-\ contracted to supply to B a certain (|iiantity of "Finland
birch timber" to be delivered at Bombay from July to October
1939. No deliveries were made before September, 1939, when
World War If broke out. Transport was disorganised and A
could not get any timber from Finland. Is A discharged from
his obligation in these circumstances?
(b) During a strike by the workers in a coal mine, the police au-
thorities tliought it enough to provide a mobile force for the
protection of the mine. The colliery manager wanted a station-
ary guard. It was ultimately agreed to pro\ide the latter at a
rate of payment by the comjjany owning the colliery, which in-
\olved a sum of Rs. 2,200. Subsequently, the company refused
liability to pay, pleading absence of consideration. How would
you decide?
(c) The deferjdant agreed to sell a certain quantity of silica sand to
the plaintiff and undertook not to sell to four specified factor-
ies, and to pay damages at a certain rate in case of a breach of
the undertaking. In a suit for recovery of damages on a breach
of the undertaking, it was contended that agreement was in'
restraint of trade and was void. Is the defence tenable?
(d) A and B borrow Rs. 5,000 from a bank on a promissory note
executed by both A and B jointly in favour of the bank. B,
gives certain of his shares to the bank as security for the loan
so Ijorrowed by A and B. Subsequently, B becomes insolvent
and A discharges the entire debt due on the promissory note.
Is A entitled to B's shares towards repayment of B's share of the
said loan?
(e) On June I, 1960, A advertised in a newspaper that he would pay
Rs. 150 to any one who would find his lost dog before July 1,
1960. On 10th June, A advertised in the same newspaper that
he 'had cancelled his offer of June I, 1960. On 15th June, B,
who had read the first advertisement, but not the second one,
found the lost dog and claimed Rs. 150 from A, which A re-
fused. Has B got any right against A?
(f) A made an offer to sell some goods to B conditional on receiv-
ing a reply by return of post. .\ gave the letter to his peon tc
po't Init" the peon forgot to post it immediately; and actually
posted It after seven > days. On receiving A's letter B wrote a
850 MERCANTILE LAW
reply, accepting the offer, and duly posted it by return of post.
In tlie meantime, not having lieaid from B, A sold the goods to
C. Has B any legal remedy against A?
(g) A took a bet of Rs. 500 with B that a certain horse would win
in a certain race. Under this agreement A had to deposit
Rs. 100 with B. Since A had no money, he approached his
friend C, who advanced the sum to him on condition that A
was td~ return Rs. 200, if A should win his bet against B, but
to return nodiing if A lost. A won his bet against B. Can C
recover Rs. 200 fr^m A? r ''
(h) A purchased from B, the owner of the M Theatre, a ticket for
Rs. 10 to witness a play to be staged at the theatre on March
15, 1961. On 10th March, the theatre was destroyed by fire. A
thereupon sued B claiming (i) damages for breach of contract
and (ii) a refund of the price of the ticket. ''B resisted A's claim
on the gi-ounds (i) that the peiformance of the contract had
become impossible and (ii) that the ticket contained a clause,
"Money paid for this ticket ivill hot be jefunded on any ground
whatsoever." How would you decide the suit?
57. Comment briefly on the following statements:
(a) The offer and acceptance bring the parties together, but the
law requires some further evidence of dleir intention to create
an obligation.
(b) Performance of the condition of a proposal is an acceptance of
the pi-oposal.
(c) Promises bind the representatives of the proraissors in case of
the death:-of such promissors before performance.
(d) An attempt at deceit which does not deceive is not fraud.
(e) Insufficiency of consideration is immaterial; but an agreement
without consideration is void.
(f) A contract is a contract from the time it is made and not from
the time its performance is due.
(g) The doctrine of frustration has often been said to depend on
adding a term to the contract by implication.
(h) An agreement requires a meeting of the minds.
(i) If a person pays an obligation which another is ugder a duty to
perform, the law gives the former a contractual remedy to re-
cover the amount.
(j) Undue influence is a subtle form of coercion.
(k) A promise against a promise is a good consideration.
(1) To consummate a contract there must be mutuality as well as a
meeting of the minds of the parties.
(m) Damages never d6 more than restore the injured party to tlie
position he would have been in^ had the promissor performed
his promise.
(n) The failure to disclose a material fact which might influence
the mind of a prudent contractor does not give the right to
avoid the contract even though it is obvious that the contractor
has a wrong impression that would be removed by disclosure.
(o) Consideration is the price for which the promise of the other is
bought.
TEST QUESTIONS 851
(p) A quasi-contract is not a contract at all. It is an obligation which
the law creates.
(q) The sanctity of contract is the foundation of the law of con-
tract and the doctrine of impossibility cannot be permitted to
become a device for destroying this sanctity.
58. Attempt the following problems, giving reasons l6r your answers:
(a) A and B, two Hindu brothers, divided the family property bet-
ween them in 1900 and agreed at the tirqe of partition that
they should contribute a sum'of Rs. 30,000 in equal' shares and
invest it in the security of immovable property and pay the in-
terest towards the maintenance of their motlier. Can the mother
compel her sons to liave the amount invested as settled in her
favou"?
(b) P let premises in Calcutta to D in January, 1942, at a high rent
for opening a restaurant, the agreement to remain in force as
long as British European troops continued to be stationed • in
the town. The particular locality of the restaurant was declared
out of bounds for the troops and thus D lost their custom. D
refused to pay 1' the dues of rent on the plea of frustration of
contract. Advise P. '
(c) A and B were joint proprietors of a hotel. Water connection
to the hotel had been taken from the .Municipal Board in tlie
name of Ay Subsequently B made an application to the Board
for recording his name as tenant jointly with A in respect of
water rates payable by the hotel. The Board refused to do so,
as B would not give an undertaking to fulfil certain conditions
proposed by the Board. Later on the Board filed a suit tor re-
covery of an ears of water rates against A as the promissor and
against B as the beneficiary under the contract. Is B liable to
pay?
(d) In July, 1946, the plaintiffs entered into a contract with the
defendants to build 100 houses for a fixed sum of Rs. 10,00,000.
Owing to unexpected sl;ortage of skilled labour and of certain
materials the contract took 24 months to complete instead of jhe
12 months expected, and cost about Rs. 12,50,000. The
plaintiffs'contended that the. contract had been frustrated and
that they were entitled for the cost actually incurred. Advise
tlie defendants.
(e) A lends money to B on interest at Rs. 2.50 P, per cent per month.
Subsequently, on a settlement of accounts between the parties, it
js agreed that A should charge interest at the rate of 50 P. per
cent per month on the balance due, if the same was paid
within a certain date; but if there was a default in payment B
slioidd nay the balance with interest at the original rate of
Rs. 2.50 P. per cent per month. Is the stipulation for the pay-
ment of interest at Rs. 2.50 P. in case of default void for the
reason of being in the nature of penalty?
(f) By a contract dated 6-9-56, the seller agreed to sell groundnuts
for shipment from Port Sudan during October or November,
1956, to Belfast. At the date of the contract the usual and
customary route was via the Suez Canal. On 2-11-56 the Suez
Canal was closed to navigation and only the route via the Cape
of Good Hope was open. The seller did not ship the goods
and the buyer sued for breach of contract. State the pleas
TEST QUESTIONS 853
(b) A bank in whose favour a fidelity guarantee was given for the
good conduct of an employee excused the employee on one occa-
sion when he misappropriated bank's moneys without informing
the surety about it and the emi^loyee again misappropriates.
Is the surety liable?
(c) K contracts to lend Rs. 2,000 to L on April 1, 1952. M guaran-
tees repayment. K pays the amount to L on March 1, 1952.
Is M discharged?
(d) A, B, and C, as sureties for D enter into three several bonds,
each in a different penalty) namely, A in the penalty of Rs. 1,000,
B in that of Rs. 2.000, and C in that of Rs. 4,000 conditioned
for D"s duly accounting to E. D makes a default to the ex-
tent of Rs. 4,000. Discus* the liabilities of A, B and C.
(e) B owes to C a debt guaranteed by A. The debt becomes pay-
able. C does not sue B for a year after the debt has become
payable. B then becomes insolvent. Thereafter, C sues A for
the debt. A pleads B's forbearance to sue B for a year as a
defence. Is this a good defence?
(f) A contracts to indemnify B against the consequences of proceed-
ings wliich C may take against B in respect of a certain sum
of money. C obtains judgment against B for the amount. With-
out paying any portion of the decree amount B sues A for its
recovery. How will you decide according to English as well as
Indian law?
(g) A figrees to guarantee the advance of a sum of Rs. 1,00,000 by
B, the creditor, to C, the principal debtor, on the security of two
properties of equal \alue belonging to C. The transaction as
finally carried out was the lending by B of a sum of Rs. 50,000
to C on the security of one of the properties. To what extent,
if any, is .\ liable to B for failure by C to discharge his liability
to B?
(h) .\ and B arc two sureties for the liability of C. A agrees to be
liable to the extent of Rs. 5,000 and B to the extent of Rs. 10,000.
Tliey are called upon to pay C's indebtedness of Rs. 10,000.
What is the liability of A and B?
(i) A debt is barred against the debtor but not against the surety.
Is the surety discharged?
(j) C advances to B, his tenant, Rs. 2,000 on the guarantee of A.
C has also a further security for the Rs. 2,000 by a mortgage
on B's furniture. C cancels the mortgage. B becomes insolvent.
Has C any claim against A?
(k) C and D go into a shop. C says to the shopkeeper, "Let him
(D) have the goods, and if he does not pay you, I will." What
kind of contract is this? Would it make any difference in your
answer, if C had said to the shopkeeper. "Let him (D) have the
goods, I will see you paid?"
(1) A firm of brewers employed C and required him to-execute a
ijond with sureties for the faithful discharge of his duties. The
bond was drawn up with four sureties, N and E being liable to
the extent o[ Rs. 500 each, and P and B to the extent of Rs. 250
each. P, B and E all signed, but N who was the last to sign,
added, "Rs. 250 only" to his signature. The brewers accepted
the bond so signed. Di.scuss the liability of the sureties.
 854 MERCANTILE LAW
(m) A advances to B, a minor, Rs. 500 on the guarantee of C. On
a demand for repayment, B pleads minority. Can A reco\'cr ihc
amount from C?
(n) P, a hlin producer, borrowed Rs. 50,000 from R. K. Bank on a
pro-note which was countersigned by M and N as bureiies.
What will be the contribution of the sureties if P fails when:
(i) each of them agrees to contribute for half of the loan subject
to a maximum of Rs. 37,500; and (ii) M agrees to pay half sub-
ject to a maximum of Rs. 37,500 and C agrees to pay half sub-
ject to a maximum of Rs. 25,000?
(o) A, as surety for B, makes a bond jointly with B to C to secure
a loan from C to 1^. Afterwards, C obtains from B a fmther
security for the same debt. Subsequently, C gives up the fur-
ther securities. Is A discharged?
(p) A contracted to buy from B 100 bales of cotton at Rs. 500 per
bale for the June, 19C1, delivery. The performance of this con-
tract iiy B was guaranteed by C. Soon after, A contracted to
sell to B 100 bales of cotton of the same kind at Rs. 600 per
bale, for the same delivery. Is C discharged from his guarantee?
(cj) B appointed A as his agent to collect his rents and required
him to execute a fidelity bond in' which C was surety. Some
time after the execution of the bond, C died and A committed
various acts of dishonesty. Is C's estate liable for the loss caused
to B?
(r) A guarantees C against the misconduct of B in an office to
which B is appointed by C and of which the duties are defined
by an Act of the Legislature. By a subseciuent legislation the
nature of the -office is materially altered. Afterwards B miscon-
ducts himself in respect of a duty not affected by the later Icgis-.
lation. Is A liable as a surety?
(s) A guaraiuees- to B to the extent of Rs. 10,000 that C sfiall pay
all the bills that B shall draw upon him. B draws upon C. C ^
accepts ilie liill. A gives notice of revocation. C dishonours the
bill at maturity. Is A liable on liis guarantee?
(t) .\ as surety for B makes a bond jointly witii B to C to secure a
loan from C to B. Aftei wards C oinains from B a further
security for the same debt. Subsequently C gives up the fiii-
ihcr security. Is A discharged?
H. Aiiemjn the following problems, giving reasons for >oin
answer:—
(a) A gives a guarantee to C for goods to be supplied by C; to B.
C supplies the goods to B ui due course. Afterwards B licconics
financially embarrassed and contracts with all his creditois lo
assign to them all his property in consideration of thcii icleasing
him from their demands. T h e sale proceeds of the ptopeiiy
are just sufficient to pay 80 paise in ilie rupee. C sues .\ lor
the balance. Decide.
(b) A agreed to stand surety for an o\erdraft allowed by the T.
Bank to S. The Bank lequired a guarantee in the form which
was handed over to S. S got it filled by A for a sum of
Rs. 25,000. The Bank declined to accept this letter of guarantee.
S took back the letter and after some time brought it back with
the figures so changgd as to read Rs. 20,000. T h e Bank accepted
TEST QUESTIONS 855
no prior oral agreement beiween A and the Bank; and the
letter of guarantee was given by A after a loan of Rs. 20,000
had already been made. On the failure of S to repay the loan,
the Bank sued A upon the letter of guarantee. A pleaded dis-
charge from liability on the ground of a material alteration of
the instrument. Give'your decision.
(c) The defendants made a written offer to the plaintiff that if he
would discount billb for another firm they would guarantee the
payment of such bills to the extent of Rs. 6,000 during the
period of 12 months. Some bills were discounted by the plain-
tiff and duly paid, but before the 12 months had expired the
defendants, the guarantors, revoked their offer and notified
that they would guarantee no more bills. The plaintiff con-
tinued to discount the bills, some of which were not paid by
the defendants. Upon this the i^laintiff sued the defendants
on the guarantee. Are diey liable?
(d) A guaranteed Z against trade debts to be contracted by M 'as
• a running balance of account to any amount not exceeding
£400'. M became indebted to X for £625 and made a compo-
sition with all his creditors, including Z, for 8s. 4d. in the
pound, leaving a balance of about £365 due to Z. Z brings
action- against A, claiming this amount under the guarantee.
Decide.
CHAPTER IV
Bailments
1. Define a "bailment' and briefly state the rights and responsibilities
of bailor and bailee. What is a bailee's lien?
2. Define 'pledge', and state the respeftive rights and duties of
pledgor and pledgee.
3. Explain the legal positions and rights of a finder of goods and
thoje of a j^awnee when tlie pawnor makes default in re-payment of ilie
loan.
4. (a) To what extent is a bailee responsible for loss arising from
defective title?
(b) State the rights of bailor and bailee against third parties.
5. Attempt tlie following problems, giving reasons for your answers:
(a) A hires a carriage of B, The carriage is unsafe although B is
not ai/are of it, and A is injured. Is B responsible to A for
the injury?
(b) A is going on a holiday for a fortnight from August 1. On
July 1, A arranges with B his neighbour that B shall take care
of his dog. When A on August 1 takes the dog to B's house,
(i) B refuses to have it; (ii) B receives the dog, but it is lost
on August 5th. Discuss any rights A maj' liave against B in
these two cases.
(c) If a person sells tlie shares pledged to him without previously
giving notice to the pledgor, does the buyer get any tide?
(d) N ga\e his car to J S: (^o. luuoniobile engineers, for, overhaul-
ius^, spriiy painting and changing the u))holblery. As ilie job
was done bfloie sdicdulc, P, u mechanic in tl\e workshop, took
out t!ie car to a nearl)y liill station for uvo <i.i)s, contending
tliat It was foi a test. Later on, N came to know of this and
856 MERCANTILE LAW
filed a suit for damages. Discuss the rights of the parties.
(e) A lends a horse to B for his own riding only. A allows C, a
member of his family, to ride the horse. C rides with care but
tlie horse is injured. Is B liable for the injury?
(f) A* de230sit» a tin of pure ghee with B, and B mixes it with
vegetable ghee. State the rights and liabilities of A and B.
(g) A asked B, who was skilled in horses, to ride his horse in order
to show off for sale. B rode it unskilfully and injured it. Js
B liable for thcv injury? *
(h) A delivered books to B to be bound. He pressed for their
return but B, although more, than a reasonable time had elaps-
ed, neglected to return them. A fire accidentally broke out in
B's premises and the books were burnt, though B was not neg-
ligent. Is B liable for the loss?
(i) A entered a restaurant to dine. His coat was taken by a
waiter and hung on a hook behind A. While A was dining
the coat was stolen. Is the restaurant proprietor liable for the
loss?
(j) D contracted to warehouse some goods (or L at Ocig'tnal Road,
but warelioused a portion elsewhere. A fire occurred there
without any negligence on D's part, and the goods were des-
troyed. Is D liable?
(k) A gives silk to B, a tailor, to make into a coat. B promises A
to deliver the coat as soon as it is made and to give A tliree
months' credit for the charges. Is B entitled to retain the co.Tt
until the charges are paid?
(1) .An elephant is entrusted to a railway company for carriage.
It escapes during the course of the journey and is killed. Is
the railway liable to make good the loss?
(m) Some cattle belonging to A were agisted with B. Without any
negligence on B's part the cattle were stolen. B did not in-
form tlie owner or the police immediately, or make any efforts
to recover them because he thought that it would be useless to
do so. Is B liable lo A for tlie loss?
(n) A guest, arriving late for dinner at an hotel, saw a number of
ladies' coats left in an ante-room which was previously used as
a supervised cloak-room. At that time, however, there was no
attendant in the room. Nevertheless, she left her mink coat
with the other coats. Whilst slie was dining, the coat was
stolen. Are the hotel-owners liable for the loss?
(o) A car owner had an arrangement with a garage owner that,
unless jie indicated otherwise, the car would be parked in tlie
garage when he was not using it. On one occasion he drove
his car to the garage and asked the attendant to fill petrol be-
fore parking it. T h e car remained outside for about two hours
before parking. When it was brought to the owner for ,use a
valuable camera, which had been left in the back seat without
intimation to the garage attendant, was found to be missing.
The car owner sued for the price of the camera and damages
for the loss of its use. Decide,
(p) B handed her jewels to M to value and tell her what ad\ance
he could- make on them, it being agreed that M was to retain
 TEST QUESTIONS 857

same day, M pledged tl\e jewels with A, a pawnbroker, who

ad\'anced £1,000 in good faitli. Two days later M agreed to
lend B £500 on the security of the jewels. Subsequently on
coming to know of the transaction between M and A, B sued
M for the reco\ery of her jewels contending that no pledge
was created between her and M owing to his ftaud. How
would you decide the case?
CHAPTER V
Agency
1. Define Agent and Principal. How is an agent appointed? Can
a minor (i) appoint an agent, (ii) be appointed an agent?
2. What is (i) an express agency, (ii) an agency by estoppel or hold-
ing out?
3. What is the effect of agency on contracts with third parties?
-/ When is a principal bound by the unauthorised act of his agent?
4. Describe the different kinds of agents. What is meant by agency
by ratification? State the conditions that must be fulfilled before that
doctrine can apply to an act of an agent.
5. Explain the term 'general agent'. What is the liability of a prin-
cipal who employs a general agent, and how does it differ from that of
the principal wiio employs a special agent? Give examples. State the
functions of (i) broker, (ii) factor, (iii) del credere agent.
6. If an agent acts for (a) a disclosed principal, (b) an undisclosed
princijxil, (c) a concealed principal, state clearly die respective rights of
the agent, the principals, and the tliird parties.
7. 'The effect of a contract made by an agent varies according to
the circumstances under which the -agent contracted.' Discuss.
8. In what circumstances can an agent appoint a sub-agent? Is the
principal liable for the acts of the sub-agent?
9. When is an agent personally bound by contracts entered into by
him on behalf of the principal?
10. When may an agent sue or be sued personally on contracts en-
tered into by him on behalf of his principal?
11. Discuss the rights and duties of an agent. How may a contract
of agency be terminated? When is it irrevocable?
12. When is an agency coupled witli interest?
13. 'Ratification is tantamount to prior authority.' Explain, point-
ing out the limitations to the principle.
14. 'The essential characteristic of an agent is that he is invested
with a legal power to alter his principal's legal relations with third par-
ties; the principal is under a correlative liability to have his legal rela-
t'ons altered.' Elucidate.
15. 'No one can become the agent of another person except by the
will of that jjerson.' Comment.
16. 'An apparent or ostensible agency is as effecti^'e as an agency
deliberately created. Appearance and reality are one. Amplify.
17. 'A principal has the power to re\oke the authority of the agent,
but he does not have the right to do so'. Examine the truth of this state-
ment.
18. Attempt the following problems, giving reasons for your ans%vcrs:
858 MERCANTILE LAW
(a) What is meant by 'warranty of autliority'? A endorsed a bill
of exchange as agent for his friend B. A knew he was not B's/
agent, but intended to do him a service. Has A any liability
for his action and if so, on wliat groimd?
(b) A appoints B as his agent, and B appoints C as a sub-agent.
State the rights and liabilities o£ A, B and C respectively.
(c) B tells C in the presence and within tlie hearing of A that he
(B) is A's agent in A's business and A does not contradict the
statement. Subsecjuently C enters into a transaction with B
bona fide believing that B is ,-Vs agent. \ the principal liable
under that contract even wlien in fact B is not A's agent?
(d) A enters into a contract with B to sell him 100 bales of cotton
and afterwards discovers that B was acting as agent for C.
Who is liable to pay A the price of the cotton?
(e) M buys goods from N, knowing that he is an agent for their
•sale but not knowing who is the principal. Who can claim the,
price of the goods, 1^ or N's principal? If N's principal files,
u suit for the price can M claim to ,set off against that claim a
debt due to himself from N?
(f) C, a broker, was employed by A to buy cotton for him with
instructions not to disclose his name. C's credit was not good
enough to contract of his own responsibility and at plaintiff's
request he gave him the name of the principal. In the notes
, G was named as the buyer. C Was called on to pay but as he
was unable to do so, the plaintiff sued A. How will you de-
cide the suit?
(g) A makes an offer to sell a'rtiachine Which B accepts on behalf
of C. B had no authority, to accept the' offer, A then gives
notice to C withdrawing the offer. Subsequet^tly C ratifies B's
acceptance. Is A bound to sell the machine to C?
(h) A holds a lease from B, termina,ble at six months' notice. C,
an unauthorised person, gives notice of termination to A. Canj
the notice be ratified by 'B as to be binding on A?
(i) A, not being authorised thereto by B, demands on behalf of
B the delivery of a chattel, the property of B, from C, who is
in possession of it. C refuses to deliver. Can B ratify the de-
mand and render C liable for damages for non-delivery?
(j) A enieis into a contract with B for buying B's motor car as
agent' of C and without C's authority. B repudiates the con-
tiact before C comes to know of it. C subsequently ratifies tlie
contract and sues to enlorce it. How would you decide?
(k) A, at Madras, by letter directs B lo sell for him some cotton
lying in a warehouse in Bombay, and afterwards, by letter, re-
vokes his authority to sell, and directs B to send the cotton to
Madras. B, after receiving the second letter, enters into a con-
tract with C, who knows of the first letter but not of the second,
for the sale to him of the cofton. C pays B the money with
which B absconds. Is C's payment good against A?
(1) A consigns goods to B for sale and gives him instructions not
to sell under a fixed price. C, being ignorant of B's instruc-
tions, enters into a contract with B for the purcha.se of the
goods at a price lower than the reserved price. Is A hound by
die contract?
T E S T QUESTIONS 859

(m) X entrusts Y with negotiable instruments endorsed in blank.

Y sells them to Z in violation of ilie instructions of X, Does
Z get good title?
(n) An agent contrary to the terms o£ his contract With his prin-
cipal failed to maintain proper accounts and examine the books
of his subordinates. Discuss the extent of liis liability to com-
pensate his principal.
{o) A was appointed as an agent by B to sell his property. Can B
thereafter sell the property by himself or through another
agent and is A entitled to commission? Would your answer be
any different it A were appointed sole agent?
(p) A autliorised by P to buy wheat at a certain price exceeded his
authority and bought at a higher p r i c e from D. A bought in'
his own name, but intended to buy for P. P agreed with A to
take the -wheat at the price, but failed' to take delivery. Is P
lialjle to D?
(q) N gave his wife authority to buy goods fiom D. N became in-
sane, but the wife continued to buy from D, who did not know
of N's insanity. Is N liable to D?
(r) At a sale by auction without reserve the auctioneer is instructed
not to sell for less than a certain price. The auctioneer ac-
cepts (he highest bona fide bid which, however,lis lower than
that price. Is the auctioneer liable to the prmcipal for his
action?
(b) A owes B Rs. 5,000. He sells rice worth Rs. 10,000 to B. C
gives a notice to B tiiat A was merely acting as an agent of C
in that transaction and demands payment from B. Discuss the
legal position of A, B and C.
(I) B, a broker, was employed by A as an agent to buy cotton. A
had instructed B not to disclose his name in the transaction.
Since B's credit was not good, he informed C, from whom he
agiced to buy the cotton, that he was acting as the agent of A.
The contract, however, was made in the name of B. Whom
can C hold liable on the contract?
(u) P instructed A, a solicitor, to defend an action on his belialf,
but became insane after tlie action was begun. In ignorance
of P's insanity, A entered an appearance, delivcied a defence
and took other steps in connection with the litigation. When
the plaintiff learned of P's condition, he got the proceedings
struck out and then sued to recover his costs from A. Is A
liable?
(\)-A consigns goods to B, a merchant, for .sale. B, in due coiiisc,
employs an auctioneer in good cicdit to sell the goods of A and
allows the auctioneer to recei\e tiic piocccds of the sale. The
auctioneer becomes insolvent without lia\iiig accounted for the
proceeds. A seeks to hold B responsible for the proceeds. Can
he do so?
(w) A directs B, his agent, to pay a certain sum to C. A dies and
D lakes out probate to his will. After A's death but before
hearing of it, B pays the money lo C. Is tlie payment good
against D?
(x) A. at the request of a party, B, purchased and sent certain
goods to C. C apjiropriatcd the goods for himself and wrote
 860 MERCANTILE LAW
to A that he would pay him the price in a few days. B was
declared insolvent. A sued C for the price o£ tlie goods. Is C-
liable to pay A?
(y) A entered into a contract witii B for the sale of a pair of horses
to him subject to the condition that X, B's agent, should certify
that the horses were sound. A secretly offered X a certain sum
(if the sale would be completed) by way of bribe. X, having
accepted the offer of A, certified that the horses were sound.
On coming to know of X's duplicity, B refused to affirm the
contract. Is A entitled to enforce the contract -against B?
(ic) S, an organi/er of fairs and exhibitions and proprietor of a
business registered under the name of 'Antique and Fine Arts
Fair', invited various persons to serve on an advisory 'Executive
Committee'. The letterheads contained the names of the mem-
beis of the 'Executive Committee' and that of S as the 'organi-
zer'. S ordered goods worth Rs. 1,000 by letter and signed,
himself as organizer. The suppliers, being unable to recover
the money, sued the members of the 'Executive Committee'.
Are tiie latter liable?
CHAPTER VI
Partnership
1. Define a partnership and distinguish it from (i) a joint Hindu
family firm, (ii) co-ownership, (iii) joint stock company.
2. How far is it true to say that the law of partnership is an extension
of tile law relating to principal and agent? Explain the doctrine of
'holding out' in relerence to the relation of partners to third parties.
3. (a) How would you determine whether a group of persons does or
does not constitute a partnership? Discuss fully.
(b) The sharing of profits is only a prima facie evidence of partner-
ship. Comment.
4. Explain the position of a partner in regard to (a) liabilities exist-
ing (i) piior to the time of his joining the firm, (ii) at the time of iiis
retirement; and (b) liabilities incurred by the firm after his retirement.
5. (a) Explain the position and riglus of a minor under the law of
partnership.
()}) What is the effect of non-registration of a firm?
(c) 'The Indian Partnership Act has effectively ensured the registra-
tion of firms without making it compulsory'. Explain.
6. What is an Act of the Firm? What is the extent of the liability
ol a partner for the acts of the firm?
7. (a) Discuss fully the mutual rights and duties as between partners
in a firm.
(b) Explain clearly the nature and extent of the authority of a partner
'in a firm.
b. (a) Examine the relations of partners to third parties. Can a firm
be liable for the wrongful act 6l a partner?
(b) Explain the legal position of the transferee of a partner's share.
9. "Every man who has the share of the profits of a trade ought also
to bear the loss." Examine the statement, mentioning how far it affords
a.satisfactory test of partnership liability.
10. What is meant by an 'implied authority' of a partner? Indicate
T E S T QUESTIONS 861
the cases in which a partner has no implied authority to bind the firm.
Does a partner's authority in emergency differ in any way from iiis im-
plied authority? Explain.
11. How and in what circumstances is (i) a partnership dissolved au-
tomatically, (ii) a trading firm dissolved compulsorily by the' court?
12. (a) What aie the rights and obligations of partners after dissolu-
tion of partnership?
(b) How are accounts settled between partners after dissolution?
IS. (a) What is the consequence if public notice is not given in cases
in which it is required to be given under the Partnership Act?
(b) Can a partner be expelled from a fitm? What are the consequences
of the dissolution of a firm so far as its creditors are concerned?
14. (a) What is 'Partnership Property', and how far is it liable for a
partner's separate debt?
(b) What do you understand by 'Goodwill' of a business? What be-
comes of the goodwill on dissolution of the partnership?
15. Attempt the following problems, giving reasons for your answers:
(a) A and B, who are partners, borrowed money from C. Eventually
C sued them on the loan and obtained a decree which was not
satisfied. Subsequently, C discovered that D was a partner with
A and B at the date of the loan. Discuss the rights of the
parties. Would it make any difference if D were dead and his
estate being administered at the time?
(b) X is the sole owner of a firm. He admits Y as a partner on the
following terms: (1) Y is not to bring any capital; (2) Y is not
to be responsible for any loss; (3) Y is to receive Rs. 200 p.m.
in lieu of profits; (4) Y is to have all the powers of a partner.
Discuss the legal position of Y.
(c) B and C jointly promise, for a valuable consideration, to pay A
Rs. 10,000. A files a suit against B and obtains a decree for the
• amount. Before the decree is drawn up, B becomes an insolvent
and A is unable to recover the amount of the decree or any part
thereof. He files a suit against D. Will be succeed?
(d) A, B and C are partners in a firm doing business of carrying
goods in motor trucks. One of the drivers of a truck while
driving at a high speed on a highway knocks down a person who
dies on the spot. Are A, B and C liable in damages to the
legal representatives of the deceased?
(e) Three Jbus companies, each having ten partners, combine by
agreement into one firm. Can contracts entered into by the new
firm be enforced by or against the firm?
(f) A, B and C carry on a partnership business as druggists. \
orders on credit two cases of Kulu apples to be delivered to his
married daughter. The order is sent on the firm's note paper
and in firm's name. Is the firm liable to pay for the apples?
(g) A and B form a trading partnership for ten years. After two
years A is convicted of travelling on the railway without a
ticket with intent to defraud. Will the Court dissolve the firm
on the application of B before tlie expiry of the term?
(h) A, B and C carry on partnership as bankers. A receives
Rs. 2,000 from D on behalf of the partnership firm for the pur-
pose o£ investing it in good securities yielding interest at 9 per
8^2 MERCANTILE LAW

cent pel annum. A does not inform B and C and appropriates

tlie amoimt to )ii.s own use. Is tlie firm liable to D for the
money? Would it make any difference to your answer if the
partftersfiip firm were a fitm of attorneys?
(i) A, B, C and D are partners in a firm which has not been register-
ed. A is wrongfully expelled from the firm by the other part-
ners. Can he successfully bring a suit against the other part-
ners for damages for wrongful expulsion and declaration that
he continues to be a member of the firm? ^Vhat lemedics, it
any, are open to A?
(j) A, B and C cairied on partnership business under an assumed
name (X & Co.). A retired and D, a new partner, joined tlie
firm, wliicli carried on business .in its old name 'X k Co.'. A
creditor hied a suit against A, B, C and D. Will he succeed?
(k) A firm of diapers dissolved paitneiship and sold the goodwill
of their business to X, Y and Z, who now cany on the same
business at the same address. Subsetpiently the old partneis A,
B and C again entered into partnership as drapeis and set up
business under a new name next door to X, Y and Z, with the
result tbnt many ot the old customen extended their cmtom to
them. Advise X, Y and Z.
(1) A and B are partners. X sues A on a contract of the film and
recovers judgment against him, but the judgment is unsatisfied
owing to A's lack of means. Can X sue B for the balance?
(m) A and B are partners. X sues A on a wrong for which the firm
is responsible and recovers judgment which is unsatisfied. Can
X sue B for the unsatisfied balance of his claim?
(n) B carried on business as M. W. gc Co., and employed M. W.
as the manager of the business. 'What is M. W.'s position in
the business?
(o) M was a partner in a firm. The firm ordeied goods in M's life-
time, but delivery was not made until after jVf's death. Is M's
estate liable?
(p) One of two partners mortgaged his share in the partnership to
X. Afterwards, without the mortgagee's consent, the partners
agreed to a dissolution on Che terms tliac the partner who had
mortgaged should sell his share to his co-partner for a sum less
than the mortgage debt. Is this agreement binding on X?
(q) A "is a partner witli other persons jn a bank. A dies and the
survivors continue the business in the firm's name. Afterwards
the firm becomes insolvent. Discuss the liabiljty of A's estate
to the customers of the bank.
(r) A, B and C are partners. C is a sleeping partner. C retires.
Is C liable for the subsequent debts incurred by A and B?
(s) A and 'E^ trade as partners, and it is agreed that profits should
be shared and losses borne equally. On dissolution it is found
that A has advanced more capital than B to the extent of
£ 1,900. The net assets are only £ 1,400. How much should B
pay to A on account of the deficiency of the capital?
(t) A and B are partners. A applies for-insolvency and then in-
dorses in the name of tlie.firm a bill belonging to the partner-
ship. -Thereafter A is adjudged an insolvent. Does the in-
dorsee acquire a good title in the bill.
TEST QUESTIONS 863
(.u) A, B and C enter into a partnersliip to execute contract works.
A secures for tlie partnership work, estimated to cost one lakh
rupees. A obtain^ the said order only on payment of a sum
of Rs. 5,000 to a person in authority and debits the sum in the
account books as an item of expense. The other partners ob-
ject to the item. How would you decide?
•(v) P, Q and R were partners in a firm. By his wilful neglect and
misconduct R caused serious loss to the business of the firm.
After several warnings to R, P and Q passed a resolution ex-
pelling R from the firm. By another resolution they admitted
S as a partner in the place of R. R objects to his expulsion as
also .to the admission of S. Is he legally entitled to do so?
(v/) A, a partner in a firm of architects, borrowed Rs. 1,000 on be-
Iialf of the firm from B. B knew that A had no express au-
thority from his partners to borrow any money, but he accepted
the assurance of A that the money would oe applied for the
payment of a debt of the firm. The money borrowed from P
was, in fact, so applied. Can P successfully sue the partners of
A to recover the amount?
16. (a) 'The relation of partnership arises from contract and not from
status.' Comment.
(b) 'The general concept of partnership still is that a firm is not an
entity or person in law but is only an association of individuals.' Explain,
stating wlietiier a firm as such can enter into an agreement with another
firm.
(c) 'The relation of partnership arises only out of an express agree-
ment.' Do you agree? Why?
17. (a) 'A third person must take heed of certain limitations and res-
trictions on the authority of a partner.' What is meant by tliis statement?
(b) 'Dissolution involves a change' in. the relation of the partners, but
it does not end partnership.' What is meant by this statement?
18. Attempt the following problems, giving reasons for your
answers:—
(a) A and B were partners in an unregistered firm'carrying on the
business of sugar manufacturing. C was advanced Rs. 1,000 by
the firm in lieu of his promise to supply sugar-cane. There
was short supply of sugar-cane and Rs. 700 were due from C
to the partnership firm. T h e partnership was afterwards dis-
solved and in a division of the assets of partnership, this debt
of Rs. 700 was allotted to A. Can A sue C to recover the
amount?
(b) J and W are in partnership as solicitors.- P pays £ 1,500 to both
of them to be invested on a mortgage of a specified real estate,
and they jointly acknowledge receipt of the amount for that pur-
pose. Aftenvards P hands over another £1,500 to W alone on
his representation that- it will' be invested on a mortgage of
some real estate of F, another client of the firm, such estate not
being specifically described. J dies and. afterwards both those
sums are fraudulently applied to his own use by W. W also
.dies, having paid interest to P on botli the sums till within a
short time before his death. W's estate' is declared bankrupt.
Is J's estate liable to make good to P the loss sustained by him
on account of W's' fraud?
864 MERCANTILE LAW

(c) A, B and C are partners in the manufacture of machinery. A

is- entitled, according to the terms of the partnership contractjl
to three-eighths of the partnership property and proiiti. A be-
comes insolvent, but B and C continue the business, under the
same name without paying out A's share of the assets of the
firm for settling accounts with A's estate. Is A's estate entitled
to any of the profits made in the business by the firm aftei tiie
date of A's insolvency? If so, till which date? Discuss.
(d) A, B and C, who are partners in a firm, bind themselves to D
by a contract, to purchase ships for a period of five years. After
a short time C retires from the firm and takes a coi'enant of
indemnity from A a n d B, who carry on the business of the firm.
D is informed of C's retirement. After C's retirement, A and
B commit breaches of contract for which heavy damages are
awarded at the suit of D. Is C liable in respect of such damages?
AVould it make any difference if D allows additional time for
perlormance to A and B and recovers damages thereafter?
(e) M and A were carrying on the business of commission agents
as partners. C was admitted to the benefits of the partnership
in 1946. The firm became indebted to S and was dissolved in
April, 1951. C became a major subsequently and did not ex-
ercise the option not to become a partner of the firm. T h e firm
and the partners were unable to pay the dues to S, whereupon
S applied for the adjudication of all the three as insolvents on
ground of their inability to pay their debts. C pleaded minority.
Advise him.

CHAPTER VII
Sale of goods
1. Define the term 'Sale of Goods'. What is the practical importance
of knowing the exact moment when the property in goods passes from a
seller to a buyer? State and illustrate the rules which determine such,
moment.
2. (a) 'The contract of sale is consensual, bilateral and commulative'.
Elucidate.
(b) Distinguish between 'sale' and 'agreement to sell'. Give examples.
3. What is meant by 'ascertained' and 'unascertained' goods? In a
contract for the sale of goods, state when tlie property in goods, sold
passes from the seller to the buyer.
4. What is the difiierence between a condition and a warranty as
these terms are used in the Sale of Goods Act? What is meant by an im- .
plied condition? What is the rule of caveat emptor, and how far is it
modified by implied conditions?
5. (a) If a person sells an article, he thereby warrants that it is fit
for some purpose, but he does not warrant that it is fit for ariy particular
purpose. State the various qualifications subject to which this proposition
should be received. /
(b) Worsted cloth of quality equal to sample was sold to i tailors wlioT
could not stitch it into coats owing to some defect in its texture. The
buyers had examined the cloth before effecting the purchase. Are they
entitled to damages?
6. Wliere goods are delivered to the buyer on approval or on sale or
TEST QUESTIONS 865
return basis, when does property therein pass to the buyer? Give ex-
amples.
7. Explain and illustrate the implied conditions and warranties in a
sale, and state liie consequences of a breach in each case.
8. State briefly the law which governs the sale o^f goods by auction.
. 9. \\'hen may a seller give a better title to the buyer than he himself
has in ilicgpods sold? 'What is the rule of the Market Ov^it? Does it
apply ill India?
10. When is a seller of goods deemed to be "unpaid seller"? What are
his rights against (i) the goods, (ii) the buyer personally?
11. When is a buyer deemed to have accepted the goods? What is a
(i) F.0.15. contiact, (ii; C.l.F. contract? Is it correct to say that a C.I.F.
contract is only a sale of documents?
12. What is meant by caveat emptor? Explain and illustrate .the ex-
ceptions to this rule.
13. Distinguish between a seller's lien and stoppage in transit. When
can he rc-scU the goods?
M. Explain the general rule that no one; can give a better title than
he himself possesses. Discuss and illustrate-the exceptions to this rule.
1J. When is a seller entitled to sue the buyer for the price of the
.^oodi? Can such a suit be brought before the property in the goods passes
10 the bujer?
1(). State the exceptions, if any, to the rule that there is no implied
condiiiou as to the quality or fitness for any particular purpose of goods
implied under a contract of sale.
17. Attempt the following problems, giving reasons for your answers:
(a) Sellers "in London drew on buyers in Bombay a bill for the price
of goods. While the goods were in transit, the buyer became
insolvent, whereupon C, the holder for value of the bill, pur-
poiting to act on behalf of the sellers, instructed th.2 carrier to
withhold delivery on the arrival of the goods in Bombay. • The
Official Assignee made a demand for their delivery which the
carrier did not comply with. Subsequently, the sellers ratified
C's act of stopping the goods in transit. Who is entitled tc
obtain delivery, the sellers or the Official Assignee?
(b) A of Agra ordered certain specified goods from B of Bombz
B sends some goods, not .ordered, along with them. What shou
A do?
(c) A contracts to sell to B a piece of silk. B thinks that it is Indi,
silk. A knows that B thinks so, but knows that it is not Indi.
silk. A does not correct B's impression. B afterwards discovt
that it is not Indian silk. Can he repudiate the contract?
(d) A sells a horse to B. When B goes with the horse he is arres
by the police on the charge of keeping stolen property as 1
horse belongs to C. Can B sue A, if so on what basis, ai
what damages can he recover?
(e) A sells a horse to B. The horse will be delivered to B nex
week and B will pay the price on delivery. A instructs the ser-
vant to keep the borse separate from the other horses. The
horse dies before it is delivered and before the price is paid.
Who shall sufier the loa?
866 MERCANTILE LAW
(f) B on January 1, offers to A for a quantity o£ rice Rs. 200 (o be
paid on Marcli 1, the rice not to be taken away till paid for./
A accepts the offer. On February 28, the rice is destroyed in ii
fire. Who is to bear the' loss?
(g) M holds very large stocks o£ rubber [or which he can only get
lOd. per lb. He wishes to create an appearance of scarcity, so
before going for a week's holiday he tells the manager X no't to
sell more than 500 lbs. to any one customer, and he expresses
the hope diat on his return rubber will be up to one shilling
per lb. Five days later N offers X one shilling per' lb., if he may
nave ten tons of rubber. A accepts the offer. On M's return,
rubber is up to 14d. per lb., and he refuses to deliver the ten
tons jto N. • What are N's rights?
(h) In ^ n u a r y 1961 C contracts to'sell to D all the mangoes in C's
garden diuring the 1961 season (1st April to 30th June), for a
sum of Rs. 5,000. Discuss whedier the contract is a sale or an
agreement to sell.
(i) P contracts with B to sell to him Java sugar as per sample shown
by P toj B. P thereafter delivers the agreed quantity of sugar
to B which corresponds to die sample, but is not Java sugar:
What are the rights of B, if any?
(j) B employs C, a mercantile agent, to buy hernp. After the pur-
chase, at B's request, the hemp is left in C's warehouse. C, act-
ing without any instructions or authority from B, sells the hemp
to D. What are the rights of D?
(k) A sells and consigns goods to B of the value of Rs. 12,000. B
assigns the R / R of tlie goods to C to secuie a specific advance
of Rs. 5,000 made to him upon the R / R by C. B becomes in-
solvent, being indebted to C to the amount of Rs. 9,000. Can
A stop the goods in transit?
(1) M sells and consigns certain goods to N. M being still unpaid,
M beconles insolvent. While the goods are in transit N assigns
the bill of lading for cash to S who knoWs that N is inso.lvent.'^
Can M stop die goods in transit?
(m) A sends B a gas meter on approval or return in March, 1960. B
returns the gas meter after a trial, in December, 1960. Can A
sue B for the price? i.
(n) Vulcanised rubber material was agreed to be sold in rolls 40
feet long under the description of LINATEX and with a small
soft piece as sample. Following a request from die buyers, the
seller sent ten rolls directly to a customer of die buyers to whom
it had been re-sold by description and die same sainple. The
customer rejected the -goods on the ground that the rolls were
crinkly, hard and folded. • The seller sued die buyers for the
price. The. Court found that simple process of heating and
pressing would correct die defects. Was the customer justified
in rejecting die goods? Can the buyers avoid payment alto-
gether or must they be content with a reduction in the price?
(o) On a bargain for die purchase of a horse, the horse was de-
livered to the buyer upon trial for eight days, the agreed price
being Rs. 500. If found suitable for the intending buyer's pur-
pose the bargain was then to be absolute. The horse died widi-
in eight days. Who should bear die loss?
TEST QUESTIONS 867
(p) B orders 140 bags ol rice £rom A, pays for them and asks for
delivery. A sends him a dcli\eiy order for 125 bags, and asks
him to send for the remaining 15 bags at A's place of business.
B waiib for a monili before sending for them, and in the mean-
time they are stolen. Who should bear the loss?
(([) A cargo of corn, loaded on a vessel not yet arrived, was sold
on 15th May, 1961. It was altcrvvaids discovered that the corn
having become heated had jjeen discharged by the master of the
ship at an intermediate port and sold off on the 27th April,
1961. The purchaser claimetl damages fronj the seller for non-
perfoimance of the contract. How would you defend the suit?
(r) A purchased tinned salmon from B, a grocer and .provision mer-
chant. The salmon was poisonous and A and his wife who ate
it fell ill. While A recovered from his illness, his wife died
from the effects of tlie poison. A claimed damages against B
l)oth ioi his illness and for the death of his wife, which deprived
him of the services rendered by her. How will you decide?
(s) A bids Rs. 500 for a costly flower vase at an auction sale. The
auctioneer purjJorts to accept the bid by striking his hammer,
but accicleutally suik.es the VA&e vjludv is. broken to pieces. Who
is to bear the loss?
(t) X in Delhi writes to Y in Madias to send to X a packet of a
patent medicine by parcel-post. Y accordingly sends the packet
by parcel post duly addressed to X. The parcel is lost on the
way. Can Y lecover its price from X?
(u) A deliveis goods to B on terms of "sale for cash only or re-
tm-n". B pawns the goods with C. Advise A.
(v) G sold his Dodge car to S ^for Rs. 22,000 which he had mortgag-
ed to A for Rs. 10,000 before the sale. After the sale was com-
pleted, the mortgagee got the car attached by order of the
Couit. What should S do?
(w) '^Vhich of the following is a 'contract of sale of goods, and why?
(i) S, an artist, undertakes to paint a life-size picture of Lady
Bugg on a canvas supplied by the latter with the latter's
brush and paints for Rs. 500;
(ii) R, a tailor,, contracts with N to make a dressing gown for
Rs. 500 with all materials supplied by the tailor;
(iii) M, a songstress, enters into a contract with the Station Direc-
tor, A.I.R., Delhi, to give a concert programme, supported
by accompaniments provided by her for Rs. 200.
(x) H, an adept of Zerda (chewing tobacco), purchased a packet of
Zerda from a perfumer. After using the first dose, she vomit-
ed the entiire food consumed by her, the reason which was sub-
sequently found out being that the Zerda was unhygienic. She
filed a suit against A for Rs. 1,000 being made up as follows:
Doctor's bill Rs. 12 and inconvenience and annoyance Rs. 988.
Decide the case.
(y) A offers to buy B's dog for Rs. 200. B accepts the offer but
before B could deliver the dog according to the agreement, the
dog dies. Who is to bear the loss?
(z) H entered into a hire-purchase agreement with B in relation to
a piano on tlie condition that on paying twelve instalments of
868 MERCANTILE LAW
Rs. 100 each the piano should be his property. After paying
ten instalments, B pawned the piano %vith M, ivl^o took it in good
^aith. H claims the piano. Will he succeed?
18. Decide the following, giving reasons in each case:— ,
(a) A manufacturer of mineral waters sold F.O.B. in England a l^rge
quantity of, 'Webb's Indian Tonic', among the ingredients of
whicli was a certain percentage of salicylic acid, a fact of which
the buyer was ignorant. The seller was aware that the purchase
was for tlie purpose of shipment to Argentine, where, however,
by a law of the country, the sale of any article' of food contain-
ing salicylic acid was prohibited, a circumstance unknown to him.
On the arri\'ai of the goods in Argentine the authorities, find-
ing that they contained salicylic acid, condemned them as unfit
for human consumption. Can the buyer recover damages \pn
the ground that the goods were unmerchantable? Discuss.
(b) j\I asked for a bottle of Stone's Ginger Wine at F's shop, which
was licensed for tiie sale of wine. While M was drawing the
cork, the bottle broke and M was injured. Can M claim
damages for the injury?
(c) Manufactured iron was .sent by canal, at the request of the
buyer; it arrived in a rusty condition. Is the. buyer bound to
accept?
(d) The goods, without the knowledge of the buyer and of the
seller, were labelled in such a way that they could not, in their
then condition, be re-sold without infringing the trade-imark of
a diird party. Can the buyer reject the goods?
(e) Soda water was'supplied by S to B in bottles. B was injured
by die bursting of one of the bottles. Can he claim damages
! from S?
(f) A purchased a hay stack from B, to be paid for on 4th Febru-
ary, they have to stand on B's land till 1st May, and not to be cut
till paid for. The hay was burnt. Who should bear the loss?
(g) Jewellery was sent by A to B 'on sale or return'. B pledged
the jewellery with C. Discuss .the rights and liabilities of the
parties.
(h) A sold a quantity of seed to B who paid by cheque, which
was dishonoured upon presentment. A ga a delivery order to
B for the goods and B re-sold to C, indorsing the delivery
order to him. A refuses to deliver the goods' to C on the plea
of the non-receipt of price. Advise C.
(i) A sells B 80 mds. of grain out ol a large quantity lying in his
. granary. B sells 60 mds. out of those, the goods not yet be-
ing ascertained, to C. Then C having a- delivery order from
B forwards it to A, who informs C that he will send the grain
in due' course. B then becomes insolvent. Can A refuse to
- deliver the 60 mds. of grain to C?
(j) F of Liverpool sells to K a, quantity of salt, which is shipped
on board a' vessel bound for Calcutta. K accepts a draft
drawn against, that cargo. The bills of lading signed by the
owner of the ship are, handed over to K, who endorses them to
- his factor to enable the factor to take possession of the goods
and re-sell them. K tliereafter becomes insolvent before the
TEST QUESTIONS 869

completion of the voyage. Can F exercise the right of stoppage

as against tlie factor?
(k) A placed an order with B & Co., requesting them to send the
goods by sea. B & Co. took a bill of lading in the name of A
and sent it to their own agent. The goods were, h6we\-er,
destroyed in the course of the voyage. Examine the position of
the buyer and the seller.
(I) A delivers a gold necklace to B on "sale <5r return" basis. It is
agreed between A and B that property is not to pass to B till
he has paid the full price of die necklace. Without paying the
price B pledges the necklace with K. Does C get a good pledge?
(m) A sold copper to B and sent him a bill of lading, indorsed in
blank, together with a draft for the price. B was insolvent and
did not accept the draft but handed the bill of lading to C .in
fulfilraent of a contract for the sale of copper to him. C paid
for the copper and took the bill of lading without notice'bf A's
right as unpaid seller. A. stopped the copper in transitu. Ex-
amine tire rights of A and C.
(n) A seller agrees to supply to the buyer timber X' thickness for
being made into cement barrels. The timber actually supplied
varies in thickness from -'' to 5 . The timber is merchantable
and commercially fit for the purpose for which it was ordered.
The buyer rejects the timber. Is his action justified?
(o) A possessed a car which he knew to be stolen, t i e secured a
loan of Rs. 1,000 from B on the security of the car. Subsequent-
ly he sold the car to C for Rs. 3,000. After the purchase C paid
Rs. 1,800 to B in-full payment of tlie mortgagq on the car. The
veal owner claimed and recovered the car from ^C. C sued to
recover Rs. 3,000 and Rs. 1,800 froin A and B respectively.
Decide.
(p) The plaintiffs ordered goods from an English company and paid
for them in advance. The goods were to be sent f.o.b. destina-
tion Bombay. The English company packed the goods into
cases, mai-ked them ivith the buyer's name, registered tliem for
consignment and ordered shipping space in a named ship.
Before tiid goods were sent to Che port, a receiver was ap-
pointed by the debenture-holders of the English company and
he refused to deliver the g"oods. The plaintiffs claimed the
goods, alleging that property in the goods had passed to dtem.
Would you allow their claim?
(q) A, the seller, sent some goods to B, the buyer, by a truck own-
ed by a firm carrying on the business of carriers of goods. Be-
fore the goods arrived at the destination, B became insolvent. C,
purporting to act on behalf of A, sent a notice to the firm not,to
deliver the goods to B. In fact, C hnd no authority to do so.
B's recei\er formally demanded the goods from the carrier firm,
tendering the freight at the same time. The firm refused to
deli\er to them. Immediately after, the firm received a tele-
gram from A confirming the notice given by C. Discuss the
rights of A and B's receiver to the goods.
(r) A contract for the sale of certain skins provided, inter alia, that
the skins wore to be of -fair average caiality' of description, and
to be passed by the bu}ers as such. I'iie goods were" inspected.
870 MERCANTILE LAW
approved and accepted as such. Bm when they were put to
work, it was found that there were defects in the skins \\hich
were not revealed at the pievious examination in the diy stale:
Advise the buyeis as to their remedies, if any.
(s) A "contracted with 15 in November, I960, for the sale of goods
deliverable to B, one half in the last fortnight of Februaiy, 19()1,
the other half in the last fortnight of March, 19G1. B (jccame
insolvent in January, 1901. I h e goods were tendered on 28th
Febiuary, 1961, and 31st March, 1961, and not accepted. Has*
the contract, been rescinded by tlie insolvency of B or is A en-
titled to damages for its breach? IC the lattqr, how arc tlie
damages to be measured? Discuss.
(t) The jjlaintifCs were tlie o.wners of a pier at Shanklin, in the Isle
of \V'ight. They wished to paint the pier and consulted the de-
fendants, a firm of paint manufactuiers,. T h e defendants told
them that their paint was suitable lor the purpose, and, acting
on the faith of this .statement, the plaintifls caused to be in-
serted in their agreement with the contractors who were to paint
(he jjier a term requiring the use of tiie defendant's paint. Tlie
paint pioved unsuitable but the plaintiffs had to pay in full '
to the contractors according to the teims of the contract. Can
the plaintiffs sue the defendants for breach of warranty?
(u) A agrees to sell B live tons of oil at Rs. 1,000 per ton to lie
paid for at tlie time of delivery. A gives to >€, a wharfinger, at
wliose wharf he had twenty tons of oils, an order to transfer fi\e
of them into llic name of B. C makes tlie transfer in his books
and gives A's cleik a notice of the transfer to B. A's clerk
takes the transfer notice to B and offers to give it to him on
payment of die price of the oil. B refuses to pay. Is his le-
fusal justified under law in any way?
(v) A, a jeweller, was entrusted with a diamond by P witii tlie in-
structions that A should obtain offers for it, and if any such
offer was approved by P, A should sell it to the offerer. Acting-
contrary to P's instructions, A sold the diamond to S ^^ho
bougiit it in good faith. Thereafter A absconded with the
price money. Can P recover the diamond from S?
(w) A ordered a certain quantity of new red chillies and B sold to
him goods said to answer to those described while they were in
transit from Calcutta to Cuddalore. The contract was c.i.f. and
A paid for the goods on presentation of slilppiiig <iocumcnis.
Tlie goods were cleared at Cuddalore port by A's dealing agents
and railed to liim to Alandur where lie had liis place of busi-
nsss. On inspection, the goods were found to be greatly de-
teriorated, while in colour and tlie seeds falling out. A reject-
ed the goods but retained them as security for tlie price already
paid. Is A entitled to do so?
(.\) A bought a car at an auction. lie offeied to pay the price by
cheque, and was allowed to remove the car upon signing a form
which provided that the prppeity would not pass until tlie
cheque had been met. The cheque was dishonoured. Wiiat
sh6u]d the seller do?^
TEST QUESTIONS 871
CHAPTERS VIII, IX AND X
Insurance
I. Explain the natme of a contract of insuiance. Distinguish bet-
^veeii hfe insuiance and othei kinds of insurances.
2 Explain and illustrate the fundamental piinciples of insuiance.
3 What do you understand by iniurable interest in connection with
liie, fne and marine insuiance? When must it sulisist in the case of
c.iclP Enumerate the different kinds of insurable interest i^cognised by
law.
4 DISCUSS die doctune of subrogation in relation to file and marine
insuiance.
5 Explain the teims in connection with insurance: contribution, re-
insiiiance, double insuiance, premium and its return, surrender; value,
c.uFa pioxima, perils of the sea, cover note, bottomry and lespondentia.
G Discuss fully the implied warranties in a contract of marine J n -
suiance. Comment on the phraseology of a marine policy.
7 What IS meant by deviation and change of voyage? When is de-
viation e.\cused?
8 Discuss fully the \aiious kinds of losses under a marine policy,
bunging out cleaily the circumstances in which the underwriter may be
liable lor eacli
S).' What is the meaning of 'Fire' in a fire policy? Is loss caused in
cMiiiguishing a file recoveiable as a loss covered by fire? If goods, in-
-siiied against fue, are sold and subsequent to the sale destroyed by fir^,
to -vUiom IS the insurer liable?
)() (a) If goods insured are jettisoned for general safety, what aie
the iiglub of ilie undciwritei on payment foi total loss of the jettisoned
good;,'
(1)) Is tiie contiact of life insuiance a contract of indemnity? C m
tlie iiibuier a\oid liability on the giound that (i) the assured cominitied
suicide, (u) the age of the assured is not coriett?
(c) C.ui an underwriter avoid a policy on the giound of material mis-
rtj:)iL"-em.iiion if tlie loss is unconnected with the tact misrepresented?
II. Discubi. the law lelatmg to assignability of insurance policies, and
gnu the piocedure m cases wheie it is assignable.
12 "A\eiage m fiic policies is quite a different thing from avciagc
in m.iiine policies" Explain and illustrate.
13. "Indemnity is the contiolling principle in insuiance law, but all
iiisniancc contracts are not perfect contiacts of indemnity." Illustiate the
statement.
I'l. "A conii.ict of insuiance is not merely a gamble on an uuccitain
fiiimc" "Insuiance is a contract on speculation." Examine these state-
ments. Can )ou leconcile them?
15 (a) Explain the special features of the contract of insurance ivliicli
disuiiguibh it fioni a simple contract.
(b) Specify ihe lights and duties of an' insurer of a maiine insur-
iiiKo policy.
11) 'Insuiance is sometimes called an aleatory contract; it is not,
howt^fi, a AN.igcring contract.' Explain fully.
17 ' l l i e use of tlie term "warranty" in a contract of insurance should
872 MERCANTILE LA1,V
be clearly distinguished from its use in other branches of law of contract.'
Explain.
18 'A motor insurance poliq', or a fire or burglary policy, is a con-'
tract of peisonal indemnity.' Explain the implications of this statement.
, 19. Attempt the following problems, giving reasons for your answeu:
(a) A eftected an insurance on his goods against loss or damage by
fire. Afterwards A and his wife quarrelled and she set fire to
and destroyed the goods. The insurance company paid off A'*
claim. Can it recover tlie amount from A's wife?
(b) A insuied his life for the benefit of his wife and wSs subsequent-
ly convicted of having murdered her. Can the insurance money
be recovered?
(c) A takes policy on his wife's life and divorces her. She dies.
Can A recover the amount of the policy?
(d) If a theft is committed during the confusion following an out-
break of fire, is the insurer liable on a fire policy to make good
the loss by theft?
(e) The captain of a ship which was on the point of being captured,
threw overboard a quantity of dollars lest it should fall into
enemy hands. Can he claim general average conti ibution?
(f) A, B and C are three contiguous houses insured against fire.
An earthquake caused A to fall and as a consequence fire broke
out and spread to B where an explosion occurred wheielsy C
was wrecked. Is the insurer liable for the loss caused to C?
(g) If rice, insured against the penis of tlie sea, is heated and ren-
dered useless owing to the closing of the ventilators against lain
and stoim, is the insurer liable on the policy?
(h) A insured goods which were in transit on board a slii]) and sold
the same to C. The goods were subsequently lost by a peril
insuied agamst. C, as the assignee of the polic), claims to re-
cox ei th'e money due under the policy but tlie insuici Contends
that C had no insurable interest in the goods at the time ihey
weic issued. Discuss whether C will succeed
(i) .V ship, insuied by a time ])olicy against loss by grounding, but
wan anted fiee fiom all consequences of wailike opeiations,
was torpedoed./ She ^vas afterwaids lowed into tlie harbour
with (he assistance of tugs. A gale spiang up and tlie harbour
autlioriiies, fearing that she would sink and block the qua\.
iemo\ed hci to the outer liieakwaieis viicie she was moored.
She remained there tuo da)s, takiilg the ground at each ebb
tide until hei hull heads gave way and slie sank. Aie the un-
dcrwnteis liable?
(j) A instruUb Siis agent B to cflcct a lost oi not lost insurance on
a ship at sea. During negotiations xsitii an underwriter, B re-
ceives' secret information oE the sinking of the ship. Thereupon
he abandons the negotiations without disclosing his infoiniation
to anyone. Some days later A instincts C to effect the insui-
ancc. Can the insurance effected by C be axoided by the un-
dei writer on the ground of concealment of material facts?
(k) \, who lias a policy on iiis life, nominates B as his nominee
B dies during A's lifetime. After A's death B's iicirs claim the
policy money. Discuss the rights of B's heirs W'U n make
anv digerence if A were to assign the pohcy to R>
TEST QUESTIONS 873

(!) Dining a fire, some ankles of furniture were thrown out of a

window and goi damaged Ijcyond lepair. Is the insurer liable
for ihii loss under a inc policy?
(m) A dies leaving two policies on his life for Rs. 1,500 and Rs. 5,000.
There are conflicting claims and insufficiency of proof as to
title to the amount secured thereby. AVhat is the insincr to
. dor (\ died in June, 1950).
(u) X. a Delhi jjiolessor, insures his household goods against risk
ol fire. While smoking in his bed X falls asleep and the goods
catch fire. X escapes with a few burns. Can X rcco\er under
the policy?
(o) H hid her jewellery in her grate under the coal. Later, Jiaving
loi gotten this, she lit the fire and the jewellery was damaged.
Can H reco\er under a fire policy?
(p) A ship, which togctlier witli. its cargo is insured against marine
risks, is driven aground by high gales and gels stuck in shift-
ing sands. AH attempts to refloat it fail; and before the cargo can
be unloaded on landing craft the ship breaks into two as a re-
sidt of the coming ol the tides. Discuss the liability of the
insurer.
(q) A ship insured against the perils of the sea was lying at anclior
olf the shore about to pioceed on her voyage. Wiiiic the boilers
were being filled, a valve remained dosed, due to ilie fault of
somebody on board whose duty it was to see that it remained
open. Consccjuently, in the operation of pumping, water was
forced back, split the air-chamber and disabled the pump. Are
the underwriters liable? '
(r) X, a Delhi Piofessor, insured his houseliold goods, worth
Rs. 0,000 for Rs. 8,000 against risk by fire. During the cur-
rency ol the policy a fire took place, causing a loss ol Rs. 2.000.
What sum, it any, can X claim from the jnsmcr (i) if there is
an a\erage clause in the policy, and (ii) if there is no average
clause? .
(s) A sliip, whicli was insured imder a time policy, was .sent to sea
unseaworthy in two respects; her hull was in an unfit state tor
ilie voyage and her crew was insufficient. T h e assured knew
of the insufficiency of the crew but not of the unfitness of the
hull. The ship was lost because of the unfitness of the hull.
Are the insurers liable?
(T) A husband insured his life for Rs. 50,000, the money to I)e paid
to liis wife if living at his death, otherwise to his personal re-
presentatives. Under a clause in the policy the husband elect-
ed to have the present value of the policy paid. Who is en-
titled to recover?
(u) A insures his life with an insurer for Rs. 5,000. A subsequent-
ly becomes insane, and, while of unsound mind, he commits
suicide. Can A's heirs recover on the policy from the insurer?
(v) A fire Ijroke out on board a ship and caused damage to some
caigo belonging to A. In putting out the fire by water some
cargo of B was damaged. Discuss if A or B can claim general
aveiagc contributions from the owners of the otiier interests in
the ship and cargo,
(w) Goods were insured from London to the Isle of France. The
874 MERCANTILE LAW
ship tarrying ihc goods was wrecked off the coast of the island, but
some of the goods were saved from the wreck and got on shore
where, however, they fell into the hands of the islanders who
destroyed a part of the goods and plundered the rest. T h e
assured claimed as for a total loss against the insurers. Dis-
cuss.
(x) A insured his house against loss by fire. Latet, while insane,
he killed nis wife, severely injured his only son, set fire to the
house, and died in the fire. The son smvives and sues tJie in-
surer for the fire loss? Is he entitled to recover?
(y) M ivas tlie owner of nearly all the shares and the'WiIy substan-
tial creditor of a timber company. He insured the timber in
his own name. A fire occurred, and the tiiijber was destroyed.
His claim was rejected by the insurer. Advise him.
(z) Bales of cotton were shipped at Bombay per the Inglis. After
the date when the goods suffered .damage, but before news of
this readied hint, the plaintiff acquired an interest in the mer-
chandise and insured it "lost or not lost". In an action on
the jjolicy ilie insurer pleaded that the plaintiff had acquired
his interest after the loss and was not therefore entitled to
claim. Decide.

CHAPTER XI
Negotiable Instruments
1. Explain what is meant by a negotiable instnmicnt. State ilie
chief insLLLiments which are at present regarded as negotiable, and dis-
cuss the statement that "the list of negotiable instruments is not closed,
it may be added to if the necessary conditions are lulfilled".
1. Explain clearly what is meant by 'negotiation'. ,How is it effccied
and how does it differ from an ordinary assignment? Can an o\erduc in-
strument be negotiated?
3. Define a promissory note and distinguish it from a bill of ex-
change. What do you understand by a mutual open and current account?
4. vState briefly the different circumstances in which a holder can
regard a negotiable instrument as dishonoured. What are his rights and
.obligations in the event of a dishonour?
5. Define 'acceptance for honour'. Can the drawee of a bill of ex-
change accept it for honour?
What are the presumptions in respect of a negotiable instrument?
6. (a) In what respect does an accommodation bill differ from other
bills?
(b) If a cheque is paid across the counter against a forged endorse-
ment, has its drawer or true owner a right of action against the banker?
(c) Indicate tlie significance and implications of the 'marking' of a
chetjue. Does the 'marking' of a post-dated cheque bintl the banker who
certifies it?
7. What are the exceptions to the rule that the effect of a mateiial
alteration of a negotiable in.strument is to discharge all the parties lialjje
on it at the time of the alteration?
8. (a) In a suit on a pro-note, can the defendant set up the plea of
total or partial failure of consideration? ,
 TEST QUESTIONS 875

(I)) A gives a blank acceptance tq one Banerjee who fills it up as a

' bill ])ayabie lo llie dialer's order and himself signs it as tlie drawer and
the ln-.si cndor.ser in a iiciitious name 'Jogendra Singh'. Is A or Banerjee
liable lo the holder o£ (lie bill?
9. W'lial arc the ciiciimstances in wiiich a party to a negotiable in-
sfrunicnt is disclKirgcd? Discuss the liability o[ jirior parties on a negoti-
able instrument lo a subsequent holder and amongst themsches.
)0. \\'hat is meant by (i) dishonour for non-acceptance, (ii) dishonour
for non-paymeni? Slate the cases in which notice of dislionour is not
necessary. State the lules for determining compensation payable in case
of dishonour of a jjro-noie, Ijill of exchange or cheque.
11. Discuss, the law relating to crossed cheques with special reference
to tlie liabilities of tlie collecting banker in respect, thereof. What is a
protest for better security?
12. Define a 'holder in due course'. State and explain some of the
im])ortant pri\ileges of a holder in due comse under the Negotiable In-
stnmients Act.
13. (a) Indicate the cases in which a banker (i) may, (ii) must, refuse
to honour a customer's dietjue,
(b) Exj)lain the eflect of 'Not Negotiable' crossing.
(c) Has a holder any remedy against the banker for wrongful dis-
honour of a chetpie?
M. Explain clearly the following:
(a) Inland instruments; (b) ambiguous instruments; (c) inchoate iu-
sirumcnts; (d) endorsement; (e) inland and foreign instruments;
(f) drawee in case of need; (g) noting and protesting.
15. Tiie failure of the consideration for a negotiable instrument,
either total or partial, is material only between immediate parties to the in-
strument. Conmient.
1(). What is the effect of a material alteration in a negotiable instru-
ment as against a pcr.son (i) who is a party thereto at the time of making
such alteration, and one (ii) wiio is an acceptor or indorser of the instru-
ment after material alteration?
17. AVhcn is payment on a negotiable instrument said to be a pay-
ment in due course?
18. 'Any Bill of Exchange on which the "bearer" or "order" appears
is and remains a negotiable bill and no words prohibiting transfer or
indicating an intention that it should not be transferred have any effect on
iis negotiability.' Comment. ,^
19. State concisely the essential features of an instrument which makes
it negotiable and specify the points of dilference between the assignability
and negotiability of such instruments.
20. Specify the conditions under wliicli the duty and authority of a
Ixmker to pay a cheque drawn on him by a customer are determined.
21. Attempt the following problems, giving reasons for your answers:
(a) A bill of exchange is drawn in favour of John Smith or order.
At maturity another person of the same name is in possession of
the instrument, endorses it. and ]3resents it for payment. The
acceptor pays him. Is he disciiargcd by such payment? \\'ould
there be any diderence if the instrument liad been a cheque and
was paid I)y a drawee banker in due course?
87G IMERCANTILE LAW
(b) A bleaks open B's cupboard and gets hold o£ B's cheque book.
A tJieii forges B's signature on a dieque and obtains money on
it from B's bankei. A then disappears. Who should bear die
loss, B or the banker?
(c) A bill is payable to "A or order". It is stolen from A and the
thief foiges A's endorsement and endoises it to B who takes it
for value and in good faith. Does B acquire good title to it?
(d) A offers to B a bill payable to bearer o£ the value of Rs. 1,000
for Rs. 500. Three days before maturity, B takes it for Rs. 500.
It is aftciwards discovered that it was stolen by A. Can B re-
cover the money?
(e) A and B executed a promissory note for Rs. 2,000 in 1950 in
lavoui; of C. In 1951 the said pro-note was replaced by another
pro-noie for the full amount by B alone. In 1952, B died. Can
C bring a suit on the basis of the pro-note of 1950 against A?
(f) Discuss whether any of the following is a valid pro-note: (i) A
promises to pay B or bearer the sum ot Rs. 1,000, 6 months after
date; (ii) A promises to pay the bearer on demand the sum of
Rs. 1,000; (iii) A promises to pay B or order Rs. 1,000, one month
1 after C's "death; (iv) A executes a writing in favour of B as follows:
"I acknowledge myself to be indebted to B in the sum of
Rs. 1,000 to be paid on demand for value received."
(g) A, B and C are the draiver, dra^vee and payee respectively of a
cheque. If, before the cheque is presented for payment, one oi
them becomes insolvent, how are tJie others prejudiced?
(h) Crossed cheques for large amounts drawn by a fnm on their ac-
count with Y Bank were from time to time delivered lo B, a cleik
of t!ie firm, for payment to their creditors, B forged the en-
dorsements of the payees and paid the cheques into his pcisonal
account with the same bank and drew die money out. Can the
bank debit die account of the firm?
(i) B obtains A's acceptance to a-bill by fiaud. B endorses it to C
who takes it as a holder in due course. C endorses the bill to
D who knows of die fraud. Can D recover from A?
(j) A. tlie holder of a bill, transfers it to B without consideration.
B transfers it to C for value. C transfers it to D for value. D
transfers it to E without consideration. Discuss the rights of E
against A, B, C and D.
(k) X sends A a cheque ^or £5 crossed generally and payable to A's
order. The letter containing the cheque is opened by A's clerk
P who steals it and forges A's signatxne for the endorsement.
P uses the cheque to pay his rent to his landlord B, telling B
tlmt die clieque was given to him as a Christmas present in place
ot a £5 Bank of England note whilch he had had the previous
year and which had been used by P to pay his rent. B pays the
cheque into tlie Afidland Bank, wlio collect it from Lloyd's Bank,
on which it was drawn. State A's rights (if any) against B and
the two Banks concerned. Suppose P went straight to Lloyd's
Bank and by an ingenious story persuaded the cashier to give
him a £5 note in exchange for the cheque, what would then be
the position, of Lloyd's Bank?
Would it make any difference to any part of your answer if the
cheque was uncrossed?
TEST QUESTIONS ' 877
(1) Examine the validity in law of the following defences to a suit
on a pro-note payable on demand: (i) that the plaintiff had made
no demand prior to filing the suit; (ii) that the pro-note was for
ilie price of 20 maunds of ghee agreed to be delivered and only
12 maunds were in fact delivered; (iii) that tlie ghee was adul-
terated with Dalda; (iv) that the .plaintiff changed the date on
the pro-note from 15th January to 15th April, 1951; (v) that
tliere was an oral agreement to charge inteiest at only 3 % .
(m) A draws a Bill of Exchange payable to the or3er of B only and
C accepts it payable at D Bank. The Bill bears t,he woVds 'Not
negotiable'. B indorses the Bill to E. The Bill being dishonour-
ed on presentation, E sues G tliereon. Examine the validity of
•E's claim.
(n) A bill drawn on M in favour of B was accepted by M through
the fraud of F. Is'M liable to B?
(o) A dra^vs a bill of exchange on B,, payable to G or order. .C
indorses it in blank, and negotiates it. The bill is diereafter
lost and X, who finds it, forges an indorsement in blank of B
and negotiates it by delivery to E. Discuss if E has any rights on
the instrument and, if so, against whom?
(p) A's wife forged his signature on aboi\j; 40 cheques drawn on M
Bank and cashed them. Upon his discovery of the forgeries,- A
did not at once inform the bank, but some' months later when
his wife informed him tliat she warifed more money for the
purpose for which the previous cheques had beeji drawn and
cashed by her, he state'd his intention of notifying the bank, widi
the result that the same night the -yvrie committed suicide. A
brought an action against the bank claiming to be credited -with
die amounts of the forged cheques. . Will he succeed?
(q) A gave to B a blank acceptance, authorising him to fill it up.
B did not nil it up, and returned- it to A, from whom it was
stolen and was subsequently filled up and put into circulation.
D, a holder in due course, demands payment from A.' Advise
A.
(r) A, the holder of a bill, endorses it 'Sans Recoiirse' to B. B en-
dorses it to G, C to D, D to E and E endorses it again to' A.
Can A recover the amount of the bill from B, C, D and E or
any of them?
(s) A bill purports to be drawn by A on B in favour of G. A's
signatm-e is forged. The bill is indorsed in blank by G to D
for value and eventually it is negotiated to X, a holder in due
course. State the rights and liabilities of the parties.
(t) G drew cheques in favour of X. G's clerk Gorged X's indorse-
ment and negotiated the cheques to G who took them in good
faith and for value. G received payment of cheques. G claims
the amount of the cheques from G. Advise him.
(u) A bill was left with the drawee for acceptance. The drawee
having written his acceptance upon it kept it in his possession,
and two days after, having in the meantime heard that the dra-t^jer
had failed, cancelled the acceptance, and returned the bill to
the holder. Was the drawee entitled to do this?
(v) A draws for his own accommodation a bill for Rs. 1,000 on B,
^^S MERCANTILE LAW
and after acceptance by B, indorses it to C as security for
Rs. 500. B is adjudged an insolvent. Discuss the rights of C.
(w) .M draws a dieque in favour of N, a minor. N endorses it in
favour of P, -wlio in turn endorses it in favour of Q. TJie cheque
IS dishonoured by the bank. Examine the rights of P and Q,
and against whom they can be exercised.
(x) A executes a promissory note in favour of B for Rs. 2,500. B
receives the amount from C and makes an endorsement thus:
'Received the amount due under this promissoiy note from C ,
and signs it and hands over tire note to C. Can C maintain a
suit on the pro-note?
(y) A owes B Rs. 1,000. A makes a pro-note for the amount pay-
able to B. A dies and the note is afterwards found among his
papers and delivered to B. Can B sue on the note?
(i) A, the partner of a firm, signed on behalf of the firm, a blank
crossed cheque, marked 'non-negotiable' and handed it over to
B, his clerk, with instructions to fill it up for Rs. 300 and give
it to M, a creditor of the firm. B filled in" the cheque for Rs. 500
in favour of R, to whom B was indebted in the amount, and
deliveifed it to R, who collected the amount. On discovering B's
fraud A sues R to recover the amount of the cheque. Will he
succeed?
22. Attempt the following problems, giving reasons for your answers:
(a) A bill of exchange purports to be drawn by A on B, payable to
C or order. It is accepted by B. C indorses and delivers the
bill to D, who takes it as a holder in due course. A's signature
is proved to be a forgery. Is B or C entitled to set up the plea
of forgery against D in order to escape liability on the bill?
(b) A accepted a bill and gave it to B who put his name as a drawer
fo'i the purpose of discounting it and paying the.proceeds to A.
B having failed to discount, returned the bill to A, who, in-
tending to cancel it, tore it into two and threw the pieces into
the street. -B picked up the pieces, pasted them together and '^
put the, bill into circulation. Examine the liability of A on the
bill.
(c) C, the payee of a bill, indorses it in blank and delivers it to D,
who specially indorses it to E or order. E without indorsement
transfers it to F.- Consider the rights of F.
(d) A executed a promissory note in favour of B. Without B!s de-
manding payment, A paid the money due on the note to B
but kft the note in his hands. Subsequently B indorsed the
note to C who had knowledge of the payment made by A. C
brings a suit against A and B for recovery of money on tiie note.
Will he succeed—against either—or both?
(e) A promissory note is executed by A in favour of B in considera-
tion of C, a relation of B, forbearing to sue on a prior promis-
sory note executed by A in favour of C. Has the note execut-
ed by A in favour of B any lawful consideration?
(£) Scrip was issued in England by the agent of a foreign govern-
ment which entitled the holder to receive certain bonds. The
plaintiff purchased some of this scrip from a broker, but allowed
the broker to remain in possession of it. The broker fraudu-
lently pledged the scrip to the defendants in order to secure a
TEST QUESTIONS/ 879
loan. The defendants took the scrip in good faith and, n^aon
the default of the broker, bold it. Custom of merchants showed
that the scrip was negotiable. Was the sale of the scrip by the
defendants valid?
(g) A draws on B a bill payable three months after sight. It passes
through several hands before X becomes its holder. On pre-
sentation by X, B refuses to accept. Discu.ss the rights of X
on the bill.
(h) X any Y, husband and wife, have a joint account in a bank.
The account is such as can be operated upon by either of them.
The deposits in the account are usually made by X, the husband,
although the^ withdrawals are usually made by Y, the wife. The
banker comes to know that a garnishee order attaching X's
money in the bank has been issued by the Court. X and Y
order the banker to transfer the amount standing in their joint
account to the current account of Y, tlie wife, in the same bank.
Discuss the liability of the banker to abide by the order if the
order is served on him before/after the order is sen-ed.

CHAPTER XII
Insolvency
1. Describe fully what constitutes Acts of Insolvency.
2. (a) In what circumstances and at whose instance can a person be
adjudicated an insolvent?
(b) 'Who (i) can, (ii) cannot, be adjudged an insolvent? Can an un-
discharged insolvent be declared an insolvent?
3. Indicate clearly the circumstances in which (i) a creditor, (ii) a de-
btor himself, can present an insolvency petition. Give die requirements
oL the petition in eacli case.
4. (a) What is an order of adjudication? What are its effects?
(b) "The object of an adjudication is to free the debtor from the
claims of creditors whicli are to be satisfied out of the insolvent's estate,
which the Court takes possession of and distributes among his creditors."
Discuss fully. >.
5." (a) "In matters arising out of insolvency the Official Assignee or
Receiver has a higher title than the insolvent." Discuss.
(b) Write a brief note on Public Examination of the Insolvent.
6. What interim orders can be made by the Court under the Pro-
•s'incial .Insolvency Act in respect o£ the person and ^property of a debtor
before adjudication, in the interest of the general body of his creditors?
7. What are the duties of an insolvent as to discovery and realisation
of property?
8. • Define insolvent's property. What property of the insolvent (i) is
divisible, (ii) is not divisible, among his creditors?
9. What debts are provable in insolvency? Wliat debts are not prov-
able?
10. (a) What is a Protection Order? What is its effect?
(b) Discuss briefly the effect of insolvency on antecedent transactions?
11. (a) When can Insolvency Court annul an order of adjudication?
State briefly die effect of an order of annulment of adjudication.
(b) Write a short note on Fraudulent Preference. .
880 JMERCANTILE LAW

12. (a) Write a sliort note on (i) Protected Transactions, (ii) Dis-
claimer of oneious pioperty.
(b) What is.the mode o£ distribution of property of the insolvent?
13. Write brief notes on (i)r Doctrine of Relation Back, (ii) Doctrine
of Reputed Ownership.
14. What is an order of discharge? What are its effects? State briefly
tlie poweis of an Insolvency Court in deciding an insohent's application
for his discharge.
15. Write short notes on (i) Preferential Debts, (ii) Committee of In-
spection, (lii) Disqualifications and disabilities of an insolvent, (iv) Final
di\ idend.
16. What, if any, are the exceptions to the general rule that an order
of discharge releases an insolvent from debts pro\able in insolvency?
17. (a) Discuss briefly the matters which the Court must consider in
deciding an insolvent's application for discharge.
(I)) What aie the disabilities of an undischarged insolvent?
18. State the cases in which the Couit must (i) absolutely refuse the
discharge, (ii) refuse to grant an absolute discharge.
19. What is the position of an undischarged insolvent? How can he
get his dischaige? What different kinds of disdiarge are there, and on
what lines is discrimination made between one insolvent and another?
20. "The two main objects 'of insolvency legislation are to protect
the debtor from harassment by his creditors and to secure an expeditious
and equitable distribution of his assets among the creditors." Indicate
briefly by reference to die provisions of the Pro^'incial Insolvency Act how
these objects have been secured.
21. (a) "The effect of the 'reputed ownership' doctrine is to transfer
to the Official Assignee property which"does not belong to the insolvent."
(b) "The effect of die doctrine of reputed ownership is to take one
man's property to pay another man's debts."
Discuss the statements, explaining the range and scope of the doctrine.
22. An order of adjudication puts all creditors on an equality and en-
titles them to be paid rateably. Discuss, mentioning in what respects this
statement should be qualified.
23. Does the order of adjudication'operate as conclusive evidence as
against a third person that the act of insolvency, on which the order is
founded, was in fact committed and that the official assignee is entitled to
payment back from the preferred creditor on the mere strength of the'de-
cision? Explain, by reference to leading decisions, Indian and English law
on the point.
24. 'A debtor may not, by stipulation with a creditor, provide for a
different.distribution of his effects in the event of his insolvency from that
which the laxv provides.' Elucidate
25. 'The intention of the Legislature is that the debtor, on giving up
the whole of the property, shall be a free man again, able to earn his liveli-
hood; but the benefit of freedom from restrictions by means of a discharge
is intended for an honest debtor. Explain, with reference to the powers
of the Court to grant a discharge.
26. Attempt the following pioblems, giving reasoYis for your answers:
.(a) A gives goods to B, a commission agent, for being sold. The
gpods remain unsold with B. who is adjudged an insolvent.
T E S T QUESTIONS 8J81

Can the Official Assignee claim the goods. Would it make any
difference in your answer if the goods had been actually sold
off hy B before adjudication and the money not received fay" him
from the buyer.
(b) A, while in a solvent condition, makes a gift of his house to his
daughter B. Fifteen months thereafter he suffers heavy losses
and within eighteen months of the date of the gift he is ad-
judicated insolvent. Can tlie Official Assignee or the Receiver
get the gift set aside?
(€) A, a Surgeon-Der.iist, is adjudged insolvent. During the pen-
dency of the insolvency proceedings, A earns Rs. 500 per month,
which is barely sufficient for his maintenance. Can the Official
Assignee or the Receiver claim the earnings in whole or in
part? Would it make any difference in your answer if A in-
stead of being a Surgeon-Dentist was an actor?
(d) A owed a debt to B. A was adjudicated insolvent on his own
petition. B's claim was not time-barred at the date of the peti-
tion, but became time-barred before the order of adjudication
was made. Is B entitled to prove his claim in insolvency?
(e) A and his sister carried on business in partnership in A's name.
T h e sister was a dormant pji'rtner and the business %vas carried
on ostensibly as his own. A absconded and was adjudged in-
solvent. The Official Assignee claimed that the entire partner-
ship stock passed to him. Is the claim tenable?
(f) A has properties, movable and immovable, in Madras, Delhi,
London and New York. Which of tliese would vest in the
Official Assignee in case of A's insolvency?
(g) C, a creditor of B, takes from B a transfer of substantially the
whole of B's property in satisfaction of his past debt. C knew
that B owed debts to other creditors. Is the transfer valid?
(h) An employee in a private press on a monthly salary of Rs, 75
is adjudicated an insolvent on his own application. The Court
while making the order of adjudication directs the employee to
pay into Court out of his salary Rs. 15 per month. Discuss
the validity of the Court's direction to pay Rs. 15.
(i) On 1st October solicitors prepared and P executed a deed of
assignment of all his property for the benefit of his creditors!'
He paid the solicitors Rs. 1,000 of which Rs. 400 was as fees
for the work done that day and the balance as fees in advance
for tlie work which they actually did in the course of the fol-
lowing week. On 1st December a petition was presented
against P and on' Stli December he was adjudicated insolvent.
One act of insolvency proved 'against him was tlie execution by
him of the aforesaid assignment deed. Is the Official .Assignee
entitled to a refund of the amount paid to the solicitors?
(j) An undischarged insolvent obtained a money decree against X
for personal services rendered by him after the adjudication
and he assigned the decree to K. To whom should X pay the
decretal amount—to K or to the Official Assignee?
(k) L, the owner of a motor car, lent it to his friend M for his
domestic use. Unknown to L, M used the car in his business,
so tliat W's customers came to regard the car as belonging to
M. On the insolvency of M, can the Official Assignee claim a
title to the car?
 MERCANTILE LAW
(1) A trader in embarraissecl drcumstances of his business, which is
his only asset, converts it into a one-man company consisting
virtually of himself, the consideration being shares whidi are
pra!ctically wortliless and on undertaking by the company to
I pay his debts. Does the act amount to an act of insolvency?
(m) A debtor pays in cash Rs. 2,000 which his solicitor requires £»
defray counsel's fees and other legal expenses in opposing a
, petition for adjudication filed against him. T h e petition ends
in an order of adjudication. Can tlie Official Assignee or Offi-
cial Receiver compel the solicitor to refund die money?
(n) A trader obtains a loan under an agreement to deliver to the
lender the next day goods of an equivalent value lying in • hk
godown to secure the loan. Both the borrower and the lender
put their own locks on the doox of the godown. T h e borrower
absconds the same night and is subsequently adjudged insolvent.
T h e Official' Assignee claims the goods. How would you de-
cide?
(o) On a debtor's application for disciiarge the insolvency Court
ordered: 'I do not grant an absolute prder of dlsdiatge, but
grant a conditional one, the condition being that the creditors,
iaay recover their dues, if within lime, until they become
irrecoverable.' Examine t h e ' validity of the order.
{f)) A, a Frenchman, residing in France, had a place of business in
Bombay. He acquired property and also incurred debts. Lattr
on, he executed in France a deed transferring the whole of his
property for the benefit of his creditors. T h e Bombay HigU
Court adjudjcated him insolvent. Examine the validity of tlie
adjudication.
(q) A hired a chattel from B. On A's wrongful refusal to return it,
B sued A for the recovery of the chattel, and alternatively for
the value thereof. A decree was passed in favour of B, but
before the decree was satisfied A became insolvent and the
chattel passed into the hands of the Official Receiver. Ejcaniine*
the rights of B.
(r) A creditor takes an assignment from the debtor for the purpose
of paying himself and other creditors named in the Jist in full,
believing that they are all the creditors. But the list turns out
to be incomplete. T h e tiansaction has, however, been entered
into honestly by tlie creditor concerned. Would the transaction
constitute an act of insolvency? Discuss.
(s) A sells a patent to B in consideration of B paying royalties to
A. At the same time B advances to A a sum of Rs. "1,25,000 as
a loan. It is agreed that B should retain one-half of the royal-
ties as they become payable to A, from time to time, towards
the satisfaction of the debt, provided that if A slioiikl become
insolvent B shall have the right to retain the whole of the
royalties in satisfaction of the debt, A becomes intolveni before
the debt is luUy paid. Can B retain the royalties as stipulated?
^t) An insolvent was granted a conditional discharge. A. a judg-
ment-creditor, filed a petition for the execution ol a decree,
which he had obtained prior to adjudication, by attachment
and sale of a house belonging to the insolvent's -^ife. Discuss
whether A will succeed.
 T E S T QUESTIONS 883
(u) A and B enter into a partnerihip for five years on the terms o(
A jJaying a premium of Rs. 1,000 to B, out of whidi Rs. 500
were to be paid immediately and the rest by instalments. In
the second year of the term and before the wliolc of the premium
was paid, A was adjudicated insolvent on the petition of B and
a Receiver of his estate was appointed by the Couit. B claimed
from tiie Receiver in insolvency Rs. 500, the atnount of unpaid
premium, standing as one of A's creditors, whereas the Receiver
in a counter-action claimed from B a sum oC Rs. 300 as money
belonging to the insolvent's assets and unjustly held by B. State,
giving reasons, which of these claims is tenable.

CHAPTER XIII
Arbitration
,, 1. What is submission to arbitration. What is the effect of a cabmis-
^sion to arbitration on an action?
2. What can be referred to arbitration? Who may refer it? What
are the different modes of submission?
3. (a) Under what circumstances would the Court appoint (i) an
arbitration, (ii) an umpire?
(b) Discuss tlie relative advantages of the settlement of a dispute under
the Indian Arbitration Act.
4. (a) What are the powers and duties of an arbitrator?
(b) What amounts to misconduct on the part of an arbitrator suffi-
cient to vitiate an award?
5. When can an award be (i) modihed, (ii) remitted for reconsider-
ation, (iii) set aside? When can a Court remove an arbitrator?
6. Explain the nature of control tlie Court exercises over the proceed-
ings of an arbitrator under the Indian Arbitration Act. When can an
~j:^rbitrator state a special case for the opinion of the Court?
' 7. (a) What powers do Courts enjoy over awards by an arbitrator?
(b) An arbitrator sends notice by registered post to parties to appc.ir
before him on a certain date. One of the parties fails to appear. The
arbitrator records the evidence of the other party in his absence and gi\'es
an award. What are the remedies open to the^party against whom the
award has been given in his absence?
8. Wiiat are the powers of a Court where arbitrator is removed or
h;s authority is revoked?
9. In a suit by P's widow for maintenance provided, by P's will, all
the parties agreed to appoint K as the sole arbitrator for settling the tUs-
pute and to abide by his decision. T h e arbitrntor examirted the defln-
dant in the absence of the plaintiff and perused the will without letting
her have her say. Can the award he- set aside?

! CHAPTER XIV
Carriage of goods
]. Who is a 'common canier'? What is meant by the statement that
at common law a common canier is the insurer of goods? To what ex-
teni has legislation in India curtailed his liberty to contract? How does
a comrnon carrier differ from a private carrier?
884 MERCANTILE LAW
2 (a) Distinguish a Bill of Lading and Charter Party.- What arcv
their respective functions? Is Bill of Lading negotiable?
(b) Explain the function of a bill of lading. How far is it regarded
as a negotiable instrument? -'
(c) "A bill of lading is negotiable only in a popular sense and not
in technical sense." Comment.
3. State dearly the position of the holder of a bill of Jading in res-
pect of goods carried on a chartered ship: (i) when he is both shipper
and charterer, (ii) when he is a shipper other than a charter, (iii) when
he is an indorsee from tlie shipper.
4. (a) What are the conditions implied in a contract of affreightment?
If any of them is broken, what is tlie legal consequence?
(b) When is the master of a ship' justified in executing a respondentia
bond? In what respect does such a bond differ from the common hypo-
thecation bond'
5. (a) T o what limit can a common carrier reduce his liability ay"
special contract? Are railways in India cornmon carriers?
(b) Is tlie endorsee of a bill of lading liable to pay (i) freight, (ii)
the loss caused to the ship owing to the dangerous chaiacter of the goods,
(iii) the general average contribution?
6. (a) What are the powers ^nd duties of the master of a ship during
voyage?
(b) What are the rights and liabilities of the holder of a bill of lad-
ing? What is the eft'ect of an endorsement o£ a bill of lading?
7. Of what facts are (i) an air consignment note, and (ii) a bill of
lading prima facie evidence? Why is it advisable for a carrier of "goods
by air to insist on an air consignment nose?
8. (a) 'The law charges the common carrier thus entrusted to carry
goods, agpinst all events but acts o t God, and of the public enemies.*
Comment and state the present position of the law regarding liability of a
railway administration for loss of or damage to goods, animals or passenger'ii>i
luggage.
(b) If an elephant entrusted to the railway for carriage escapes during
the journey and is killed, is the railway liable to make good tlie loss?
9. (a) On each of the two dates, viz., 9-6-1943 and 20-11-1943 one
wagon of salt was booked from Khewra Salt Mines Railway Station (now
in Pakistan) to M in Hyderabad, and the Railway freight payable was
endorsed on the R / R as being Rs. 1,613 on tlie first consignment and
Rs. 1,497 on the second. At the destination only Rs. 1,360 and
Rs. 1,247 respectively were recovered as according to fresh calculations the
original figures were found to cpntain over-charges. Later, it was discover-
ed by the Railway that the original figures were correct and rebates for
overcliarge were allowed by mistake. T h e Railway claimed the balance
and witliheld delivery of another consignment until payment. Advise M.
(b) Three boxes described to contain stationery and Eversharp foun-
tain pens and pencils (with nibs, clips and caps of gold) were put in the
luggage van and receipt obtained by L who was travelling in a second
class compartment from Boniliay to Lahore. At Ddlii L inquired whether
the Ijoxes were there, but got no information, and was told to iiiquire at
Amritsar. At Amritsar he was told that the boxes were missing. Car L
recover darnages from ilie Railway?
(c) A consigned a marble statue valued at Rs. 9,000 wrapped'in grass
TEST QUESTIONS 885

and gunny bags and did not declare its value at the time of tendering it
to the station master. T h e statue was damaged in transit. Is the Rail-
way liable?
(<1) A tiger was entrusted by A to tlie railway for carriage. T h e cage
broke by the jolts received during the journey and the tiger escaped. It
killtd :i bullock, belonging toV B but was almoi^t immediately crushed by
the engine. Discuss the liability Of the .rajlway' to A and B.
(e) A railway company accepts goods to be carried to a place on the
system of another company. T h e receiving company makes a contract
with the consignor to carry tlie goods all the way to the destination. T h e
goods are lost while in transit on the line of the second company. Is the
receiving company liable for the loss?
(f) A carrier issues a bill of lading acknowledging receipts of a bos
of 'goods. T h e agent notes on the bill of lading that the weight, value,
contents, and quantity of the goods are unknown. T h e shipper transfers
the bill of lading to a bona fide purchaser. When the goods aie found
not to be the same as described in the bill of lading, the latter brings an
action for damages against the carrier. Will he succeed?
(g) An agent for a carrier issues a bill of lading acknowledging re-
ceipt of certain perishable goods. No goods, in fact, were delivered to
the carrier. T h e bill of lading is transferred to a bona fide purchaser.
Thereafter the purchaser of the bill o£ lading brings an action against
the carrier for failure to deliver such goods. Is he entitled to rerover?
(h) The goods of A disappeared somewhere between Delhi, the point
of shipment, and Bombay, the point of destination. The Railway Ad-
ministration disclaimed liability for the loss on the ground that they were
stqlen by thieves. Was A entitled to recover,
(i) A steals a mo'for car from B in Delhi and consigns it to himself
in Lucknow, B learns of thie shipment and demands the car from the
railway at I.ucknow. T h e railway refuses to deliver unless transport
charges are paid. Is the refusal justified?
(j) One hundred barrels of oil and one hundred and six bales'of palm
baskets were shipped under a bill of lading which contained the clause
'not accountable for rust, leakage or breakage'. On delivery two barrels
of oil were found to be empty and sixty bales of palm baskets were damag-
ed witli oil. The shipper sued the shipowner for damages on account of
the loss suffered. Decide.
(k) A reputed race-horse was entrusted by B to the railway for carriage
from Bombay to Calcutta. As the result of loose-shunting in transit, the
horse fell and broke one of his legs, and it became necessary to shoot him.
B claims Rs. 3,000 as damages for the loss of his horse. Advise the rail-
way administration.

CHAPTER XV
Mortgages and Charges
1. Define a mortgage, a charge, and distinguisli between them.
2. Briefly describe the various kinds of mortgages, bringing out clear-
ly the distinguisliing features of each.
3. State the rights and liabilities of (!) a mortgagor, (ii) a mortgagee.
'!. Expl.iin Cully, (i) E<iuity of Redemption; (ii) Tacking; (iii) Equit-
able Mortgage; (iv) Af.irslialling of Securities; (v) Clog on the Right of
Redemption; (vi) ''Once a mortoage always a mortgage"
 886 MERCANTILE LAW
5. Explain and iUustrate (i) contribution, (ii) subrogation, in connec-
tion with mortgages.
6. What is meant by 'Right of Foreclosure'? "When and how can a
mortgagee exercise this right? State the cases in which a mortgagee has
a right to sue for mortgage money.
7. Define a Bill of Sale. Distinguish between an absolute and con-
ditional bill of sale.

CHAPTER XVI
Company Law
i. (a) What is meant by limited liability? What is the basis of the
protectiou given to creditors who deal with a company which has limited
liability?
(b) A and B wish to carry on business as a private company with a
limited liability. What steps must they take?
(c) Examine the constitution, fuixctjons and legal position of a Coin-
niittee of Inspection in a winding up.^,Can a member of the Commktes
buy the company's property from the liquidator?
(d) Examine the legal .effect of the Articles of Association of a com-
pany. How far is a provision depriving the company of the power to al-
ter the Anifles valid?
(e) 'While respecting the essential principle of company law that the
majority of the members of a company are entitled to control the com-
pany's affairs, the Indian Company's Act lias provided for the protection
of the minority of the members from the tyranny of the majority.' Com-
ment.
(f) Can a company be wound up against the wishes of a majority of its
shareholders?
(g) The fundamental attribute of corporate personality is that the cor-
poiaiion is a legal entity distinct from its members. Discuss.
(h) 'Piomoter is not a trustee or agent for the company but he stands
in a fiduciary position towards it.' Comment.
(i) 'The power of altering Articles is wide, yet it is subject to a large
number of limitations.' Explain.
2. Give a brief description of the documents and statements which
h:uc to be filed with the Registrar before and after the incorporation of a
company.
'i. What do you understand by (a) Afemorandum of Association, (b)
Articles of .\ssociation? What is the purpose of each? Explain the effect
of Articles.
4. Mention the clauses that a memorandum must contain. Explain
the necessity of setting out clearly the objects in the memorandum. T o
v.-hat extent may a company lawfully undertake business and perform .icis
not expressly set out in the object clause?
5. By what method and to what extent may a coinpany alter iis
memorandum? By whom may an alteration be opposed and in what
way?
G. How, and in what circumstances, can a company reduce, increase
ar.d reorganise its share capital?
7. Explain the meaning and significance of (i) artificial person, (ii)
perpetual bucccssion. Stale the piesent position of the law as to (n) pay-
TEST QUESTIONS 887
ment of commission, (b) the issue of shares at a discount, (c) payment of
interest out of capital, (d) thi creation and redemption of redeemable
shares.
8. (a) State who are members of a compapy. How does a person be-
come a member, and how does he cease to be one? Enumerate a mem-
ber's rights and liabilities.
(b) When will the liability of a member ot A limited company to pay
the company's debts become unlimited?
9. State the law relating to contracts entered into on behalf o£ a
company (i) before its incorporation, (ii) before issue of the certificate • to
commence' business. Can the company ratify tliese contracts?
10. Can a company buy its own shares? When may a company issue
bonus shares? Why are ,trusts prohibited from being entered on the re-
gister?
11. (a) When will the Court order rectification Sf the register of
members?
(b) When can share warrants be issued? What is the effect of the
issue of a share warrant? Can a private company issve it?
12. (a) What is a private company? State its more important pri-
vileges. Describe the procedure for converting a (i) private company into
a public company, and (ii) public company into a private company.
(b) Describe the procedure for transferring shares. Write a short note
on blank transfer and its effect.
13. (a) Explain the meaning and importance of Prospectus. What
constitutes 'public issue' of prospectus? What are the particulars that a
prospectus must contain?
(b) What are the remedies open to the allottee of shares who had
applied for them on the faith of a false and misleading prospectus and
what are the defences available to the directors ot a company that has
issued sutlli a prospectus? Can a buyer of shares in the share market
claim these remedies?
14. (a) Explain the nature of a call. What is the law as to D'ayments
in advance of calls?
(b) In what circumstances may shares be forfeited and what is th
effect of forfeiture? Has a member whose shares have been forfeited any
liability towards the company? How are shares surrendered?
15. Explain fully the doctrine of 'ultra vires' in relation t6 com-
panies. What arc the liabilities of a company and its agents for ultra
vires acts.
16. Explain shares and different classes thereof. Distinguish shares
from stock.
17. DifTerentiatc between tlie various kinds of meetings of the mem-
bers of a company and the various kinds of resolutions which can be pass-
ed at such meetings. Give a few instances in which each ot the resolu-
tion-, is rcciuired. When is special notice of a rcsoliiiion necessary?
18. Define Directors and their position with reference lo company
and to the shareliolders. Enumerate the restrictions, if any, placed on the
election of directors and their powers.
19. What are the duties of directors? When is ilic office of a director
^.•lcatcd? Discuss the liabilities and disqualifications of (h'rcctors.
888 MERCANTILE LAW
20. W h y have tlie systems o£ managing agenqr and secretaries and
treasurers been abolished?
21. What is Minimum Subscription? What is Allotment? Write a
bhort note one Irregular allotment and its effect.
22. State the rules as to the payment o£ dividend. How.and when
may profits be capitalised?
23. Discuss briefly tlie different ways in which- a company can give
security for loans taken by it. Enumerate the mortgages and charges whicli
require' registration, and state the effect of their non-registration.
24. Define Debenture. Discuss different kinds of debentures.. Dis-
ungnish debenture and debenture stock. What are the remedies available
to debenture-holders for realisation of their security?
25. Define a Floating Charge, and distinguish it from fixed charge.
When does a floating charge cease to be afloat?
26. "An auditor is a watchdog and not a bloodhound." Discuss with
special reference to an auditor's duties, powers and liabilities.
27. Enumerate the provisions in the Act dealing with arrangements
for the purposes of re-construction or amalgamation of companies.
28. Examine crititally the provisions of the Companies Act, 1956, for
the prevention of oppression of tlie minority and mismanagement.
29. .What is 'winding up'? State the modes of winding up' of a com-
pany. Outline the procedure of voluntary winding up. When will the
Court order the winding up of a company?
30. What is a contributory and what persons may be made liable as
contributories? What is tlie nature of a contributory's liability? Can he
set off a debt due by the company to himself against his liability to pay a
call? What is the position, if the company had agreed to a set off?
31. When may misfeasance proceedings be taken? When may a liqui-
dator disclaim onerous property of the company.
32. State shortly the rules according to which the assets of a com-
pany are to be distributed in the winding up of an insolvent company.
33. When and how is a company dissolved? A company has been
dissolved. A year later certain of the property of the company comes to
light. Can the dissolution be declared void? If it is not so declared,
what will be the fate of the property?
34.1 "It is a cardinal rule of law that majority of the members of a
company is entited to exercise all the powers of the company and generally
to control its operations." Discuss this rule with reference to companies
registered under the Companies Act.
35. "Directors are not only agents, but are also in some sense trustees
of ihe company." Explain. Can the directors of a company (i) get a loan
from it, (ii) refuse to register a transfer of shares?
' 3(). 'The exact position of directors with regard to the company is
haul to define. They are not servants of the company but are rather in
the position of managing partners.' Discuss, indicating the safeguards
available under tlie Companies Act to prevent misuse of power by directors
for tlieir own private ends.
37. "Not only does the Legislature recognise the private company; it
may be said to bestow its benediction upon it." Comment, indicating the
ad\antages to be derived from the conversion of a trading firm into a
private company. State also how a private <:ompant)r can be converted into
a';)ublic company. When will it be, degmed to tie a public company?
 TEST QUESTIONS 889

38. "A petition for a wnding-up order is a proper as well as effective

' mode of 'enforcing payment of a debt due from a company." Discuss,
indicating the several grounds on which a winding-up order can be made
and the effect of such an order.
39. State what you undei stand by tiie term 'unregistered company'
and briefly describe the procedure of winding-up sucli companies under
the Indian Companies Act.
40. (a) Can a fully paid up shareholder apply for winding up order?
(b) Can an illegal association or an unregistered company be wound
up? Why?
41. If a company borrows beyond its powers, examine the remedies
op>en to such a creditor—(i) where the money has not been spent, and (ii)
where the money has been used to pay the debts of the company.
42. What is the position and status of a company consisting of more
than 20 members but not registered under the Indian Companies .Act?
What are the disabilities that the said company and those that deal with it
suffer from?
43. Point out the distinction between and the special features of (i)
a winding up of a company by .Court, (ii) a winding up subject to 'he
supervision of Court, and, (iii) a voluntary winding up.
Can a Court order winding up of a Company on the petition of a
holder of fully paid up shares?
44. Attempt the following problems, giving reasons for your answers:
(a) A contract between N. W. Ltd.,' and B, one of its directors, is
referred to a general meeting for its approval. At the meeting,
B voted for the resolution and all others against it. But, as B
held a majority of shares and was entitled to a "majority of
votes, the resolution was passed. Is tlie contract binding on the
company?
(b) A shareholder of a company, who sold his shares, executed blank
transfer forms and delivered diem along witli the share certi-
ficates to the purchaser. He wrote to the company that he had
sold the shares, but neither he nor the purchaser deposited the
transfer forms with the company, and consequently the transfer
was not noted on the register of members. On the winding u p
of the company, who should be placed on the list of contri-
butories?
(c) T h e articles of a company contained a clause providing Miat A
should be employed as a legal adviser' of the compary for five
years. A took office and subsequently became a shareholder.
Before the period of five years expired the company disconti-
nued his employment. Can he claim damages?
(d) Consider these two cases: (i) A agrees to take up debentures in
the company; he subsequently refuses to j>ay. (ii) B sells cer-
tain property to the Z Co., and the company agrees to pay for it
"by the issue to B of debentures cliarged on the p7openy: the
property is handed over to the company, and before any de-
bentures are issued to B, it is seized in execution of a decree. ]i
wishes to know what his rights aie.
(e) A was employed as a Managing Diicctor of a company under a
written contract but the direciors who ra.nde it were not quali-
fied. Discuss if A has any remedy against I'lc company for the
woik. done by iiini as managing director.
890 MERCANTILE LAW
(() T h e constitution o£ a company empowers it to borrow money
"on the security of any property of the company". Can it /
create a charge on uncalled capital?
(g) A applied for shares in a company. T h e directors sent a letter
of allotment to A calling upon him to pay the allotment money
by a certain day. A docs not pay the allotment money and his
iiami- is r!Ot included in the register of members. After two
years, the company is wound up. A is called upon to pay calls
by the liquidator. How far is A liable? Can A|s n?»me be in-
cluded in the list o£ cSntributories?
(h) A managing director "of a company draws a bill on behalf o£
the company. In 'fact he had no authority to draw the bill. Is
the' bill binding upon the company?
(i) J, a furniture dealer, entered upon a contract with a company
for furnishing the offices of the company. T h e company went
jt5to liquidation before it became entitled to commence busi-
ness. Can J prove in the winding up for the price of furniture
supplied to the company? '
(j) A, the director of a public limited company, borrows money from
the company. Discuss the legality or otherwise of the loan (i)
if it is with security, (ii) if it is without security, (iii) if the com-
pany is a banking company.
(k) P agrees with T & Co., Ltd. to provide monfey for the payment
of dividends to the shareholders of T & Co., Ltd., for three year*
and the company agrees to repay P on demand any sums so ad-
vanced by P with interest agreed upon. After P has paid vari-
ous sums to the company under the agreement for three years.
he calls upon the company to repay the amount. Is the com-
pany liable to pay?
(1) A joint-stock company borrows money from X beyond its powers.
Has Y, a shareholder, any remedy against (i) the company, (ii)
the directors of the company?
(m) A & Co. were appointed managing agents of M. P. Ltd., on
5th March, 1964. On July 28, lOfiS, the company at its general
meeting, at whicli all the members were present, extended the
term of office of the managing agents by 20 yea>s and increased
their rc-nuncration. Is the new agreement binding on the com-
pany?
(n) Explain the nature and legal incidence of a floating charge.
On Februa-y 1, I9G5, a company, in consideration of a past debt
of Rs. 50,000 and a fuiuie ad\ance of Rs. 25,000, issues a de-
benture to a creditor accompanied Ijy a floating charge over its
assets. On October 1, in()5, the company is wound up. .State
the rights of the creditor in the winding up.
(o) T h e name of a creditor entitled to object to reduction of share
capital of a company was omitted from the list of creditors by
mistake. Reduction of share ca])ital was ordered. If the com-
pany is unable to pay his debt, how is h e ' t o recover the debt
(i) if the company is .•> irking, and (ii) if tlic company is woimd
up?
(p) The managing agents of a company borrowed Rs. 10.000 from
A and executed a promissory note in favour of A. There was
no indiraiiovi on the face of the pro-note as to whether the
T E S T QUESTIONS 891

money was borrowed for and on behalf of tlie company The

company got the benefit of the money so borrowed. Is the
company liable to pay the debt?
(q) An employee of the press where a prospectus is being printed
reads it during the printing and on tlie faith of ihe statements
made therein purchases some sh.ires in the company. T h e state-
ments are false. Can he avoid the coiitraLt, .md .uc the direc-
tors, under whose signatures the piospectus is issued, liable to
him?
^r) In a winding up the Court -makes a call of Rs. 5 per equity
share. The company owes a debt of Rs. 1,000 to a shareholder
who holds 500 equity shares. How much will the shareholder
have to pay in pursuance of this call?
(s) T h e auditors of a company presented a confidential report to the
directors, pointing out that the security for the loans was in->
sufficient and that there was difficulty in realisation. They also
reported that in their opinion no dividend should be paid for
the year. In their report to the shareholders, they merely stat-
ed that the value of the assets depended upon realisation. 'i"he
company declared a dividend of 7 p.c. out of the capital and
not out of income. Examine the liability of the auditors.
(t) A lent a sum of money to a company, upon the terms that he
should have a collateral security of fully paid shares in the com-
pany. The company handed over to A certificates for 10,000
shares of £1 each. The certificates stated that he was the regis-
tered holder of the shares and that they were fully paid. No
money had in fact been paid upon the shares which were is-
sued from the company direct. A did not know it and believ-
ed that they were fully paid shares. Subsequently the company
was wound up and A was placed on the list of contributories.
Examine the legal position.
(u) A buys from B 4,000 shares in a company on the faith of a
share certificate issued by the company, A tenders to the com-
pany a' transfer from R to himself duly execttcd together with
B's share certificate. T h e company discovers that the certificate
in the name of B has been fraudulently obtained «nd refuses
to register the transfer. Is A entitled to get registration of the
transfer?
(v) T h e prospectus of a cycle manufacturing company stated: "This
is the first time that the company's cycle has done a mile in
90 seconds... .Every rider to whom speed is an object is bound
to have i t . . . . w h a t cycle riders are there who will buy slow
macliines when one admittedly faster is there in the market."
On the faith of this statement the plaintiff bought 50 shaies,
but later disto\ered that the foni])any's cycle had only Ordinary
speed. Discuss his tcmedics.
(w) A company was in great need of further capital. The majority
representing 9 8 % of the share capit.il were wiljing to provide
tlie capii=il if they could buy up the two per cent minority.
Tlic majority passed a resolution altering the articles and en-
ablutg them to purchase the minority shares. Examine the
legality of the .ilteration.
(x) Tlie majority of the sliarelioldcrs of a comp.my passed a special
resolution to alter its articles and give the directors a power to
892 MERCANTILE LAW
require any shareholder who competed with the company's
business to transfer his shares. 'I'he plaintifE who carried on a
competing business challenged the validity of the alteration.
Give your decision on this point,
(y) A company was formed to manufacture cement and allied pro
ducts. Finding that there was a profitable future in making
tarred roads the directors made a scheme to undertake it on
behalf of the company. They consulted the company's solicitor
who advised that the scheme was 'intra vires'. T h e schema,
however, failed and the whole of the capital was lost. T h e
directors were sired for negligence and breach of trust. T h e
scheme was found to be 'ultra vires'. Examine their liability.
45. 'While the Memorandum of Association of a company defines as
well as conhnes its scope and powers, the articles govern the way in which
the objects of the company are to be carried out.' Explain, bringing out
clearly the scope and purpose of, each, with particular reference to the
doctrine of ultra vires.
46. 'There is no binding authority for the proposition that a com-
pany, because it has taken the benefit of work done under a contract
entered into before the formation of the company, can be made liable in
equity under tliat contract.' Examine the truth of this statement.
47. 'On the plain reading of Sec. 125 of the Act it cannot be said
that the failure to register a charge created by a company renders the
charge invalid and a nullity; the effect of the section is that if the charge
is unregistered the liquidator is not to take any notice of it as a mortgage.'
Amplify.
48. Attempt the following problems, giving reasons for your answei;.:—
(a) R converted his business info a company. He had business as-
sets of the value of £1,000 and debts of the same amount. R
contmued to carry on the whole business of the company, and
without any meeting of the board of directois or of the company
issued debentures to D for £5,000 under the seal of the com-
pany. The articles empowered the company to is^ue deben-
tures. Tb.s company was ordered lo be wound up. Discuss
whether D has priority over the other creditojs.
(b) A was on the list of contributories as a member who had trans-
ferred lijs shares within a year before the winding up order.
After ,a_ call had been made against him by the liquidator, he
bought certain debts which were due from the company before
he transferred his shaies, and claimed a ieduction in his liabil-
ity unc'er the call to the extent of those debts. Is his claim
maintainable?
(c) T h e debentuies issued by a company created a floating ch.ugc
on the company's .property and stock-hi-trade, %vitli tlie condi-
tion that the company was not to create any prior charge. T h e
manager of the company having completely forgotten this com-
mirment deposited the title deeds ol the comp.myS propeiry
with a bank l)y way of security for a loan obtained. The bank
also happened to hold some of the company's debentures on
deposit Cor one of its customers. How would you decide the
issue of piioiity of charges between the debeiUurc-liolders and
the bank?
(d) Tlie directors oE a company bought some of its shares fiom a
shareholder while they were negotiating for a transaction finan-
T E S T QUESTIONS 893
cially advantageous to the company, and which, iE successful,
would have substantially raised the market value of its shares.
They did not disclose this information to the shareholder when
buying his shaies. The erstwhile shareholder sued the directors
for rescision of sale on the ground of fraud. Stale, giving rea-
sons, ivhetlier he will succeed,
(e) Four-fifths of the voting shares in' a family company founded
by a man were held by himself and his wife who voted as he
directed. Four-fifths of .the dividends-6n ordinary shares were
payable to his tivo sons. Fatlier and sons were all life directors
and the father was also the chairman. T h e sons' shares were
gifts fiom the father. T h e father acted consistently as if he
could, whenever he liked, overrule any decision of the board or
regulate any matter of the company's business as he wished
without any formality. He gave directions to the staff behind
the back of his co-directors and tried to pack the board with
voters on whom he could rely. Advise the sons as to the courses
open to them.

CHAPTER XVII
Banking Ckimpanies
1. Define a banking company, and state the business which a bank-
ing company may transact.
2. What are the requirements, under the Banking Regulation Act,
with regard to paid up capital and reserves as xvell as reserve fund and
cash reserve?
"S. What powers may the Reserve Bank exercise to ensure the stability
of a bank with a view to protecting the interests of depositors?
4. What is meant by 'moratorium'? How, when and for what
period can it be granted and by whom?
5. Summarise the provisions of the Banking Regulation Act, 1949,
regarding winding up of a banking company.
6. Discuss the restrictions placed by the Banking Regulation Act with
regard to (i) trading by a bank, (ii) appointment of managing agent or
managing director, (iii) voting power, (iv.) directors, and (v) licensing of
banking companies.
7. State the provisions of the Act regarding chairman and directors
of a banking company.
8. State the restrictions imposed regarding loans and advances.
9. Summarise the statutory provisions regarding acquisition by the
Central Government of the undertaking of a banking company.
10. W h a t are the functions and powers of the Tribunal set up under
Banking Regulation Act?
CHAPTER XVIII
Insurance Act, 1938
1. Who is entitled to transact insurance business in India? Under
what circumstances may the Controller of Insurance cancel or withhold the
ccrtifirate of registration?
2. What are tlie requirements of the Insurance Act as to deposits
to be ns.iintained with the Reser\'e Bank of India by insurers carrying on
t!ie business of insurance after 1968? What is the insurer's obligation in
894 MERCANTILE LAW
the event of any part of such deposit being used in the discharge of any
lialjiliiy ol the insurer?
3. Explain the restrictions on the name by which any insurer, includ-
ing a provident society, can be registered?
4. What arc the requirements of the Insurance Act relating to the
submission of returns of their audited accounts by insurers incorporated
or domiciled in India and carrying on business in India and abroad? What
is the nature of tlie exemption to which insurance companies incorporat-
ed under tlie Companies Act are entitled in connection with such returns?
5. Outline the powers conferred on the Controller of Insurance for
the purpose of conducting an investigation into tlie affairs of any insurer.
6. Enumerate tlie securities in which an insurer carrying on general
insurance business may invest or, keep investet'i any part of his assets.
7. When may the Central Government sanction a scheme submitted
by an insurance company limited by shares lor its conversion into a com-
pany limited by guarantee (a "Mutual Company")? What remedy is avail-
able to a person aggrieved by such a sanction?
8. (a) Distinguish between assignment and nomination.
^b) Describe the procedure for making and recording a transfer or
as^is5nment of a policy of life insurance under the Insurance Act.
(c) Describe the alternative methods of making an effectual nomination
under a life insurance policy. Can a nomination be changed or cancelled
by will? When is a cancellation or change of nomination "binding upon
the insurer?
9. Attempt the following problems, giving reasons for your answers:
(a) A, the holder of a policy of life insurance on his own life,
assigns it to his wife, B, on the condition that the benefits under
the policy are to revert to him should B die during his life-time.
A year later A revokes the assignment on the ground that it was
conditional. Thereafter A dies during B's life-tirne. Both B
and A's legal representatives claim tlie policy money. Whose
claim will prevail, and why?
(b) M is the holder of a policy of life insurance on his own life, and
Mrs. M is mentioned in the text of the policy as the person who
should be paid the amount of the policy in the event of his
death. Afteiwards, "M nominates by will his brother, R, in place
of Mrs. M, and sends a notice of the change by post to the Life
Insurance Corporation. T h e letter is lost in transit. Upon the
death of M, the Corporation pays the policy money to Mrs. M.
What are R's rights against the Corporation?
(c) A took a loan from the A. Bank Ltd., and ,issigncd his life policy
in its favour. A died and the bank claimed the policy money,
but the insurer declined to pay. In the mcamimc, R, the legal
representative of A, redeemed the policy by satisfying the bank's
debt, and put in a claim with the insurer for the policy money.
The insurer refused to pay to R on tlic plea that the bank,
as assignee, was entitled to receive payment. Advise R.
(d) A holder of a marine insurance policy obtains a decree against
the insurer in respect of a claim arising but of his policy. Prior
to the date of this decree another decree had bcci: pissed against
the ir.surer iis a suit for arrears of rent filed by the landlord of
the premises rented by the insurer. Upon the failure of (he
insurer to satisfy the decrees, ths dccree-hclrferi scel to execute
TEST QUESTIONS 895
their respective decrees by attaching the amount of the statutory
deposit made by the in&arer with liie Re^si-ve Bank, under S. 7
of the Insurance Act. Can tJipy do so? Discuss.
(e) T h e holder of a policy of life insurance nominated a minor as
the beneficiary of his pohci' and simultaueousiy appointed X in
the prescribed manner a;, the person to receive tlie money
secured by the policy in the event of his own deadi during the
minority of the nominee. The appointment was in due courbC
communicated to the insurer. Prior to the nomination Y has
been appointed die lawful guardian of the property of the
minor by an order of a conipet'ent court. T h e holder of d.e
policy subsequently died during the minority of the nominee.
Both X any Y apply to the insurer for being paid the amount
covered by the policy on behalf of the minor. Which of them
is entifled to the payment and why?
(f) On 15th January, 1969 A assigned his life insurance poliqf to B
for valuable consideration by a separate deed of assignment.
On 1st February, 1969 A transferred the same policy by endorse-
nii-!it thereon to C as a gift, and on the same day gave notice of
the transfer in favour of C to the Life Insurance Corporation in
the prescribed manner enclosing therewith the original deed o£
assignment. Bodi B and C claim the amount covered by the
policy upofi maturity. Whose claim will be recognised by the
Cotporation and why? Will it make any difference to your
answer if faotli the assignments had been for consideration?
(g) A, the holder of a policy of life insurance on his own life,
nomirtates B as the person to whom the amount of the policy
is to be paid in the event of his death. Thereafter A secures a
loan from the insurer and assigns his policy to the insurer in
consideration of the loan. In due course the loan is repaid
and the policy is reassigned to A. A thereafter dies. Both B
and the legal representative of A claim the amount of the policy.
Whose claim will be preferred, and why? Discuss.
CHAPTER XIX
Trusts afld Socjeties' Registration
1. Define a 'Trust', a 'Beneficiary'. What is meant by a 'breacli of
trust'?
2. What are the requisites of a valid trust? How may such trusts be
created? Who may create a trust? Of what subject matter may a trust
be created? Is it correct to say that the trustee is the legal owner, while
the beneficiary is the equitable owner?
3. "One of the essentials to the creation of a trust under the Indian
Trust Act is that the audior of the trust should transfer the property to
the trustee." Comment.
4. Who may be appointed.as a trustee? Who can be a beneficiary?
Is a trustee entitled to renounce a trust, and if so, when?
5. ^Vhen may a trustee disclaim a trust and a beneficiary liii, interest
under the trust?
6. Enumerate the duties, rights and powers of a tiustee.
7. What is the care required from a trustee?
8. (a) A bequeaths certain properties to B having die fullest ccn-
hdence that he will dispose of it for the bepe£t pf C. 1'^ the:2 any tru^t?
896 MERCANTILE LAW

(b) A trustee was given power 'to invest the trust funds in his own
business'. He transferred the trust funds to discharge an overdraft ac-
count lie had with his bankers, Discuss v/hether this was in order.'
(c) X contracts with Y to pay him monthly Rs. 1,000 for the benefit
o£ Z. Y writes and signs a letter declaring that he will hold in trust for
Z the money so to be paid. X fails to pay the money in accordance with
the contract. Has Z any remedy, and if so, what?
(d) The mesnorandum of association of a limited company contained
among its objects the allocation of 2 0 % of moneys received from donation
certificate holders to a specified trust. Moneys were remitted by subscri-
bers on the footing of the conditions in the certificate and the raemorandum
of association. Is any valid trust created?
9. (a) What are the liabilities of a trustee who commits a breach of
trust? State the cases in. which a trustee, v/ho commits a breach of trust, is
liable to pay (i) simple interest, (ii) compound interest.
(b) A trustee improperly leaves trust propelty outstanding and it is->
lost. Is he liable to make good the loss of the property jmd pay interest?/
10. Elucidare: "A trustee cannot delegate his office or any of his
duties." State the exceptions to this lule.
11. State the rights and liabiiiti« of a beneficiary. In what circum-
stances and to what extent is a beneficiary entitled to follow trust property
in the hands of third persons? Can- he follow trust money?'
12. What is the position of beneficiary whg joins in a breach of trust?
When are the other beneficiaries entitled to impound the beneficial in-
terest of the beneficiaries?
13. How is the office of a trustee vacated? When and how will a
new trustee be appointed?
14. How is a trust (i) extinguished, (ii) revoked?
15. Write a short note on "obligations in tlie nature o£ a trust".
16. What types of societies are entitled to register under the Societies
Registration Act, J860? State the advantages gained by such registration.^
17. What is the procedure for registering a society under the Societies
Registration Act? What js the mode o£ altering tlie purpose of such a
society?
18. What are the provisions for the dissolution of a society register-
ed under the Societies Registration Act? On the dissolution of such a
society, wl\at h done with the surplus ussets after paying its debts and
liabilities?
19. (a) The governing body of a society registered under the Societies
Registration Act for the etiucation of boys wishes to include the education
of girls. State the nece.ssary formalities.
(b) T h e Delhi Tennis Club wishes to be incorporated. Can it do so
(i) under the Societies' RegisUation Act, (ii) without using the word
'Limited' under the Companies Act?

CH.A.rTER XX
Factories Aci
1. Define a factory, and an occupier. AVhcn is a worker liable to
punishment under the Factories Act?
2. Briefly state the provisions of the Factories Act with regard to
health, safety and welfare.
 TEST QUESTIONS 897

. S. Examine the provisions of the Factories Act regarfiing' one hours

of work in factories and leave with pay.
4 What restrictions are imposed by the Factories Act on the em-
plpynjent and work, of women and young persons in India?
5. A t t e m p t the following problems giving reasons for your answers:
(a) In a factory, women workers were allowed by t|ie occupier to
dust and otherwise regulate their spinning frames for their own
satisfaction and comfort before the fixed time.- What action
could be taken against the occupier?
(b) T h e services of a woman worker who had compleied a period
of four months' continuous service in a factory were terminated
before she had completed a period of twelve months' continu-
ous service. T o what leave is she entitled? Woiild it make any
difference if she were a girl under the age of 15 years?
(c) A was the owner and B the manager of a factor]' which was
sold to C on March 1, 1955. Immediately after taking posses-
sion, C appointed D as a manager who, during a check up, dis-
covered that a boy, ten years old, had been working in the
factory since January 1, 195'i. D reported the fact to the Chief
Factory Inspector and discharged the boy, whereupon prosecu-
tion was launched against A, B, C and D. How would you de-
cide the case?

CHAPTER XXI
Workmen's Compesisation
1. Distinguish between total and partial disability (disablement) of
a workman under the Workmen's Compensation Act.
2. When is an employer (i) liable, (ii) not liable, to pay compen-
sation to a workman for personal injury?
3. Explain fully and illustrate the expression 'arising out of and in
the course of employment'. Where an accident arises out of and in the
^course of employment, can the employer plead 'common employment',
'assumed risk' or 'contributor}- negligence' in his defence?
4. Discuss whether the employer is liable to pay compensation in the
following cases:—
(a) A workman went across the road to fetcli milk for himself for
tea on the premises and was run over.
(b) An employee left the employer's premises to take meals else-
where.
(c) A roadman, while working on the road, was killed by lightning.
(d) A worker working in a shed was injured by the fall of a wall
which was not tlie property of -or under the control of the em-
ployer.
(e) A minor in the drilling work for releasing gas was forbidden to
enter the gas-filled part of tlie mine. He violated the order and
was suffocated.
(f) An electrician in a press had, in the course of his duties, fre-
quently to go into a heating room and from there a cooling plant
where tlw temperature was kept considerably low. One night,
when he went into the cooling room, he got pneumonia and
died fiom that disease.
 898 MERCANTILE LAW
(g; fl V^«~irVey Jost his mental balance as a result of an injury by
accident and committed suicide.
CHAPTER XXII
Trade Unions
1. What is a Trade Union? What are the rights and privileges of a
registered Trade Union and of its members? Does a suit lie to prevent
tfie officer of a registered Trade Union from trespassing on the plaintiffs
land (accompanied by'some armed persons) and staging demonstrations
thereon, which are calculated to overawe and intimidate the plaintiff and
workmen?
2. When and for what purpose may a Trade Union create a politi-
cal fund?
S. Describe the procedure for the registration of a Trade Union and
its dissolution.
CHAPTERS XXIII AND XXIV
Payment of Wages, Industrial DisjJutes
1. Define wages under Payment of Wages Act. State tlie rules with
regard to the time of payment of wages.
2. Discuss the provisions of the Payment of Wages Act with regard to
the deductions which (i) may, (ii) may not, be made from wages.
3. (a) T h e N. W. Railway reduced the monthly r a t e of pay of A,
an engine driver, by Rs. 7 for unsatisfactory work. Advise A.
(b) The employa^ of a worker under the age of 15 years and earning
Rs. 30 a month deducts 50 paise by way of fine from his wages for the
month and credits the amount to a fund created for building a temple in
the employer's village. T h e employee petitions for refund and prays for
punishment to the employer. Will he succeed?
4. Explain clearly the machinery that exists under the Industrial Dis-
putes Act for tlie settlement of disputes.
5. Examine briefly the powers and duties of a conciliation officer, and
an industrial tribunal under the Industrial Disputes Act. \_
6. (a) When will a" strike or a lock-out be illegal? State the piovis-
ions relating to the prohibition of strikes and lock-outs.
(b) As a result of faction between rival trade unions there was a stop-
page of work for twelve days in a colliery, and not a single worker out of
a total strength of 2,200 men attended. T h e employer contended that tlic
cessation of work was a 'concerted refusal' to work witliout notice and
amounted to an illegal strike. Decide the case.
7. State the provisions relating to lay-off and retrenchment.
8. Discuss the considerations taken into account by the Adjudicators
or Industrial Tribunals in deciding the issue of payment of wages during
a period of strike or lock-out.
CHAPTER XXV
Minimum Wagei
1. What is a minimum wage, a living ^age? Describe the procedure
for fixing minimum wages, ,
2. Discuss the provisions according to which the employer must pay
to his employees a minimum wage. What are tlie consetjuencff of fnikire
to pay the minimum wage? When and how can an employer escape
liabilty for an offence committed against the Act?
3. Enumerate the different kinds of employment in whicli minimum
-wages must be paid.
 Index
of memorandum 514
of negotiable instruments 387
Abandonment 300Ambiguous Instrument 353
Acceptance Annual Return 531
o£ bill of exchange 373 meeting 551
of goods 252Annulment o[ Adjudication 417,
o£ offer 20 oi composition 41 d
for honour 375Anomalous mortgage 483
presentment for 377Anticipatory Breach 96
revocation of 23Appropriation
Accept, who may 20, 375 of goods 241
Acceptor for honour^ 357, 376 of payments 74
Accident Arbitration
Insurance 321 • ' agreement 444
Accommodation bill 340 award 454
Accord and Satisfaction 32, 81 modes of submission to 448
Account Payee M9 Arbitrator and Umpire 449
Accounts appointment by Court 451
of company 557 duties and powers of 452
of partnership, settlement 210Articles of Association 519
Acts of Insolvency 406 alteration of 520
Act of the Firm 203 effect of 520
Adatia 55Ascertained Goods 227
Adjudication Order- 412 passing of property in " 240
annulment of 417Assignment
Advisory Commission 589 of contract 77
Committee 589 of policy 297, 310,
318
Affreightment, contract of 466Association not for profit 506
Agency Auction Sales 261
creation of 151Auctioneer 157
termination of 170Auditor and Audit 559
Agent Average
and Principal, defined 150 carriage of goo^s in 473
authority of 164 clause, in fire insurance 307
classes of 155 general, in marine insurance 303
personal liability of 168 particular, in marine in
Agreement 11 su ranee 3oa
arbitration 444Avoidance of Fraudulent
illegal 50, 52 Preference 415
immoral 57Award 454
opposed to'public policy 57
unlawful 50
Alien Enemy 37
Allotment of shares 533 Bailment and P]edge ]3i
irregular 534 Banker 157, 343, 607
return of 535 collecting 346
Alteration marking of cheques by 351
of articles 520 protection of paying 345
 MERCANTILE LAW
ts ot holders, against capital 516
jJariking Companies ' 6201 memorandum of association 514
ircr Instrument 364 annual return 531
neficiary 642, 648 appointment of auditors 559
( c£ Exchange 338 directors 566
i of Lading 471 managing agents 582
J of Sale 492 special audit 552
tiomry & Respondentia bond 305 articles of association 519
94 auditois 559
Breath of Contracr 96 balance sheet 558
ai'ticipatory or constructive 97 borrowing powers 544
remedies for 156 calls 542
B/okers 221 diairman 5^3
Buyer 252 commencement of business 509
acceptance of goods, by 249 commission 535
duties o£ 260 contracts, preliminary 508
rights of 248
cooperative societies 631
sale by debenture and debenture
C stock 545
directors 566-581
Calls 542 dividends 542
Capital da"J53 512 capitalisation of profits 544
Carri.igc, con'fart of 460 fixed or floating cliarge 546
by air 479 foreign companies 505
470 government companies 505
of goodD by sea
464 holding and subsidiary com-
Carriers 460
corr-iTiOT 141, panies 504
460 insurance companies 641
private 462
r<i!iway; as investment company 505
275, 297 liability of members 518, 528
Causa Proxiiaa
Caveat Emptor 42, 232 liquidators 595
508 manager ,580
Certificate ot Incorporation
Champerty and Maintenance 59 managing agent 581
Charges 544 managing director 581
register of 548 meetings 550
Charter party 467 membership 527
Cheoues ^'^2 •S52 memorandum of association 514
C.I.F. or C.F.L Contracts 243 minimum subscription 534
C.LF.I. Contracts 246 mortgages 544
Coercion ' 46 notice of trusts 529
Commission, agent 156 preliminary contract 508
under Company Law 535 private company 50\
Common carrier H I . 460 prohibition of large partner-
Common Law 2 ships 506
Communication, when complete promoter 509
19, 22 prospectus 522
477 proxv 553
Company 606 pui)lic company 503
banking 507 public trustee 530
formation of 477 t(u orum 552
Company Law 557 rectification of register 'J20
accounts of company 5P9 relative ')R3
advisory committee 533 resohnions fi5S
aHotment of shares secrctaiie-, and treaswicrs ^182
afieration of 520 shaies 532
articles of association
INDEX 901

allotment of 533 opposed to pisibC«-fo^'«^? 57

certificate of 537 Contract of
classes of ^^2 agency 150
loifeiture of 542 affreightment 466
issue of, at premium or bailment 134
discount 536 carriage 460
transfer of ^ao guarantee 115
blank transfer 540 indemnity 113
certification of 540 insurance 272
forged tiansfer 540 mortgage 481
surrender of 542 pledge 143
share \\arrant 5S7 sale of goods 221
stock 516 uberrimae fidei 42
underivriting commission' 536 Corporation 38, 497
winding up 589 Ci OSS words 56
consequences of 592
liquidators 595 D
compulsory 589 Damages
wnder supervision 592 buyer's right for 260
voluntary 590 lor breach of contracf, 97-101
CompCiisation, Workmen's 697, 704 I ules re 99
amount of 709 seller's right for 259
Composition and Scheme 583 Dangerous Goods 461
Conditions and Warranties 232, 290 Debentures 545
Consent ^" Debenture Holders
absent, what effect 38 appointnjent of Receiver by 547
discharge of contract, by 79 remedies of 547
essential in contract 10 register of 548
flaw in 38 Debenture Stock 545
Consideration 25 Debts
accord and satisfaction 32, 81 ^ priority of 430, 592
t;oritngent Contracts 71 in insolvency 430
^Contiacts 5 in winding up 592
assignment of '' proof of
definition of ^ in' insolvency 420
devolution <•' in winding up 592
discharges of 71 Delivery (See Sale of Goods) 250
essentials of a valid 10 Demurrage 470
consensus ad idem 10 Deviation 293
proposal or offer 12 justifiable 294
acceptance 20 De\oiution of joint rights and
consideration 25 liabilities 75
flaws in contracts 33 Director (See Company Law) 556
\oid agreements 35, 64 Dishonour of Bill 383
void and voidable 33 Di\ idends 542
flaw in capacity 34 Doiil)ie Insurance 280
Paw in consent 38 Drunken Persons 37
implied or quasi contracts 66J1
tiovation 80
remedies for breach of 97-102
unlawful agreements 50 Elcctiicity Act 637
2
illegal 50, 52 t(]iuty
illegal,and void 50 of redemption
immoral 57 Ltpiity 'hate;
902 MERCANTILE LAW
Equitable Mortgage 483 Hundis goQ
Estoppel Hypothecation 223, 4 ^
agency by 152
partners by 185

Implied Conditions and

Warranties
Factories Act 660 in marine insurance 29J
certifying suigeon 663 in sale of goods 234
definitions 660 Implied Contracts 3
employment of women 680 Inchoate Instrument 353
of young persons 681 Indemnity, contract of 113
health 664 Indorsement (See Neg. Ins.) 365
inspecting staff 662 Industrial Disputes Act 731-750
leave with wages 685 authorities under 734
penalties 690 definitions 731
safety 667 lay-off 74K
welfare 674 procedure under - ^4f)~
working hours 676 retrenchment 745
Finder of goods 69, 140 strikes and lock-outs 744
Fire Insurance 307-312 Infants (See Minors) 34
Flaws in Contracts 33 Insolvency 403-443
F.p.B. ' 243 acts of 406
Foreclosure 486 Adjudication order 412
Foreign Companies 505 after acquired property 429
Foreign Sovereigns and annulment
Ambassadors 37 of adjudication order 417
Fraud 44 of composition 419
of agent 168 antecedent transactions 414
of partner 204 avoidance of fraudulent
Frustration 87-94 preference 415
avoidance of voluntary

Goods (See.Sale of Goods)

Goodwill
226
194
transfer
composition and scljeme
disclaimer
t'
41
430
doctrine of relation back 413
Government Companies 505 duties of debtor (P.I.A.) 411
Gratuitous Bailment_^ 135, 140 of insolvent 416
Guarantee, contract of 115 discharge of 43S
discharge of surety 124 duties, after 437
distinction between indemnity effect of 436
and ' limitations to
Kinds of guarantee ' 119 P.T.I.A. 435
rights of surety 121 P.T.I.A. and P.I.A. 435
revocation of (P.T.I.A.) 437
H who may become 404
insolvent's property 422
H ire-Purchase Agreement 224 insolvent's schedule 416
Holder 357 Insurance 272-331
Holder in Due Course 358 accident 321
Holding and subsidiary contract uberrimae fidei 42, 273
Companies 504 definition of j272
Hei-iing out contribution 282
O.J agent 152 cover note, etc. I79
^ partner 185 days of grace- 277
INDEX 903

double 2801 Manager of Comparry 580

fundamental principles of 273 of factory 690
policy 278 Managing Agency abolished 581
premium 276 Marine Insurance 284
le-insurance 279 Market Overt 249
siibrogatiojj 281 Master of Ship 473
Fidelity Insurance 323 Mate's Receipt 472
Fire Insurance 305 Maturity 355
Lite Assurance 313 Meetings 550
Marine Insurance 284 ,\rembers 527
Motor Car Insurance 323 Memorandum of Association 514
Personal Accident Merchantability 237
I::surance 321 Mercantile Agents 155
Property Insurance S23 sale by 247
Insurance Act 635-641 Mercantile Person I
Issue of shares at premium Mergers 489
or discount 536 Minimum Subscription 534
Minimum Wages Act 746-755
Advisory Boards 749
claims 751
Jettison 304 fixing of 747
Joint and Several Liability of interpretation 746
Partner 203 mihimum rates of wages 748
Joint Hindu Family Firm 192 Minor
age of majority 34
as agent 151
contracts by or with, void 35
Law Merchant 3 in partnership 183
Lays Days 470 Misrepresentation 44
Lay off 745 by agent 167
Lex Mercatoria 4 fraudulent, by minor 86
Lien 495 innocent or wilful 44
agent's ' 163 prospectus and 526
auctioneer's 157 Mistake 39
bailee's 139 Aforatorium 624
company's 528 Mortgage 481
finder's 141 charge and 490
general and particular 139 kinds of 482
pawnee's 143 marshalling 484
seller's 255 hypothecation 495
stoppage in transit and 256 pledge 481
Life Assurance 333 sub-mortgage 483
Limited Paitnership 213 Mortgagee 485
Liquidator rights and liabilities of 485
ii! compulsory winding up 595 Mortgagor 483
ill %oIuntary winding up 597 rights and liabilities of 483
Lo'.scs 297-30G
Lotteries 56 N
Lunatics 37
foiitracis by or witli 37 Necessaries 36
idiots and 37 Negotiable Instruments 332
acceptance 33,1
M for honour
accommodation bill
Nr.iiniciitnce and rhnmpcrty 50 backer
3tfe
904 MERCANTILE LAW
bill of exchange 338
cheques 342
banker, collecting 346 Pakka Adatia
i)5%
banker, liability of 343 Partners
344 184
lefuse to pay classes of 184
paying 345 duties of
347 197v
rights of holdei, against implied authority of 201
crosbing of 348
350 joint and several liability of 203
not nejjotiabie rainoc !8S
billi and 342
351 no implied authority 202
marking of rights of i95
discharge fiom liability sub-partners 187
of parties to 386 Partnership 180, 189
dishonoui 380 company and 191
drawee in case of need 356 co-ov^nership and 191
holder 357 deed of ^ 189
holder in diife course 358 180
definition and nature of
hundis 390 206^
tlissolution of
indorsement 365 192 ^
362 duration of
l^iability of parties to effect of non-registration of 179^
material altef^ion 387 182
355 firm and firm name
maturity goodwill 194
meaning of Neg. Inst 333 192
363 Hindu Joint Family and
negotiability 333, property of 193
363 178
negotiation registration of firms
383 •212
noting return of .premium
356 189
parties to test of
376 209
payment for honour winding up
377 213
presentment
380 Partnership Limited
378, 143, 48i
excused Pawn
335 143
presumptions as to
335 Pawnee 144
promissory Bote Pawnor
338 144
bill and effect of default by
384 34C*
protest, contents of
383 Payment in due course 724-730TI
protesting 388 Payment of Wages Act
retirement of bill 353 claim for wrongful deduc-
usances tions 729
Notice deductions 726
of abandonment 300 definitions 724
of dishonour 381 responsibility for payment 725
of meetings 552 wage periods 72i
to agent 167 Penalty and Liquidated
of Trusts 529 100
Damages
Novation 80,188 71
Performance of Contract
Impossibility of 82-94
O 74
mode of
Offer 12 order of, reciprocal 73
acceptance of 20 Personation of Shareholder 538
legal rules as to 12 Pledge 143
standing 19 by non owners 145 -
•when lapses 17 Poll 554 j
C4|cial Assignee 426. 427, 431 Power of Attorney 152
Off cial Liquidator 596 Preference shares 532
Mf cial Receiver 432 Price 230
ojjeration of contract 102 Primage 473