Law of Contract — II

UNIT I: Indemnity, Guarantee and Agency

1.1 Contract of Indemnity (Section 124, Indian Contract Act, 1872)

A contract of indemnity is a special type of contract under the Indian Contract Act. Its fundamental purpose is to protect one party (the indemnity holder) against financial loss or damage arising from a specific event. The liability of the indemnifier crystallises the moment actual loss is suffered by the indemnified.

The scope of Section 124 is intentionally narrow compared to English law. Under the Indian statute, the loss must flow either from the promisor's own conduct or from the conduct of a third person — but crucially, accidental loss or loss from natural causes does not create a contract of indemnity under Indian law. English law, by contrast, defines indemnity far more broadly to include losses from accidents and natural causes as well, making the English definition wider.

Features of Contract of Indemnity

1. The contract is made for protecting the promisee against anticipated or contingent loss.
2. The liability of the indemnifier starts as soon as the loss occurs to the indemnified.
3. Indemnification is made for actual loss, not anticipated loss.
4. The event specified in the contract must actually happen.
5. If the indemnified caused the loss through his own misconduct, he cannot claim indemnity.
6. The contract may be express or implied.

1.2 Rights of Indemnity Holder (Section 125, ICA)

The Indian Contract Act is silent on the rights of the indemnifier — the Act does not expressly provide for the indemnifier's rights. However, courts have held that upon paying the indemnity, the indemnifier is subrogated to the rights of the indemnity holder, i.e., he steps into the shoes of the indemnity holder and can sue the third party who caused the loss.

Duties of the Indemnifier

Though not explicitly stated in the Act, the indemnifier's duty to pay arises when:

1. There is actual damage or loss to the indemnity holder.
2. The loss or damage was caused by an incident mentioned in the contract.
3. The indemnity holder acted carefully, prudently and within the authority of the indemnifier.

1.3 Contract of Guarantee (Section 126, ICA)

The contract of guarantee is a tripartite arrangement involving three distinct parties and three sets of legal relationships: (a) between the creditor and the principal debtor (creating the primary debt/obligation), (b) between the surety and the creditor (creating the secondary liability), and (c) an implied contract between the surety and the principal debtor (by which the debtor undertakes to indemnify the surety if the surety is required to pay).

Guarantee contracts are most prevalent in the banking and financial sector. Commercial banks, development banks, finance companies, and co-operatives rely heavily on guarantees as security for loans disbursed. The surety's liability is secondary and conditional — it arises only when the principal debtor defaults, and the surety's primary obligation is merely to ensure performance or payment if the debtor fails.

Essential Features of a Contract of Guarantee

1. Tripartite agreement — three parties: creditor, surety, and principal debtor.
2. No misrepresentation or concealment of material facts regarding the contract.
3. No direct consideration between surety and creditor is necessary — the consideration moving from the creditor to the principal debtor is sufficient to support the surety's promise.
4. Primary liability is of the principal debtor; secondary liability is of the surety.
5. All parties must be competent to contract.
6. As a conditional contract, the surety's liability arises only on the default of the principal debtor.
7. Under English and Nepalese law, the guarantee must be in writing; under Indian law, no such form requirement exists.

1.4 Distinction Between Indemnity and Guarantee

1.5 Types of Guarantee

1. Absolute and Conditional Guarantee

An absolute guarantee is one where the guarantor unconditionally promises to pay the debt on the default of the principal debtor, without any additional contingency. A conditional guarantee involves a further contingency beyond mere default of the principal debtor.

2. General and Special Guarantee

A general guarantee can be accepted by the general public (e.g., a guarantee by a bank accepted by any member of the public). A special guarantee is one that can only be accepted by a specific, identified person.

3. Limited and Unlimited Guarantee

A limited guarantee fixes the time period, transaction type, or maximum amount for which the surety is liable. An unlimited guarantee covers all transactions without limit of time, amount, or nature.

4. Prospective and Retrospective Guarantee

A prospective guarantee covers future transactions. A retrospective guarantee is given for past or existing transactions, confirming the surety's liability for obligations already incurred.

5. Specific and Continuing Guarantee

A specific guarantee extends to a single transaction or debt and is discharged once that transaction is completed or the promise performed. A continuing guarantee (Section 129) extends to a series of transactions and remains operative for multiple dealings over time until revoked.

1.6 Revocation of a Continuing Guarantee (Section 130–131)

A continuing guarantee may be revoked in the following ways:

1. By notice of revocation by the surety (Section 130): A surety may revoke a continuing guarantee for future transactions at any time by giving notice to the creditor. He remains liable for transactions already entered into before the notice.
2. By death of the surety (Section 131): Death of the surety automatically terminates the continuing guarantee with respect to future transactions. Notice of death to the creditor is not required.
3. By other modes:
   • By variance or alteration in the terms of the original contract (without the surety's consent)
   • By novation
   • By release or discharge of the principal debtor
   • By loss of security by the creditor
   • By arrangement between the creditor and principal debtor impairing the surety's rights
   • By the creditor's acts that impair the surety's eventual remedy against the debtor

1.7 Rights, Duties and Liabilities of the Surety

A. Rights of Surety Against the Creditor

• Right to Securities (Section 141): On paying the guaranteed debt, the surety is entitled to demand from the creditor all the securities held against the principal debtor. If the creditor loses or parts with such securities without the surety's consent, the surety is discharged to the extent of the value of such security.
• Right to Exoneration (Fidelity Guarantee): In a fidelity guarantee, the surety can call upon the employer/creditor to dismiss the dishonest employee. He may also file a suit for a declaration that the principal debtor is the person primarily liable.
• Right to Share Reduction: Where multiple sureties exist for the same debtor, all co-sureties share the burden of the debt in proportion to their guarantee.
• Right to Set-Off: The surety can avail of any counter-claim or set-off that the principal debtor could have used against the creditor in respect of the same transaction.

B. Rights of Surety Against the Principal Debtor

• Right of Subrogation (Section 140): Once the surety pays the guaranteed debt on the debtor's default, he steps into the shoes of the creditor and can exercise all the creditor's rights and remedies against the debtor.
• Right of Indemnity (Section 145): There is an implied promise by the principal debtor to indemnify the surety for all sums the surety has rightfully paid under the guarantee.

C. Rights of Surety Against Co-Sureties

• Right of Contribution (Section 146–147): Where there are co-sureties, they must contribute equally (in the absence of contrary agreement) to the discharge of the guaranteed debt. If one co-surety pays more than his share, he has a right to recover contribution from others.

1.8 Bailment (Section 148, ICA)

The word "bailment" derives from the French word "Baillier" meaning to deliver or hand over. A bailment arises when one person transfers possession (not ownership) of movable goods to another for a specific purpose, with the condition that the goods shall be returned after the purpose is accomplished. There is no transfer of title — only possession changes hands.

Essential Elements of Bailment

1. There must be actual or constructive delivery of goods.
2. The subject matter must be movable goods (not immovable property).
3. Delivery must be made by the owner (bailor).
4. Goods must be delivered to another person (bailee).
5. Delivery is for a specific purpose.
6. There must be a condition that goods shall be returned or disposed of as directed by the bailor.
7. Delivery of possession without ownership — ownership remains with the bailor.

1.9 Rights and Duties of Bailor and Bailee

Rights of the Bailor

• Right to demand return of goods.
• Right to claim damages in case of bailee's negligence.
• Right to claim compensation for unauthorised use of goods.
• Right to claim compensation if goods are mixed with bailee's goods without consent (and cannot be separated).
• Right to terminate bailment if bailee uses goods wrongfully.
• Right to demand accretions (natural increases) to the goods.
• Right to return of goods at any time in gratuitous bailment (bail for free).

Duties of the Bailor

• To disclose defects in goods (Section 150) — Failure makes bailor liable for damage caused to the bailee.
• To repay necessary expenses incurred by bailee in gratuitous bailment.
• To pay extraordinary expenses in non-gratuitous bailment.
• To pay indemnity to the bailee (Section 150) for losses caused by undisclosed defects.
• To bear risk of loss of goods.

Rights of the Bailee

• Right to claim indemnity from the bailor for undisclosed defects.
• Right to claim reimbursement of necessary expenses incurred.
• Right to exercise right of lien until remuneration is paid (for non-gratuitous bailment).
• Right to deliver goods to one of several joint bailors.
• Right to receive remuneration in non-gratuitous bailment.

Duties of the Bailee

• To take reasonable care of the goods (standard of care varies: for gratuitous bailment, that of ordinary man; for non-gratuitous, higher standard).
• Not to make unauthorised use of goods.
• Not to mix goods bailed with his own goods without consent (Section 155–157).
• To return the goods (Section 160) after the purpose is accomplished.
• To deliver any accretion to the goods.
• Not to set up any adverse title against the bailor.

1.10 Right of Lien

A right of lien is the right to retain possession of the property or goods belonging to another until a debt or claim is paid. It is a possessory right — it is lost as soon as possession is surrendered. It is also called "possessory lien."

Types of Lien

1.11 Pledge / Pawn Contract (Section 172)

Pledge is a special kind of bailment where the goods are delivered as security for repayment of a debt or performance of a promise. The key difference from ordinary bailment is the element of security — the pawnee can sell the goods in case of default (with notice), whereas an ordinary bailee cannot sell.

Rights of the Pawnor

• Right to receive back goods after repaying debt, interest, and expenses.
• Right to receive accretions to the goods.
• Right to receive notice before sale/auction of pledged goods.
• Right to surplus amount after sale of goods.
• Right to redeem goods before sale by repaying the full amount.

Rights of the Pawnee (Section 173–176)

• Right to retain goods until full payment of debt, interest, and expenses (Section 173).
• Right to extraordinary expenses incurred for preservation of goods (Section 175).
• Right to sell on default (Section 176): On default of the pawnor, the pawnee may sell the goods after giving reasonable notice. If sale proceeds are insufficient, the pawnee can sue the pawnor for the deficit; if surplus, must return it to the pawnor.

1.12 Finder of Lost Goods (Section 71)

A finder of goods is treated as a bailee of those goods. He owes the same duties as a bailee: to take reasonable care, not to use them for personal purposes, not to mix them with his own goods, to find the true owner, and ultimately to return the goods. However, the finder has certain rights as well.

Rights of the Finder

• Right to possess goods until the true owner is found.
• Right to reimbursement of all expenses from the true owner.
• Right of lien — can refuse to return goods until expenses are paid.
• Right to sue the true owner for any reward offered for return of lost goods.
• Right to sell the goods (Section 169) in any of the following cases:
  1. Where the owner cannot be found with reasonable diligence.
  2. Where the owner refuses to pay the expenses.
  3. Where the goods are of a perishable nature or about to lose most of their value.
  4. Where the expenses incurred by the finder amount to two-thirds of the value of the goods.

1.13 Agency (Section 182, ICA)

Agency is a legal relationship whereby a person (the agent) has authority to act on behalf of another (the principal) and to create legal relations between the principal and third parties. The agent is a mere link between the principal and third parties — he brings them into contractual relationship without himself becoming a party to those contracts.

The two fundamental maxims of agency law are: (i) Qui facit per alium facit per se — He who acts through another acts himself; and (ii) Delegatus non potest delegare — a delegate cannot further delegate.

Characteristics of Agency

• Agent is appointed at the wish of the principal.
• Appointment may be express or implied.
• The principal delegates his authority to the agent.
• Acts of the agent bind the principal to third parties.
• No consideration is necessary between principal and agent.
• The principal must be competent to contract; the agent may be a minor (as the agent's personal competence is not required — he simply acts as a conduit).
• Agency is based on good faith (uberrimae fidei).

1.14 Modes of Creation of Agency

1. Agency by Express Agreement

The most common mode. The agreement may be oral or in writing. The usual formal document is a Power of Attorney. Types of Power of Attorney:

• General Power of Attorney: Authorises the agent to act generally in all matters of the principal.
• Special Power of Attorney: Authorises the agent for a specific transaction only (e.g., selling a particular property).
• Particular Power of Attorney: Authorises the agent for a single specific act (e.g., presenting a document before the Registrar).

2. Agency by Implied Agreement

Arises from the conduct, situation, or relationship of the parties without any express appointment. Includes:

• Agency by Estoppel: Where a person by his words or conduct has led another to believe that a certain person is his agent, he is prevented from denying the existence of agency. Example: A tells B in C's presence that A is C's agent; C does not contradict; B contracts with A — C is bound.
• Agency by Holding Out: A branch of estoppel requiring some affirmative or positive act by the principal. Example: A, B's domestic servant, regularly purchases goods on credit from C, and B regularly pays. C can assume A is B's implied agent.
• Agency by Necessity: In emergencies where it is impossible to obtain the principal's instructions and urgent action is required to protect his interests. Conditions: (i) impossible to contact principal; (ii) the action taken was the only practicable course; (iii) agent acted honestly; (iv) real emergency existed.
• Agency by Operation of Law: Created by statute — for example, every partner is an agent of the firm by operation of law.

3. Agency by Ratification (Ex Post Facto Agency)

Where an agent exceeds his authority or acts without authority, the principal may subsequently ratify (adopt) the act. Conditions for valid ratification:

1. The agent must have acted on behalf of and in the name of the principal.
2. The principal must have been in existence and competent to contract at the time of the act.
3. The principal must have full knowledge of all material facts.
4. The entire transaction must be ratified — cannot ratify in part and repudiate in part.
5. Ratification must be within a reasonable time.
6. The act must not be void or illegal.
7. Ratification must not injure a third party.
8. The act must be within the principal's power at the time of ratification.
9. Ratification may be express or implied.

1.15 Rights and Duties of Agent

Rights of an Agent

• Right to remuneration and commission (agreed or reasonable amount).
• Right to lien (Section 221): Right to retain goods, papers, and other property of the principal until his dues for commission, disbursement and services are paid.
• Right to stoppage in transit: Where the agent has purchased goods for the principal with his own money, or where the principal is insolvent, the agent can stop the goods in transit.
• Right to indemnity for lawful acts (Section 222): The principal must indemnify the agent against consequences of all lawful acts done in the exercise of his authority.
• Right to indemnity for acts done in good faith (Section 223).
• Right to compensation for undue removal from agency without cause.

Duties of an Agent

1. To carry out work within the scope of authority.
2. To follow instructions; in absence, to follow trade custom.
3. To work with reasonable care, skill, and diligence.
4. To communicate with the principal in case of difficulty.
5. Not to make any secret profit beyond agreed remuneration.
6. To maintain true and correct accounts and render them to the principal.
7. Not to deal on his own account against the principal's interests.
8. Not to delegate authority (subject to exceptions).
9. Not to set up adverse title against the principal.
10. Not to use information obtained through agency against the principal.

1.16 Rights and Duties of Principal

Rights of the Principal

• Right to revoke agency for fraud, excess authority, or deception.
• Right to instruct the agent in working procedures.
• Right to claim compensation for negligent or ultra vires acts.
• Right to demand accounting of any secret profits.
• Right to reject unauthorised transactions.

Duties of the Principal

• To pay agreed or reasonable remuneration.
• To reimburse the agent for expenses incurred in the course of agency.
• To provide indemnity for consequences of lawful acts and good faith acts.
• Not to terminate the agency wrongfully.
• To give reasonable compensation for undue removal of agent.
• To be responsible for losses caused by agent while executing the agency.

1.17 Delegation of Authority and Sub-Agent

The general rule is: Delegatus non potest delegare — a delegate cannot further delegate. Since the principal appoints the agent on the basis of personal confidence and skill, the agent cannot pass on that authority to a sub-agent without the principal's consent (Section 190).

Exceptions to the General Rule (Where Agent CAN Delegate):

1. Where the principal has expressly permitted delegation.
2. Where the custom of the trade permits delegation.
3. Where the principal knows the agent intends to delegate and acquiesces.
4. Where the nature of the authority makes a deputy necessary.
5. Where the act is purely ministerial (clerical/routine work).
6. In an unforeseen emergency.

Sub-Agent (Section 191)

Key points regarding sub-agents:

• There is no privity of contract between the principal and the sub-agent — so the sub-agent cannot sue the principal for money due.
• The original agent remains responsible to the principal for the acts of the properly appointed sub-agent.
• If the sub-agent is appointed improperly (without authority): the principal is not bound, the agent is fully responsible, and the sub-agent is not liable to the principal (except for fraud or wilful wrong).

1.18 Termination of Agency (Sections 201–210)

Agency may be terminated by the following modes:

1. Revocation by principal (with reasonable notice)
2. Renunciation by agent
3. Completion of the purpose for which the agency was created
4. Expiry of the period of agency
5. Death of the principal or agent (Section 209)
6. Insanity of either party
7. Insolvency of principal (agency terminates; insolvency of agent alone does not terminate)
8. Destruction of subject matter
9. Mutual consent
10. Alien enemy (where principal or agent becomes alien enemy)
11. Winding up of the company (where principal is a company)
12. Illegal contract
13. Termination of authority by the agent through reasonable means

UNIT II: The Indian Partnership Act, 1932

2.1 Definition of Partnership (Section 4)

The definition adopted in Section 4 is largely based on the formulation suggested by the English jurist Pollock, with minor modifications. The definition emphasises the fundamental principle of mutual agency — partners, when carrying on the business of the firm, are both agents and principals vis-à-vis each other. Partnership is not the agreement itself but the relation arising out of an agreement.

2.2 Essentials of Partnership

1. Two or More Persons

There must be at least two persons as principals. The maximum number is restricted by the Companies Act, 1956: 10 persons for banking business and 20 persons for any other business. Exceeding this limit makes the association an illegal association. The word "persons" includes both natural and artificial persons — a company can be a partner.

2. Agreement

Partnership must arise from an agreement — it cannot arise by status or operation of law (Section 5). The agreement may be oral or in writing. A written partnership agreement is called a Partnership Deed. The agreement must satisfy the essentials of a valid contract under the Indian Contract Act, 1872.

3. Carrying on of Business

There must be a business — "business" includes every trade, occupation, and profession (Section 2). A partnership formed merely for sharing profits from property without carrying on any business is not a partnership.

4. Sharing of Profits

Partners must agree to share the profits of the business. However, sharing of profits alone does not conclusively establish partnership — creditors receiving a share of profits as interest, employees receiving profit-sharing bonus, and widows of deceased partners receiving profit shares are not partners (Section 6, Explanations).

5. Mutual Agency (Carrying on by All or Any of Them Acting for All)

This is the most crucial test. Every partner must be capable of binding the firm and being bound by acts of the firm. Mutual agency — each partner acts as agent for all the others — distinguishes partnership from co-ownership, joint Hindu family business, and mere profit-sharing arrangements.

2.3 Distinctions: Partnership vs. Other Associations

2.4 Types / Duration of Partnership

1. Partnership at Will (Section 7)

Such a partnership can be dissolved at any time by any partner by giving notice in writing to all other partners. If there is a provision for duration or for determination, it is not partnership at will.

2. Particular Partnership (Section 8)

A partnership for a specific venture or project only. Once the venture is complete, the partnership dissolves automatically. The rights and liabilities of partners are more limited than in general partnership.

2.5 Rights and Duties of Partners Inter Se

A. Absolute Duties (Cannot be varied by agreement)

• Section 9 — Duty to carry on business to the greatest common advantage: Partners must act for the maximum benefit of all, not for personal gain at the expense of co-partners.
• Section 9 — Duty to render true accounts: Full and frank disclosure of all facts affecting the firm.
• Section 10 — Duty to indemnify for fraud: Every partner must indemnify the firm for losses caused by his fraud in the conduct of business. This duty cannot be contracted out.

B. Duties Subject to Contrary Agreement

• Section 12(b) — Duty of due diligence: Every partner must attend diligently to his duties.
• Section 13(f) — Duty to indemnify for wilful neglect: Partners must indemnify the firm for losses caused by wilful negligence (can be contracted out, unlike fraud).
• Section 13(a) — Duty to work without remuneration: Partners are not entitled to remuneration for participation in management (unless agreed).
• Section 13(b) — Duty to contribute equally to losses.
• Section 15 — Duty to apply firm property exclusively for firm's business.
• Section 16 — Duty to account for personal profits (secret profits) and duty not to compete with the firm.

Rights of Partners

• Section 12(a): Right to take part in the conduct of business.
• Section 12(c): Right to be consulted on ordinary matters (majority rule); unanimous consent required for fundamental changes.
• Section 12(d): Right to access, inspect, and copy firm's books.
• Section 13(b): Right to share profits equally (or as agreed).
• Section 13(c)/(d): Right to interest on capital (only out of profits) and right to interest at 6% p.a. on advances.
• Section 13(e): Right to indemnity for payments made in the ordinary course of business.
• Section 15: Right to use firm's property for firm's business.

2.6 Position of Minor in Partnership (Section 30)

A minor cannot be a partner in a firm (since a minor's agreement is void ab initio). However, with the consent of all existing partners, a minor may be admitted to the benefits of an existing partnership.

Rights of Minor Admitted to Benefits

• Right to an agreed share of property and profits.
• Right to access, inspect, and copy accounts of the firm.
• His share is liable for the acts of the firm, but the minor is NOT personally liable.
• Cannot sue for his share except on severing his connection with the firm.

On Attaining Majority — The Six-Month Option (Section 30(5))

Within six months of attaining majority (or of obtaining knowledge of his admission to benefits, whichever is later), the minor must give public notice whether he elects to become a full partner or not. If he fails to give notice within six months, he is deemed to have become a partner.

2.7 Incoming and Outgoing Partners

Admission of a New Partner (Section 31)

No person can be introduced as a partner without the unanimous consent of all existing partners (mutual trust and confidence are the bedrock of partnership). A new partner is not liable for any obligation of the firm incurred before his admission — unless there is a tripartite novation agreement.

Retirement of a Partner (Section 32)

A partner may retire: (a) with the consent of all other partners; (b) in accordance with an express agreement; or (c) in a partnership at will, by giving written notice to all partners. A retiring partner remains liable to third parties for pre-retirement acts until public notice of retirement is given (Section 72).

Expulsion of a Partner (Section 33)

A partner may be expelled by a majority of partners only in exercise of powers conferred by the partnership agreement, and in good faith. Expulsion contrary to good faith is invalid.

Insolvency of a Partner (Section 34)

An insolvent partner automatically ceases to be a partner from the date of adjudication. His estate is not liable for acts after that date.

2.8 Dissolution of Firms (Sections 40–44)

Modes of Dissolution

1. Dissolution by Agreement (Section 40): A firm may be dissolved with the consent of all partners or in accordance with a contract between partners.

2. Compulsory Dissolution (Section 41): A firm is compulsorily dissolved by: (a) adjudication of all or all-but-one partners as insolvent; or (b) happening of an event making the business unlawful.

3. Dissolution on Contingencies (Section 42): Subject to contrary agreement, a firm is dissolved: (a) on expiry of fixed term; (b) on completion of a specific venture; (c) on death of a partner; or (d) on adjudication of a partner as insolvent.

4. Dissolution by Notice (Section 43): In a partnership at will, any partner may dissolve the firm by giving written notice to all other partners of his intention to dissolve. The notice must clearly express the intention and must be final.

5. Dissolution by Court (Section 44): At the suit of a partner, the court may dissolve a firm on grounds of: (a) unsoundness of mind of a partner; (b) permanent incapacity; (c) misconduct of a partner prejudicial to business; (d) wilful or persistent breach of agreement; (e) transfer of whole interest to a third party; (f) perpetual losses making it impossible to carry on business; (g) just and equitable ground.

UNIT III: The Sale of Goods Act, 1930

3.1 Sale and Agreement to Sell (Section 4)

How a Contract of Sale is Made (Section 5)

A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. It may: (a) provide for immediate or future delivery; (b) immediate or future payment; (c) payment by instalments. It may be oral, written, partly written or implied from the conduct of the parties. A credit sale is also a "sale." A verbal contract or contract by conduct (e.g., picking goods off a shelf in a supermarket) is valid.

3.2 Classification of Goods (Section 6)

I. Existing Goods

• Specific Goods: Goods that are identified and agreed upon at the time of the contract (e.g., "the specific car with registration no. DL-01-AB-1234").
• Ascertained Goods: Goods which are identified in accordance with the contract after the contract is made. Originally unascertained but identified later.
• Unascertained / Generic Goods: Not specifically identified — described by type or class only (e.g., "50 kg of basmati rice").

II. Future Goods (Section 2(6))

Goods to be manufactured, produced, or acquired by the seller after the making of the contract. A contract to sell future goods operates as an agreement to sell (not a sale), since property cannot pass in goods that do not yet exist.

III. Contingent Goods

A special type of future goods whose acquisition by the seller depends upon a contingency which may or may not happen.

Effect of Destruction of Goods

• Section 7 — Goods perishing before contract: Contract for the sale of specific goods that have perished (unknown to the seller) is void ab initio.
• Section 8 — Goods perishing after agreement to sell but before sale: If specific goods perish without fault of seller or buyer before risk passes to the buyer, the agreement is avoided (frustrated).

3.3 Conditions and Warranties (Sections 12–17)

When Condition Treated as Warranty (Section 13)

• Voluntary waiver: Buyer may waive the condition and choose to treat its breach as a breach of warranty.
• Acceptance of goods: If the buyer has accepted the goods (or part thereof) under a non-severable contract, he can only claim damages for breach of condition — he cannot reject the goods.

Implied Conditions in Every Contract of Sale

• Section 14(a) — Right to sell: Implied condition that the seller has the right to sell the goods. Breach: buyer can return goods and recover full price (even after use — Rowland v. Divall).
• Section 15 — Sale by description: Where goods are sold by description, there is an implied condition that the goods correspond to the description.
• Section 16(1) — Fitness for purpose: If the buyer makes known to the seller the particular purpose for which goods are required and relies on the seller's skill or judgment, there is an implied condition that the goods are reasonably fit for that purpose.
• Section 16(2) — Merchantable quality: Where goods are bought by description from a seller who deals in goods of that description, there is an implied condition that the goods are of merchantable quality.

Implied Warranties

• Section 14(b) — Quiet possession: Buyer shall have and enjoy quiet possession of the goods.
• Section 14(c) — Freedom from encumbrances: Goods shall be free from any charge or encumbrance in favour of any third party not disclosed to the buyer before the contract.

3.4 Doctrine of Caveat Emptor (Section 16)

The maxim Caveat Emptor means "let the buyer beware." The general rule under Section 16 is that there is no implied condition or warranty as to the quality or fitness of goods for any particular purpose — the buyer must examine and satisfy himself before purchasing.

Exceptions to Caveat Emptor

1. False representation by the seller — seller made a false representation about the goods.
2. Seller actively conceals a defect — seller concealed a defect that the buyer could not discover on reasonable inspection.
3. Buyer relied on seller's skill (Section 16(1)): Buyer communicated the purpose and relied on the seller's judgment. (Case: Priest v. Last; Bombay Burma Trading Corp. Ltd. v. Aga Muhammed)
4. Sale by description (Section 15): Goods bought by description must correspond to that description.

3.5 Passing of Property (Sections 18–26)

The transfer of general property (legal ownership) from seller to buyer is essential for a sale. Risk generally follows property — once property passes, the buyer bears the risk of loss.

Rules for Passing of Property

• Section 18 — Unascertained goods: No property passes in unascertained goods unless and until they are ascertained.
• Section 19 — Specific or ascertained goods: Property passes when the parties intend it to pass.
• Section 20 — Unconditional sale of specific goods in deliverable state: Property passes when the contract is made, regardless of when payment or delivery occurs.
• Section 21 — Specific goods not in deliverable state: Property passes when the seller puts the goods into a deliverable state and the buyer has notice.
• Section 22 — Specific goods — price to be ascertained: Property passes when seller has done what is necessary (weighing/measuring) and buyer has notice.
• Section 23 — Sale of unascertained goods by description: Property passes when goods of that description in a deliverable state are unconditionally appropriated to the contract with the assent of both parties.
• Section 24 — Goods sent on approval / sale or return: Property passes when buyer signifies approval, or when he retains goods beyond the agreed or reasonable time without rejection.
• Section 25 — Reservation of right of disposal: If seller reserves the right of disposal of goods until certain conditions are fulfilled, property does not pass until those conditions are met — even if goods are delivered to a carrier.

3.6 Unpaid Seller (Section 45)

3.7 Rights of Unpaid Seller

I. Rights Against the Goods (Sections 46–54)

• (a) Right of Lien (Sections 47–49): The right to retain possession of goods until payment of price. Applies where: goods sold without credit; credit period has expired; buyer is insolvent. Lien is lost when: goods are delivered to carrier without reserving right of disposal; buyer lawfully obtains possession; seller waives the lien.
• (b) Right of Stoppage in Transit (Sections 50–52): The right to stop goods in transit and resume possession, after the seller has parted with possession, if the buyer has become insolvent. Transit ends when the carrier acknowledges that he holds goods on behalf of the buyer.
• (c) Right of Re-Sale (Section 54): The seller can resell goods when: goods are perishable; seller has reserved the right of re-sale in the contract; seller gives notice to buyer of intention to re-sell and buyer does not pay within a reasonable time.
• (d) Right to Withhold Delivery: Co-extensive with right of lien — applies before delivery. If property has not passed, seller can withhold delivery.

II. Rights Against the Buyer (Suits) — Sections 55–61

• Suit for Price (Section 55): Where property in goods has passed to buyer and buyer wrongfully refuses to pay, seller may sue for the price.
• Suit for Damages for Non-Acceptance (Section 56): Where buyer wrongfully refuses or neglects to accept and pay for goods, seller may sue for damages.

UNIT IV: The Negotiable Instruments Act, 1881

4.1 Definition of Negotiable Instruments (Section 13)

A negotiable instrument is essentially a written document creating a right in favour of some person and which is freely transferable from one person to another. Two conditions must be satisfied for an instrument to be negotiable: (i) it must be freely transferable by delivery or by endorsement and delivery; and (ii) the person who obtains it in good faith and for value must get it free from all defects of title.

Instruments Recognised by Statute:

• Promissory Notes
• Bills of Exchange
• Cheques

Instruments Recognised by Custom / Usage:

• Hundis
• Share warrants (bearer)
• Dividend warrants
• Bankers' drafts
• Circular notes
• Bearer debentures
• Railway receipts (in some contexts)

NOT Negotiable Instruments (even though transferable):

• Money orders, Postal orders
• Deposit receipts
• Share certificates
• Bill of lading
• Dock warrants

Characteristics of Negotiable Instruments

1. Property: Possessor is presumed owner; property passes without formality.
2. Title: Holder in due course gets a clean title free from all defects of prior holders.
3. Rights: Holder can sue in his own name.
4. Presumptions: Consideration presumed; date presumed valid; prior endorsements presumed valid.
5. Prompt Payment: Dishonour ruins the credit of all parties.

4.2 Promissory Note (Section 4)

Essential Elements of a Valid Promissory Note

1. It must be in writing (ink, pencil, printing — any form that cannot be easily altered).
2. It must contain an express unconditional promise to pay (mere acknowledgement of debt — "I owe you" — is NOT a promissory note).
3. The promise must be unconditional.
4. It must be signed by the maker.
5. The maker must be certain.
6. The payee must be certain (by name or designation).
7. The promise must be to pay money and money only.
8. The amount must be certain.
9. Other formalities (date, place, stamp) — not essential at law, though usually included.

4.3 Bill of Exchange (Section 5)

Classification of Bills

• Inland Bill: Drawn in India on a person residing in India OR drawn in India payable in India.
• Foreign Bill: Any bill that is not an inland bill. Usually drawn in sets of three (called "via") — payment of one set renders others inoperative.
• Time Bill: Payable after a fixed period.
• Demand Bill: Payable at sight or on demand.
• Trade Bill: Drawn and accepted for a genuine trade transaction.
• Accommodation Bill: Drawn and accepted NOT for a genuine trade transaction but to provide financial help. Neither party owes the other money at the time of drawing.

4.4 Cheque (Section 6)

A cheque is a special type of bill of exchange with two additional qualifications: (i) always drawn on a specified banker; and (ii) always payable on demand. All cheques are bills of exchange but not all bills are cheques. A cheque does not require acceptance by the bank.

Types of Cheques / Crossing

• Open Cheque: Payable over the counter — can be cashed directly.
• Crossed Cheque: Two parallel lines drawn across the face — payment only through a bank account.
• General Crossing (Section 123): Two parallel transverse lines with or without words "& Co." or "Not Negotiable."
• Special Crossing (Section 124): Name of a specific bank written within or across the two parallel lines — only that bank can collect payment.
• "Not Negotiable" Crossing: Holder cannot get better title than the transferor had.
• "Account Payee" Crossing: Amount must be credited only to the payee's account.

4.5 Holder vs. Holder in Due Course

Essentials of Holder in Due Course

1. Must hold for valuable consideration (not by gift or inheritance).
2. Must become holder before maturity of the instrument.
3. Must have obtained the instrument in good faith (without notice of any defect in title).
4. Must have taken with reasonable care — mere good faith without due caution is not sufficient under Indian law.

Privileges of Holder in Due Course

• Instrument purged of all defects (Section 53): HDC gets clean title despite defects of prior holders. Instrument is like a "current coin."
• All prior parties remain liable to HDC.
• Estoppel against original invalidity of instrument (Section 120): Drawer of a bill and acceptor for honour cannot deny original validity against HDC.
• Estoppel against denying capacity of payee (Section 121).
• No effect of absence of consideration (Section 58).
• Can enforce payment even on fictitious bills (Section 42).

4.6 Endorsement — Types and Effects

Endorsement is the writing of one's name on the back of a negotiable instrument (or on a paper attached to it called "allonge") with the intention of transferring the rights therein. The endorser transfers his rights to the endorsee.

Essentials of Valid Endorsement

1. Must be on the instrument itself (or allonge).
2. Must be made by the maker or holder of the instrument.
3. Must be signed by the endorser.
4. Must be an endorsement of the entire bill (partial endorsement is invalid).
5. Must be completed by delivery of the instrument.

Classes of Endorsement

• Blank / General Endorsement (S. 16): Endorser signs without naming any endorsee. The instrument becomes a bearer instrument transferable by delivery.
• Special / Full Endorsement (S. 16): Endorser names the endorsee — "Pay A or order" [signature]. Only the named endorsee can negotiate further.
• Partial Endorsement (S. 56): Purports to transfer only part of the amount — INVALID for negotiation purposes.
• Restrictive Endorsement (S. 50): Restricts further negotiation — "Pay C only" or "Pay C for my use." Endorsee gets all rights except right to negotiate.
• Conditional / Qualified Endorsement: Endorser limits his liability by adding a condition. Includes:
  • Sans Recourse: "Pay A or order sans recourse" — endorser excludes his own liability on dishonour.
  • Facultative: Endorser extends his liability or waives a right — "Pay A or order. Notice of dishonour waived."
  • Sans Frais: Endorser does not want endorsee to incur any expense on his account.

4.7 Material Alteration (Section 87)

A material alteration is one that changes the rights and liabilities of the parties. Examples include: alteration of date, amount, place of payment, time of payment, rate of interest, the parties' names, or addition of a new party.

Related Provisions

• Section 88: An acceptor or endorser is bound by his acceptance or endorsement notwithstanding any previous alteration (alteration before he became a party).
• Section 89: If a materially altered instrument does not appear to have been altered, a banker paying in good faith according to its apparent tenor is discharged from liability.

4.8 Dishonour of Negotiable Instruments

Dishonour by Non-Acceptance (Section 91 — applies to Bills only)

A bill is dishonoured by non-acceptance when:

1. The drawee fails to accept within 48 hours of presentment.
2. The drawee is a fictitious person or cannot be found.
3. The drawee is incompetent to contract.
4. The bill is accepted with a qualified (conditional) acceptance.
5. The drawee has become insolvent or died.
6. Presentment for acceptance is excused and the bill is not accepted.

Dishonour by Non-Payment (Section 92)

Occurs when the acceptor/maker/drawee fails to make payment on the due date. A cheque is dishonoured when the bank refuses to pay.

Notice of Dishonour (Section 93–98)

• On dishonour, the holder must give notice to all prior parties (drawer and endorsers) he wishes to make liable.
• No notice needed to: maker of promissory note, acceptor of bill, or drawee (they are primary debtors).
• Notice may be oral or written.
• Notice must be given within reasonable time — if parties are in different places, notice must be dispatched by next post; if same place, it should reach next day.
• Failure to give notice discharges all parties except the maker and acceptor.

Duties of Holder Upon Dishonour

1. Give Notice of Dishonour (Section 93) to all prior parties he seeks to make liable.
2. Noting and Protesting (Section 99–100): Holder may have the dishonour noted by a notary public and then "protested" — formal certification of dishonour. Required for foreign bills.
3. Suit for Recovery: After noting and protesting, the holder may sue all parties liable on the instrument.