Meaning and definition of Indian Contract Act 1872

Introduction:
The Indian Contract Act, 1872 is the law relating to Contracts in India. It came
into force on September 1, 1872 and is extended to the whole of India except to the
state of Jammu and Kashmir.

The term 'Contract' has been defined in Section 2(h) of the Indian Contract Act,
1872. It defines the Contract as an agreement enforceable by law.

An agreement cannot become a contract unless it can be enforceable by law. To be

enforceable by law, a contract must contain all the essential elements of a valid
contract as defined in Section 10.

According to Section 10, "All agreements are contracts, if they are made by the free
consent of the parties, competent to contract, for a lawful consideration, with a
lawful object and are not expressly declared by the Act to be void.

Now after examining the definitions of contract we can say that-

Contract = Agreement + Enforceability

Illustration- There is an agreement between A and B. that A will construct a house

for B, and B will pay Rs. 10 lakhs to A. The agreement between A and B is a contract
because it is enforceable by law.
Essential Elements of a Contract
A contract that is not a valid contract will have many problems for the parties
involved. For this reason, we must be fully aware of the various elements of a valid
contract.

Essential Elements of a Contract as defined in Section 10 of the Indian Contract Act

1872

1. Offer and Acceptance:-

2. Aim to Create Legal Relationship
3. Lawful Consideration
4. Capacity of the parties
5. Free Consent
6. Legal Object
7. Certainty of Meaning
8. Possibility of Performance
9. Not expressly declared void
10. Legal formalities like Writing, Registration

1. Offer and Acceptance

An offer or proposal by one party and an acceptance of that offer by another party is
called an agreement. An agreement has been defined by the Act as “every promise
or every set of promises forming considerations for each other.” The acceptance of
the offer must be according to the mode prescribed and must be communicated to
the proposer.
Example: – John offers to purchase a house from the builder (Estate organization)
and manufacturer acknowledges it.
2. Aim to Create Legal Relationship: - Whenever parties make an agreement, there
must be an intention to create a legal relationship between them. If such intention is
not present, there is no contract between the parties. In case of social or domestic
agreements, parties do not contemplate legal relationship, as such these are not
contracts.
Example: a husband agreed to pay to his wife certain amount as maintenance every
month while he was abroad. Husband failed to pay the promised amount. Wife sued
him for the recovery of the amount. Here in this case wife could not recover as it
was a social agreement and the parties did not intend to create any legal relation.

3. Lawful Consideration: - Consideration is an essential element of a valid contract.

An agreement without consideration is a bare promise and is not binding on the
parties. Contracts result only when a promise is made in exchange for in something
in return. This something in return is termed as “consideration”.

Example: A agrees to sell his car to B for a sum of Rs.10, 000. For A’ a promise the
consideration is assume of 10,000 while for B’s promise consideration is the car.

4. Capacity of the parties: - Section 11 of the Indian Contract Act provides the
requirements for competency of the parties to the contract. It says, "Every person is
competent to contract, who is of the age of majority, according to law, which he is
subject to also who is of sound mind and who is not disqualified from contracting
by any law to which he is the subject"

Minors, lunatics, unsound and intoxicated persons are incompetent to enter into a
contract. However, there are exceptions as defined in Section 68. In case of an
exception the minor or lunatic is not personally liable.

 (a). Minors,
 (b). Persons of unsound personality, and
 (c). Persons precluded by law to which they are subject.

5. Free Consent: - Consent of the parties must be genuine consent means agreed
upon same thing in the same sense i.e. there should be consensus – ad – idem. A
consent is said to be free when it is not caused by

 (1). Coercion,
 (2). Undue impact
 (3). Fraud
 (4). Miss-representation
 (5). Mistake.
Example: - John is purchasing the house due to the deceptive notice by the
manufacturer of having ocean confronting flats yet just by paying higher rate was
not unveiled.

6. Legal Object: - The object of the agreement should be lawful and not of which
the law is disapproved. The object would be unlawful if it is forbidden by law, is
fraudulent, or cause injury to the person or property of another or is immoral or
opposed to any public policy.
The agreement must not relate to a thing which is contrary to the provisions of any
law or has expressly been forbidden by any law or which is opposed to public policy
or immoral. All agreements which are not lawful cannot be enforced by law.

Example: A agrees to sell certain goods to B. A knows that the goods are to be
smuggled out of the country. The contract is unlawful and not enforceable.

7. Certainty of Meaning: - Every agreement of the contract must be certain. If the

agreement is not certain or incapable of being made certain, it is void.

Example: A agrees to sell to B a hundred tons of oil. There is nothing in order to

show what kind of oil was intended for sale.

8. Probability of Performance: - On the off chance that the demonstration is

inconceivable in itself, physically or legitimately if can’t be upheld at law.
Example – Builder guarantees to have John an additional sq. feet space for their
home that is not lawfully enlisted then it is unrealistic.

9. Not expressly declared void: The agreement must not have been expressly
declared to be void under the Act. Examples of such agreements are restraint of
trade, marriage, legal proceedings and wagering agreements. Such agreements are
not enforceable by law.

Example: threat to commit murder or making defamatory statement or entering into

agreement which are opposed to public policy are illegal in nature.

10. Legal formalities like Writing, Registration: A contract may be oral or in

writing according to the Indian Contract Act. In certain special cases the agreement
must be in written. In some cases like contracts by companies, selling or buying of
shares etc., the contract must be registered.

Example: - Contract of insurance is not valid except as a written contract.

Conclusion
Contracts play a very important role in the day-to-day life of every person. Contracts
or agreements between various parties are framed and validate by the Contract Act.
So for the formation of a contract, the above-given conditions must be fulfilled by
the parties.
Types of Contract
On the basis of validity/enforceability
1. Valid contract
“An agreement enforceable by law is a contract’. An agreement which has all the essential element
s of a contract is known as a valid contract. A walid contract is one which can be enforce by any
other parties to the contract and the apart not at fault can also file a suit in the court of law.
Example– A offers B to offer his home for Rs 3 Lakhs. B consents to purchase the house at this
cost. It is a substantial contract Void contract.
2. Voidable contract
An agreement enforceable by law at the option of one or more parties, but not at the option of other
is a voidable contract’. An avoidable contract is one which can be set aside, repudiated or avoided
at the option of the aggrieved party. Until the contract is set aside or repudiated by the aggrieved
party, it remains a valid contract
Example Contract with a minor to work can be Voidable.
Or Amar promises to sell his horse to Akbar for1000 and Amer’s consent was obtained forcefully.
The contract is voidable at the option of Amar if he fails to avoid the contract remains valid.
3. Unenforceable contract
A contract which is good in substance, but due to technical defects cannot be enforce by law is
known as unenforceable contract. If the defect is removed, the contract can be enforced
Example when the law requires that a contract should be in writing, stamped or registered the
contract cannot be enforced by law if such formalities are not properly observed
4. Void contract
“A contract which cease to be enforceable by law becomes void when it ceases to be enforceable”.
In other words a void contract is a contract which has enforceable by, when originally created, but
due to the happening of some events, it ceases to be enforceable by law. W Example: Amar offer
to marry Laxmi. Laxmi accepted the offer. Later Laxmi dies the contract was valid at the time of
formation but subsequently becomes void on the death of Laxmi.
 Or destruction of subject matter
 Death of the parties
 Parties becoming unsound mind
 Party becoming alien enemy
5. Illegal agreement
The term illegal refers to an act which is in contravention of law, in other words agreements which
are forbidden and punishable by law are called illegal agreements. Making of such agreements is
unacceptable and the law does not recognize such agreements and they are declared void-ab-initio.
Moreover any collateral agreement to an illegal agreement is also tainted with illegality and hence
void.
Example; Salman agree to pay 1 lakh to Virat if he skills Smit. Such agreement are illegal in nature
and therefore cannot be enforced in the court of law.
A contract is illegal if its forbidden by law or is of such nature that if permitted would defeat the
provisions of any law or is fraudulent; or involves or implies injury to a person or property of
another, or court regard it as immoral or opposed to public policy. These agreements are punishable
by law. These are void-ab-initia. “All illegal agreements are void agreement but all void agreement
are not illegal”.
On the basis of Formation
1. Express contract
Where the terms of contract are expressly agree in words (written or spoken) at the time of
formation, the contract is said to be express contract.
Example: Amar said to Akbar. “Will you buy my watch for 50” Akbar replies, “I am ready to buy”.
This is an express contract made orally.
2. Implied contract
An implied contract is one which is inferred from the acts or conduct of the parties of from the
circumstances of the cases. Where a proposal or acceptance is made otherwise than in words,
promise is said to be implied.
Example: buying a cup of tea in a restaurant, getting into public bus, using a phone booth are some
of the many examples where parties do not signify there offer and acceptance by words spoken or
written.
3. Quasi contract
A quasi contract is created by law. Thus, quasi contracts are strictly not contract as there is no
intention of parties to enter into a contract. It is legal obligation which is imposed on a party who
is required to perform it. A quasi contract is based on the principle that a person shall not be allowed
to enrich himself at the expense of another
Example: Amar a trader leaves goods at Akbar’s place. Akbar treats the good as his own and uses
the goods. Akbar is bound to pay for the goods to Amar as Akbar has used the goods to his benefit.
4. E-contract
An e contract is the one, which is entered between the parties via internet. It is one of the most
common ways of contracting in the current scenario. The offer and acceptance of the arties don not
happen in person but over the information technology (internet)
Example: Amar ordered a law book from an online book store. The book store makes the deliver
in four working days and Amar pays for the same.

On the basis of execution

1. Executed contract
An executed contract is one in which both the parties have performed their respective obligation.
Example: Hussain agrees to paint a picture for Amitabh for 5k when Hussain paints and Amitabh
pays the price, i.e., when both parties perform their obligation, the contract is said to be executed
contract.
2. Executory contract
An executory contract is one where one or both the parties to the contract have still to perform their
obligations in future. Thus, a contract which is partially performed or wholly unperformed is termed
as executory contract.
Example: X offer his auto to Y for 10k. Y acknowledges X offer. On the off chance, that X has
not yet conveyed the auto and Y has not yet paid the cost, it is executory contract.
On the basis of liability
1. Unilateral contract
A unilateral contract is one in which only one part has to perform his obligation at the time of their
formation of the contract, the other part having fulfilled his obligation at the time of the contract or
before the contract comes into existence.
Example: raj makes payment for rail tickets for his journey from Delhi to Chandigarh. He has
performed his promise. It is now for the rail way company to perform the promise.
2. Bilateral contract
A bilateral contract is one in which the obligation on both the parties to the contract is outstanding
at the time of the formation of the contract. Bilateral contracts are also known as contracts with
executory consideration
Example: Amar promises to sell his two wheeler for 15k to Akbar and agrees to deliver the two
wheeler on the receipt of the payment by the end of the month. The contract is bilateral as both the
parties have exchanged a promise to be performed within a stipulated time period in the future.

Proposal or Offer
According to the Indian Contract Act 1872, proposal is defined in Section 2 (a) as “when one
person will signify to another person his willingness to do or not do something (abstain) with a
view to obtain the assent of such person to such an act or abstinence, he is said to make a
proposal or an offer.

Let us look at some features or essentials of such an offer

 The person making the offer/proposal is known as the “promisor” or the “offeror”. And
the person who may accept such an offer will be the “promisee” or the “acceptor”
“offeree”.
 The offeror will have to express his willingness to do or abstain from doing an act. Only
willingness is not enough. Or simply a desire to do/not do something will not constitute
an offer.
 An offer can be positive or negative. It can be a promise to do some act, and can also be a
promise to abstain (not do) some act/service. Both are valid offers.

Example: Mr. A says to Mr. B “will you purchase my car for 10k?” in this case Mr. A is making
an offer to Mr. B. here A is the offeror and B is the Offeree.
Essentials of a Valid Offer
1. There must be two parties
2. The offer must be communicated
3. Offer may be subject to terms and conditions
4. Offer may be expressed or implied
5. Offer must create legal relation
6. Offer must be clear not vogue
7. Offer cannot contain negative condition
8. Offer can be specific or general
9. Offer must be different from invitation
10. The offer must be made with view to obtain the assent of the other party
11. The offer must have its terms definite and clear

1. There must be two parties: For a valid offer there must be two parties. A person
cannot make an offer to himself. The parties to contract are:
The person who make offer is called offeror or promisor
The person to whom offer is made is known as offeree or promise.

2. Offer must be communicated to the Offeree: For a proposal to be completed it

must be clearly communicated to the offeree. No offeree can accept the proposal
without knowledge of the offer. It makes clear that acceptance in ignorance of the
proposal does not amount to acceptance.

3. It may be subject to any terms & conditions: - An offeror may attach any terms
and conditions to the offer he makes. He may even prescribe the mode of acceptance.
There is no contract, unless all the terms of the offer are accepted in the mode
prescribed by the offeror. It must be noted that if the offeror asks for sending the
acceptance by telegram and the offeree sends the acceptance by letter, and the offeror
may reject such acceptance.

Example: - A asks B to send the reply of his offer by telegram but B sends reply by
letter, A may reject such acceptance because it is opposed to the prescribed mode of
communication.
4. Offer may be Expressed or Implied: The offeror can make an offer through
words or even by his conduct. An offer which is made via words, whether such words
are written or spoken (oral contract) we call it an express contract. And when an
offer is made through the conduct and the actions of the offeror it is an implied
contract.

Example: If A says to B that he is willing to sell him his car for a sum of Rs. 10,000
it is an express offer.

Example: A bus company runs a bus on a particular route. This is an implied offer
by the bus company to take any person on the route who is prepared to pay the
prescribed fare. The acceptance of the offer is complete as soon as a passenger gets
into the bus.

5. Offer must create Legal Relations: The offer must lead to a contract that creates
legal relations and legal consequences in case of non-performance. So a social
contract which does not create legal relations will not be a valid offer. Say for
example a dinner invitation extended by A to B is not a valid offer.

6. Offer must be clear, not vague: The terms of the offer or proposal should be
very clear and definite. If the terms are vague or unclear, it will not amount to a valid
offer. Take for example the following offer – A offers to sell B fruits worth Rs 5000/-
. This is not a valid offer since what kinds of fruits or their specific quantities are not
mentioned.

7. It should not contain negative condition: An offer should not contain a

condition the non-compliance of which may be assumed as acceptance. An offeror
cannot say that if acceptance is not communicated up to a certain date, the offer
would be presumed to have been accepted. If the offeree does not reply, there is no
contract, because no obligation to reply can be imposed on him, on the ground of
justice no agreement because such condition cannot be imposed on the offeree. It is
only a one sided offer.

Example: A wrote to B offering to sell his book for Rs.500 adding that if he didn’t
reply within 5 days, the offeree would be presumed to have been accepted. There is
no agreement b/c such condition can’t be imposed on the offeree. It is only a one
sided offer.
8. Offer can be specific or general: An offer may be made to definite person or
persons or to the world at large. When it is made to some specific person or persons
it is called a specific offer. When it is made to the world at large it is called a General
offer. A specific offer can be accepted only by the person to whom the offer has been
made and in the manner, if any specified in the terms of the offer.

But a general offer can be accepted by any persons having notice of the offer by
doing what is required under the offer.

9. Offer must be distinguished from invitation: An invitation to offer is an action

inviting other parties to make an offer to form a contract. In the case of an invitation
to offer the person sending out the invitation does not make an offer by only invites
the other part to make an offer. Thus such invitation for offers are therefore not offer
in the eye of law and do not become agreement by their acceptance.

Menu card of restaurant is an invitation to put an offer

10. It must not contain cross offers: When two parties make similar offers to each
other, in ignorance of each other’s such offers are called cross-offers. The acceptance
of cross-offers does not result in complete agreement.

Example: On 23rd December 2007, A wrote B to sell him 100 ton of iron at Rs.10,
000 per ton. On the same day, B wrote to A to buy 100 tons of iron at Rs.10, 000 per
ton. There is no contract between A & B because the offers were similar and made
in ignorance of the other and so there is no acceptance of each other’s offer.

11. The offer must have its terms definite and clear: The terms of offer must be
certain, definite and clear. If the terms of the offer are not certain or definite it is not
a valid offer, as it not clear what exactly the parties intend to do.

Example: ram offer to sell to Rahim his gold ring for 10k or 15k. Here ram offer is
not certain because it is not clear as to which of the price is to be paid by Rahim.

12. The offer must be made with view to obtain the assent of the other party:
The offer must be made with an intension to obtain the assent of the other part. The
offer made as a prank or joke is not a valid offer and therefore it accepted it cannot
amount a valid contract.
Example: if B jokingly offer M to sell his scooter 11k and m knows that B is not
serious, accepted the offer, then such acceptance does not hold any value as the offer
made jokingly in not valid

The offer may involve doing something or not doing something. An offer to do
something is a positive offer and an offer not to do something is a negative offer.

Example: anil proposes Sunil to manufacture 10k shirt the proposal is to do

something. I.e. to manufacture shirts. This is positive offer

Classification of Offer
There can be many types of offers based on their nature, timing, intention, etc. Let us take
a look at the classifications of offers.

Express offer: when the offeror expressly communicate the offer the offer is said to be an
express offer the express offer may be made by Spoke word or written word

Implied offer: when the offer is not communicate expressly it’s called implied offer. An
offer may be implied from: the conduct of the parties or the circumstances of the case.

General Offer: A general offer is one that is made to the public at large. It is not made any
specified parties. So any member of the public can accept the offer and be entitled to the
rewards/consideration. Say for example you put out a reward for solving a puzzle. So if
any member of the public can accept the offer and be entitled to the reward if he finishes
the act (solves the puzzle.)

Specific Offer: A specific offer, on the other hand, is only made to specific parties, and so
only they can accept the said offer or proposal. They are also sometimes known as special
offers. Like for example, an offers to sell his horse to B for Rs 5000/-. Then only B can
accept such an offer because it is specific to him.

Cross Offer: In certain circumstances, two parties can make a cross offer. This means both
make an identical offer to each other at the exact same time. However, such a cross offer
will not amount to acceptance of the offer in either case.
For example, both A and B send letters to each other offering to sell and buy A’s horse for
Rs 5000/-. This is a cross offer, but it will be considered as acceptable for either of them.
When does a contract come into existence: a contract comes to existence when any of the
parties accept the cross offer made by the other party.
Counter Offer: There may be times when a promise will only accept parts of an offer, and
change certain terms of the offer. This will be a qualified acceptance. He will want changes
or modifications in the terms of the original offer. This is known as a counteroffer. A
counteroffer amounts to a rejection of the original offer.

Standing, open and continuous offer: An offer is allowed to remain open for acceptance
over a period of time known as standing, open or continually offer. Tender for supply of
good s is a kind of standing offer.
Example: when we ask the newspaper vendor to supply the newspaper daily. In such case
we do not repeat our offer daily and the newspaper vendor supplies the newspaper to us
daily. The offer of such type are called standing offer.

LAPSE OF AN OFFER
An offer should be accepted before it lapses (i.e. comes to an end). An offer may come to
an end in any of the following ways stated in Section 6 of the Indian Contract Act:

1. by communication of notice of revocation: An offer may come to an end by

communication of notice of revocation by the offeror. It may be noted that an offer can be
revoked only before its acceptance is complete for the offeror. In other words, an offeror
can revoke his offer at any time before he becomes before bound by it. Thus, the
communication of revocation of offer should reach the offeree before the acceptance is
communicated.

2. by lapse of time: Where time is fixed for the acceptance of the offer, and it is not
acceptance within the fixed time, the offer comes to an end automatically on the expiry of
fixed time. Where no time for acceptance is prescribed, the offer has to be accepted within
reasonable time. The offer lapses if it is not accepted within that time. The term ‘reasonable
time’ will depend upon the facts and circumstances of each case.

3. by failure to accept condition precedent: Where, the offer requires that some condition
must, be fulfilled before the acceptance of the offer, the offer lapses, if it is accepted
without fulfilling the condition. ARUN VERMA - (c) 14

4. by the death or insanity of the offeror: Where, the offeror dies or becomes, insane, the
offer comes to an end if the fact of his death or insanity comes to the knowledge of the
acceptor before he makes his acceptance. But if the offer is accepted in ignorance of the
fact of death or insanity of the offeror, the acceptance is valid. This will result in a valid
contract, and legal representatives of the deceased offeror shall be bound by the contract.
On the death of offeree before acceptance, the offer also comes to an end by operation of
law.
5. By counter – offer by the offeree: Where, a counter – offer is made by the offeree, and
then the original offer automatically comes to an end, as the counter – offer amounts to
rejections of the original offer.

6. by not accepting the offer, according to the prescribed or usual mode: Where some
manner of acceptance is prescribed in the offer, the offeror can revoke the offer if it is not accepted
according to the prescribed manner.

7. by rejection of offer by the offeree: Where, the offeree rejects the offer, the offer comes
to an end. Once the offeree rejects the offer, he cannot revive the offer by subsequently
attempting to accept it. The rejection of offer may be express or implied.

8. by change in law: Sometimes, there is a change in law which makes the offer illegal or
incapable of performance. In such cases also, the offer comes to an end.

9. An offer lapses by subsequent illegality or destruction of subject matter. An offer

lapses if it becomes illegal after it is made, and before it is accepted. An offer may lapse if
the substance, which is the subject matter of the offer, is destroyed or substantially impaired
before acceptance

10. An offer lapses by not being accepted in the mode prescribed, or if no mode is
prescribed, in some usual and reasonable manner. But, according to Section 7, if the offeree
does not accept the offer according to the mode prescribed, the offer does not lapse
automatically. It is for the offeror to insist that his proposal be accepted only in the
prescribed manner, and if he fails to do so he is deemed to have accepted the acceptance.

Acceptance
The Indian Contract Act 1872 defines acceptance in Section 2 (b) as “When the person to whom the
proposal has been made signifies his assent thereto, the offer is said to be accepted. Thus the proposal
when accepted becomes a promise.”

Therefore once an offer is accepted it cannot be revoked because it has become a promise which
creates a legal obligation between the parties.

When the proposal is accepted and it becomes a proposal it also becomes irrevocable. An offer
does not create any legal obligations, but after the offer is accepted it becomes a promise. And a
promise is irrevocable because it creates legal obligations between parties. An offer can be revoked
before it is accepted. But once acceptance is communicated it cannot be revoked or withdrawn.

Example -Anita offers to buy Riya’s car for Rs.10 lakhs and Riya accepts such an offer. Now, this
has become a promise.
Essentials of a valid acceptance
1. Acceptance must be given by Offeree
2. Acceptance must be absolute and unqualified
3. Acceptance must be in the mode prescribed
4. Acceptance must be communicated to the offeror
5. Silence cannot be prescribed as mode of acceptance:
6. Acceptance must be given within the time stipulated or within a reasonable time
if time is not mentioned
7. There can be no acceptance before the communication of the offer
8. Acceptor must in indicate intention to fulfil the promise
9. If the proposal is made through an agent, it is sufficient if the acceptan
ce is communicated to him
10. Acceptance of the proposal will mean acceptance of all the terms of the offer

1. Acceptance must be given by (offeree) that person only to whom the offer is made the proposal can
only be accepted by the person to whom it is made (offeree) and not by any other person. If it is accepted
by any other person on behalf of the original proposed, there cannot be a promise and the parties be valid.
2. Acceptance must be communicated: Necessary for the valid acceptances that it must be communicated
by the Offeree to the offerer. If the offeree has the intention to accept the proposal but he fails to
communicate it to the offerer, there cannot be an acceptance and therefore, there cannot be a contract.
Illustration: An offers to sell his car to B for Rs. B intends to accept the proposal writes a letter of
acceptance of the Proposal but forgets to dispatch it. A sells the car to C, B has no claim against A because
his acceptances has not been communicated to A.
3. Acceptance must be absolute and unqualified: Acceptance of the proposal must be absolute and
unqualified by the offeree. There cannot be the slightest deviation from the term of the offer for the valid
acceptances. So it is compulsory for the valid acceptances that the offeree must accept the proposal with all
its terms and conditions.
Illustration: An offers to sell his motorcycle to B for Rs. 20,000 on a cash basis. B accepts the proposal
and pays Rs. 10,000 down and promises to pay the balance of Rs. 10,000 at evening. There cannot be a
contract because the acceptance is not absolute and unqualified.
3. The acceptance must be given within the prescribed time: The acceptance must be given within the
time prescribed by the offerer and if no time prescribed by the offerer for the acceptance of the proposal,
the proposal must be accepted within a reasonable time. The reasonable time is a question of fact, depends
on each particular case.
Illustration: The application for the allotment of shares was given on June 8th. The applicant was informed
on November 23 that’ shares were allotted to him. He refused to accept them. In a legal proceeding, it was
held that due to the delay in notification of acceptances: time applicant is not bound to purchase shares
(Rams gate Victoria Hotel Co. Vs Montefiore 1866)
5. Acceptance must be unconditional: It is another important essential element of a valid acceptance. A
valid contract arises only if the acceptance is absolute and unconditional. It means that the acceptance
should be in total (i.e. of all the terms of the offer), and without any condition. Thus, an acceptance with a
variation is no acceptance. It is simply a counter offer. A counter offer puts an end to the original offer, and
it cannot be revived by subsequent acceptance.
Example: An offers to sell his watch to B for Rs.500 and B replies that he can buy it only for Rs.300 thee
is a material variation in the acceptance. Therefore, there is no agreement as the acceptance is not absolute
and unconditional.
6. The acceptance must be given within the time prescribed by the offerer: and if no time prescribed
by the offerer for the acceptance of the proposal, the proposal must be accepted within a reasonable time.
The reasonable time is a question of fact, depends on each particular case.
Illustration: The application for the allotment of shares was given on June 8th. The applicant was informed
on November 23 that’ shares were allotted to him. He refused to accept them. In a legal proceeding, it was
held that due to the delay in notification of acceptances: time applicant is not bound to purchase shares
(Rams gate Victoria Hotel Co. Vs Montefiore 1866)
7. Acceptance must follow the offer: The acceptances always given after the proposal is made. The
acceptance is not possible before the offer is received. Therefore, a person cannot be allotted this shares of
the company until he applied for them.
Illustration: An offers to pay Rs. 5000 to a person who provides information about his lost horse. B
ignorant of a proposal provide information to A about his lost horse. But later on, he known about an offer
B is not entitled to get the reward of Rs. 5000 because cannot be made before the proposal.
8. The acceptance cannot be presumed from silence: Sometimes, the acceptor does not convey his
decision to the offer or/and keeps silent. In such a case, his silence does not amount to acceptance. Similarly,
the offeror does not have the legal rights to say that if no answer is received within a certain time, the offer
shall be deemed to have been accepted.
He (the offeror) cannot impose a condition that offeree’s silence will be regarded as equivalent to
acceptance.
9. It may be express or implied: When an acceptance is given by words spoken or written, it is called
express acceptance. When it is given by conduct, it is called implied acceptance. Sometimes the proposal
instead of being made to a definite person is made to the public.
Example: A wrote a letter to B to sell his cycle for Rs.2, 000. B accepted his offer and sent a letter of
acceptance to A. It is an express acceptance.
10Acceptance must be communicated in the method specified by oferer: offeree is bound to accept the
proposal with a manner prescribed by the offerer for the acceptance of the proposal. If the offeree deviates
from the manner prescribed by the offerer for the acceptance of the proposal, the proposer has a right not
to accept the acceptance and there cannot be a contract.
Illustration: A offers to sell 100 units of his product for Rs. 20 per unit to B and requires that acceptance
must be sent through a telephonic message. But B sends a letter for the acceptance of the Proposal. A can
refuse to accept the acceptance by informing B that acceptance is not according to prescribed mode.
11. The acceptance must be given before the laps of offer: A valid contract can arise only when the
acceptance is made before the offer has lapsed or been withdrawn. An acceptance which is made after the
withdrawal of the offer is invalid, and does not create any legal relationship.
Example: Amar offered, by letter, to sell his horse to Akbar for 2k subsequently, Amar withdraw his offer
by telegram which was also receive by Akbar. After the receipt of this telegram, Akbar accepted the offer
by a letter and posted the same in this case the acceptance is invalid as it was made after the effective
withdrawal of the offer.
12. Communication of offer and acceptance: An offer and its acceptance have legal effect unless it’s
communicated to the other party. The offer and the acceptance can be communicated by word (spoken or
written) or by conduct. Communication of offer is complete. As soon as it comes to the knowledge of the
offeree. A communication of acceptance is complete at different time for the offeror and offeree.
 For the offeror, the communication of acceptances complete when it is put in the course of
transmission to him. Thus, the offeror becomes bound by acceptance as soon as letter of acceptance
is posted by the offeree
 For the offeree, the communication of acceptance is complete when it comes to knowledge of
offeror.
Example: Amar offers to sell his house to Akbar for 14k by a letter dated 25 Aug . The letter reach Akbar
on 29 Aug. Akbar accepts the offer by a letter posted on 29 Aug. this letter of acceptance reach Amar on
30 Aug,
Consideration
The Indian Contract Act defines consideration as follows: Section 2(d) ‘When at the desire of the promisor,
the promisee or any other person has done or abstained from doing, or does or abstains from doing, or
promises to do or to abstain from doing, something, such act or abstinence or Promise is called a
consideration for the promise.’

A consideration consists of the following four components:

 The act or abstinence or promise which forms the consideration for the promise, must be done at
the desire of the promisor;
 It must be done by the promisee or any other person;
 It may have been already executed or is in the process of being done or may be still executory;
 It must be something to which the law attaches a value.

At the desire of the promisor if the promisee either

 Does something (in the past, present or future) OR

 Abstains from doing something (in the past, present or future)

Then, this act of doing or abstinence is called Consideration. Now, it has two aspects, either doing
some act or abstaining from doing something. Let’s look at some examples:

Example 1 – Doing something

Peter and John enter into a contract where Peter promises to deliver 15 curtains to John in one
month’s time. Also, John promises to pay Peter an amount of Rs 3,000 on delivery. In this contract,
John’s promise to pay Rs 3,000, on delivery, is the consideration for Peter’s promise. Also, Peter’s
promise of delivering 15 curtains is the consideration of John’s promise to pay.

Example 2 – Not doing something

Peter has taken a loan from his friend John. However, he has not repaid the loan yet. John promises
not to file a suit against Peter if he promises to repay the loan within a week. In this case, abstinence
on the part of John is due to the consideration of Peter’s promise of repayment of the loan.

The definition of consideration highlights the following essentials to be fulfilled for the presence of a valid
consideration:

1. Consideration to be given “at the desire of the promisor

2. Consideration may move from the promisee to any other person
3. Consideration may consist of an act at or abstinences
4. It cannot be Unlawful
5. Consideration should not be something which the promisor is already bound
6. Consideration must not be illegal, immoral or against the public policy
7. Consideration should not be illusory but real
8. Consideration should not be adequate
9. Consideration may be past, present or future, in so far as definition says that the promisee:
10. Consideration must be ‘something of value’
1.Consideration to be given “at the desire of the promisor: The definition of consideration in the Act
clearly emphasize that an act or abstinence which is to be a consideration for the promise must be done or
promised to be done in accordance with the desire of the promisor.. If such consideration is made at the
will of a third party or without the desire of the promisor it will be a good consideration.
Example: A save’s B goods from a fire without being asked to do so. A cannot demand payment for his
service.

2. Consideration may move from the promisee to any other person: If you look at the definition of
consideration according to section 2 (d) of the Indian Contract Act. 1872, it explicitly states the phrase
‘promisee or any other person…’ This essentially means that in India, consideration may move from the
promise to any other person. However, it is important to note that there can be a stranger to consideration
but not a stranger to the contract.

Example: Peter gifted his son, Oliver an apartment in the city with a condition that he pays a fixed
amount of money to his uncle, John, every year. On the same day, Oliver executed a deed to pay
a fixed amount of money to John every year. However, Oliver failed to pay and John filed a suit
for recovery. Oliver pleaded that he was not liable since no consideration had moved from John.
However, the court held the words ‘promisee or any other person…’ and allowed John to maintain
his suit for recovery.

3. Consideration may consist of an act at or abstinences: consideration may consist of either positive act
or an abstinence, i.t. a negative act. It must be noted that past condition is good consideration only if it is
given the promise, at the desire of the promisor.

4. It cannot be Unlawful: A consideration that is against the law or public policies is not valid. Peter offers
Rs 10,000 to John to beat up his business rival. John beats him up but Peter refuses to pay him. John cannot
file a suit for recovery since the consideration is against the law.

5. Consideration should not be something which the promisor is already bound.

A person may already be bound to do something law or by contract. A promise to do something which he
is already bound to do is not a good consideration. Likewise, a promise to perform a public duty by a public
servant is not a good consideration.

6. Consideration must not be illegal, immoral or against the public policy

This says that consideration to an agreement should not be something illegal, immoral or something against
the public policy. The court should decide whether the consideration promised is lawful or unlawful, where
it is unlawful the court should not allow the action on agreement.

7. Consideration should not be illusory but real

Although the consideration accepted may not be adequate but it should be real and not illusory and should
be competent and of some value in the eye of law. There is no real consideration in the following cases.
a. Physical impossible: a promise to put life in b’s dead wife on behalf of 500 this is physically
impossible to perform.
b. Legally impossible: A owes to B 100 he promise to pay 521 to C, the servant of B, who in return
promises to discharge A from his debt. This is legally impossible cause C cannot give A discharge
for a debt due to B
c. Uncertain consideration: A engages B for doing certain work and promises to pay A “reasonable”
sum. There is no recognized way to ascertain the “reasonable” remuneration this consideration is
uncertain consideration.
8. Consideration should not be adequate: It is however not necessary that consideration must be adequate
to the promise made. Consideration as considered to be “something in return” it need not necessarily be
equal to the value to the “something given”. But it should be something to which law attach value.
Example: A purchase table from B for 5k. It’s a difficult task for the court to ascertain whether the value
of table worth the price given or not.

9. Consideration may be past, present or future, in so far as definition says that the promisee:
 Has done or abstained from doing, i.e. before the date of promise
Example: A render some service to B at the latter’s desire. After a month B promise to compensate
A for the service rendered to him its pas consideration.
 Does or abstains from doing, i.e. at the same time as promise is made.
Example: could be cash sale, when we buy something in consideration for money from a shop it’s
a present consideration.
 Promises to do or to abstain from doing, something.
Example: D promised to deliver certain goods to P after a week; P promises to pay the price after
a fortnight. The promise of D is supported by the promise of P. consideration in this case is future
or executory.

10. Consideration must be ‘something of value’. The fourth and last essential of valid consideration is
that it must be ‘something’ to which the law attaches a value. The consideration need not be adequate to
the promise for the validity of an agreement. The law only insists on the presence of consideration and not
on the adequacy of it. However, if the consideration be grossly or shockingly inadequate, and if one of the
parties to the contract alleges that his consent was obtained by fraud, coercion or undue influence, the court
will treat inadequacy of consideration as an evidence in support of such allegation and will
Declare the contract, void

Exceptions to the Rule of ‘No Consideration, No Contract’

Consideration being one of the essential elements of a valid contract, the general rule is that ‘an agreement
made without consideration is void’, But there are a few exceptions to the rule, where an agreement without
consideration will be perfectly valid and binding. These exceptions are as follows:
1. Agreement made on account of natural love and affection [Sec. 25 (1) An agreement made without
consideration is enforceable if, it is (i) expressed in writing, and (ii) registered under the law for the time
being in force for the registration of documents, and is (iii) made on account of natural love and affection,
(iv) between parties standing in a near relation to each other. Thus there are four essential requirements
which must be complied with to enforce an agreement made without consideration, as per Section 25(1).
Examples: A, out of his love and affection, promises to give his wife, Rs.10, 000. This promise is put into
writing and is registered. It will be a valid contract without consideration.
After persistent quarrels and disagreement between husband and his wife, the husband promised in writing
to pay his wife, a sum of money for her maintenance and separate residence. The agreement was also
registered. It was held that the promise was not enforceable because it was not entered out of natural love
and affection. (Rajlusmi Dabee v. Bhootnath) (1900).
2. Agreement to compensate for past voluntary service [Sec. 25 (2)]. A promise made without
consideration is also valid, if it is a promise to compensate, wholly or in part, a person who has already
voluntarily done something for the promisor, or done something which the promisor was legally
compellable to do.
When a contract is made to compensate a person who has already done something voluntarily for the
promisor, or done something which the promisor was legally compellable to do. Here two conditions must
be fulfilled. First, the act must have been done voluntarily and for the benefit of the promisor, secondly, the
intention of promisor must have been to compensate the promisee. This contract may be oral or written.
Thus, services voluntarily rendered but not with gratuitous intention can form valid consideration for a
promise given to compensate him.
3. Agreement to pay a time-barred debt [Sec. 25 (3)]. Where there is an agreement, made in writing and
signed by the debtor or by his authorized agent, to pay wholly or in part a debt barred by the law of
limitation, the agreement is valid even though it is not supported by any consideration. A time-barred debt
cannot be recovered and therefore a promise to repay such a debt is without consideration.
For example, A owes B Rs. 2,000 but the debt is barred by the Law of Limitation. A sign written promise
to pay B Rs. 1,000 on account of the debt. This is a contract.

4. Completed gift. A gift (which is not an agreement) does not require consideration in order to be valid.
‘As between the donor and the donee, any gift actually made will be valid and binding even though without
consideration’. In order to attract this exception there need not be natural love and affection or nearness of
relationship between the donor and donee. The gift must, however, be complete.
5. Contract of agency. Section 185 of the Contract Act lays down that no consideration is necessary to
create an agency.
6. Remission by the promisee, of performance of the promise (Sec. 63). For compromising a due debt,
i.e., agreeing to accept less than what is due, no consideration is necessary. In other words, a creditor can
agree to give up a part of his claim and there need be no consideration for such an agreement. Similarly, an
agreement to extend time for performance of a contract need not be supported by consideration.
7. Contribution to charity. A promise to contribute to charity, though gratuitous, would be enforceable, if
on the faith of the promised subscription, the promisee takes definite steps in furtherance of the object and
undertakes a liability, to the extent of liability incurred, not exceeding the promised amount of subscription.
Stranger to Contract: According to general rule of law only parties to a contract my sue and may be sued
on the contract. This rule is based on the doctrine of the privity of contract. This means relationship
subsisting between the parties to a contract. It means mutually of will and creates a legal bond or tie between
the parties to a contract. The consequences of the doctrine of privity of contract are:
 Any person who is not a party to a contract cannot sue upon it even though the contract is for his benefit
and he supplied consideration.
 A contract cannot give rights or impose obligations arising under the contract on any person other than
the parties to it.
But there are certain exceptions to the rule that a stranger can sue, i.e. a stranger can sue in certain cases.
This is possible in cases of trust or charge. Similarly, a stranger may sue in case of marriage settlement,
partition or other family arrangements. A stranger can also be sued in case of acknowledgement or estoppel.
Where the promisor by his conduct, acknowledge or otherwise constitutes himself as an agent of the Third
party, a binding obligation is thereby incurred towards him. Similarly, in case of assignment of a contract,
the assignee of rights and benefits under a contract not involving personal skill can enforce the contract
subject to the equities between the original parties.
Capacity to Contract
One of the most essential elements of a valid contract is the competence of the parties to make a contract.
Section 11 of the Indian Contract Act, 1872, defines the capacity to contract of a person to be dependent on
three aspects; attaining the age of majority, being of sound mind, and not disqualified from entering into a
contract by any law that he is subject to. In this article, we will look at all aspects in a detailed manner.
Capacity to Contract

According to Section 11, “Every person is competent to contract who is of the age of majority
according to the law to which he is subject, and who is of sound mind and is not disqualified from
contracting by any law to which he is subject.”

So, we have three main aspects:

1. Attaining the age of majority

2. Being of sound mind
3. Not disqualified from entering into a contract by any law that he is subject to

Who can all enter into a contract?

Under section 11 of the Indian Contract Act, any person is competent to contract are as follows.
 A person who attained the age of majority and is not a minor.
 A person of sound mind.
 A person who has not been disqualified by law or declared as insolvent/bankrupt

Persons not eligible for contract

If a person falls in any of the following categories, he/she will be declared as an incompetent party
to a contract.

 Minors
 Persons of unsound mind
 Persons disqualified by law
Minors
Section 3 of the Indian Contracts Act, 1872 states the definition of a minor.
Any person who is a citizen of India and is under the age of 18 years is a minor.
An agreement with a minor is null and void that means it cannot be enforceable by law.
Further, even if the minor attains the age of majority that is age above 18 years, still the agreement cannot
be enforced afterwards.

Ratification of minor’s agreement – An agreement with a minor is void and hence cannot be
ratified even if the minor attains the age of majority.

Minor as a beneficiary – If a contract benefits a minor, then such an agreement is valid and
enforceable by law. Thus, he is permitted to act as a beneficiary for a contract.

Role of estoppel against a minor – Even if a minor by misrepresenting his age, induced a person
to enter into a contract with him then also he cannot be made liable for such an act. Thus there can
be no estoppel against a minor.

No specific performance – As a contract with a minor is void, he cannot be asked for specific
performance of the contract. But the contract can be specifically enforced only if it falls under
these exceptions.

If the guardian enters into a contract on behalf of the minor.

If the minor is being benefited from the contract.

 The doctrine of restitution – As per section 33 of the Specific Relief Act, 1963 we can
conclude that the court cannot compel a minor to restore the property unless the property
is in a recoverable position or still in possession of that minor.
 Necessaries supplied to a minor – A minor being incapable of contracting can be
supplied with necessaries, the basic essentials of life such as food, shelter, clothes etc.
The person supplying such necessaries is entitled to get reimbursed from the property of
such a person. The necessaries provided must be as follows.
1. Basic minimal necessaries that are needed for survival.
2. It should be only provided when the minor does not have a sufficient supply of it.
 Minor acting as a partner – A minor person cannot act as a partner but can be made as a
beneficiary of the partnership as per section 30 of Indian Partnership Act, 1932.
 Minor acting as an Agent – A minor can be appointed as an agent but cannot delegate his
authority to any other person. Hence, he cannot appoint an agent himself.
 Contract of apprenticeship – A contract of apprenticeship shall be binding on minors as
per the Apprentices Act, 1961.
 Contract of Marriage – The arrangement of the marriage of minors is enforceable by law
as it is considered beneficial for them.
 Minor as a shareholder – A minor cannot act as a shareholder of any company.
 Minor as a trade union member – In some cases, a minor can be a member of a trade
union if he has attained the age of 15 years at the time of registration
Persons of unsound mind
Under section 12 of the Indian Contract Act 1872, persons of sound mind can be defined as the
people who while entering into a contract are capable of understanding the nature of it and
therefore can form a rational judgment regarding the same.
Thus, from the above statement, it can be concluded that people of unsound mind are:

 Incapable of understanding the nature of their act while entering into a contract.
 Unable to form a rational judgment.

As per section 11, any contract with a person of unsound mind will be declared as void.
Persons of unsound mind can be bifurcated into following heads –

 An idiot
 Lunatic
 Intoxicated person

An Idiot
An idiot is a person who is permanent of unsound mind that is being of unsound mind by birth.
Such a person can never understand the nature of the act and form a rational judgement about the
same. Thus, contracts with such a person are void-ab-initio.

Lunatic
Lunatics are the ones who are not permanently of unsound mind but are also of sound mind during
a specific period or interval. Such people are allowed to enter into a contract only when they are
of sound mind.
NOTE: A person occasionally of sound mind but generally of unsound mind can enter into a
contract at the time when is of sound mind.
A person occasionally of unsound mind but generally of sound mind cannot enter into a contract
when is of unsound mind.

Intoxicated person
A person when intoxicated or drunk is usually not capable of making a rational judgment. Thus if
such a person enters into a contract, it will result in a void contract.

Persons disqualified by law

Following are the people disqualified by law.

 Alien Enemy
 Foreign Sovereign
 Convict
 Insolvent

1) Alien Enemy: An “Alien” is the one who is an outsider or the one not belonging to our
country. If the state where the person is an alien and the state where he belongs is at war, then
such a person will be an alien enemy to the other state.
A contract can be entered with an alien enemy only with the approval of the central government.
Any contract without the approval of the Central Government will result in an unenforceable
contract.
2) Foreign Sovereign: The foreign sovereigns can enter into a valid contract and such contracts
are only enforceable in the Indian Courts when the contracts were made with the prior approval
of the Central Government. A suit cannot be filed in the Indian Courts regarding the contract
if there is no sanction of the Central Government.

Or foreign sovereigns are the representatives of foreign states. They and their representatives
are bestowed upon with certain privileges and immunities in every country. In India they
cannot enter into a contract except through their agents residing in India. If they enter into a
contract through their agent, that agent will have the entire liability. Foreign sovereigns and
ambassadors can enter into contracts and enforce those contracts in Indian court, but they
cannot be proceeded again in courts without the sanction of the central government.

Company or statutory bodies: a contract entered into by a corporate body or statutory body
will be valid only to the extent it is within its memorandum of association, memorandum of
association of a company is legal document which is important to its formation. While entering
into a contract the company cannot go beyond the conditions mentioned in the memorandum
of association.
3) Convict: A convict is incapable of entering into a contract only during the period of his
imprisonment but still, he can enter into a contract if the central government permits.
Thus a convict is incapable only for a specific period of time as at the time of his acquittal, he
again becomes capable of entering into a contract.

4) Insolvent: When a person is declared insolvent by the court, that means his property vests in
the receiver, and therefore he is unable to enter into a contract relating to property as his power
has already been taken away by the court.
Such a person can again become capable of entering into a contract when discharged by the court.

Conclusion
From the above discussion, it can be concluded that the capacity to contract is the legal
competence to contract. A person declared as incompetent to contract is the one who is
incapable of entering into a contract, and a contract with such a person is unenforceable by
law. Further, such persons are also divided into categories such as minor, unsound mind
and persons disqualified by law. Any person if falls in any of these categories will be
declared as an incompetent person to contract, making his contract void or voidable in
certain circumstances. But the court of law also provides relief to certain people, making
them incapable of contracting for only a specific period of time such as convicts and
insolvents.
Thus, the capacity to contract is an essential element to fulfil the requirements of a valid
contract.
Free Consent
In the Indian Contract Act, the definition of Consent is given in Section 13, which states that “it is
when two or more persons agree upon the same thing and in the same sense”. So the two people
must agree to something in the same sense as well. Let’s say for example A agrees to sell his car
to B. A owns three cars and wants to sell the Maruti. B thinks he is buying his Honda. Here A and
B have not agreed upon the same thing in the same sense. Hence there is no consent and
subsequently no contract.

Now Free Consent has been defined in Section 14 of the Act. The section says that consent is
considered free consent when it is not caused or affected by the following,

1. Coercion
2. Undue Influence
3. Fraud
4. Misrepresentation
5. Mistake

Clearly, Free Consent means the absence of any kind of coercion, undue influence, fraud,
misrepresentation or mistake. When the consent which is given is affected by these elements it
calls into question whether the consent given was free and voluntary. The objective of this principle
is to ensure that judgment of the parties while entering into the contract wasn’t clouded. Therefore
consent given under coercion, undue influence, fraud, misrepresentation or mistake has the
potential to invalidate the contract.

Coercion (Section 15)

Coercion means using force to compel a person to enter into a contract. So force or threats are used
to obtain the consent of the party under coercion, i.e. it is not free consent. Section 15 of the Act
describes coercion as

 committing or threatening to commit any act forbidden by the law in the IPC
 unlawfully detaining or threatening to detain any property with the intention of causing any
person to enter into a contract

For example, A threatens to hurt B if he does not sell his house to A for 5 lakh rupees. Here even
if B sells the house to A, it will not be a valid contract since B’s consent was obtained by coercion.

Undue Influence (S.16)

Section 16 of the Act contains the definition of undue influence. It states that when the relations
between the two parties are such that one party is in a position to dominate the other party, and
uses such influence to obtain an unfair advantage of the other party it will be undue influence.

The section also further describes how the person can abuse his authority in the following two
ways,
  When a person holds real or even apparent authority over the other person. Or if he is in a
fiduciary relationship with the other person
 He makes a contract with a person whose mental capacity is affected by age, illness or
distress. The unsoundness of mind can be temporary or permanent

Say for example A sold his gold watch for only Rs 500/- to his teacher B after his teacher promised
him good grades. Here the consent of A (adult) is not freely given, he was under the influence of
his teacher.

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 at 6 per cent per month. The Court may set the bond aside,
ordering B to repay Rs. 100 with such interest as may seem just.

Transaction with Parda-nishin women: Who is a parada-nishin women? A woman who

observes complete seclusion due to the prevailing custom in her community is said to be parada-
nishin. She does not act independently but has to depend upon someone else for performing her
outward duties. A woman going to the Court to give her evidence, settling gent with her tenant,
collecting rents from them, dealing with other parties in matters of business, falling to outsiders
cannot be regarded as a Prada- nishin woman. The training, habit and surrounding circumstances
are the main elements to be considered to decide whether a woman is a Parada-nishin or not
wearing a Bourka does not make a woman a Prada- nishin.

A Parada-nishin woman can be influenced by undue influence. Persons entering into contracts with
such a woman have to be very careful because they may be required to prove (1) that such woman
understood the contents of the contracts; (2) she had free and independent advice and (3)she
exercise her free will.

“Fraud”: (S.17)
Consent is not said to be free when it has been obtained by means of fraud. In such cases, the contract
becomes voidable at the option of the party whose consent was obtained by means of fraud. So according
to Section 17, a fraud is when a party convinces another to enter into an agreement by making
statements that are

 suggesting a fact that is not true, and he does not believe it to be true
 the active concealment of facts
 a promise made without any intention of performing it
 any other such act fitted to deceive
 Any act or omission which the law specifically provides to be fraudulent.

Examples

 A sells, by auction to B, a horse which A knows to be unsound. A says nothing to B about

the horse’s unsoundness. This is not fraud by A.
  B says to A “If you do not deny it, I shall assume that the horse is sound”. Here, A’s silence
is equivalent to speech. Here, the relation between the parties would make it A’s duty to
tell B if the horse is unsound.
 B is A’s daughter and has just come of age. Here the relation between the parties would
make it A’s duty to tell B if the horse is unsound.
 A and B, being traders, enter upon a contract. A has private information of a change in
prices which would after B’s willingness to proceed with the contract. A is not bound to
inform B.

False Statement: A false statement intentionally made by one of the parties, which is considered
to be a fraud.

Active Concealment: The active concealment of a fact by an individual who believes the fact is
a fraud.

Intentional non-performance: A promise that is made without any intention to perform it is

intentional non-performance.

Deception: Any other facts stated to deceive is called deception.

Fraudulent act or omission: The clause provided under certain acts makes it mandatory to
disclose relevant facts. According to Section 55 of the Transfer of Property Act, the seller of
immovable property has to reveal to the buyer all the material defects, and any failure in the same
leads to fraud.

Is silence a fraud: A general rule is that silence is not a fraud until there is a duty to speak
particularly in the fiduciary relationships.

Where silence is a fraud: Under certain circumstances, ‘silence is in itself equivalent to speech’.

Misrepresentation (S.18)

Misrepresentation is also when a party makes a representation that is false, inaccurate, incorrect,
etc. The difference here is the misrepresentation is innocent, i.e. not intentional. The party making
the statement believes it to be true. Misrepresentation can be of three types

A person makes a positive assertion believing it to be true.

Any breach of duty gives the person committing it an advantage by misleading another. But the
breach of duty is without any intent to deceive.

When one party causes the other party to make a mistake as to the subject matter of the contract.
But this is done innocently and not intentionally.
Fraudulent Misrepresentation: This refers to a false representation that has been made
intentionally.

Negligent Misrepresentation: This refers to a representation that is made carelessly.

Innocent Misrepresentation: This refers to a representation that is neither fraudulent nor

negligent.

Mistake
When one of the parties has given its consent to the contract under some kind of misunderstanding
then the consent is said to be have been given by mistake. If it wasn’t for the misunderstanding the
party would not have entered into the agreement. Under contract law, a mistake can of two kinds:
i. A Mistake of Law
ii. A Mistake of Fact

Mistake of Law
This mistake may relate to the mistake of the Indian laws, or it can be a mistake of foreign laws.
If the mistake is regarding Indian laws, the rule is that the ignorance of the law is not a good enough
excuse. This means either party cannot simply claim it was unaware of the law.
The Contract Act says that no party shall be allowed to claim any relief on the grounds of ignorance
of Indian law. This will also include a wrong interpretation of any legal provisions.

Mistake of law may be of two types

1. Mistake of law of the country

2. Mistake of foreign law

Mistake of law of the country or mistake of law. Everyone is deemed to be conversant with the
law of his country, and hence the maxim ‘ignorance of law is no excuse’. Mistake of law, therefore,
is no excuse and it does not give right to the parties to void the contract.

Mistake of foreign law. Mistake of foreign law stands on the same footing as the ‘mistake of fact’.
Here the agreement is void in case of ‘bilateral mistake’ only,

Mistake of Fact

Then there is the other type of mistake, a mistake of fact. This is when both the parties
misunderstand each other leaving them at a crossroads. Such a mistake can be because of an error
in understanding, or ignorance or omission etc. But a mistake is never intentional, it is an innocent
overlooking. These mistakes can either be unilateral or bilateral.
Bilateral Mistake
When both parties of a contract are under a mistake of fact essential to the agreement, such a
mistake is what we call a bilateral mistake. Here both the parties have not consented to the same
thing in the same sense, which is the definition of consent. Since there is an absence of consent
altogether the agreement is void.

Unilateral Mistake
A unilateral mistake is when only one party to the contract is under a mistake. In such a case the
contract will not be void. So the Section 22 of the Act states that just because one party was under
a mistake of fact the contract will not be void or voidable. So if only one party has made a mistake
of fact the contract remains a valid contract.
‘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.

2. ‘A’ agrees to buy from ‘B’ a certain horse. It turns out that the horse was dead at the time of
bargain, though neither party was aware of the fact. The agreement is void.

3. ‘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.

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 law not in force in India has the same effect as a mistake of fact.

For example if ‘A’ and ‘B’ make a contract grounded on the erroneous belief that a particular
debt is barred by the Indian Law of Limitation; the contract is not voidable.

A contract is not voidable merely because it was caused by one of the parties to it being under a
mistake as to a matter of fact.
Legality of object and Consideration
If an agreement is to be enforced in a court of law, both consideration and object of the agreement must be
lawful. When one of consideration or object is unlawful, the contract is void.

According to section 23 “the consideration of object of an agreement is lawful unless its forbidden by law;
or is of such a nature that if permitted, it would defeat the provision of any law; or is fraudulent; or involves
or implies injury to the person or property of another; or the court regards it as immoral, or opposed to
public policy. In each of these cases, the consideration or object of an agreement is unlawful is void”.
Section 2(d0 of Indian contract act defines consideration as when at the desire of the promisor, the promise
or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or
to abstain from doing something, such act or abstinence or promise is described a consideration for the
promise.
Example: A agree to sell his home to b for 10k. Here B promise to pay 10k is the consideration for A’s
promise to sell the home and a’s to sell the home is the consideration for b’s promise to pay 10k.

When consideration and object is unlawful

 specifically forbidden by law
 of such a nature that they would defeat the purpose of the law
 are fraudulent
 involve injury to any other person or property
 the courts regard them as immoral
 Are opposed to public policy.

1] Forbidden by Law: When the object of a contract or the consideration of a contract is prohibited by
law, then they are not lawful consideration or object anymore. They then become unlawful in nature. And
so such a contract cannot be valid anymore

Example: A promise B to drop a prosecution which he has instituted against B for robbery, and B
promise to restore the value of the things taken. The agreement is void as its object is unlawful

2] Consideration or Object Defeats the Provision of the Law: This means if the contract is
trying to defeat the intention of the law. If the courts find that the real intention of the parties to
the agreement is to defeat the provisions of the law, it will put aside the said contract. Say for
example A and B enter into an agreement, where A is the debtor, that B will not plead limitation.
This, however, is done to defeat the intention of the Limitation Act, and so the courts can rule the
contract as void due to unlawful object.

Example: An agreement between husband and wife to live separately is invalid as being opposed
to Hindu law. Or an agreement by the debtor not to raise the plea of limitation is void.

3] Fraudulent Consideration or Object: Lawful consideration or object can never be fraudulent.

Agreements entered into containing unlawful fraudulent consideration or object are void by nature.
Say for example A decides to sell goods to B and smuggle them outside the country. This is a
fraudulent transaction as so it is void. Now B cannot recover the money under the law if A does
not deliver on his promise.

Examples: a promise to pay 22 to b if b would commit fraud on c. b agreeing to defraud is unlawful

consideration for A’s promise to pay. Hence the agreement is illegal and void

Or A, B and C enter into an agreement for the division among them of gains acquired, or to be
acquire by fraud. The agreement is void as its object unlawful.

4] Defeats any Rules in Effect: If the consideration or the object is against any rules in effect in
the country for the time being, then they will not be lawful consideration or objects. And so the
contract thus formed will not be valid.

5] When they involve Injury to another Person or Property: In legal terms, an injury means to
a criminal and harmful wrong done to another person. So if the object or the consideration of the
contract does harm to another person or property, this will amount to unlawful consideration. Say
for example a contract to publish a book that is a violation of another person’s copyright would be
void. This is because the consideration here is unlawful and injures another person’s property, i.e.
his copyright.

Example: an agreement by which a debtor, who borrowed rs20 promise to do manual labor without
pay for the creditor so long as the debt was not repaid in full has been held to be void, as it involved
injury to the person of the debtor.

An agreement between some persons to purchase shares in a company and thus by fraud a deceit
to induce other persons to believe that there is a bona fide market for the shares is void.

6] When Consideration is Immoral: If the object or the consideration are regarded by the court
as immoral, then such object and consideration are immoral. Say for example A lent money to B
to obtain a divorce from her husband C. It was agreed once B obtains the divorce A would marry
her. But the court passed the judgement that A cannot recover money from B since the contract is
void on account of unlawful consideration.

Examples: A agree to let her daughter to B for cocubinage (state of living together as man and
wife) without being married. This agreement is unlawful and immoral.

An agreement for future marriage after

7] Consideration is opposed to Public Policy: Whenever an agreement is harmful to public

welfare it is said to be against public policy. Or harmful to political, economic, social,
technological and welfare of public.

For the good of the community, we restrict certain contracts in the name of public policy. But we
do not use public policy in a wide sense in this matter. If that was the case it would curtail
individual freedom of people to enter into contracts. So for the purpose of lawful consideration
and object public policy is used in a limited scope. We only focus on public policy under the law.
So let us look at some agreements that are opposed to public policy,

1. Trading with the Enemy: Entering into an agreement with a person from a country with
whom India is at war, void be a void agreement. For example, a trader entering into a
contract with a Pakistani national during the Kargil war.
2. Stifling Prosecution: This is a pervasion of the natural course of law, and such contracts
are void. For example, A agrees to sell land to B if he does not participate in the criminal
proceedings against him.
Example: A saw B murdering C. A for a consideration of 1 lakh promises B not disclose
it to any one
3. Maintenance and Champerty: Maintenance agreement is when a person promises to
maintain a suit in which he has no real interest. And champerty is when a person agrees to
assist another party in litigation for a portion of the damages or proceeds.
Example: if A an advocate helps in litigation for B a plaintiff. Here B has agreed to pay
certain amount to A if decision will be in favor of him

4. Interfering with the Courts: An agreement whose object is to induce a judicial or state
officials to act corruptly and interfere with legal proceedings
5. Agreements in restraint of legal proceedings: If the object of an agreement is to restrain
an individual from going to a court of law for redress and relief. Such an agreement is void
since it is opposed to public policy.
6. Agreements in restraint of parental rights: According to Family Law father is the natural
guardian and he has got the right of guardianship of his child until he attains majority. In
the absence of the father, mother is the guardian. Thus right is considered by law so
important and so fundamental that it cannot be bartered away by any agreement under the
law. A father is entitled to the custody of his minor child. Any agreement by the parents
which contemplates a transfer such of rights to stranger is void since it is opposed to public
policy.
7. Agreements restricting personal liberty: Agreements which unduly restrict the personal
freedom parties to it are void as being against public policy.
8. Agreements tending to create interest opposed to duty: It person enters into an
agreement whereby he is bound to do something which is against his public or professional
duty, the agreement is void on the ground of public policy.
9. Agreements interfering with marital status: Agreements to create against marital duties
are void.
10. Marriage Brokerage agreements: Agreements to procure marriages for reward are void
since marriage ought to proceed from the free and voluntary decision of the parties.
11. Agreements in restraint of marriage: The law considers marriage and the married status
as the individual and personal right of every man. A person while selecting his life partner,
should be guided by only consideration of love, affection and mutual welfare and not by
monetary consideration. Marriage ought to be free. Freedom of choice in marriage has been
guaranteed to every person who is major in age. If the object of an agreement is to restrain
a person from marriage, such agreement is void since it is opposed to public policy.
12. Agreements to defraud creditors or revenue authorities: An agreement the object of
which is to defraud the creditors or the revenue authorities is not enforceable, being
opposed to public policy.
13. Agreements in restraint of trade: Where the object of an agreement is to interfere with
the freedom of a person to carry on any lawful trade or profession the said agreement is
called agreement in restraint of trade. Freedom of contract and freedom of trade are well
recognized rules of law. The public policy requires that every man shall be at liberty, in
welfare of the community to carry on his trade, business or profession to the best of his
capacity. Any restraint of trade not only affects the means of livelihood of an individual%
but also affects the industrial growth and enterprise and thereby weakens the whole
economic system of a country. Further it deprives the skill and services of capable persons.
Void Agreement
Section 2(g). A void agreement as an agreement not enforceable by law is said to void’ a void
agreement does not give rise to any legal consequences and is void ab initio (from the beginning).
According to section 10, an agreement, in order to become a valid contract, must not be one of
those that are expressly declared to be void by law.

Difference between a Void Agreement and a Void Contract

Definition:
Void agreement is defined by Section 2(g) viz., an agreement not enforceable by law is void
agreement. Void contract is defined by Section 2(j) viz., a contract which ceases to be enforceable
by law is a void contract since the time it ceases to be enforceable.

Thus it is very clear from the two definitions that a void agreement is void from the very beginning
and does not create any legal effect, while a void contract is not void from the beginning, it
becomes void at a subsequent stage due to the occurrence of an event or change in the original
conditions. We may illustrate this with the help of an example. A, an Indian, enters into a contract
with B, a Pakistani national, to supply woolen a carpets after three months. After some time war
breaks out between India and Pakistan. The contract in between A & B shall become void at the
outbreak of war.
The agreement that are expressly declared to be void are as follows:
Void agreement may be broadly be classified as
1. Agreement contrary to (express provision of ) law
2. Agreement contrary to public

EXPRESSLY DECLARED VOID AGREEMENT

There are certain agreements, which are expressly declared to be void.
They are as follows:
(1) Agreement by a minor or a person of unsound mind.[Sec(11)]
(2) Agreement of which the consideration or object is unlawful[Sec(23)]
(3) Agreement made under a bilateral mistake of fact material to the agreement[Sec(20)]
(4) Agreement of which the consideration or object is unlawful in part and the illegal part
cannot be separated from the legal part [Sec(24)]
(5) Agreement made. without consideration.[Sec(25)]
(6) Agreement in restraint of marriage [Sec(26)]
(7) Agreement in restraint of trade [Sec(27)]
(8) Agreement in restrain of legal proceedings[Sec(28)]
(9) Agreements the meaning of which is uncertain [Sec(29)]
(10) Agreements by way of wager [Sec(30)]
(11) Agreements contingent on impossible events [Sec(36)]
(12) Agreements to do impossible acts [Sec(56)]
Some discussions on void agreement are as follows:

(1) Agreement by a Minor or a Person of Unsound Mind- A person who has not
completed his or her 18 years of age signifies as minor. Law acts as the guardian of
minors and protects their rights, because their mental facilities are not mature- they
do not possess the capacity of judge what is good and what is bad for them.
Accordingly, where is a minor charged with obligations and the other contracting
party seeks to enforce those obligations against the minor, the agreement is deemed
as void.

A person who does not possess a sound mind or whose mental powers are not
arranged or whose mental condition is not under his or her own control. Any
agreement by person of unsound mind is absolutely void because he has no
capacity to judge, what is good and what is bad for him.

Illustration
(a) A, 15 years old boy, made an agreement with B to give him Tk.1000. This is
a void agreement.
(b) A mentally disordered man made an agreement with X to marry her, but this
is not a valid agreement.

(2) Agreement Made Without Consideration- An agreement made without

consideration is void, unless
1) it is expressed in writing and registered under the law for the time being
enforce for the registration of(documents), and is made on account of natural love
and affection 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 which the promissory
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 authorized in the behalf, to pay
wholly or in part a debt of which the creditor might have enforced payment but for
the law for the limitation of suits.

In any of these cases, such an agreement is a contract.

Explanation 1–Nothing in 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 merely because the consideration may be taken into account by the
court in determining the question whether the consent of the promisor was freely
given.

Illustrations
a) A promises for no consideration, to give to B Rs. 1000; this is a void
agreement.
b) A, for natural, love and affection, promises to give his son, B Rs. 1000. A puts
his promise to B into writing and registers it. This is a contract.
c) A finds be 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 in so doing. This is
a contract.

(3) Agreements in Restraint of Marriage- Every individual enjoys the freedom

to marry and so according to section 26 of the contract act “every agreement is
restraint of the marriage of any person, other than a minor, is void.” The restraint
may be general or partial but the agreement is void, and therefore, an agreement
agreeing not to marry at all, or a certain person or, a class of persons, or for a fixed
period, is void. However, an agreement restraint of the marriage of a minor is valid
under the section.
Illustrations
(a) A agrees with B for good consideration that she will not marry C. It is a void
agreement.
(b) A agrees with B that she will marry him only; it is a valid contract of
marriage.

(4) Agreement in Restraint of Trade- The constitution of India guarantees that

the freedom of trade and commerce to every citizen and therefore section 27
declares “every agreement by which any one is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void.” Thus no person is
at livery to deprive himself of the fruit of his labor, skill or talent, by any contracts
that he enters into.

It is to be noted that whether restraint is responsible or not, if it is in the nature of

restraint of trade, the agreement is void always, subject to certain exceptions
provided for statutorily.

Illustration
An agreement whereby one of the parties agrees to close his business in
consideration of the promise by the other party to pay a certain some of money , is
void, being an agreement is restraint of trade, and the amount is not recoverable, if
the other party fails to pay the promised some of money. (Mad hub Chander
vs. Raj Kumar).

But agreements merely restraining freedom of action necessary for the carrying on
of business are not void, for the law does not intend to take away the right of a
trade to regulate his business according to his own discretion and choice.

(5) Agreement in restraint of legal proceedings- Every agreement, by which any

party thereto is restricted absolutely from enforcing his right under or in respect of
any contract, by the usual legal proceedings in the ordinary tribunals, or which
limits the time within which he may thus enforce his rights, is void to that extent.
Section 28 declares the following two kinds of agreements void:
(a) An agreement by which a party is restrained absolutely from taking usual
legal
Proceeding, in respect of any rights arising from a contract.
(b) An agreement which limits the time within which one may enforce his
contract
Rights, without to the time allowed by the limitation act.

Illustration
In a contract of fire insurance, it was provided that if a claim is rejected and a suit
is not filed within three months after such rejection, all benefits under the policy
shell be forfeited. The provision was held valid and binding and the suit filed after
three months was dismissed. (Baroda spinning Ltd. vs. Satyanarayan Marine and
Fire Ins. Com. Ltd.)
(6) Uncertain Agreements- “Agreements, the meaning of which is not certain, or
capable of being made certain, are void” (Sec-29). Through Sec-29 the law aims to
ensure that the parties to a contract should be aware of the precise nature and scope
of their mutual rights and obligation under the contract. Thus, if the word used by
the parties are or indefinite, the law cannot enforce the agreement.

Illustration
(a) A agrees to sell to B “a hundred tons of oil.” There is nothing whatever to
show what kind of oil was intended. The agreement is void for uncertainty.
(b) A who is dealer in coconut oil only, agrees to sell to B “a 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 toms of coconut oil.
(C) A agrees to sell to B “one thousand mounds 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.
(d) A agrees to sell to “his white house for rupees five hundred or rupees one
thousand.” There is nothing to show which of the price was to be given. The
agreement is void.

Further, an agreement “to enter into an agreement in future” is void for uncertainty
unless all the terms of the proposed agreement are agreed expressly or implicitly.
Thus, an agreement to engage a servant sometime next year, at a salary to be
mutually agreed upon is a void agreement.

(7) Wagering Agreement- Literally the word ‘wager’ means ‘a bet’ something
stated to be lost or won on the result of a doubtful issue, and, therefore, wagering
agreements are nothing but ordinary betting agreements. Thus where A and B
mutually agree that if it rains today A will pay B Tk.100 and if it does not rain B
will pay A Tk.100 or C and D entered into agreement that on tossing up a coin, if it
fall head upwards C will pay D Tk.50 and if falls tail upwards D will pay C Tk.50,
there is a wagering agreement.

(8) Agreement Contingent on Impossible Events- “Contingent agreements to do

or not to do anything if an impossible event happens are void, whether the
impossibility of the event is known on not to the parties to the agreement at the
time when it is made.” (Sec. 36)
Illustration
(a) A agrees to pay B Rs.1000 (as a loan) if two straight line should enclosed a
space. The agreement is void.
(b) A agrees to pay B Rs.1000 (as a loan) if B will marry A’s daughter, C. C was
dead at the time of the agreement, the agreement is void.

(9) Agreements to do Impossible Act- “An agreement to do an act impossible in

itself is void.” (Sec, 56 Part-1)
Illustration
(a) A agrees with B to discover treasure by magic. The agreement is void.
[Section 56].
(b) A agrees with B to run with a speed of 100 Kilometer per hour. The
agreement is void.
Contingent contract
The word contingent means when an event or situation is contingent, i.e. it depends on some other
event or fact. For example, making money is contingent on finding a good-paying job.
Now, the ‘contingent contract’ means enforceability of that contract is directly depends upon
happening or not happening of an event.

Section 31 of the Indian Contract Act, 1872 defines the term ‘Contingent Contract’ as follows:
‘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’.
In simple words, contingent contracts, are the ones where the promisor perform his obligation only
when certain conditions are met. The contracts of insurance, indemnity, and guarantee are some
examples of contingent contracts.
Illustration: - A contracts to pay to B Rs. 20,000 if B’s house is burnt. This is a contingent.

Essentials of a contingent contract

1] Depends on happening or non-happening of a certain event: The contract is contingent on
the happening or the non-happening of a certain event. These said events can be precedent or
subsequent, this will not matter. Say for example Peter promises to pay John Rs 5,000 if the
Rajdhani Express reaches Delhi on time. This is a contingent event.

2] The event is collateral to the contract: It is important that the event is not a part of the contract.
It cannot be the performance promised or a consideration for a promise.
Example: Peter enters into a contract with John and promises to deliver 5 television sets to him.
John promises to pay him Rs 75,000 upon delivery. This is NOT a contingent contract since John’s
obligation depends on the event which is a part of the contract (delivery of TV sets) and not a
collateral event.

Peter enters into a contract with John and promises to deliver 5 television sets to him if Brazil wins
the FIFA World Cup provided John pays him Rs 25,000 before the World Cup kicks-off. This is
a contingent contract since Peter’s obligation arises only when Brazil wins the Cup which is a
collateral event.

3] The event should not be a mere will of the promisor: The event cannot be a wish of the
promisor. Say for example Peter promises to pay John Rs 5,000 if Argentina wins the FIFA World
Cup provided he wants to. This is NOT a contingent contract. Actually, this is not a contract at all.

Example: Peter promises to pay John Rs 50,000 if he leaves Mumbai for Dubai on August 30,
2018. This is a contingent contract. Going to Dubai can be within John’s will but is not merely his
will.

4] The event should be uncertain: If the event is sure to happen, then the contract is due to be
performed. This is not a contingent contract. The event should be uncertain.
Example: Peter promises to pay John Rs 500 if it rains in Mumbai in the month of July 2018. This
is not a contingent contract because in July rains are almost a certainty in Mumbai.

5] Uncertain event: Contingent contract to do or not to do anything, if an uncertain future event

happens, it cannot be enforced by law unless and until that event has happened. If event become
impossible, such contract become void. Example: Peter promises to pay John Rs 500 if it rains in
Mumbai in the month of July 2018. This is not a contingent contract because in July rains are
almost a certainty in Mumbai.
6] Impossible event: Contingent contracts to 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. Example: If X agrees to pay Y 1000 rupees if Y will marry X’s daughter but at the time
of the agreement, the daughter was dead. Thus, this contract is void.

7] Performance dependent on non-happening of event: When performance depends on non-

happening of an event, the contract shall not be performed unless the happening of that event
becomes impossible. If a man promises to pay another man some money if a ship does not return
within a year, the contract becomes void if the ship is burnt or sinks within that year.
Illustration: X promises to pay Y a sum of money if a certain ship does not return before 31st
March 2019. The contract may be enforced if the ship does not return before 31st March 2019.
Also, if the ship burnt before the given time, the contract is enforced by law since the return is
impossible.
8] Performance dependent on particular individual: Contingent contracts to 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. Illustration: X agrees to pay Y, Rs. 100,000 if Y marries Z. However, Z
marries A. The marriage of Y to Z must now be considered impossible, although it is possible
that A may die and that Z afterward marry Y.
9] Event within fixed time: Contingent contract to do or not to do anything, if a specified
uncertain event does not happen within 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 , if it becomes certain
that such event will not happen. Illustration: X promises to pay Y a sum of money if a certain
ship returns before 1st April 2019. The contracts may be enforced if the ship returns within the
fixed time. On the other hand, becomes void if the ship sinks.
10] Dependence on impossible event: Contingent contract to do or not to do anything if
impossible event happens, are void whether the impossibility of event of the event is known or
not to be parties to the agreement at the time when it is made. Illustration: Peter promises to pay
John Rs 50,000 if the sun rises in the west the next morning. This contract is void since the
happening of the event is impossible.
Discharge of Contract
As per the INDIAN CONTRACT ACT 1872 – “Discharge of contract means the termination of a
contractual relationship between parties”.

A contract is said to be discharged when it ceases to operate, i.e. when the rights & obligation
created by it come to an end.
Example: Two parties A & B Make a contract to build a fly-over in a City. A is the municipal
authority of the city & B is a construction company. Due to some reasons the contract get
discharged. Then the both parties are free from the obligations of contract, i.e. the rights &
obligations of the parties come to an end.

A contracts is discharged when the obligations created by it come to an end. A contract

may be discharged in any of the following ways:
1. Discharge of contract by mutual agreement.
2. Discharge by impossibility of performance
3. by lapses of time.
4. by operation of law.
5. Discharge of contract by breach of law
6. Discharge by Non-Provisioning of Facilities

Discharge of Contract by agreement:

According to sec. 62-64 of Indian Contract Act 1872 – A Contract can be terminated or
discharged by mutual express or implied agreement between the parties in any of the following
ways

Discharge by Mutual Agreement

If all parties to a contract mutually agree to replace the contract with a new one or annul or remit or
alter it, then it leads to a discharge of the original contract due to a mutual agreement.
Example: Peter owes Rs 100,000 to John and agrees to repay it within one year. They document the
debt under a contract. Subsequently, he loses his job and requests John to accept Rs 75,000 as a final
settlement of the loan. John agrees and they make a contract to that effect. This discharges the original
contract due to mutual consent.

A) By Novation: Substitution of a new contract in place of the old existing one is known as
‘novation of contract’. New contract may be either between the same parties or between
different parties, the consideration being mutually the discharge of the old contract. Known
as ‘novation of contract’. New contract may be either between the same parties or between
different parties, the consideration being mutually the discharge of the old contract.
Examples
(i) A owes money to B under a contract. It is agreed between A, B and C that B shall
henceforth accept C as his debtor, instead of A. The old debt of A to B is at an end and a
new debt from C to B has been contracted.
 (ii) 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.
(iii) 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 contract has been entered into.

B) By Accord and Satisfaction

“Every promise may dispense with or remit the performance of promise made to him and
accept, instead of it, any satisfaction which he think fit.” In other words “when a lesser
sum is actual paid than what is due under an existing contract, the new contract is called
‘accord’ and the actual payment is called satisfaction.

Example: Ramesh has a postpaid mobile connection of Airtel. A bill of his mobile is of
rs1234 which he seems more than actual bill. Thus he register a complaint with Airtel. The
Airtel official offers him to pay 1200 as settlement. Here 1245 is accord and 1200 is
satisfaction.

By alteration: Alteration means change in one or more of the conditions of

the contract. Alteration made by the mutual consent of the parties will be
perfectly valid. But any material alteration in terms of a written contract by
the one party without the consent of other party will discharge such party from
its obligations under the contract.

C) By Remission and Waiver

By remission: Remission means acceptance of a lesser performance than what was actually
due under the contract. According to Sec. 63 a party may dispense with or remit, wholly or
in part, the performance of the promise made to him. He can also extend the time of such
performance or accept instead of any satisfaction which he deems fit. A promise to do so
will be binding even though there is no consideration for it
Example:
(1) A owes B Rs. 5,000. A pays to B and B accepts in satisfaction of whole debt Rs. 2,000
paid at the time and place where Rs. 5,000 were payable. The whole debt is discharged.
(ii) 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 therefore,
accepts the sum of Rs. 2,000. This is a discharge of the whole debt whatever may be its
amount.

Waiver means: A contract may be discharged by agreement between the parties to waive
their rights arising from the contract. Thus, in case of waiver, the person who is entitled to
any right under the contract, intentionally relinquishes them without consideration and
without a new agreement. Under English law waiver is possible only by agreement under
seal.
 Example: A promises to paint a picture for B.B afterwards forbids him to do so. A is no
longer bound to perform the promise. “When party to the contract abandons or waiver his
rights, the contract is discharge”.

D). By Rescission.
“When a person at whose option a contract is voidable rescinds it, the other party thereto
need not perform his promise”. He is discharged from his liability under the contract.
Rescission ma occur by mutual consent of the parties or when one party fails to perform
his obligation the other party may rescind the contract. Rescission of contract be in party
only. The entire contract must rescinded Rescission means cancellation of the contract. A
contract can be rescinded by any of the following ways:-
(i) By mutual consent: - Parties may enter into a simple agreement to rescind the
contract before its breach.
(ii) By the aggrieved party :- Where a party has committed a breach of the contract, the
aggrieved party can rescind the contract without in any way effecting his right of getting
compensation for the breach of contract.
(iii) By the party whose consent is not free: - In case of a voidable contract, the party
whose consent is not free can, if so decides, rescind the contract.

Accord and satisfaction: ‘Accord means promise to accept less than what is due under
the contract. ‘Satisfaction’ implies the payment or the satisfaction of the lesser obligation.
An accord not followed by satisfaction will be unenforceable. Actual performance of the
new promise and its acceptance by the other party is essential to discharge the old
obligations by accord and satisfaction. The original cause of action is not discharged so
long as the satisfaction, agreed upon, remains executory.

Example: A is B’s debtor for a sum, of Rs. 500. B agrees to accept Rs. 300 in full
satisfaction of his claim. This promise is unenforceable. However, if A pays Rs. 300 and
B accepts the payment, A will be discharged from his liability for the whole debt.

2. Discharge by impossibility of performance

If an agreement contains an undertaking to perform an impossibility, it is void. This rule is
based on the following: The law does not recognize what is impossible. What is impossible
does not create an obligation.
According to Sec. 56, impossibility of performance may fall into either of the following
categories:
Impossibility existing at the time of agreement: - Sec. 56{1} lays down that an agreement
to do an act impossible in itself is void. This is known as pre-contractual or initial
impossibility.
Impossibility arising subsequent to the formation of contract: - Impossibility which
arises subsequent to the formation of contract (which could be perform at the time when the
contract was entered into) is called post-contractual or supervening impossibility.
3. Discharge by lapse of time
The Limitation Act, 1963 lays down that a contract should be perform within a specified period
called period of limitation. If it is not perform & if no action is taken by the promisee within
the period of limitation, he is deprived of his remedy at law. In other words, we may say that
the contract is terminated.
Example: Peter takes a loan from John and agrees to pay instalments every month for the next
five years. However, he does not pay even a single instalment. John calls him a few times but
then gets busy and takes no action. Three years later, he approaches the court to help him
recover his money. However, the court rejects his suit since he has crossed the time-limit of
three years to recover his debts.

4. Discharge by operation of law

A contract terminates by operation of law in the following cases:
a. Death. Where the contract is of a personal nature, the death of the promisor discharges the
contract. In other contracts the rights and liabilities of the deceased person pass onto the legal
representatives of the dead man.
b. Insolvency. A contract is discharged by the insolvency of one of the parties to it when an
Insolvency Court passes an “order of discharge” exonerating the insolvent from liabilities on
debts incurred prior to his adjudication.
c. Merger. Where an inferior right contract merges into a superior right contract, the former
stands discharged automatically.
d. Unauthorized material alteration. A material alteration made in a written document or
Contract by one party without the consent of the other, will make the whole contract void.
Thus, where the amount of money to be received is altered, or an additional signature is
Forged, on a promissory note by a creditor, he cannot bring a suit on it and the pro-note
Cannot by enforced against the debtor even in its original shape. The effect of making such an
alteration is exactly the same as that of cancelling the contract

5. Discharge by breach of contract

Breach of contract means promisor fails to perform the promise or breaking of the obligations
which a contract imposes. It occurs when a party to the contract without lawful excuse does not
fulfill his contractual obligation or by his own act makes it impossible that he should perform his
obligation under it. Breach of contract may be of two kinds:

Actual Breach: Actual breach means breach committed either; (i) at the time when the
performance of the contract is due; or (ii) during the performance of the contract.
Example: (i) agrees to supply to B on the 1st February, 1975, 1000 bags of sugar. On 1st February,
1975 he fails to supply. This is actual breach of contract at the time when the performance is due.
The breach has been committed by A.
(ii) If on 1st February, 1975 A is prepared to supply the required number of bags of sugar and B
without any valid reasons refuses to accept them, B is guilty of breach a contract.
Anticipatory Breach
Breach of a contract committed before the date of performance of the contract is called anticipatory
breach of contract. (Sec. 39). The contract in this case is repudiated before the time fixed for its
performance arrives and is so discharged.
Example: (i) A agrees to employ B from 1st of March. On 1st February, he writes to B that he
need not join the service, the contract has been expressly repudiated by A before the date of its
performance.
(ii) A agrees to marry B. But before the date A marries C. The contract has been repudiated by A
by his conduct before the due date of its performance.
Anticipatory breach of contract does not give rise to a right of action unless the promisee elects to
treat it as equivalent to actual breach.

6. Discharge by Non-Provisioning of Facilities

In many contracts, the promisee agrees to offer reasonable facilities to the promisor for the
performance of the contract. If the promisee fails to do so, then the promisor is discharged
of all liabilities arising due to non-performance of the contract.

Illustration: Peter agrees to fix John’s garage floor provided he keeps his car out for at
least 6 hours. Peter approaches him a few times but John is reluctant to get his car out. John
fails to provide reasonable facilities to Peter (an empty floor). This discharges him of all
obligations arising under the contract.
Breach of contract
A contract is breached or broken when any of the parties fails or refuses to perform its promise
under the contract. Breach of contract is a legal cause of action in which a binding agreement is
not honored by one or more parties by non-performance of its promise by him renders impossible.

According to Section 39, where the party has refused to perform or disabled himself from
performing, his promise in its entirely, the other party may put an end to the contract,, unless that
other party has expressly or impliedly signified its consent for the continuance of contract. If the
other party chooses to put an end to the contract, the contract is said to be broken and amounts to
breach of contract by the party not performing or refusing to perform its promise under the
contract. This is called repudiation. Thus repudiation can occur when either party refuses to
perform his part or makes it impossible for him to perform his part of contract in each of the cases
in such a manner as to show an intention not to fulfil his part of the contract.

Remedies for Breach of Contract

When a promise or agreement is broken by any of the parties we call it a breach of contract. So when
either of the parties does not keep their end of the agreement or does not fulfil their obligation as per
the terms of the contract, it is a breach of contract. There are a few remedies for breach of contract
available to the wronged party. Let us take a look.
1] Recession of Contract
When one of the parties to a contract does not fulfil his obligations, then the other party can rescind the
contract and refuse the performance of his obligations. The aggrieved party may rescind the contract.
In such cases, the injured / aggrieved party can either rescind the contract of file a suit for damages.
In general, rescission of the contract is accompanied by a suit for damages.
Examples 'A' contracts to supply 10kg of tea leaves for Rs. 8,000 to 'B' on 15 June. If 'A' does not
supply the tea leaves on the appointed day, 'B' need not pay the price. 'B' may treat the contract as
rescinded and may sit quietly at home. 'B' may also file a „suit for rescission‟ and claim damages
A promises B to supply 10 Bags of cement on a certain day. B agrees to pay the price after the receipt
of the goods. A does not supply the goods. B is discharged from liability to pay the price
2] Sue for Damages
Damages are monetary compensation allowed to the endured party for the loss or injury suffered by
him as a result of the breach of contract.
The fundamental principle underlying damages is not punishment but to compensate the aggrieved
part for the loss suffered by him in the original position as he would have seen.
Types of damage
There are mainly four types of damages
1] Ordinary damages
On the breach of a contract, the suffering party may incur some damages arising naturally, in the usual
course of events. Even if the suffering party knew about the likely damages if the contract was
breached, he can claim compensation for such losses.
Peter agrees to sell and deliver 10 bags of potatoes to John for Rs 5,000 after two months. On the date
of delivery, the price of potatoes increases and Peter refuses to perform his promise. John purchases
10 bags of potatoes for Rs 5,500. He can receive Rs 500 from Peter as ordinary damages arising
directly from the breach.
2] Special Damages
A party to a contract might receive a notice of special circumstances affecting the contract. In such
cases, if he breaches the contract, then he is liable for the ordinary damages plus the special damages.
Peter hired the services of John, a goods transporter, to deliver a machine to his factory urgently. He
also informed John that his business has stopped for want of the machine. However, John delayed the
delivery of the machine by an unreasonable amount of time. Peter missed out on a huge order since
he didn’t have the machine with him.
In this case, Peter can claim compensation from John. The compensation amount will include the
amount of profit he could have made by running his factory during the period of delay. However, he
cannot claim the profits that he would have made if he got the contract since John was not made aware
of the same.
3] Vindictive or Exemplary Damages
There are two scenarios for awarding vindictive or exemplary damages:
 Breach of a promise to marry because it causes injury to his/her feelings
 Wrongful dishonor of cheque by a banker because it causes loss of reputation and credibility.

In case of a wrongful dishonor of cheque from a businessman, the compensation will include
exemplary damages even if he has not suffered any financial loss. However, a non-trader is not
awarded heavy compensation unless the damages are alleged and proved as special damages.
Example: Peter is a farmer. He issues a cheque for procuring seeds for his next crop. He has sufficient
funds in his account but the bank erroneously dishonors the cheque. Peter files a suit claiming
compensation for damages to his reputation. The Court awards a nominal amount as damages since
Peter is not a trader.
4] Nominal Damages
If a party to a contract files a suit for losses but proves that while there has been a breach of contract,
he has not suffered any real losses, then compensation for nominal damages is awarded. This is done
to establish the right to a decree for a breach of contract. Also, the amount can be as low as Re 1.
A contracted to purchase ‘LML Scooter’ from B, a dealer, for Rs. 25, 000. But A failed to purchase
the Scooter. However, the demand for the Scooter far exceeded the supply and B could sell the
Scooter to Z for Rs. 25, 000, i.e., without any loss of profit. Here if B makes a claim upon A for
breach of contract, he will be entitled to nominal damages only.
3. Suit for Quantum Merit
It means “AS MUCH AS EARNED” or “in proportion to the work done.”  The phrase „Quantum
Merit‟ literally means  When a person has begun the work and before he could complete it, the
other party terminates the contract or does something which make it impossible for the other party
to complete the contract, he can claim for the work done under the contract so far party.
EXAMPLES  P agreed to write a volume on ancient armor to be published in a magazine owned
by C. For this, P was to receive 100 pounds on completion. When P had completed part of the
work, but not the whole, C abandoned the magazine. P was held entitled to get damages for breach
of contract and payment quantum merit for the part already completed.  A, engages B, a
contractor, to build a three storied house. After a part of the house is constructed, A prevents B
from working any more. B, the contractor, is entitled to get reasonable compensation for work
done under the doctrine of quantum merit in addition to the damages for breach of contract.

4] Sue for Specific Performance

This means the party in breach will actually have to carry out his duties according to the contract. In
certain cases, the courts may insist that the party carry out the agreement.
So if any of the parties fails to perform the contract, the court may order them to do so. This is a decree
of specific performance and is granted instead of damages.
For example, A decided to buy a parcel of land from B. B then refuses to sell. The courts can order B
to perform his duties under the contract and sell the land to A

5] Injunction
Is an order of a court restraining a person from doing a particular act? It is a mode of securing the
specific performance of the negative terms of the contract. To put it differently, where a party is
in breach of negative term of the contract (i.e., where he is doing something which he promised
not to do) the court may, by issuing an injunction, restrain him from doing, what he promised not
to do.
Examples A, a singer contracts with B the Manager of a theatre to sing at his theatre for one year
and to abstain from Singing at other theatres during the theatre. She absents herself, B cannot
compel A to sing at his theatre, but he may sue her for an injunction restraining her from Singing
at other theatres.
G agreed to take the whole of his supply of electricity from a certain company. The agreement
was held to import a negative promise that he would take none from elsewhere. He was, therefore,
restrained by an injunction from buying electricity from any other company.
Quasi contracts
The name ‘Quasi Contracts’ is given by the English Law to such transactions in which there is in fact
no contract between the parties, but the rights and obligations are created similar to those created by a
‘contract’.
For a contract there must be offer and acceptance, free consent, lawful consideration and object and
such other elements described under Sec. 10 of the Indian Contract Act. But Quasi Contracts do not
have such essential elements of a contract and, therefore, Indian Contract Act has now here used the
term ‘Quasi or Implied’ Contracts’.
“An obligation created by law for the sake of justice; specif., an obligation imposed by law
on parties because of a relationship between parties or because one of them would
otherwise be unjustly enriched. It’s not a contract, but instead is a remedy that allows the
plaintiff to recover a benefit conferred on the defendant.
Example of a quasi-contract: Peter and Oliver enter a contract under which Peter agrees to deliver a
basket of fruits at Oliver’s residence and Oliver promises to pay Rs 1,500 after consuming all the
fruits. However, Peter erroneously delivers a basket of fruits at John’s residence instead of Oliver’s.
When John gets home he assumes that the fruit basket is a birthday gift and consumes them.
Although there is no contract between Peter and John, the Court treats this as a Quasi-contract and
orders John to either return the basket of fruits or pay Peter.
A quasi contract example involves an agreement between at least two parties who had no prior
obligation to each other. It is a contract that's legally recognized in a court of law. More
specifically, this type of contract is created by court order, not between the parties in question.

Quasi contracts arise when a dispute exists over payment for goods and services. What's difficult
about these circumstances is that no official agreement has been created between the parties
involved. The court steps in to prevent what's known as unjust enrichment. In essence, it's trying
to correct a situation where one party has acquired something to the detriment of the other party.
The types of relations dealt here in the Contract Act in these sections are stated as below:

1. Supplier of necessaries to minors. Lunatics, married women etc. (S. 68).

2. Person paying moneys due by another (S.69).
3. Person enjoying benefit to non-gratuitous act or Quantum Meruit. (S. 70).
4. Finder of goods (S.71).
5. Person receiving money/goods belonging to another under mistake or under coercion
(S.72).

1. Claim for necessaries suppled to a person Incapable of contracting (Section 68)

If the “necessaries” for a person, who is incapable of contracting (for example, a minor or a mentally
disabled person) or of the dependents of such a person are taken care of by someone, he has the right
to be reimbursed from the property of such incapable person. Although the word “necessaries” has not
specifically been defined in the Act, it is impliedly clear that it means the necessaries to sustain life,
basic things like food, clothing, education, etc. These are things without which a person cannot
reasonably exist. In simple terms, if a person A supplies another person B (who is incapable of entering
into a contract) or his family or anybody else who is dependent on him, with necessaries for life, he is
entitled to take his due return from the property of person B. He is entitled only to such a reasonable
amount as the value of the goods or services he may have supplied hold.

Example: A supplies B, a lunatic, with necessaries suitable to his conditions in life. A is entitled
to be reimbursed from B’s property.
Illustration: The amount is recoverable from the property and not from the person. Such person
is not personally liable. If he has got any property, then only the creditors shall be able to get their
re- imbursement. If no property belongs to such person or persons the creditors shall not be left
with any right.
 Things supplied must be suited to the minor’s conditions in life;
 These must be necessary for minor’s requirements, when actually sold or delivered; and
 The minor must be having such things in sufficient quantity at the time of such supply.
Non-fulfilment of any of these above stated conditions shall effect adversely the rights of the other
party.
Nature of Remedy: Remember, a supplier of necessaries has been granted a remedy under this
section against the property of the person and not the person himself.

2. Reimbursement to person paying money due by another in payment of which

he is interested (Section 69).
If a person A pays something in someone’s (a person B’s) place, that which person B is himself
‘bound by law’ to pay, A will be reimbursed by B. Please note that the person A should be
‘interested’ in this payment. It is a case of implied indemnity.
For instance, Joe is a Zamindar. Annie holds one of his lands on lease in Punjab. The revenue of
Joe’s land is payable to the government in arrears. So, the land ends up being advertised for sale
by the government. According to the Revenue Law, if the land is sold, it will end Annie’s lease.
To prevent this sale, Annie pays Joe’s dues to the government. Joe is bound to pay back to Annie.
Illustration: B hold land in Bengal, on a lease granted by A, the zamindar. The revenue payable
by A to the Government being an arrear, his land is advertised for sale by the Government. Under
the revenue law, the consequence of such sale will be the annulment of B’s lease to prevent the
sale and the consequent annulment of his own lease, pays to the Government the sum due from A.
A is bound to make good to B the amount so paid.

3. Obligation of a person enjoying benefit of non-gratuitous act (Sec.70)

Where a person lawfully does anything for another person or delivers anything to him not intending
to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make
compensation to the former in respect of, or to restore the thing so done or delivered.
Illustrations:
(i) A, tradesmen, leaves goods at B’s house by mistake. B treats the goods as his own. He is
bound to pay A for them.
(ii) A saves B’s property from fire. A is not entitled to compensation from B, if the circumstances
show that he intended to act gratuitously. A manages the estate of his wife and sisters-in-law and
is under the impression that he will receive remuneration for his services. He is entitled to get
reasonable remuneration.
(iii) The right of action this section arises only after the fulfilment of the following three
conditions:-
(a) The thing must be done lawfully;
(b) The thing must be done by a person not intending to act gratuitously; and
(c) The person for whom the act is done must enjoy the benefit of it.

4. Finder of Goods
Simply, a person who finds goods that belong to another person shall be treated as a Bailee. A
Bailee is essentially a safe keeper of the goods, who is supposed to return the goods to the actual
owner or dispose them in the manner in which the actual owner may want them to. The Bailee has
certain duties and rights as the ‘possessor’ or ‘custodian’ of the goods for the time being. For
example, Sarah finds a diamond lying on the floor in a shop. She picks it up and keeps it in her
safe possession. Sarah makes all reasonable efforts to find the true owner of the diamond. The
diamond actually belonged to Nadia. Sarah has the right to hold the possession of the diamond
against all the world except Nadia, and is supposed to make reasonable efforts to find her, and
return it to her. In this case, Nadia will have to pay the compensation for all the loss suffered by
Sarah in finding her.

Duties of the finder of goods

1. The finder has a duty to take reasonable care.
2. He/she has a duty not to use the goods for his personal purposes.
3. He/she has a duty not to mix the found goods with his own goods.
4. He/she has a duty to make reasonable efforts to find the actual owner of the goods.

Rights of the finder of goods

1. Right to Lien– The right to retain the goods found until he receives compensation for all
the expenses suffered in finding the owner.
2. Right to Sue– If the owner had announced a reward for whoever finds the good, the finder
has the right to sue the owner for such reward or retain the goods until he is compensated.
3. Right to Sell– The finder of goods has the right to sell the goods in certain specific
circumstances, for example:
i) If the owner could not be found even after reasonable efforts.
ii) If the owner is found but refuses to pay compensation or the lawful charges of the finder.
iii) If the goods are in immediate danger of perishing if not used.
iv) If the lawful charges of the finder amount to two-thirds of the value of goods.

5. (Liability of person to whom money is paid or thing delivered by mistake or under

coercion)
As the heading suggests, if something is delivered to a person by ‘mistake’ or under ‘coercion’, he
is liable to pay it back. For instance, Aristotle and Dante share a flat and contribute in half for the
rent to be paid. Aristotle, without knowing that Dante has already paid the due rent to the landlord
in whole, pays again to the landlord. The landlord, in this case, is liable to give back the money
delivered to him by mistake. The term mistake here can mean both mistake of fact or mistake of
law.
The section also uses the term ‘coercion’. Here is an example of something delivered under
coercion- A railway company refuses to deliver goods to a certain consignee except upon the
payment of a certain illegal sum of money. The consignee pays the sum to obtain his goods. The
company is liable to return the sum of money illegally charged.
Contract of indemnity and guarantee

Contract of Indemnity (Section 124) A Contract by which one party promises to another to save
him from loss caused to him by the conduct of the promisor himself or by the conduct of any other
person is called a Contract of Indemnity

Parties to the Contract of Indemnity

 The person who promises to protect another: INDEMNIFIER \
 The person who is so protected is: INDEMNITY-HOLDER/INDEMNIFIED

Meaning of Indemnity means enact to compensate or protect somebody from the loss or make good to the loss.
When one person promises to another person that in case another person suffers from some loss the first person
will compensate the loss.

For example, A promises to deliver certain goods to B for Rs. 2,000 every month. C comes in and
promises to indemnify B’s losses if A fails to so deliver the goods. This is how B and C will enter into
contractual obligations of indemnity.
A contract of insurance is very similar to indemnity contracts. Here, the insurer promises to compensate
the insured for his losses. In return, he receives consideration in the form of premium. However, the
Contract Act does not strictly govern these kinds of transactions. This is because the Insurance Act and
other such laws contain specific provisions for insurance contracts.

Right of the indemnity holder – (Section 125)

An indemnity holder (i.e. indemnified) acting within the scope of his authority is entitled to the
following rights –

1. Right to recover damages – he is entitled to recover all damages which he might have
been compelled to pay in any suit in respect of any matter covered by the contract.
2. Right to recover costs – He is entitled to recover all costs incidental to the institution and
defending of the suit.
3. Right to recover sums paid under compromise – he is entitled to recover all amounts
which he had paid under the terms of the compromise of such suit. However,
the compensation must not be against the directions of the indemnifier. It must be prudent
and authorized by the indemnifier.
4. Right to sue for specific performance – he is entitled to sue for specific performance if
he has incurred absolute liability and the contract covers such liability. The promisee in a
contract of indemnity, acting within the scope of his authority, is entitled to recover from
the promisor-
It is important to note here that the right to indemnity cannot be claimed of dishonesty, lack of
good faith and contravention of the promisor’s request. However, the right cannot be negative in
case of oversight.

Rights of Indemnifier
As per the Indian Contract Act, 1872 indemnifier does not have any right. But in the case of Jaswant
Singh v Section of State[4] the court has held that the indemnifier shall be entitled with all the securities
of indemnified in the same manner as the creditor is against its principal debtor whether or not he is
aware of the same.
 Comparison Chart
BASIS INDEMNITY GUARANTEE

Meaning A contract in which one party promises
to another that he will compensate him
for any loss suffered by him by the act of
the promisor or the third party.
Defined in Sec 124 of Indian Contract Act, 1872
A contract in which a party promises to
another party that he will perform the
contract or compensate the loss, in case of
the default of a their person, it is the
contract of guarantee.
Sect 126 of Indian Contract Act, 1872

Parties Two,i.e.indemnifier and indemnified Three, i.e. creditor, principal debtor and
surety
Number of One Three
Contracts
Degree of Primary Secondary
liability of the
promisor
Purpose To compensate for the loss To give assurance to the promisee
Maturity of When the contingency occurs. Liability already exists.
Liability
Differentiation between contract of indemnity and contract of guarantee
There is a difference between the two special types of contracts, contract of indemnity and contract
of guarantee which is as follows: –
1. In a contract of guarantee, there are three parties to a contract namely surety, principal debtor
and creditor whereas in case of indemnity there are only two parties to a contract, promisor,
and promisee.
2. In case of the contract of guarantee, the liability of the surety is secondary whereas in a contract
of indemnity the liability of promisor is primary.
3. Surety provides guarantee only when requested by the principal debtor in a contract of
guarantee. Indemnifier is not required to act at the request of the debtor, in a contract of
indemnity.
4. In a contract of guarantee, there is an existing liability for debt or duty, surety guarantees the
performance of such liability. In a contract of indemnity, the possibility of incurring a loss is
contingent against which indemnifier undertakes to indemnify.
5. Surety is eligible to proceed against the principal debtor on payment of debt, in case principal
debtor fails to pay the debt. Indemnifier cannot sue third parties in his own name.
Indemnity
Mr. Joe is a shareholder of Alpha Ltd. lost his share certificate. Joe applies for a
duplicate one. The company agrees, but on the condition that Joe compensates for the
loss or damage to the company if a third person brings the original certificate.
Guarantee
Mr. Harry takes a loan from the bank for which Mr. Joseph has given the guarantee that
if Harry default in the payment of the said amount he will discharge the liability. Here
Joseph plays the role of surety, Harry is the principal debtor and Bank is the creditor.
Contract of Guarantee
Section 126 of the Indian contract act defines a contract of guarantee as a contract to perform the
promise or discharge the liability of the defaulting party in case he fails to fulfill his promise.
As per section 126 of Indian Contract Act, 1872, a contract of guarantee has three parties: –
Surety: A surety is a person giving a guarantee in a contract of guarantee. A person who takes
responsibility to pay a sum of money, perform any duty for another person in case that person fails to
perform such work.
Principal Debtor: A principal debtor is a person for whom the guarantee is given in a contract of
guarantee.
Creditor: The person to whom the guarantee is given is known as the creditor.
For example, Mr. X advances a loan of 25000 to Mr. Y and Mr. Z promise that in case Mr. Y fails
to repay the loan, then he will repay the same. In this case of a contract of guarantee, Mr. X is a
Creditor, Mr. Y is a principal debtor and Mr. Z is a Surety.

Illustration
Anita advances a loan of INR 70000 to Palov. Rishi who is the boss of Palov promises that in case
Palov fails to repay the loan, then she will repay the same. In this case of a contract of guarantee, Anita
is the Creditor, Palov the principal debtor and Rishi is the Surety.

Essentials of a Contract of Guarantee

1) Must be made with the agreement of all three parties
All the three parties to the contract i.e. the principal debtor, the creditor, and the surety must agree to
make such a contract with the agreement of each other. Here it is important to note that the surety takes
his responsibility to be liable for the debt of the principal debtor only on the request of the principal
debtor. Hence communication either express or implied by the principal debtor to the surety is
necessary. The communication of the surety with the creditor to enter into a contract of guarantee
without the knowledge of the principal debtor will not constitute a contract of guarantee.
Illustration
Sam lends money to Akashi. Sam is the creditor and Akashi is the principal debtor. Sam approaches
Raga to act as the surety without any information to Akashi. Raga agrees. This is not valid.

2) Consideration
According to section 127 of the act, anything is done or any promise made for the benefit of the
principal debtor is sufficient consideration to the surety for giving the guarantee. The consideration
must be a fresh consideration given by the creditor and not a past consideration. It is not necessary that
the guarantor must receive any consideration and sometimes even tolerance on the part of the creditor
in case of default is also enough consideration.

3) Liability
In a contract of guarantee, the liability of a surety is secondary. This means that since the primary
contract was between the creditor and principal debtor, the liability to fulfill the terms of the contract
lies primarily with the principal debtor. It is only on the default of the principal debtor that the surety
is liable to repay.
4) Presupposes the existence of a Debt
The main function of a contract of guarantee is to secure the payment of the debt taken by the principal
debtor. If no such debt exists then there is nothing left for the surety to secure. Hence in cases when
the debt is time-barred or void, no liability of the surety arises. The House of Lords in the Scottish case
of Swan vs. Bank of Scotland (1836) held that if there is no principal debt, no valid guarantee can exist.

5) Must contain all the essentials of a valid contract

Since a contract of guarantee is a type of contract, all the essentials of a valid contract will apply in
contracts of guarantee as well. Thus, all the essential requirements of a valid contract such as free
consent, valid consideration offer, and acceptance, intention to create a legal relationship etc. are
required to be fulfilled.
To know more about the essentials of a valid contract, please read this

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

7) No Misrepresentation
The guarantee should not be obtained by misrepresenting the facts to the surety. Though the contract
of guarantee is not a contract of Uberrima fides i.e., of absolute good faith, and thus, does not require
complete disclosure of all the material facts by the principal debtor or creditor to the surety before he
enters into a contract. But the facts, that are likely to affect the extent of surety’s responsibility, must
be truly represented

Types of Guarantee
Specific Guarantee: It is given for single debt or obligation and comes to an end when the
debt guaranteed has been paid or obligation guaranteed has been discharged. Thus, where A gives
a loan to B for which C stands guarantee, it is a case of a specific guarantee. In this case, there is a
specific debt and the guarantee shall come to an end the moment the loan is repaid.
Example: a guarantees B that C would make payment on 20 Sep. after the completion of
obligation the guarantee would be discharge
Illustrations
a) S is a bookseller who supplies a set of books to P, under the contract that if P does not pay for the
books, his friend K would make the payment. This is a contract of specific guarantee and K’s liability
would come to an end, the moment the price of the books is paid to S.

A specific guarantee cannot be revoked. Once the guarantee is given it cannot be withdrawn or revoked and
even after the death of the Surety (guarantor), it continues to operate making his legal representatives liable
for the same.

Continuing Guarantee: a continuing guarantee is one where the guarantee given is not for a single or
specific debt or obligation, but for a series of debts.
Therefore Bankers always prefer to have a continuing guarantee so that the guarantor’s liability is not
limited to the original advances and would also extend to all subsequent debts.
The most important feature of a continuing guarantee is that it applies to a series of separable, distinct
transactions. Therefore, when a guarantee is given for an entire consideration, it cannot be termed as a
continuing guarantee.
Illustration
K gave his house to S on a lease for ten years on a specified lease rent. P guaranteed that S, would
fulfill his obligations. After seven years S stopped paying the lease rent. ‘K sued him for the payment
of rent. P then gave a notice revoking his guarantee for the remaining three years. P would not be able
to revoke the guarantee because the lease for ten years is an entire indivisible consideration and cannot
be classified as a series of transactions and hence is not a continuing guarantee.

RIGHTS AND LIABILITIES OF SURETYRIGHTS AND LIABILITIES OF

SURETY
1. Right of subrogation (interchange): when the surety has paid the guaranteed debt on default of the
principal debtor he is then entitled to all the rights which the creditor had against the principal debtor.
The surety is entitled to all the remedies which are available to the creditor against the principal debtor.
E.g. a guarantees b for all the payments that c would make to be for the delivery of shoes.
2. Right to securities: Surety is entitled to the benefit of all the securities given by the principal debtor
to the creditor. The surety at the time of payment can demand the securities, which the creditor has
received from the principal debtor. Surety can recover the securities only after making full payment. He
cannot claim the benefit of a part of the securities if he has paid a part of the debt.
3. Right of surety when the creditor loses or parts with the securities of the principal debtor: if the
creditor by negligence loses any security held by him, or if the creditor parts with the security, the liability
of the surety is reduced to the extent of the value of those securities.
4. Right of reimbursement (compensation) from the principal debtor: a surety is entitled to recover
from the principal debtor whatever amount, he has rightfully paid to the creditor.
LIABILITIES The liabilities of the surety are co-existent which those of the principal debtor unless it is
otherwise provided.
Example: if A guarantees to B the payment of a Bill of Exchange by C, the acceptor. The bill is
dishonored by C. A is liable not only for the amount of the bill but also for any interest or charges which
may have become due on it.
5. Change in the terms of the contract: If the principal debtor and the creditor make any changes,
without the consent of the surety, the surety is discharged from the contract.

DISCHARGE OF SURETY
1. Discharge by death of the surety: In specific guarantee the surety is not discharged from his liability
on his death if the liability has already occurred. But the death of surety operates as revocation of a
continuing guarantee as to future transactions. The deceased surety’s estate will not be liable for any
transaction after the death, even if the creditor has no knowledge of surety’s death. Prof. SVK
2. Release or discharge of principal debtor: a surety is discharged by any contract between the creditor
and the principal debtor, or any act or omission of the creditor by which the principal debtor is released
or discharged. Prof. SVK
3. Compounding of creditor with principal debtor: a contract between the creditor and the principal
debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the
principal debtor, discharge the surety.
Revocation of Guarantee
1. Notice of revocation
2. Surety’s death
3. Novation
4. By alteration in terms of contract
5. Release or discharge of principle debtor and creditor
6. Loss of security
So far as a guarantee given for an existing debt is concerned, it cannot be revoked, as once an offer is
accepted it becomes final. However, a continuing guarantee can be revoked for future transactions. In
that case, the surety shall be liable for those transactions which have already taken place.
A contract of guarantee can be revoked in the following two ways-
1) By giving a notice (Section 130)
Continuing guarantees can be revoked by giving notice to the Creditor but this applies only to future
transactions. Just by giving a notice the surety cannot waive off his responsibility and still remains
liable for all the transactions that have been placed before the notice was given by him. If the contract
of guarantee includes a clause that a notice of a certain period of time is required before the contract
can be revoked, then the surety must comply with the same as said in Offord v Davies (1862).
Illustration
A guarantees to B to the extent of Rs. 10,000 that C shall pay for all the goods bought by him during
the next three months. B sells goods worth Rs. 6,000 to C. A gives notice of revocation, C is liable for
Rs. 6,000. If any goods are sold to C after the notice of revocation, A shall not be, liable for that.

2) By Death of Surety (Section 131)

Unless there is a contract to the contrary, the death of surety operates as a revocation of the
continuing guarantee in respect to the transactions taking place after the death of surety due to the
absence of a contract. However, his legal representatives will continue to be liable for transactions
entered into before his death. The estate of deceased surety is, however, liable for those
transactions which had already taken place during the lifetime of the deceased. Surety’s estate will
not be liable for the transactions taking after the death of surety ‘even if the creditor had no
knowledge of surety’s death.

Discharge of a surety
 By giving notice of revocation for future transactions (section 130).
 In case of death of surety, the guarantee is revoked for all the future transactions (section 131).
 When there is a change in terms and condition of the contract between the creditor and principal
debtor without obtaining the consent of surety. The surety will be discharged of all the
transactions taking place after such change in terms and condition (section 133). For example
– Q rents his house to R at a fixed rent, P becomes surety for rent payable by R to Q. R and Q
agree on a higher rent for which they do not obtain P’s consent. In such a case P will be
discharged as a surety after such change in contract.
 In case the creditor releases the debtor or makes any omission due to which results in the
discharge of principal debtor’s liability (section 134).
 When the principal debtor makes payment of debt.
 When the creditor enters into an arrangement with the principal debtor for not to sue him or to
provide extra time for payment of debt, the surety will be discharged (section 135).
 The surety will be discharged when the creditor does any act which is inconsistent with the
rights of surety.
What is Bailment?
Bailment as defined in section 148 of the Indian contract act 1872 is the delivery of goods by one
person to another for some specific purpose, upon a contract that these goods are to be returned
when the specific purpose is complete. For example, A delivering his car for Service at the service
center is an example of bailment.

Who is a Bailor?
Bailor: A person who has the duty to deliver the good is called the ‘Bailor.’[2]
Who is a Bailee?
Bailee: The person to whom the Bailor has the duty to deliver the good, is called the ‘Bailee.’[3]

Essentials of Contract of Bailment

1. Agreement
2. Delivery of Goods
3. Purpose
4. Return of Goods

Agreement
For a valid contract of bailment, both the bailor as well as Bailee have to enter into an agreement
that the bailor will transfer goods to the Bailee for a specific purpose and after the completion of
the purpose Bailee will return the goods to the bailor and bailor will pay to the Bailee for his
services.
Illustration: If A and B want to enter into the contract of bailment with the purpose that B will
repair A’s car, they have to enter into an agreement, which includes all the instruction and orders
of A regarding the repairs and usage of his property etc.

Delivery of Goods
For a valid bailment, it is necessary that the bailor will transfer i.e. deliver his goods to the Bailee
so that Bailee can act towards completion of the purpose. The possession should be voluntary i.e.
not by force, coercion, undue influence etc.

Delivery of possession of goods can be actual or constructive

Actual delivery means when the bailor transfer the goods to the Bailee that transfer should be in
physical nature.
Illustration: If A wants B to repair his car, so A has to transfer the physical possession of the car
to B, because without the physical possession B is unable to complete the purpose for which
bailment took place.

Constructive delivery is the opposite of actual delivery. In constructive delivery, the document
which shows the title of goods gets transferred, due to which indirectly the possession gets
transferred.
Illustration: If A has a railways receipt i.e. document of title to goods, transfers the receipt to B,
here B indirectly has the possession of goods, as he has the document of title to goods.
Purpose
Bailment takes place when the bailor transfers constructive to the Bailee, the main reason why
bailor transfer his goods is the performance of a specific purpose. And when that purpose gets
completed the bailor return the goods to the Bailee.
Illustration: If A and B want to enter into the contract of bailment, A should transfer his goods
and provide some purpose to B, so that B can act to complete that purpose.

Return of Goods
The contract of bailment comes to an end when the Bailee after fulfilment of the purpose return
the goods to the bailor or disposed of as per the direction of the bailor.
Illustration: If Ram transfers his gold to Shams so that Shams can make a ring from that gold.
Shams has to return the gold ring to Ram after the purpose for which they enter into an agreement
gets accomplished.
Illustration If A gives his car to B his neighbor for 10 days, but at the same time he keeps one key
with himself and during this period of 10 days he used to take the car. Now this will not be a case
of bailment as A is keeping control over the property bailed.
o Exception: The money deposited in the bank shall not account to bailment as the money
returned by the bank would not be the same identical notes. And it is one of the
essentials of the bailment that same goods are to be delivered back.

Types of Bailments
Deposit: - It is the simple bailment of goods by one man to another for a particular use.
For example, A gives his computer to B for 7 days, it will be a case of a deposit
Hire: - It includes goods delivered to the Bailee for hire.
For example, A gives his car to B for 7 days on rent of Rs. 700 per day, it will be a case of a hire
Pawn/ Pledge: - when goods are delivered to another person by way of security for money
borrowed.
For example, A takes a loan from the Bank and keeps his papers of the house with a bank as
security, it will be a case of pledge

Duties of a Bailor
Section 150 of the Indian Contract Act, 1872 bound the bailor with certain duties to disclose the
latent facts specifically pertaining to defect in goods. Bailor’s duty of disclosure are:
1. Gratuitous Bailment: It is the duty of the bailor to disclose all the defects in the goods
that he is aware of to the Bailee that can interfere with the use of goods or can expose him
to extraordinary risks. And failure to do the same will make bailor liable for damages.
Example if a person bails his scooter to his friend and if the person know that the brakes
are loose, then he must tell this to the friend. Otherwise, the bailor will be responsible for
damages arising directly out of the faults to Bailee. But the bailor is not bound to tell the
Bailee about the fault if the bailor himself does not know about it.
2. Non Gratuitous Bailment (Bailment for Reward): This duty particularly deals with the
goods given on hire. As per this provision, when the goods are bailed for hire, then in such
a situation even if the bailor is aware of the defect in the goods or not will be held liable
for the injury that has been caused due to the existence of such defect.
 3. To bear extraordinary expenses of Bailment:-
The Bailee is bound to bear ordinary and reasonable expenses of bailment but for any
extraordinary expenses the bailor is responsible. E.g., ‘A’ lends his horse to ‘B’, a friend,
for two days. The feeding charges are to be paid by ‘B’. But if the horse meets with an
accident ‘A’ will have to repay ‘B’ medical expenses incurred by ‘B’.

4. To receive back the goods:-

It is the duty of the Bailor to receive back the goods when the Bailee returns them after the
expiry of the term of the Bailment or when the purpose for which Bailment was created
has been accomplished. If the Bailor refuses to receive back the goods, the entitled to
receive compensation from the Bailor for the necessary expenses of custody.

5. To indemnify the Bailee:-

Where the title of the Bailor to the goods is defective and the Bailee suffers as a
consequence, the Bailor is responsible to the Bailee may sustain by reason that the Bailor
was not entitled to make Bailment, or to receive back the goods, or to give directions
respecting them.

Duties of Bailee
Bailee has to fulfil several obligations as per Indian Contract Act, 1872. That is:
1. Duty to take reasonable care: It is the duty of the Bailee to take care of goods as his own
goods. He shall ensure all safety measures that are necessary to protect the goods. The
standard of care should be such as taken care by a prudent man. The goods shall be taken
care of equally whether they are gratuitous or non-gratuitous. The Bailee shall be held
liable for payment of compensation if he fails to take due care. But if the Bailee has taken
due care and instead of that the goods are damaged then in such a situation Bailee will not
be liable to pay compensation. The Bailee is not liable for the loss of goods due to
destruction by fire. (Section 151-152)
2. Duty not to make unauthorized use of the goods: Bailee is duty bound to use the goods
for a specific purpose only and not otherwise. If he uses the goods for any other purpose
than what is agreed for then the bailor has the right to terminate such bailment or is entitled
with compensation for damage caused due to unauthorized use. (Section 153-154)
3. Duty not to mix bailor’s goods with his own goods: It is the duty of the Bailee not to mix
bailor’s goods with his own. But if he wants to do the same then he shall seek consent from
the bailor for mixing of goods. If the bailor agrees for the mixing of the goods then the
interest in the mixed goods shall be shared in proportion. In case, Bailee without the
consent of bailor mixes the goods with his own then two situations arise: goods can be
separated and goods can’t be separated. In the former case the Bailee has to bear the cost
of separation and in the latter case since there is the loss of the goods, therefore, bailor shall
be entitled with damages of such loss. (Section 155-157)
4. Duty to return the goods on the fulfilment of purpose: Bailee is duty bound to return
the goods once the purpose is achieved or on the expiry of the time period for which the
goods were bailed. But if the Bailee makes default in returning the goods on proper time
then he will be responsible with the loss, destruction or deterioration of the goods if any.
(Section 160-161)
 5. Duty to deliver to the bailor increase or profit if any on the goods bailed: The Bailee
has a duty to return the goods along with increase or profit subject to contract to the
contrary. Accretion that has accrued from the bailed goods is the part of the bailed goods
and therefore bailor has the right over such accretions if any. And such accretions shall be
handed over to the bailor along with the goods bailed. For instance, A leaves a cow in the
custody of B and cow gives birth to the calf. Then B is duty bound to hand over the bailed
goods along with accretion to the bailor. (Section 163)

Rights of a Bailor
As such Indian Contract Act, 1872 does not provide for Rights of a Bailor. But Rights of a Bailor
is same as Duties of the Bailee i.e. Rights of Bailor = Duties of Bailee. So the rights of bailor are:
1. Enforcement of Bailee’s Duty: Since Right of the bailor is same as the right of the Bailee,
therefore on the fulfilment of all duties of Bailee the bailor’s right is accomplished. For
example, it is the duty of the Bailee to give the accretions and it is the right of bailor to
demand the same.
2. Right to claim damages: If the Bailee fails to take care of the goods, the bailor has the
right to claim damages for such loss. (Section 151)
3. Right to Termination the Contract: If the Bailee does not comply with the terms of the
contract and acts in a negligent manner in such case the bailor has the right to rescind the
contract. (Section 153)
4. Right to claim compensation: If the Bailee uses the goods for an unauthorized purpose or
mixes the goods which cause loss of goods in such case bailor has the right to claim
compensation.
5. Right to demand the return of goods: It is the duty of the Bailee to return the goods and
the bailor has the right to demand the same.

Rights of a Bailee
1. Right to recover expenses: In the contract of Bailment, the Bailee incurs expenses to
ensure the safety of goods. The Bailee has the right to recover such expenses from the
bailor. (Section 158)
2. Right to remuneration: When the goods are bailed to the Bailee he is entitled to receive
certain remuneration for services that he has rendered. But in case of gratuitous bailment,
the Bailee is not awarded any remuneration.
3. Right to recover compensation: At times a situation arises wherein bailor did not have
the capacity to contract for bailment. Such a contract causing loss to the Bailee, therefore
the Bailee has the right to recover such compensation from the bailor. (Section 168)
4. Right to Lien: Bailee has the right over Lien. By this, we mean that if the bailor fails to
make payment of remuneration or does not pay the amount due, the Bailee has the right to
keep the goods bailed in his possession till the time debtor dues are cleared. Lien is of two
types: particular lien and general lien. (Section 170-171)
5. Right to suit against a wrongdoer: After the goods have been bailed and any third party
deprives the Bailee of use of such goods, then the Bailee or bailor can bring an action
against the third party. (Section 180)
 Comparison Chart
BASIS FOR
BAILMENT PLEDGE
COMPARISON

Meaning When the goods are temporarily When the goods are delivered to act
handed over from one person to as security against the debt owed by
another person for a specific one person to another person, it is
purpose, it is known as bailment. known as the pledge.

Defined in Section 148 of the Indian Contract Section 172 of the Indian Contract
Act, 1872. Act, 1872.

Parties The person who delivers the goods is The person who delivers the goods
known as the Bailor while the person is known as Pawnor while the
to whom the goods are delivered is person to whom the goods are
known as Bailee. delivered is known as Pawnee.

Consideration May or may not be present. Always present.

Right to sell the The party whom goods are being The party whom goods are being
goods delivered has no right to sell the delivered as security has the right to
goods. sell the goods if the party who
delivers the goods fails to pay the
debt.

Use of Goods The party whom goods are being The party whom goods are being
delivered can use the goods only, for delivered has no right to use the
the specified purpose. goods.

Purpose Safe keeping or repairs, etc. As security against payment of debt.

Bailment of Pledge
Pledge is a kind of bailment. Pledge is also known as Pawn. It is defined under section 172 of the
Indian Contract Act, 1892. By pledge, we mean bailment of goods as a security for the repayment
of debt or loan advanced or performance of an obligation or promise. The person who pledges the
goods as security is known as Pledger or Pawnor and the person in whose favor the goods are
pledged is known as Pledgee or Pawnee.

Concept of Pledge
In the pledge, the pawnor transfer/bailed his goods to the Pawnee as security against the amount
he takes from the Pawnee. The pawnor has a duty to pay the amount back to the Pawnee and the
Pawnee has a duty to return the goods after pawnor pays the amount. The Pawnee should not make
unauthorized use of the goods bailed to him if he does he will be liable to pay compensation to the
pawnor. The Pawnee has a right to sell the goods after giving prior notice to the pawnor if he fails
to pay the amount back.
Illustration: A borrowed Rs.100 from B and gave his cycle as a security for the repayment of the
amount, in the condition that if A pays back to B he will get his cycle back. It is called the contract
of Pledge.

Who is a Pawnor?
A Pawnor is the bailor in this case
Who is a Pawnee?
A Pawnee is the Bailee in this case.
.

Rights and Duties of Pawnor

Rights of Pawnor

1. Right to redeem goods it is the right of the pawnor to redeem his goods i.e. to get back from the
Pawnee after he paid the amount to the Pawnee.
Illustration
If A bailed his watch as security and took Rs.800 as a loan from N. A return the money to N. Here,
A has a right to get his watch back.
2. Right to claim damages or compensation
It is the right of the pawnor to get the compensation if the Pawnee makes any unauthorized
use of the goods or fails to keep the goods safe.
Illustration: If A bailed his Car as security and took Rs.1, 30,000 as a loan from C on the
terms that C will not use that car in any manner. C uses it as a taxi. Here A can claim
damages as C made unauthorized use of the goods.

Duties of Pawnor
1. Duty to pay the loan
It is the duty of the pawnor to pay the amount back to the Pawnee so that he will get his
goods back.
Illustration: If A bails his gold chain as security to B for a loan of Rs.3000 Here, A has a
duty to pay back the amount of loan to B.
 2. Duty to pay extraordinary expenses incurred by Pawnee.
It is the duty of the pawnor to pay the extraordinary expenses to the Pawnee, which the
Pawnee incurred in keeping the goods safe.
Illustration: If A bails his cow to B for Rs.8000. B paid all the expenses like food for cow,
shelter etc. Here A has a duty to pay the expenses back to B.
3. Duty to pay claims and damages or compensation to Pawnee
The pawnor has a duty to pay the compensation or damages to the Pawnee if the Pawnee
suffered any type of legal damages due to pawnor goods.
Illustration: If A bails his bike as security to B for the loan of Rs.50000 with the term that
B can use his bike. A, however, didn’t disclose the fact to B that the breaks of the bike are
not working well. B met with an accident and suffered damage. Here it is the duty of A to
compensate B for the damage he has suffered due to A’s goods.

Rights and Duties of Pawnee

Rights of Pawnee
1. Right to retain Goods
As per Section 173 of the Indian Contract Act, if the pawnor fails to pay the amount to the
Pawnee, so the Pawnee has a right to retain the goods of the pawnor.
Illustration: If A bails his watch as security to B for the loan amount of Rs.500. If A fails
to pay the amount or pays the amount after the time as per the terms and conditions, B has
a right to retain the watch.
2. Right to get compensation
In the case, where Pawnee suffered because of the goods of the pawnor, the Pawnee has a
right to get the compensation against that damage from the pawnor.
Illustration: If A bails his bike as security to B for the loan of Rs.50000 with the terms
that B can use his bike. A, however, didn’t disclose the fact to B that the brakes of the bike
were not working well. B met with an accident and suffered damage. Here, B has a right
to claim compensation from A.
3. Right to Sell
As per section 176 of the Indian Contract Act, if the pawnor fails to pay the amount back
to the Pawnee, the Pawnee has a right to sell the goods and reimburse his amount.
Illustration: If A bails his gold ring to B as a security for the loan amount of Rs.7000 if A
fails to pay the amount back to B. B has a right to sale the ring and get his amount back.
4. To get extraordinary expenses incurred by him
As per section 175 of the Indian Contract Act, if the Pawnee has suffered any extraordinary
expenses with respect to pawnor goods then he has a right to get paid back by the pawnor.
Illustration: If A bails his cow to B as security for Rs.18000 as a loan. B incurred expenses
like food expenses, shelter expense etc. B has a right to get all the amount back from A.

Duties of Pawnee
1. Duty to take reasonable care
It is the duty of Pawnee to take reasonable care of the goods of pawnor, like his own goods.
Illustration: If A bails his gold to B for the amount of Rs.80, 000 as loan security. B has a
duty to keep the gold of A safe and should take reasonable care.
 2. Duty to give back the goods after repayment of the loan
When the pawnor pays back the amount to the Pawnee, the Pawnee has a duty to give back
the goods back to the pawnor.
Illustration: If A bails his watch to B as security for Rs.2000 as a loan. It is the duty of B
to give back the watch to A when A repay Rs.200
3. Duty not to make unauthorized use of goods
It is the duty of the Pawnee to not to make any unauthorized use of pawnor goods. If the
Pawnee makes unauthorized use of goods he will be liable to pay compensation to the
pawnor.
Illustration: If A bails his car to B as a security against loan amount of Rs.90000. If B uses
the car as a taxi without A’s Consent. Here, B will be liable for unauthorized use of the car.
4. Duty to give back the owner any increment in the goods
It is the duty of the Pawnee to give to the pawnor any increment in the goods during his
possession.
Illustration If A bails his cow to B as a security against loan amount of Rs.80000. During
B’s possession cow gives birth to a calf. If A repays the amount, it is the duty of B to give
that calf and the cow back to A.
5. Duty not to mix the goods
It is the duty of the Pawnee to not to mix the pawnor goods with his own goods.
Illustration: If A bails 100lt. of petrol to B against the loan of Rs.13000. It is the duty of
the B to not mix the goods of A with his goods.

Pledge by Non Owner

Pledge by Mercantile agent
Section 178 of the Indian Contract Act states that the pledge between the mercantile agent and
Pawnee can be valid if the agent has the possession of the goods with the consent of the owner and
the Pawnee acted good faith and does not know about the original title of the goods.
Illustration: If A is a mercantile agent of B bails the bike of B which is in his possession to D. D
in good faith and does not know about the title of the bike accept as security. Here the pledge is
considered as valid. But if B knows about title, then the pledge will not be held valid.
Pledge by the person in possession under voidable contract
As per section 178 ‘A’ of the Indian Contract Act, the pledge between the pawnor having the
possession of the goods under voidable contract and Pawnee can be valid, provided that during the
pledge the contract has not been revoked and the Pawnee acted in good faith and does not have
any idea about the title of the goods.
Illustration: If A has possession of the watch under voidable contract, bails the watch to B. B in
good faith and does not know about the title of the watch, accepts it. That pledge is considered as
valid. But if B knows about the title, then that pledge is not considered as valid.
Pledge where pledger has only a limited interest
As per Section 179 of the Indian Contract Act, the pledge between the pawnor having limited
interest and Pawnee can be valid, if during the pledge the Pawnee acted in good faith and does not
know about the title of the goods.
Illustration: If A finds a defective watch and spent Rs.50 in repairing that watch. Here A can have
a limited interest on watch i.e. he can bail the watch in pledge for Rs.50 or less.
Pledge by a co-owner in possession
The pledge between a co-owner and Pawnee can be valid if he has the consent of other co-owner.
But when the co-owner without the consent of other co-owner enters the contract of pledge, that
contract can be valid if the Pawnee acted in good faith and does not know about the title of the
goods.
Illustration
Situation 1: If A and B jointly owned a car. The car is in the possession of A. One day A wants
to bail the car for the purpose of the pledge, he has to take the consent of B.
Situation 2: if A enters into the pledge with C and bails the car to C, without the consent of B.
That pledge is considered as valid only if C acts in good faith and does not know anything about
the title of the car.
Pledge by seller or buyer in possession
A seller, after selling his goods has the possession of the goods with the consent of the buyer or
the buyer before completion of the sale has the possession of goods with the consent of the seller
can enter into the valid pledge. But if the party enter into a contract without the consent of the
other party, that contract can be valid, if the Pawnee acted in good faith and does not know about
the title of the goods.
Illustration: If A buys a cycle from B. A after purchase left the cycle in the possession of B. B
bails the cycle in a pledge with C. C act in good faith and does not know about the title of the
cycle. This is a valid pledge.
What is Agency?
When one party delegates some authority to another party whereby the latter performs his actions
in a more or less independent fashion, on behalf of the first party, the relationship between them
is called an agency.

Meaning and definition of Agency

In agency contracts, there exists a legal relationship between two people whereby one person acts
on behalf of the other. The person acting on behalf of the other is called an agent, and the person
from whom the agent derives authority to act is called the principal.

Parties to the contract of Agency

Agent
The Indian Contract Act, 1872 defines an ‘Agent’ in Section 182 as a person employed to do any
act for another or to represent another in dealing with third persons.

Who can appoint an Agent?

According to Section 183, any person who has attained the age of majority and has a sound mind
can appoint an agent. In other words, any person capable of contracting can legally appoint an
agent. Minors and persons of unsound mind cannot appoint an agent.
Who may be an Agent?
In the same fashion, according to Section 184, the person who has attained the age of majority and
has a sound mind can become an agent. A sound mind and a mature age is a necessity because an
agent has to be answerable to the Principal.

Principal
According to Section 182, the person for whom such act is done, or who is so represented, is called
the “principal”. Therefore, the person who has delegated his authority will be the principal.
Illustrations: A, a businessman, delegates B to buy some goods on his behalf. Here, A is the
principal and B is the agent, and the person from whom the goods are bought is the ‘Third Person’.

Who may become principal?

Any person who is of the age of majority according to the law of majority and who is of sound
mind may employ an agent. It has been held that a guardian of a minor can appoint him (minor)
as agent

Consideration for Agency u/s 185

No consideration is required for creating an agency .Thus the contract of agency constitutes an
exception to the rule contained in s.25 of ICA that no consideration – no contract It means there
can be a gratuitous contract of agency.
Creation of Agency
An agency can be created either in writing or orally. An oral appointment is a valid appointment
even though the contract of agency by which agent is authorized has to be in writing.
An agency can be created by:

1. Express agreement
2. Implied agreement
1. Agency by estoppel
2. Agency by necessity
3. Agency by holding out
3. Agency by ratification

Direct (express) appointment– The standard form of creating an agency is by direct appointment.
When a person, in writing or speech appoints another person as his agent, an agency is created
between the two.
Example: execute a deed for sale or purchase of land, the agent must be appointed by executing a
formal ‘power of attorney’ on a stamped paper.

Implied Agency: implied agency arises when there is no express agreement appointing a person
as an agent, but instead the existence of agency is inferred from the circumstances of the case, or
from the conduct of the parties. On a particular occasion of from the relationship between parties.
Such an agency may take the following forms
Example: A of Calcutta has a shop in Delhi. B, the manager of the shop, has been ordering and
purchasing goods from C for the purpose of the shop. The goods purchased were being regularly
paid for but of the funds provided by A. B shall be considered to be an agent of A by his conduct.
Partners, servants and wives are usually regarded as agents by implications because of their
relationship

1. Agency by estoppel: An agency can also be created by estoppel. In a situation where one
person behaves in such a manner in front of a third person, as to make someone believe he
is an authorized agent on behalf of someone, an agency by estoppel is created.
Ex: A tells B in the presence and within the hearing of C that he is C’s agent. C does not
contradict this statement and keeps quiet. Later on b enters into a transaction with a
believing honestly that A is C’s agent. C is bound by this transaction and he will be
estopped from denying the existence of agency, even though such agency did no in fact
exist.
2. Agency by necessity
In a situation of necessity, one person can act on behalf of another to save the person from
any loss or damage, without expressly being appointed as an agent. This creates an agency
out of necessity.
For example, a sent a horse by railway. On its arrival at the destination, there was no one to
receive it. The railway company, is bound to take reasonable steps to keep the horse alive, was
an agent of the necessity of A
Example: The master of the ship on finding that the cargo is rapidly perishing is entitled to
dispose it of at the best price available so as to bind the consignor as an agent by necessity.
 3. Agency by Holding Out: Such an agency is based on the doctrine of holding out which
is a part of the law of estoppel. In this case also the alleged principal is bound by the acts
of the supposed agent, if he has inducted third persons to believe that they are done with
his authority. But, unlike an agency of estoppel, an agency by holding out required some
affirmative or positive act or conduct by the principal to establish agency subsequently.
Thus, where an employer has been accustomed to pay for goods bought on his behalf by
his employer from Galaxy4u, the employer may be liable for a purchase made in the
customary manner, even though it is made, by the employee fraudulently after he has left
the employment. The employer’s conduct in holding out his employee to be his agent
(paying for purchases made by the employee on previous occasions) estops him from
denying that his authority was not still in existence.

Agency by ratification– When an act of a person, who acted as another person’s agent (on his
behalf) without his knowledge is later ratified by that person, this creates an agency by ratification
between the two. Also called ex post facto agency.
Example: The manager of a company purporting to act as an agent on the company’s behalf but
without its authority, accepted an offer by L, the defendant L subsequently withdrew the offer, but
the company ratified the manager’s acceptance. L was held to be bound by the acceptance. His
revocation of the offer was held to be invalid. Ratification relates back to the due when the agent
had first acted and, therefore, subsequent revocation shall have no effect.
“”were acts are done by one person on behalf of another, but without his knowledge or authority,
he may elect to ratify or to disown such acts. If he ratifies them the same effects will follow as if
the had been performed by authority.
Or A without authority buys goods for B. Afterwards B sells them to C on his own account. B’s
conduct implies that ratification of the purchases made for him by A

In order that ratification may be legal and valid, it must satisfy the following essentials.
(1) The act must be done in the name of the principal.
(2) Principal must have been in existence and competent to contract at the time when agent acted
on his behalf as well as on the date of ratification.
(3) The act must be legal which the principal must be competent to do.
(4) Ratification must be with full knowledge of all the material facts (Sec. 198).
(5) Ratification must relate to the whole act and not to a part of it. Ratification of a part of the act
will not be valid (Sec. 199).
(6) There can be no valid ratification of an act which is to the prejudice of a third person (Sec.
200).
Example: A holds a lease from B, terminable on three months’ notice, C, an unauthorized person
gives notice to termination to A. The notice cannot be ratified by B, so as to be binding on A.
(7) Ratification of an act must be made, either within the time fixed for this purpose or within a
reasonable time after the contract was entered into by the agent.
Classification of agent
According to extent of authority
1. Special agent
A general agent is one who is appointed to represent the principle in all the matters
concerning a particular business.
2. General Agent
A special agent is one who is appointed to do some particular act or enter into some
particular contract.

According to nature of work performed by them

1. Commercial or mercantile agent
A mercantile agent is one having authority in the course of business to sell goods or consign
goods for the purpose of sale or to buy goods and even to raise money on the security of
goods. A mercantile agent is also called a commissioner agent
1. Factor: possession of property sell on credit and in his own name, general lien,
cannot barter and connote delegate
2. Auctioneer: appointed to sell by auction deliver goods on receipt of price recover
price from highest bidder can file suit in his own name particular lien.
3. Universal agent: whose authority is unlimited? He enjoys extensive power to
transact every kind of business on behalf of principle.
4. Sub-Agent-An agent appointed by an agent.
5. Co-Agent- Agents together appointed to do an act jointly.
6. Broker- An agent whose job is to create a contractual relationship between two
parties.
7. Commission Agent- An appointed to buy and sell goods (make the best purchase)
for his Principal. Or employed to buy or sell or to transact business not liable for
third part, particular lien may or may not have possession.
8. Del Credere- An agent who acts as a salesperson, broker and guarantor for the
Principal. He guarantees the credit extended to the buyer.

2. Non mercantile agent

1. Wife as an agent: living together and looking for necessaries
2. Husband is not liable: expressly forbidden credit, not necessary, given money and
trader is told expressly.

Sole Selling Agent: In case of sole selling agent, the relationship between the principal and the
sole selling agent is more or less of a seller and buyer and therefore, when a sole selling agent sells
the goods to his buyer the relationship between the sole selling agent and the buyer may be of the
vendor and purchaser unless the agency is disclosed.

Forwarding or Clearing Agent: A forwarding agent, also called shipping agent or clearing agent
acts as agent of the principal, who wants to export goods outside the country or to clear the goods
imported by the principal and all the functions for exporting or clearing and taking possession of
imported goods are done by this agent.
Duties of an agent
1. To follow the instructions of his principal: The agent must conduct the business of the principal
according to the directions of the latter. In the absence of any such directions, he must follow the
custom of the business prevailing in the locality where the agent is conducting such business. If
the agent acts otherwise and the principal sustains a loss, the former must compensate the latter
for it. He will have to account for the profits to the principal if there are any. He will also lose his
remuneration (Sec. 211).
Example: A, an engaged in carrying on for B a business in which it is the custom to invest from
time to time, at interest, the money which may be in hand omits to make such investment. A must
take good to B the interest usually obtained by such investment.
2. Duty to act, with skills and diligence (Sec. 212): The agent must conduct the business of agency
with as much skill as is generally possessed by persons engaged in similar business unless the
principal has notice of his want of skill.
Example: A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit
without, making the proper and usual enquires 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 sustained.
3. Duty to render accounts: An agent is bound to render proper accounts to his principal on
demand. He must explain those accounts to the principal and produce the vouchers in support of
the entries (Sec. 213).
4. Duty to communicate with the principal: In cases of difficulty it is the duty of the agent to
use all reasonable diligence in communicating with the principal and in seeking to obtain the
instructions. It is only in an emergency where there is no time to communicate that he may act
bona fide without consulting the principal (214).
5. Duty not to deal on his own account: The relationship of principal and agent is of a fiduciary
character. An agent, therefore, should not deal on his own account and should not do anything
which may indicate a clash between his interest and duties. An agent shall have to pay all the
benefits to the principal, which may have resulted to him from his dealings on his own account in
the business of the agency without the knowledge of the principal (Secs. 215 & 216).
Example: A directs B, his agent, to buy a certain house for him. B tells A that it cannot be bought,
any buys the house for himself. A may, on discovering that B has bought the house, compel him
to sell it to A at the price he gave for it.
6. Duty not to delegate his authority: An agent cannot delegate his authority to another person
unless authorized or warranted by the usage of trade or nature of the agency. A work entrusted to
the agent must be done by him.
7. Duty to protect the interest of principal or his legal representative in the event of
principal’s unsoundness of mind or his death: When an agency is terminated by the principal
dying or becoming of unsound mind, the agent is bound to take on behalf of the representatives of
his late principal, all reasonable steps for the protection and preservation of the interests entrusted
to him (Sec. 209).
8. Duty to pay sums received for principal: The agent is bound to pay to his principal all sums
received on his account after deducting for his own claim (Sec. 218).
Rights of an agent
1. Right to claim reimbursement for expenses: Agent has the right to retain, out of the money
received on behalf of the principal, money advanced or expenses properly incurred in conducting
the agency business (Sec. 217). The agent may have paid the money at the request of the principal,
or on account of the understanding implied by the terms of the agency or through mercantile usage.
2. Right to receive remuneration: He has also a right to claim remuneration as may be payable
to him for acting as an agent. In the absence of any contract to the contrary, this right to claim
remuneration will arise only when he has carried out the object of the agency in full without being
guilty of misconduct (Sec. 219).
An agent who is guilty of misconduct in the business of the agency is not entitled to any
remuneration in respect of the part of that business which had been misconducted (Sec. 220).
Example: A employs B to recover 1, 00,000 rupees from C, and to lay it out on good security. B
recovers, 1,00,000 rupees and lays out 90,000 rupees on good security, but lays out 10,000 rupees
on security which he ought to have known to be had, whereby A losses 2,000 rupees. B is entitled
to remuneration for recovering the 1, 00,000 rupees and for investing the 90,000 rupees. He is not
entitled to any remuneration for investing the 10,000 rupees and the he must make good the 2,000
rupees to A.
3. Right to indemnification against consequences of all lawful acts: An agent has a right to be
indemnified by the principal against the consequences of all lawful acts done in exercise of his
authority. (Sec. 222).
Example: B, a broker at Calcutta, by the orders of A, merchant there, contracts with C for the
purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil and C sues B. B informs
A, who repudiates the contract altogether. B defends, but unsuccessfully, and has to pay damages
and incurs expenses. A is liable to B for such damages, costs and expenses.
4. Rights of indemnification against consequences of acts done in good faith: An agent has a
right to be indemnified by the principal for any compensation which he may be required to pay to
the third parties for injuries caused to them by his wrongful acts within the scope of his actual
authority done in his good faith, i.e., without any wrong or dishonest intentions (Sec. 223).
Example: B at the request of A, sells goods in the possession of A, but which A had no right to
dispose of B does not know his, and hands over the proceeds of the sale to A. Afterwards C, the
true owner of the goods sues B and recover the value of the goods and cost. A is liable to indemnify
B for what he has been compelled to pay to C and for B’s own expenses.
But where one person employs another to do an act, which is criminal, the employer is not liable
to the agent either upon an express or an implied promise, to indemnify him against the
consequences of the act (Sec. 224).
Example: A employs to B to beat C, and agrees to indemnify him against all consequences of the
act. B thereupon beats C, and has to pay damages to C for so doing. A is not liable to indemnify B
for those damages.
5. Right of indemnification for injuries caused by Principal’s neglect: An agent has a right to
claim compensation from the principal for injuries caused to him by the negligence or want to skill
on the part of the principal (Sec. 225).
Example: A employs B as a bricklayer in building a house, and puts up the scaffolding himself.
The scaffolding is unskillfully put up, and B is in consequence hurt. A must make compensation
to B.
 6. Right of particular lien: An agent is entitled to retain under the possession both movable and
immovable of the property of the principal received by him until the amount due to him for
Termination of Agency
Agency may be terminated by any of the following ways.

1. By act of the parties

1. Agreement
2. Revocation by the principal
3. Revocation by the agent
An agency may be terminated by act of the parties in the following ways:
1. By agreement between principal and agent: The parties are free to terminate the contract of
agency mutually. Such as agreement may be made at any time and at any stage.
2. By revocation of agents authority by the principal: The principal can revoke the authority of
the agent any time before the authority has been exercised so as to bind the
principal: Revocation on may be express or may be implied.
3. By Renunciation of agency by the agent: The agency is terminated if the agent himself
renounces the business of agency.

2. Termination by operation of law

1. Performance of the contract
2. Expiry of the time
3. Death of either party
4. Insanity of either party
5. Insolvency of either party
6. Destruction of the subject matter
7. Principle become alien enemy
8. Dissolution of a company

Termination of Agency by Operation of Law

An agency can be terminated by operation of law in any of the following cases:
1. Performance of the Contract: When the agency is for a particular object, the agency terminates
when the object is fulfilled.
2. Expiry of Time: When an agency is created for a particular period of time, it comes to an end
on the expiry of that period even if the work is not completed.
3. Death or Insanity of Either Party: The agency is terminated when the agent or principal dies
or becomes insane. On the death of either the agent or the principal, the agency is automatically
terminated because a person cannot act on behalf of non-existent person. Thus, where a client dies,
his pleader’s authority also terminates. Similarly, the relationship between agent and principal
comes to an end when principal or agent becomes insane, for a person of unsound mind cannot
contract.
4. Insolvency of the Principal: When the principal is declared as insolvent, the agency is
terminated. This is because the insolvent is disqualified from entering into contract in respect of
his property.
5. Destruction of Subject-Matter: When the subject-matter in respect of which agency was
created has been destroyed, the agency is terminated. Thus, if an agent is asked to sell a house, and
the house is destroyed by fire, there is a cessation of the agency.
6. Principal becoming an Alien Enemy: When the war breaks out between the countries of the
principal and the agent, the contract of agency is terminated.
7. Dissolution of a Company: When a company, whether it is of principal’s or agent’s dissolved,
the contract of agency between them comes to an end.
8. Termination of Sub-Agent’s Authority: The sub-agents authority is terminated automatically,
as and when the authority of the agent is terminated.
9. Subsequent event Rendering the Agency Unlawful: It maybe that an act is lawful when the
agency was created but if it is declared by law to be unlawful subsequently, agency cannot
continue, as that would be unlawful. An agency that is lawful may become unlawful due to
declaration of war when the principal or agent is deemed an alien enemy.

Lien
Lien is a right of person to retain that which is in his possession and which belongs to another,
until the demands of the person in possession are satisfied.
Kinds of Lien
Particular Lien
It is a right to retain possession over those particular goods in connection with which the debt
arose. It is restricted to those goods which are subject matter of the contract and are liable for
certain demands of the person in possession of those goods.
According to Section 170 where the Bailee has, in accordance with the purpose of the contract of
bailment, rendered any service involving the exercise of labor and skill in respect of the goods
bailed, he has, in the absence of a contract to contrary, a right to retain such goods in his possession
until he receives due remuneration for the services he had rendered in respect of them.
Besides the Bailee, other persons who are entitled to exercise particular lien are unpaid seller of
goods, finder of goods, Pawnee, agents, etc.

General Lien
It entitles a person in possession of the goods to retain them until all claims of the person in
possession against the owner of the goods are satisfied. It is not necessary that the demands should
arise only out of the articles detained under possession. General lien is a kind of a special privilege
which the law has granted only to few persons (i) bankers, (ii) factors (iii) wharfingers, (iv)
attorney of the High Courts, (v) policy brokers, and (vi) others by agreement. These parties, can
exercise general lien against any goods under their possession and for any sum legally due on a
general balance of account. But where the goods are deposited for some special purposes, e.g.,
safe custody, they will not come under the spell of general lien. This is because acceptance of
goods for, special purpose implied by excludes general lien.
Example (i) K deposited certain jewels with the Madras Bank to secure certain debt. After
payment of this debt he demanded the return of these jewels from the bank. He was still indebted
to the bank for certain other debts. On the bank’s refusal to return, it was held that he was not
entitled to recover unless he proved that the bank had agreed to give up its general lien (Kunhan
V. Bank of Madras, 1895).
(ii) A solicitor has a general lien on all the papers of the client in his possession in his professional
capacity as solicitor. He can claim a lien for all costs due to him from the client but not for money
loans.
The sale of goods Act 1930
A contract of goods is a contract whereby the seller transfers or agrees to transfer the property to
goods to the buyer for a price. There may be a contract of sale between one part-owner and another
[Sec. 4(1)]. A contract of sale may be absolute or conditional [Sec 4(2)].

The term ‘contract of sale’ is a generic term and includes both a sale and an agreement to sell.

Sale: it is a contract where the ownership in the good is transferred by seller to the buyer
immediately, the contract is called a ‘sale’.
Example: A sell his house to B for 20k. It is a sale since the ownership of the house has been
transferred from A to B.

Agreement to sell: when the transfer of the property in the goods is to take place at a future time
or subject to some conditions thereafter to be fulfilled, the contract is called an ‘agreement to sell’
[Sec. 4(3)].
Example: A agreed to buy from B a certain quantity of nitrate of soda. The ship carrying the nitrate
of soda was yet to arrive. This is ‘an agreement to sale’. In this case, the ownership of nitrate of
soda is to be transferred to a on the arrival of the ship containing the specified goods. I.e. nitrate
of soda.

Contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such
offer by the other party. The contract may be oral or in writing. A contract of sale may be
absolute or conditional.

Formalities of a contract of sale: Section 5 of the Act specifically provides for the following
three steps or formalities in a contract of sale:

1) Offer and Acceptance: A contract of sale is made by an offer to buy or sell the goods for a
price and acceptance of such offer.

2) Delivery and Payment: It is not necessary that the payment for the goods to the seller and
delivery of goods to the buyer must be simultaneous. They can be made at different times or in
instalments – as per the contract.

3) Express or Implied: The contract can be in writing, oral or implied. It can also be partly oral
and partly written.
Essentials of contract of sale
The five essential features of a contract of sale are as discussed below:
1) Two partied
2) Subject matter to be goods
3) Transfer of ownership of goods
4) Consideration is price.
5) Essential elements of a valid contract

1) Two parties: There must be two parties- a buyer and a seller to constitute a contract of sale.
There must be a buyer, a person who buys or agrees to buy the goods and seller, a person who sell
or agree to sell goods. The seller and buyer must be different persons.

2) Subject matter to be goods: The term ‘goods’ is defined in Section 2(7). It states that ‘goods’
“means every kind of movable property other than actionable claims and money; and includes
stock and shares, growing crops, grass and things attached to or forming part of the land which are
agreed to be severed before sale or under the contract of sale”.

3) Transfer of ownership of Goods: There must be transfer of ownership or an agreement to

transfer the ownership of goods from the seller to the buyer – not the transfer of mere possession
or limited interest as in the case of pledge, lease or hire purchase agreement). If goods remain in
possession of seller after sale transaction is over, the ‘possession’ is with seller, but ‘ownership’ is
with buyer. The Act uses the term ‘general property’ implying that sale involves total ownership
and not a specific right limited by conditions.

4) Consideration is Price: The consideration in a contract of sale has to be price i.e., money. If
goods are offered as the consideration for goods, it will not amount to sale. It will be barter. If
there is no consideration, it will be called gift. But where the goods are sold for definite sum and
the price is paid partly in kind and partly in cash, the transaction is a sale.
Consideration is an essential for a valid contract as per the Indian Contract Act, 1872. It is the duty
of a buyer who has received and appropriated the goods to pay a reasonable price. According
to Section 2(10) ‘price’ means the money consideration for the sale of goods. If the price is not
fixed, the contract is void ab initio.

5) Essential elements of a valid contract: All the essentials of a valid contract must be present.
viz., competent parties, free consent, legal object and so on. The transfer of possession and
ownership under the Act has to be voluntary and not be tainted with fraud or duress.
Time: Any stipulation with respect to time is not deemed to be of essence to a contract of sale
unless a different intention appears from the terms of the contract.
Subject matter of Contract of Sale
The subject matter of contract of sale is essentially the goods. Section 2 (7) says that “goods”.
Means every kind of movable property other than money or actionable claims, it includes stock
and shares, growing crops, and things attached to the earth which are to be removed because of
the contract of sate. According to this definition money and actionable claims are not goods and
cannot be bought and sold. Money here means legal tender money. It does not include old coins
which are sold like goods, e.g., silver rupee coins in our country. An actionable claim means a debt
or claim for money which a person may have against another and which he can recover by suit.

Goods may be classified into three types:

1. Existing goods
2. Future Goods
3. Contingent Goods.

1. Existing goods: These are the goods which are owned or possessed by the seller
at the time of sale. Only existing goods can be the subject of a sale. The existing
goods may be-
a) Specific goods: Goods identified and agreed upon at the time of making of
the contract of sale of goods.
b) Ascertained goods: Goods identified subsequent to the formation of the
contract of sale. The terms ascertained and specific, are commonly used for
same kind of goods.
For example, when a customer selects a particular painting/artwork to buy
from the seller at the time of formation of the contract, the painting/artwork is
an ‘ascertained good’ since the customer contracted to purchase that specific
painting/artwork only
c) Unascertained or generic goods: Goods not identified or agreed upon at
the time of making of the contract of sale. They are the goods defined for
description only
Example: ‘A’ who wants to buy a television set goes to a showroom where
four sets of Janta model of Oscar television are displayed? He sees the
performance of a particular set, which he agrees to buy. The set so agreed to
be bought is a specific set. If after having bought one set he marks a particular
set, the set so marked become ascertained. Till this all is done all sets are
unascertained.

2. Future goods:
Future Goods are goods which the seller 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.
Example: ‘A’ contract, on 1st January, to sell B 50 shares in Reliance Ltd., to be
delivered and paid for on the 1st March of the same year. At the time of making of
the contract, A is not in possession of any shares. The contract is a contract for the
sale of future goods.

3. Contingent goods: Contingent goods are those goods which the seller will
acquire on the happening of a contingency. They are also a type of future goods.
Example: ‘A’ agrees to sell 100 units of an article provided the ship which is
bringing them, reaches the port safely. This is an agreement for the sale of contingent
goods
Example 2, A agrees to deliver a T.V. set to B when he receives the same from the
vendor upon fulfilment of his contract with the vendor (between the seller and the
vendor).
Condition and warranty
The Sale of Goods Act 1930 provides the definition for a Condition as – “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”.

A Condition forms the core of the contract i.e. considered as an essential to the main
purpose of the contract. Therefore, the repercussion would be repudiation of the
contract or claim for damages or both depending upon the breach and case.[ii]
Breach of a Condition makes a contract voidable on the part of non-defaulting party
to the contract. However, a Warranty is treated as a collateral to the main purpose of
a contract and therefore, the repercussions of breach of warranty by one of the parties
would be only a claim for damages by the non-defaulting party.

A condition is a stipulation essential to the main purpose of the contract, the breach
of which gives the right to repudiate the contract and to claim damages. (Sec 12 (2)).
We can understand this with the help of the following example:

Example: Say ‘X’ wants to purchase a car from ‘Y’, which can have a mileage of
20 km/lt. ‘Y’ pointing at a particular vehicle says “This car will suit you.” Later ‘X’
buys the car but finds out later on that this car only has a top mileage of 15 km/ liter.
This amounts to a breach of condition because the seller made the stipulation which
forms the essence of the contract. In this case, the mileage was a stipulation that was
essential to the main purpose of the contract and hence its breach is a breach of
condition.

Kinds of Condition

1. Express condition: A condition that has n expressly provided for agreed upon by
both the parties at the time of the contract of sale.

2. Implied condition: Condition are said to be implied when the law incorporates
their existence as implicit to a contract of sale unless otherwise agreed upon between
parties. Both parties shall be bound by implied condition unless they are excluded
by an express agreement between them implied condition are of following types.

1. Condition to title
2. Condition as to description
 3. Condition as to sample
4. Condition as to sample as well as description
5. Condition as to quality or fitness
6. Condition as to merchantability
7. Condition as to wholesomeness

1. Condition as to Title [Section 14(a)]: This means that the seller has the right to
sell a good only if he is the true owner and holds the title of the goods or is an agent
of the title holder. When a good is sold the implied condition for the good is its title,
i.e. the ownership of the good. If the seller does not own the title of the said good
himself and sells it to the buyer, it is a breach of condition. In such a situation the
buyer can return the goods to the seller and claim his money back or refuse to accept
the good before delivery or whenever he learns about the false title of the seller.

2. Sale by Description (Section 15): Section 15 of the Sale of Goods Act, 1930
explains that when a buyer intends to buy goods by description, the goods must
correspond with the description given by the buyer at the time of formation of the
contract, failure in which the buyer can refuse to accept the goods.

3. Sale by Sample (Section 17): When the goods are to be supplied on the basis of
a sample provided to the seller by the buyer while the formation of a contract the
following conditions are implied:

 Bulk supplied should correspond with the sample in quality

 Buyer shall have a reasonable opportunity to compare the goods with the
sample
 The good shall be free from any apparent defect on reasonable examination
by the buyer.

4. Condition as to Quality or Fitness (Section 16): Normally, in a contract of sale

there is no implied condition s to quality or fitness of the goods for a particular
purpose. The buyer must examine the goods thoroughly before he buys them in order
to satisfy himself. Example: an order was place for some Lorries to be used for
heavy traffic in a hilly area. The Lorries supplied were unfit and breakdown. There
is a breach of condition as to fitness.

The doctrine of Caveat Emptor is applicable in the case of sale/purchase of goods,

which means ‘Buyer Beware’. The maxim means that the buyer must take care of
the quality and fitness of the goods he intends to buy and cannot blame the seller for
his wrong choice.
5.Condition as to merchantability sec. 16 (12): Where goods are bought by
description from a seller whole deals In goods of that description there is an implied
condition that the goods are of merchantable quality. This means good should be
such that they are commercially saleable, as per the description by which they are
known in the market at their full value.

6. Condition as to wholesomeness: In the case eatable and provision, in addition to

the implied condition as to merchantability, there is another implied condition that
the goods shall be wholesome. Example: x purchase milk from y, a milk dear. The
milk contained typhoid germs. X’s wife, on taking the milk, got infection and died.
Held, x can entitled for damages.

Warranty
Warranty as – “A warranty is a stipulation collateral to the main purpose of the
contract, the breach of which gives rise to a claim for damages but not to a right to
reject the goods and treat the contract as repudiated”.

A warranty is a stipulation collateral to the main purpose of the said contract. The
breach of warranty gives rise to a claim for damages. However, it does give a right
to reject the goods or treat the contract as repudiated. (Sec 12(3)). Let us understand
this with the help of an example below.

Example: A man buys a particular car, which is warranted to be quite to drive and
very comfortable. It turns out that after some days the car starts to make a very
unpleasant noise every time it is operated. Also sitting inside it is also not very
comfortable.

Thus the buyer’s only remedy is to claim damages. This is not a breach of the
condition but rather a breach of warranty, because the stipulation made by the seller
was only a collateral one.
Kinds of warranties

Express warranties: a warranty is said to be express when the term of the contract
expressly provides for it. At the time of contract of sale, both the parties may agree
upon any number of express warranties.

Implied warranties: an implied warranty is one which the law incorporates into a
contract of sale. Even when no express representations have been made in
connection with a contract of sale, the law implies certain representation s having
been made by the parties while entering into the contract following are the three
implied warranties.

1. Warranty to quiet possession: Section 14(b) of the Act mentions ‘an implied
warranty that the buyer shall have and enjoy quiet possession of the goods’
which means a buyer is entitled to the quiet possession of the goods purchased
as an implied warranty which means the buyer after receiving the title of
ownership from the true owner should not be disturbed either by the seller or
any other person claiming superior title of the goods. In such a case, the buyer
is entitled to claim compensation and damages from the seller as a breach of
implied warranty.
2. Warrant against encumbrances: Any charge or encumbrance pending in
favor of the third party which was not declared to the buyer while entering
into a contract shall be considered as a breach of warranty, and the buyer is be
entitled to compensation and claim damages from the seller for the same.
3. Warranty to disclose the dangerous nature of goods: Where a person sell
goods, knowing that the good are inherently dangerous or they are likely to be
dangerous to the buyer and that the buyer is ignorant of that danger, he must
warn the buyer of the probable danger, otherwise he will be liable in damages.
4. Warrant as to quality of trade of fitness by usage of trade: An implied
warranty as to quality of fitness for a particular purpose may be annexed by
the usage of trade.

Conclusion–As regards conditions and warranties , section 16(4) lays down that an
express warranty or condition does not negative a warranty or condition implied by
this Act unless inconsistent therewith. That means that when the parties expressly
agree to such stipulation and the same are inconsistent with the implied conditions
and warranties, the express conditions and warranties will prevail and the implied
ones in S. 14 to 17 will be negative.
 Comparison Chart

BASIS FOR
CONDITION WARRANTY
COMPARISON

Meaning A requirement or event A warranty is an assurance

that should be performed given by the seller to the
before the completion of buyer about the state of the
another action, is known product, that the
as Condition. prescribed facts are
genuine.

Defined in Section 12 (2) of Indian Section 12 (3) of Indian

Sale of Goods Act, 1930. Sale of Goods Act, 1930.

What is it? It is directly associated It is a subsidiary provision

with the objective of the related to the object of the
contract. contract.

Result of breach Termination of contract. Claim damages for the

breach.

Violation Violation of condition can Violation of warranty does

be regarded as a violation not affect the condition.
of the warranty.

Remedy available to Repudiate the contract as Claim damages only.

the aggrieved party well as claim damages.
on breach
Transfer of Property in Goods
The most important consequence of a contract of sale of goods is the transfer of property in the
goods from the seller to the buyer because risk always follows such a transfer of ownership and
the time of payment as well as the time of delivery of the goods is not an essential consequence of
such a contract.

The most important point regarding the transfer of ownership is that it can take place only in case
of ascertained and specific goods.
According to Sec. 18 “No transfer of property in the goods can take place from the seller to the
buyer unless and until they are ascertained”.
Illustration: A sells 200 kg’s of wheat out of a total of 618 kg’s stored in a warehouse and gives
a delivery order to B, the purchaser, directing the warehouse men to deliver 200 kg’s of wheat to
B. B lodges the delivery order with the warehouse men to no transfer of property takes place from
A to B so far as the quantity to be sold to him is concerned because the goods were unascertained.
For the consideration of the problem of transfer of property it can be divided in two broad
categories:

The transfer of property in the goods from the seller to the buyer is the essence of a contract of
sale. Therefore the moment when the property in goods passes from the seller to the buyer is
significant for following reasons:

a. Ownership -- The moment the property in goods passes, the seller ceases to be their owner
and the buyer acquires the ownership. The buyer can exercise the proprietary rights over
the goods. For example, the buyer may sue the seller for non-delivery of the goods or when
the seller has resold the goods, etc.
b. Risk follows ownership -- The general rule is that the risk follows the ownership,
irrespective of whether the delivery has been made or not. If the goods are damaged or
destroyed, the loss shall be borne by the person who was the owner of the goods at the time
of damage or destruction. Thus the risk of loss prima facie is in the person in whom the
property is.
c. Action Against Third parties -- When the goods are in any way damaged or destroyed by
the action of third parties, it is only the owner of the goods who can take action against
them.
d. Suit for Price - The seller can sue the buyer for the price, unless otherwise agreed, only
after the gods have become the property of the buyer.
e. Insolvency - In the event of insolvency of either the seller or the buyer, the question
whether the goods can be taken over by the Official Receiver or Assignee, will depend on
whether the property in goods is with the party who has become insolvent.
Passing of Property
There are four primary rules that govern the passing of property:

1. Specific or Ascertained Goods

2. Passing of Unascertained Goods
3. Goods sent on approval or “on sale or return”
4. Transfer of property in case of reservation of the right to disposal

1. Transfer of Property in Specific and Ascertained Goods

According to Sec. 19 where there is a contract of sale of specific or ascertained goods, the property
in them shall pass from the seller to the buyer when the parties have intended it to pass.
In order to find out the intention of parties in this regard, consideration is to be given to the terms
of the contract, conduct of the parties and circumstances of the case.
But if the parties fail to lay down their intentions regarding the transfer of property in the goods,
certain rules have been laid down for ascertaining the intention of the parties as to the time at which
the property in the goods is to pass to the buyer, which are contained from Sec. 20 to 24 and which
are the following:
1. When goods are in a deliverable state: According to Section 20 where there is an
unconditional contract for the sale of specific goods in a deliverable state the property in
the good passes to the buyer when the contract of sale is made and it is immaterial whether
the time of payment of the price or the time of delivery of the goods or both is postponed.
Illustration: Where there is a contract between A & B for the purchase of a specific
quantity of hemp stored on the premises of the seller A; price to be paid on 4th February
and the delivery to be given on 1st of May while the contract is being made on 20th January
the property in the specific lot of hemp shall be transferred from A to B on 20th January
itself.
As goods under this rule are in such a state they can be immediately delivered to the buyer,
there remains nothing which can prevent a transfer of ownership. But if the parties in such
cases themselves decide that no transfer of property shall take place till the entire price is
paid, or till the delivery of goods has been given to the buyer, there would be no transfer
of property in the goods in spite of the fact that the goods are specific and in a deliverable
state. As for example goods sold under hire purchase agreement.
2. When goods are not in a deliverable state: According to Section 21 where there is a
contract for the sale of specific goods but the seller is bound to do something to the goods
in order to put them in a deliverable state, property in them shall not be transferred until
such thing is done by the seller and buyer has notice thereof.
Illustration: There was a contract for the wood of Oak trees in a certain forest. The buyer
purchased the wood from the seller selecting certain portion of trees and rejecting others.
According to the custom of trade the seller was to separate the selected portions from the
rejected portions. But the buyer threw upon himself the duty of separating the two portions.
The court decided that no transfer of ownership has taken places so far as wood is
concerned.
3. When goods are to be measured etc.: According to Section 22, where there is a contract
for the sale of specific goods in a deliverable state but the seller is bound to measure, weight
 or count the goods in order to determine the price, there would be no change of ownership
from the seller to the buyer till such act is done and the buyer has notice thereof.
Illustration: There was a contract for the sale of 289 bales of goat skin. Every bale was to
contain 5 dozens smaller bales and according to the contract the price was to be determined
according to the price of smaller bales so that the seller was to count the number of smaller
bales in every bigger bale. It was decided that no transfer of property has taken place when
the bales were destroyed by the fire during the process of counting by the seller.

2. Transfer of property in unascertained goods: According to section 18 no transfer of property

can take place from the seller to the buyer in unascertained goods. Therefore some acts have got
to be done in order to convert unascertained goods into ascertained or specific goods. Such acts
are collectively and technically called ‘appropriation’. According to Section 23 “Where there is a
contract for the sale of unascertained or future goods by description and goods of that description
as well as in deliverable state are unconditionally appropriated to the contract, either by the seller
with the consent of the buyer or by the buyer with the consent of the seller, the property in the
goods shall be transferred from the seller to the buyer, as soon as such appropriation is made, the
consent of the buyer or the seller as the case may be obtained either before or after appropriation.
Thus appropriation of goods is the most important act which permits the transfer of property from
the seller to the buyer. Appropriation may be defined as the application of the goods for the
purposes of a contract of sale such an act must have the following essentials.
1. Goods which are appropriated must be of the same description under which they are
sold: For example where an order was placed for tea sets, jars and glasses made of china
clay and where the seller while supplying the goods also placed some other things in the
parcel it was held that there was no appropriation because the goods did not exactly answer
the description given in the contract.
2. The goods appropriated to the contract must be in a deliverable state because unless they
are in such a state no transfer of property can take place.
3. The goods must be unconditionally appropriated to the contract: According to section
23 sub-section 2. “Goods are said to be unconditionally appropriated to the contract when
the seller gives them to the buyer or a carrier or some other Bailee (whether named by the
buyer or not) for the purpose of transmission to the buyer. The most common form of
appropriation is the delivery of goods to person for the purpose of transporting them to the
buyer and as soon as this is done, generally speaking, the property shall be transferred to
the buyer if the seller has not reserved the right of disposal as defined by section 25.
4. Basis of appropriation: Appropriation of goods is done on the basis of consent of either
the buyer or the seller. Such a consent may be obtained either before or after appropriation.
By the buyer with the consent of the seller: Where the buyer is holding the goods on behalf
of the seller as an agent, the buyer can appropriate the goods for the purpose of the contract,
inform the seller regarding the same, obtain his consent only them the property shall be
transferred to the buyer.

3. Transfer of property in sale by approval when goods are delivered on approval (Sec. 24):
When goods are delivered to the buyer on approval or ‘on sale or return,’ or on other similar terms,
the property therein passes to the buyer:

(i) When he signifies his approval or acceptance to the seller, or

(ii) When the buyer does any other act adopting the transaction, e.g., pledges the goods or resells
them.
(iii) When the buyer retains the goods, without giving notice of rejection, beyond the time fixed
for the return of goods, or if no time has been fixed, beyond a reasonable time. In short, the property
passes either by acceptance or by failure to return the goods within specified or reasonable time.
Goods Sent on Approval
Let us see an example. Peter is a jeweler. John visits his shop to buy a necklace for his wife Olivia.
However, he is not sure if Olivia will like the necklace he has chosen. Peter agrees to deliver the
necklace to John’s house on a sale or return basis.
If Olivia does not like the necklace, then John can return it to Peter without having to pay for it. When
Peter reaches John’s house, another man called Chris is also present in the house. Olivia or John don’t
express their approval to Peter but John pledges the necklace with Chris for a certain amount.
In this case, the ownership of the necklace transfers to John since his act of pledging the necklace
shows his unequivocal intention to buy it. Peter can recover the price of the necklace from John.

4. Transfer of property when right of disposal is reserved: The object of reserving the right of
disposal of goods is to secure that the price is paid before the property passes to the buyer. For
example, under the VPP (Value Pre Paid) system the ownership passes to the buyer when the price
is paid against the delivery of goods, till then the seller retains control over the goods.
Section 25(1) lays down that—
In a contract for the sale of specific goods or where goods are subsequently appropriated to the
contract, the seller may reserve the right of disposal of the goods until certain conditions are
fulfilled. In such a case, even if the goods are delivered to the buyer himself, or to a carrier or other
Bailee for transmission to the buyer, the buyer does not acquire ownership until the conditions
imposed by the seller are satisfied.
For example, X sends certain goods by lorry to Y and instructs the lorry driver not to deliver the
goods until the price is paid by Y to the lorry driver. The property passes only when the price is
paid.

Transfer of title by Non-owners (sec.27-30)

Latin maxim says: ‘Nemo dat quod non habet’ which means that no one can give what he doesn’t
have. This is the ground principle regarding the transfer of title. Sections 27 to 30 of the Sale of
Goods Act, 1930 specify these laws about the transfer of title. Let us take a look.

Transfer of Title
Section 27 deals with the sale by a person who is not the owner. Imagine a sale contract where the
seller –
 Is not the owner of the goods
 Does not have consent from the owner to sell the goods
 Has not been given authority by the owner to sell the goods on his behalf
In such cases, the buyer acquires no better title to these goods than the seller had, provided the
conduct of the owner precludes the seller’s authority to sell.

Let us see an example. Peter steals a mobile phone from his office and sells it to John, who buys
it in good faith. However, John will get no title to the phone and will have to return it to the owner
when he demands, i.e. there is no transfer of title.

Now, this seems to be a really straight-forward rule. However, enforcing this rule can mean that
innocent buyers might suffer losses in most cases. Therefore, to protect the interest of the buyers,
certain exceptions are provided.

Exceptions to Section 27
1. Sale by mercantile agent.(sec.27) It as an agent having in the customary course of business as
such agent authority either to sell goods for the purpose of sale, or to buy goods, or to raise
money on the security of goods.

2. Sale by a joint-owner.(sec.28) Several joint owners of goods has the sole possession thereof,
with the consent of the others, any purchaser from such person, for value without notice at the
time, of the seller’s want of authority to sell, acquire a good title thereof against the other joint
owners.

3. Sale by a person in possession under a voidable contract(sec.29) A person who has obtained
possession of goods under a contract which is voidable on the ground of fraud,
misrepresentation, coercion, or undue influence, can convey a good title, provided the sale
takes place before the voidable contract is

4. Sale by a seller in possession of goods after sale. (sec.30) a seller having sold goods, continues
in possession thereof or title to the goods, the transfer by such person or by a mercantile agent
acting for such person, of the same, by way of sale will pass a good title to the transferee, if such
latter person has acted in good faith and without notice of the previous sale.

5. Sale by buyer in possession of goods.(sec.30(2)) A person having bought or agreed to buy

obtains, with the consent of the seller, possession of the goods or of the documents of title to
the goods. The delivery of such person, of the goods or documents, pledge or other disposition
thereof will be valid and effective, if the person receiving the same, acted bona fide and without
notice of the seller’s lien, if any.

6. Sale by an unpaid seller.(sec.54(3)) An unpaid of goods who has exercised his right of the lien
or stoppage in transit can, even though the ownership in them has passed to the buyer, resell
the goods and convey a valid to another buyer, though no notice of re-seller has been given to
the original buyer.
Performance of Contract of Sale

“It is the duty 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 of sale”. Apart from the transfer of property in goods
from the seller to the buyer, a contract of sale of goods envisages two other important events, the
delivery of goods to buyer and the payment of price to the seller.

According to Section 2 (2) of the Sale of Goods Act, 1930, delivery means voluntary transfer of
possession of goods from one person to another. Hence, if a person takes possession of goods by
unfair means, then there is no delivery of goods. Having understood delivery, let’s look at the law
on sales.

Modes of delivery:-Delivery of goods can be allowed to take place by doing anything which the
parties agree to be taken as delivery or which has the effect of putting the goods in the possession
of the buyer of his agent. It can be:-Actual, symbolic or constructive
1. Actual delivery: the goods are physically handed over by the seller to the buyer\when
the seller hand over the contracted good in the hand of buyer or buyer’s agent by giving in
possession
2. Symbolic delivery: the goods remain where they are, but the means of obtaining
possession of goods is delivered. Or when the goods are bulkier (or ponderous), where
actual handover is not possible a symbolic done. Ex. Handover of key of car or warehouse
or papers.
3. Constructive delivery/delivery by attornment: The person in possession of the goods
of the seller acknowledges that he holds the goods on behalf of the buyer and the buyer
haws assented to it/ where a 3rd person i.e. an agent or bailer, who holds the good on
behalf of the buyer and acknowledges the buyer
It happens as
a. The seller possesses the goods and agrees to hold the goods for the buyer
b. Goods are in possession of a buyer, and the seller agrees to the buyer as the owner of
the goods.
c. Where the 3rd person is in possession of goods, acknowledges the buyer that he holds
the goods on behalf of buyer.
Example: S has his goods stored in the warehouse of C who keeps account of the goods for S.
S sell 50 bags of goods to B, S gives instruction to C to transfer goods to B, C assents such transfer
of the 50 bags of goods to B and make an entry of transfer of goods to B in his book of account
this is delivery by attornment.

Law on Sales
1] The Duty of the Buyer and Seller (Section 31)
It is the duty of the seller to deliver the goods and the buyer to pay for them and accept them, as
per the terms of the contract and the law on sales.
2] Concurrency of Payment and Delivery (Section 32)
The delivery of goods and payment of the price are concurrent conditions as per the law on sales
unless the parties agree otherwise. So, the seller has to be willing to give possession of the goods
to the buyer in exchange for the price. On the other hand, the buyer has to be ready to pay the price
in exchange for possession of the goods.
Rules Pertaining to the Delivery of Goods
The Sale of Goods Act, 1930 prescribes the following rules regarding delivery of goods:
1. Delivery (Section 33)
The delivery of goods can be made either by putting the goods in the possession of the buyer or
any person authorized by him to hold them on his behalf or by doing anything else that the parties
agree to.
2. Effect of part-delivery (Section 34)
If a part-delivery of the goods is made in progress of the delivery of the whole, then it has the same
effect for the purpose of passing the property in such goods as the delivery of the whole. However,
a part-delivery with an intention of severing it from the whole does not operate as a delivery of the
remainder.
3. Buyer to apply for delivery (Section 35)
A seller is not bound to deliver the goods until the buyer applies for delivery unless the parties
have agreed to other terms in the contract.
4. Place of delivery [Section 36 (1)]
When a sale contract is made, the parties might agree to certain terms for delivery, express or
implied. Depending on the agreement, the buyer might take possession of the goods from the seller
or the seller might send them to the buyer.
If no such terms are specified in the contract, then as per law on sales
 The goods sold are delivered at the place at which they are at the time of the sale
 The goods to be sold are delivered at the place at which they are at the time of the agreement
to sell. However, if the goods are not in existence at such time, then they are delivered to
the place where they are manufactured or produced.
5. Time of Delivery [Section 36 (2)]
Consider a contract of sale where the seller agrees to send the goods to the buyer, but not time of
delivery is specified. In such cases, the seller is expected to deliver the goods within a reasonable
time.
6. Goods in possession of a third party [Section 36 (3)]
If at the time of sale, the goods are in possession of a third party. Then there is no delivery unless
the third party acknowledges to the buyer that the goods are being held on his behalf. It is important
to note that nothing in this section shall affect the operation of the issue or transfer of any document
of title to the goods.
7. Time for tender of delivery [Section 36 (4)]
It is important that the demand or tender of delivery is made at a reasonable hour. If not, then it is
rendered ineffectual. The reasonable hour will depend on the case.
8. Expenses for delivery [Section 36 (5)]
The seller will bear all expenses pertaining to putting the goods in a deliverable state unless the
parties agree to some other terms in the contract.
9. Delivery of wrong quantity (Section 37)
 Sub-section 1 – If the seller delivers a lesser quantity of goods as compared to the
contracted quantity, then the buyer may reject the delivery. If he accepts it, then he shall
pay for them at the contracted rate.
 Sub-section 2 – If the seller delivers a larger quantity of goods as compared to the
contracted quantity, then the buyer may accept the quantity included in the contract and
reject the rest. The buyer can also reject the entire delivery. If he wants to accept the
increased quantity, then he needs to pay at the contract rate.
  Sub-section 3 – If the seller delivers a mix of goods where some part of the goods are
mentioned in the contract and some are not, then the buyer may accept the goods which
are in accordance with the contract and reject the rest. He may also reject the entire
delivery.
 Sub-section 4 – The provisions of this section are subject to any usage of trade, special
agreement or course of dealing between the parties.
10. Installment deliveries (Section 38)
The buyer does not have to accept delivery in installments unless he has agreed to do so in the
contract. If such an agreement exists, then the parties are required to determine the rights and
liabilities and payments themselves.
11. Delivery to carrier [Section 36 (1)]
The delivery of goods to the carrier for transmission to the buyer is prima facie deemed to be
‘delivery to the buyer’ unless contrary terms exist in the contract.
12. Deterioration during transit (Section 40)
If the goods are to be delivered at a distant place, then the liability of deterioration incidental to
the course of the transit lies with the buyer even though the seller agrees to deliver at his own risk.
m. Buyers right to examine the goods (Section 41)
If the buyer did not get a chance to examine the goods, then he is entitled to a reasonable
opportunity of examining them. The buyer has the right to ascertain that the goods delivered to
him are in conformity with the contract. The seller is bound to honor the buyer’s request for a
reasonable opportunity of examining the goods unless the contrary is specified in the contract.
Acceptance of Delivery of Goods (Section 42)
A buyer is deemed to have accepted the delivery of goods when:
 He informs the seller that he has accepted the goods; or
 Does something to the goods which is inconsistent with the ownership of the seller; or
 Retains the goods beyond a reasonable time, without informing the seller that he has
rejected them.

Return of Rejected Goods (Section 43)

If a buyer, within his right, refuses to accept the delivery of goods, then he is not bound to return
the rejected goods to the seller. He needs to inform the seller of his refusal though. This is true
unless the parties agree to other terms in the contract.

Refusing Delivery of Goods (Section 44)

If the seller is willing to deliver the goods and requests the buyer to take delivery, but the buyer
fails to do so within a reasonable time after receiving the request, then he is liable to the seller for
any loss occasioned by his refusal to take delivery. He is also liable to pay a reasonable charge for
the care and custody of goods.

Solved Example on law on sales

Q: Peter agrees to sell 100 kilograms of tomatoes to John at Rs. 20 per kilo. However, he delivers
120 kilograms instead. Can John reject the delivery? What other option does John have according
to the law on sales?
Answer: Since the contract was for 100 kilograms but Peter delivers 120 kilograms, John has the
following options:
Right of unpaid seller
Unpaid seller defined as the seller of goods is deemed to be an “unpaid seller” within the meaning
of this Act.”
a. Who has not been paid or tendered the whole of the price of the goods sold, or
b. Who had received a bill of exchange or other negotiable instrument has as a condition
payment, and the condition on which it was received has not been fulfilled because of the
dishonor of the instrument or otherwise.
Example: a purchase some goods in his personal name on behalf of his principal b. b refuses to
pay the price of the goods. Since a has incurred personal liability, the relationship between him
and his principle will be taken as that of a seller and a buyer. A will be taken as unpaid seller under
the provision of sec.45

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

1. Rights of unpaid seller against the goods.
2. Rights of unpaid seller against the buyer personally.
RIGHTS OF AN UNPAID SELLER AGAINST THE GOODS SOLD
(1) A possessory lien (particular, not general);
(2) A right of stoppage in transit; and
(3) A right of resale.

1. Right of Lien:
For the recovery of price, an unpaid seller has a right to keep the goods in his own possession.
Right of Lien means seller can withhold the delivery of goods to the seller till his payment is being
made. In other words, ‘Lien’ is the right to retain possession of goods and refuse to deliver them
to the buyer until the price due in respect of them is paid or tendered
Example: X sells the goods to Y for Rs. 500. Y pays 250 and promises to pay the remaining 250
after two month. X has a right of lien on the goods.

Termination of Lien

An unpaid seller loses his right of lien in the following cases:

1. by Waiver:
If an unpaid seller himself waives his right of lien then it will be terminated.
2. Goods delivered to Buyer:
When a buyer or his agent or his any representative obtains the lawful possession of goods, unpaid
seller’s right of lien automatically ends.
3. No Right of Disposal:
When an unpaid seller delivers the goods to the carrier/Bailee without reserving the right to
disposal with himself then his right of lien ends.

2. Right of Stopping the Goods in Transit:

The right of stoppage in transit means the right of stopping the goods while they are in transit, to
regain possession and to retain them till the full price is paid [10]. In other words, if buyer has
become insolvent, an unpaid seller has a right of stopping the goods in transit and can resume the
same on the payment of price.
  He must be unpaid seller.
 Buyer must be insolvent.
 There should be no credit terms in the Contract of Sale. After expiry of Credit period, this
right can be exercised.
 Amount must be due on those goods only against which this right is desired.

At times the transport company may refuse to deliver the goods to buyer due to any reason. Then
the goods are said to be in transit. At times, the buyer may retain the goods at the transport
company. Then the goods are said to be not in transit.
Example: A sells 100 Kgs of wheat to B but delivery will be two stages. A delivers 50 Kgs wheat
in first week of January and will deliver remaining in last week of January. Later on he comes
know that B has become insolvent. A can stop delivery of remaining in transit and can resume the
same on the payment of price.

3. Right of Resale: An unpaid seller is considered the owner of the goods until he is not paid by
the buyer. So he has a right to sell his goods subject to a few conditions.
The right of resale is very important right of an unpaid seller. In the absence of this right, the
unpaid seller’s other right against the goods, namely, ‘lien’ and ‘stoppage in transit,’ is just futile
because these rights only entitle the unpaid seller to retain the goods until paid by the buyer. If the
buyer continues to remain in default, then what else the seller is expected to do with the goods,
especially when the goods are perishable? Hence, Section 54 of SOGA, therefore, gives to the
unpaid seller a limited right to resell the goods in the following cases:

 Where the goods are of a perishable nature; or

 Where such a right is expressly reserved in the contract in case the buyer should make a
default.

Example: A agrees to deliver a homemade cake to C on credit. C does not pay. A can re-sell it to
any other person.
What are the Rights of Unpaid Seller against Buyer

Rights of Unpaid Seller against Buyer

When the buyer of goods does not pay his dues to the seller, the seller becomes an unpaid seller.
And now the seller has certain rights against the buyer. Such rights are the seller remedies against
the breach of contract by the buyer. Such rights of the unpaid seller are additional to the rights
against the goods he sold.

1. Right to sue for price

It is fundamental right of buyer to file a suit for recovery of unpaid price. In the case of sale. Suit
will be made for price balance, but not for compensation.

2. Right to sue to interest

If the buyer makes unreasonable delay for making payment, the seller has right to claim interest
also.
3. Right to sue for compensation
When an agreement to sell is breached, the seller can see only for compensation for the breach of
Contract. Under such circumstances he cannot sue for price.

4. Right to Sue for anticipatory contract

When an agreement to sell is breached by buyer before date of performance. It is called
anticipatory breach. Then also seller can sue for compensation.

Remedies of Buyer against the Seller

Just as the seller can rescind the contract, then so can the seller. When the seller breaches the
contract the buyer also has certain remedies against the seller. Let us take a look at some remedies
that the Sales Act prescribes for the buyer.

1. Damages of Non-Delivery
If the seller wrongfully or neglectfully refuses to deliver the goods to the buyer, then the buyer can
sue for non-delivery of the goods. According to Section 57 of the Sale of Goods Act, if the buyer
faces losses due to the wrongful actions of the seller (non-delivery) he can sue for damages caused
due to this.
Example A whose agrees to sell to B 10 pair of shoes for 1000/- each? B was going to sell the
same shoes to C for 1100/- a pair. A neglects to deliver the goods to B. Now, B can sue A for non-
delivery. He can sue for the amount of 100/- per pair, i.e. 1000/- (the difference between B’s cost
price and sale price)
2. Suit for Specific Performance
If the seller commits a breach of contract, the buyer can approach the court to ask the seller for
specific performance. The court after deliberation can command the seller for specific
performance. One important point to keep in mind is that this remedy is only available if the goods
are ascertained or specific.
Example: There was a contract between A and B that A will sell to B a very expensive painting
on a specific date. On the said day A refuses to sell. B can approach the court, who orders A to sell
the painting to B at the ascertained price.
3. Suit for Breach of Warranty
When the seller breaches the warranty of the goods, the buyer cannot simply reject the goods on
such basis. The buyer has two options in such a case,
 set up against the buyer the said breach of warranty in the extinction of the price
 or sue the seller for breach of warranty
4. Repudiation of Contract
If the seller repudiates the contract, the buyer does not have to wait until the date of the contract.
He can treat the contract as rescinded and sue for damages immediately. This will be an
anticipatory breach of contract.
5. Sue for Interest
The Act specifically states that nothing in the act will affect the right of the seller or the buyer to
recover interest or special damages due to him by the contract. And if there is no specific clause
in the contract, the court can come to the rescue of the affected party.
Doctrine of Caveat Emptor
“Caveat Emptor” is a Latin phrase that translates to “let the buyer beware”. What exactly does this
mean? Does the seller have no responsibilities? The answers lie in the Doctrine of Caveat Emptor.
Let us learn more about it along with its exceptions.

The doctrine of Caveat Emptor is an integral part of the Sale of Goods Act. It translates to “let the
buyer beware”. This means it lays the responsibility of their choice on the buyer themselves.

It is specifically defined in Section 16 of the act “there is no implied warranty or condition as to

the quality or the fitness for any particular purpose of goods supplied under such a contract of sale“

A seller makes his goods available in the open market. The buyer previews all his options and then
accordingly makes his choice. Now let’s assume that the product turns out to be defective or of
inferior quality.

This doctrine says that the seller will not be responsible for this. The buyer himself is responsible
for the choice he made.

So the doctrine attempts to make the buyer more conscious of his choices. It is the duty of the
buyer to check the quality and the usefulness of the product he is purchasing. If the product turns
out to be defective or does not live up to its potential the seller will not be responsible for this.

Let us see an example. A bought a horse from B. A wanted to enter the horse in a race. Turns out
the horse was not capable of running a race on account of being lame. But A did not inform B of
his intentions. So B will not be responsible for the defects of the horse. The Doctrine of Caveat
Emptor will apply.

However, the buyer can shift the responsibility to the seller if the three following conditions are
fulfilled.

 if the buyer shares with the seller his purpose for the purchase
 the buyer relies on the knowledge and/or technical expertise of the seller
 and the seller sells such goods

Exceptions to the Doctrine of Caveat Emptor

1] Fitness of Product for the Buyer’s Purpose

When the buyer informs the seller of his purpose of buying the goods, it is implied that he is relying
on the seller’s judgment. It is the duty of the seller then to ensure the goods match their desired
usage.

Say for example A goes to B to buy a bicycle. He informs B he wants to use the cycle for mountain
trekking. If B sells him an ordinary bicycle that is incapable of fulfilling A’s purpose the seller
will be responsible. Another example is the case study of Priest v. Last.
2] Goods Purchased under Brand Name: When the buyer buys a product under a trade name or
a branded product the seller cannot be held responsible for the usefulness or quality of the product.
So there is no implied condition that the goods will be fit for the purpose the buyer intended.

3] Goods sold by Description: When the buyer buys the goods based only on the description there
will be an exception. If the goods do not match the description then in such a case the seller will
be responsible for the goods.

4] Goods of Merchantable Quality: Section 16 (2) deals with the exception of merchantable
quality. The sections state that the seller who is selling goods by description has a duty of providing
goods of merchantable quality, i.e. capable of passing the market standards.

So if the goods are not of marketable quality then the buyer will not be the one who is responsible.
It will be the seller’s responsibility. However if the buyer has had a reasonable chance to examine
the product, then this exception will not apply.

5] Sale by Sample: If the buyer buys his goods after examining a sample then the rule of Doctrine
of Caveat Emptor will not apply. If the rest of the goods do not resemble the sample, the buyer
cannot be held responsible. In this case, the seller will be the one responsible.

For example, A places an order for 50 toy cars with B. He checks one sample where the car is red.
The rest of the cars turn out orange. Here the doctrine will not apply and B will be responsible.

6] Sale by Description and Sample: If the sale is done via a sample as well as a description of
the product, the buyer will not be responsible if the goods do not resemble the sample and/or the
description. Then the responsibility will fall squarely on the seller.

7] Usage of Trade: There is an implied condition or warranty about the quality or the fitness of
goods/products. But if a seller deviated from this then the rules of caveat emptor cease to apply.
For example, A bought goods from B in an auction of the contents of a ship. But B did not inform
A the contents were sea damaged, and so the rules of the doctrine will not apply here.

8] Fraud or Misrepresentation by the Seller: This is another important exception. If the seller
obtains the consent of the buyer by fraud then caveat emptor will not apply. Also if the seller
conceals any material defects of the goods which are later discovered on closer examination then
again the buyer will not be responsible. In both cases, the seller will be the guilty party.

Solved Question on Doctrine of Caveat Emptor

Q: While selling mangoes to A, the seller B did not mention that these mangoes will not ripen.
This meant A could not make ice cream for his restaurant the next day. Is the seller at fault?

Ans: No, the seller is not at fault. A did not mention his reason for buying the mangoes. Here the
rule of ‘let the buyer beware’ will apply.
 Section 2

Companies Act 2013

Meaning of the company
A company can be defined as a group of persons associated together for the purpose
of carrying on a business, with a view to earn profits. The word ‘Company’ is an
amalgamation of the Latin word ‘Com’ meaning “with or together” and ‘Pains’
meaning “bread”. Thus, a company is nothing but a group of persons who have come
together or who have contributed money for some common person and who have
incorporated themselves into a distinct legal entity in the form of a company for that
purpose.

There is very good definition by Lord Justice Lindsey, “A company is an

association of many persons who contribute money or money’s worth to a common
stock and employ it in some trade or business and who share the profit and loss
arising there from. The common stock so contributed is denoted in money and is the
capital of the company. The persons who contribute it or to whom it belongs are
members. The proportion of capital to which each member is entitled is his share.
The shares are always transferable although the right to transfer is more or less
restricted.”

Definition:
The term company has been defined as under
Section2 (20) of the companies act 2013 ‘company’ means a company incorporated
under this Act or under any previous law

According to Graf Evans “in common law, a company is a “legal person or legal
entity separate from and capable of surviving beyond the lives of it member”.

According to Haney, “a joint stock company is voluntary organization formed with

the object of earning profit, whose capital is divisible into transferable shares and
membership is necessary for its ownership’.

Nature of companies
1. Incorporated association
Every company must be compulsorily registered or incorporated under the
company’s Act, 2013.
According to sec 3 the minimum number of persons required for forming a private
company is two, seven for a public company and one for one person company. These
persons are also known as the subscribers to the memorandum.
2. Separate legal entity
A company is in law regarded as an entity separate from its member. It has an
independent corporate existence.
Any of its member can enter into contract with it in the same manner as any other
individual can and he cannot be held liable for the acts of the company even if he
holds virtually the entire share capital.
3. Limited liability
The limited liability is another important feature of the company. If anything goes
wrong with the company his risk is only to the extent of the amount of his shares
and nothing more. If some amount is uncalled upon a share, he is liable to pay it and
not beyond that.
The creditors of a company cannot get their claims satisfied beyond the assets of the
company. The liability of members of a company ‘limited by guarantee’ is limited
to the amount of guarantee.
4. Perpetual succession
The life of company is not related with the life of members. Law creates the company
and dissolve it. The death, insolvency or transfer of shares of members does not, in
any way, affect the existence of a company.
According to Tennyson- “For men may come, men may go, but I go on forever.”
In the case of company it may be said that members may come and members may
go but the company goes on. It is a legal person having come into being by law and
only law can bring its end and none else.
5. Common seal
Common seal is the official signature of the company, any document on which
common seal is affixed, is deemed to be signed by the company.
On incorporation a company becomes legal entity with perpetual succession and a
common seal. The common seal of the company is of great importance. It acts as the
official signature of the company. As the company has no physical form, it cannot
sign its name on a contract. The name of the company must be engraved on the
common seal. A document not bearing the common seal of the company is not
authentic and has no legal importance.
6. Transferability of share
A shareholder can transfer his shares to any person without the consent of the
member. Under articles of association, a company can put certain restriction on the
transfer of shares but it connot altogether stop It. Private Company can put more
restriction on the transferability of share
7. Separate property
As a company is legal person distinct from its member, it is capable of owning,
enjoying and disposing of property in its own name. Although its capital and assists
are contributed by its shareholders, they are not the private and joint owner of its
property.
8. Capacity to sue and be sued
A company being a separate legal entity has the legal entity to sue other such as
members, directors, debtors, outsiders etc. similarly, a company may also be sued
by others such as member, directors, creditors, and outsiders.
9. Artificial person
A company is not a natural person. Consequently, a company cannot fail, ill or die
or to be declared as insolvent. A company is an artificial person but it is not a
fictitious person. A company does exist but only in the eyes of law. In other words,
a company exist only in contemplation of law.
10. Separation of ownership from management
The members do not participate in day to day affairs of the company.
The management of the company lies in the hands of elected representatives of
member, commonly called as board of directors or directors of simply the board.
The directors are appointed as well as removed by the members. Thus, the act has
been ensured the ultimate control of members over the company.
11. Voluntary Association for Profits
A company is a voluntary association of persons to earn profits. It is formed for the
accomplishment of some public good and whatsoever profit is divided among its
shareholders. A company cannot be formed to carry on an activity against the public
policy and having no profit motive.
12. Termination of Existence
A company is created by law, carries on its affairs according to law and ultimately
is affected by law. Generally, the existence of a company is terminated by means of
winding up.
Kinds of companies under companies act, 2013
Kinds of Companies

The various Kinds of companies that can be formed under the Companies Act,
2013 are:

The following are the different kinds of companies that can be formed under the
Companies Act –

Types of Companies Based On the Mode of Incorporation

Royal Chartered Company – These are companies formed under the Royal Charter
of a company or by a special order of king or queen. E.g. East India Company formed
by the Royal Charter of Great Britain. Such a company derives its nature on the
basis of the charter under which they are formed.

Statutory Company – It is incorporated by a special Act passed either by the

Central or State legislature. Companies intended to carry on some business of
national importance are formed this way to provide a service to its citizens. E.g.
RBI formed under RBI Act 1934. `

Registered Companies – A company registered under the companies Act 2013 or

any other existing Act. It is governed by the companies Act 2013.
Types On the basis of liability the company can be classified into:

Company limited by shares – It is a company in which the liability of the members

(shareholders) limited i.e. they are only liable for the unpaid value of shares held by
the member. The unpaid amount can be called upon any time during the life time or
winding up of the company. If the shares of a member are fully paid up then his
liability will be nil.

Company limited by Guarantee – In such a company the Liability of shareholders

is limited up to the amount guaranteed or invested by the shareholder towards the
assets of the company in the event of its being wound up. The amount guaranteed
can be only demanded at the time of its wound up, hence it is a reserve capital. Such
companies are generally formed to promote art, science, commerce, sports etc. and
are not for profit making.

Unlimited companies – A company having no limit on the liability of its

Shareholders is an unlimited company. Thus the liability may extend to the personal
property of the Shareholders in case the company is not able to satisfy its claims at
the time of winding up. This liability of members is like a partnership where they
have to contribute according to the ratio of amount invested in the company.

On the Basis of Control:

On the basis of control, companies may be classified into two categories:

1. Holding Company:
According to Section 4(4) of the Companies Act, 1956 “A company shall be deemed
to be the holding company of another, if that other is its subsidiary.”

2. Subsidiary Company:
A company is said to be a subsidiary of another if:
 The other company controls the composition of its Board of Directors.
 The other company holds more than half in nominal value of its equity share
capital.
 It is a subsidiary of such a company which is itself subsidiary of any other
company.
For example, if company B is the subsidiary of company A and company C is the
subsidiary of company B then company C also becomes the subsidiary of company
A. If company D is the subsidiary of company C, it also becomes subsidiary of
Company B and A and so on.
Holding and Subsidiary company – Where one company controls the management
of another company, the former is called the holding company and the later over
which the control is exercised is termed as a subsidiary company.

1. A company shall deemed to be a holding company of another, if that other is

a subsidiary
2. A company shall be deemed to be subsidiary of another company if the other
company –

 Controls the composition of its Board of Directors.

 Holds more than half of nominal value of equity share capital.
 It is a subsidiary of another company which is another company’s subsidiary.
 If it holds more than 50% of the total voting rights of the company.

Types of Companies Based On the Number of Members

Private Company – The term “private company” has been defined under section
2(68) of Companies act 2013. A private company means a company, which has a
minimum paid up share capital of Rs. 1 lakh and which provides the following
restrictions through its Articles of Association and Memorandum –

 Restricts the transfer of shares by its members

 Limits the maximum number of members to 50
 Prohibits any invitation or acceptance of public deposits
 Prohibits invitation to public for debentures of the company

Public company – The term ‘public company’ has been defined under section 2(71)
of Companies act 2013. A ‘public company’ means a company which has minimum
paid up share capital of Rs. 5 lakh and which is not a private company. It has the
following features –

 It does not restrict transferability of shares

 At least 7 members are required to form a public company
 There is no restrictions on the number of members
 It has at least 3 directors
 Its name end with the word “limited”
 It can accept public deposits and invite public for subscription of its shares
and debentures
A private company which is a subsidiary of a public company will also be considered
a public company under this Act

Or the legal existence of a Public Limited Company is separate from its members
(shareholders) and the liability of its members is also limited. Its existence is thus
not affected by the retirement or death of its shareholders. A minimum of 7 members
is needed to form a Public Limited company but there is no maximum limit on this.
The company collects its capital by the sale of its shares to the shareholders. The
shareholders of a company do not have the right to participate in the day-to-day
management of the company, thus separating ownership from management. All the
major decisions of the company are taken by the Board of Directors

On the Basis of Ownership:

1. Government Company:
According to section 617 of the Companies Act. 1956, Government company means,
“any company in which not less than 51% of the paid-up share capital is held by the
Central Government or by any State Government and includes a company which is
a subsidiary of a Government Company.” It may be a public company or a private
company.

2. Non-Government Companies:
Non-Government Company means a company which is not Government Company.
The majority of companies in India belong to this category.

(D) According to Domicile

Domestic company – A company which is based in India registered under the

Companies Act 2013. The head Office and its business operations are conducted
within the country. It can either be private or public.

Foreign company – A Foreign Company is a company incorporated outside India

which establishes its business operations within India under the Companies Act
2013. Within 30 days of its establishment, it has to furnish important documents to
the registrar as per Sec 380. They are:

 A certified copy of the charter of the company

 Memorandum and Articles of Association of the company
 Address of the registered office
  List of directors and secretary
 Full address of the principle place of business in India
 Name and address of the authorized person to do business on behalf of the
company in India.

One Man Company – Where one man holds practically the whole of the share
capital of a company and takes a few more dummy members simply to meet the
statutory requirements of the minimum number of persons such a company is one
man company. A one man company can be incorporated under sec 2(62) of the
Companies Act, 2013. In such a company the principle shareholder is the virtual
owner running the business with limited liability and other members may have even
one share.

Companies not for profit – These companies must obtain a license from the central
government before they are registered. They are limited liability but are not required
to use the word Limited or private with their names.

They are formed promoting art, science, commerce, sports etc. Profits are applied
towards its objective and cannot be distributed among its members.

1. It enjoys various exemptions on registration.

2. It does not pay stamp duty for registration of Memorandum and Articles of
Association.
3. It can be formed without share capital
4. Government can revoke license any time by giving a notice
Formation of companies
Formation of a company is a complex activity involving completion of a lot of legal
formalities and procedures. To fully understand the process on can divide the
formalities into four distinct stages which are:
1. Promotion
2. Incorporation
3. Subscription of capital
4. Commencement of business

Promotion of a company
Promotion is the first stage in the formation of a company. It involves conceiving a
business opportunity and taking initiatives to form a company so that practical shape
can be given to exploiting the available of business opportunity.

Function of a promoter
1. Identification of business opportunity
2. Feasibility studies
a. Technical feasibility
b. Financial feasibility
c. Economic feasibility
3. Name approval
4. Fixing up signatories to the memorandum of association
5. Appointment of professionals
6. Preparation of necessary document.

1. Identification of business opportunity: The first and foremost activity of a

promoter in the direction of formation of company in India is to identify a business
opportunity by the formation of company. The opportunity may be in respect of
producing a new product or service. It may be by making some product available
through a different channel or any other opportunity having an investment potential.
Such opportunity is then analyzed to see its technical and economic feasibility before
formation of company in India.
2. Feasibility studies: It may not be feasible or profitable to convert all identified
business opportunities into real projects. The promoters, therefore, undertake
detailed feasibility studies to investigate all aspects of the business they intend to
start. Depending upon the nature of the project, feasibility studies may be
undertaken, with the help of the specialists like engineers, chartered accountants etc.
To examine whether the perceived business opportunity can be profitably exploited
by formation of company in India.
(i) Technical feasibility: Sometimes an idea may be good but technically not
possible to execute. It may be so because the required raw material or
technology is not easily available. This is an important steps towards
formation of company.
(ii) Financial feasibility: Every business activity requires funds. The
promoters have to estimate the fund requirements for the identified business
opportunity. If the required outlay for the project is so large that it cannot
easily be arranged within the available means, the project has to be given up.
For example, one may think that developing townships is very lucrative. It
may turn out that the required funds are in several crores of rupees, which
cannot be arranged by floating a company by the promoters. The idea of
formation of company may be abandoned because of the lack of financial
feasibility of the project.
(iii) Economic feasibility: Sometimes it so happens that a project is
technically viable and financially feasible but the chance of it being profitable
is very little. In such cases as well, the idea may have to be abandoned.
Promoters usually take the help of experts to conduct these studies before
formation of company. It may be noted that these experts do not become
promoters just because they are assisting the promoters in these studies. Only
when these investigations throw up positive results, the promoters may decide
for the formation of company. Formation of company in India thus involves
the above said technicalities associated with it.
3. Name approval: The first and foremost task in the direction of formation of
company is the selection of a name to be given to the proposed company. Having
decided to launch a company, the promoter has to select a name for it and submit an
application to the registrar of companies of the state in which the registered office
of the company is to be situated, for its approval. The proposed name may be
approved if it is not considered undesirable. It may happen that another company
exists with the same name or a very similar name or the preferred name is
misleading, say, to suggest that the company is in a particular business when it is not
accepted but some alternate name may be approved. Therefore, three names, in order
of their priority are given in the application to the Registrar of Companies before
formation of company.
4. Fixing up Signatories to the Memorandum of Association: The second
important step towards the Formation of company is the signing the Memorandum
of Association of the proposed company. Usually the people signing memorandum
are also the first Directors of the Company. Their written consent to act as Directors
and to take up the qualification shares in the company is necessary.
5. Appointment of professionals: Certain professionals such as mercantile bankers,
auditors etc., are appointed by the promoters to assist them in the preparation of
necessary documents which are required to be with the Registrar of Companies. The
names and addresses of shareholders and the number of shares allotted to each are
submitted to the Registrar in a statement called return of allotment. Formation of
company involves some more steps associated therein.
6. Preparation of necessary documents: The promoter takes up steps to prepare
certain legal documents, which have to be submitted under the law, to the Registrar
of the Companies for getting the company registered. These documents are
Memorandum of Association, Articles of Association and Consent of Directors. This
is a crucial and important stage in Formation of company hence is done by legally
trained hands.

Incorporation stage
1. The memorandum of association duly stamped signed and witnessed. In case
of public company at last seven members must signed it. For a private
company however the signature of two members are sufficient the signatories
must also give information about their address, occupation and the number of
share subscribed by them.
2. The articles of association duly stamped and witnessed as in case of the
memorandum. However, as stated earlier, a public company may adopt table
A Act. In that case a statement in lieu of the prospectus is submitted, instead
of article of association.
3. Written consent of the proposed directors to act as directors and undertaking
to purchase qualification shares
4. The agreement, if any, with the proposed managing directors, manager or
whole – time director.
5. A copy of the registrar’s letter approving the name of the company
6. A statutory declaration affirming that all legal requirements for registration
have been compiled with. This must be signed by any advocate of a high court
or Supreme Court or a signatory to the memorandum of association or a
chartered accountant or company secretary in whole time practice in India.
7. Documentary evidence of payment of registration fees
Documents required to be submitted
1. Memorandum of association
2. The name clause
3. Registered office clause
4. Object clause
5. The main object
6. Other objects
7. Liability clause
8. Capital clause
9. Association clause
10.Article of association
11.Consent of proposed directors
12.Agreement
13.Statutory declaration
14.Payment of fee

Documents required to be submitted during formation of company in India are

described as under:
A Memorandum of Association: Memorandum of Association is the most
important document as it defines the objectives of the company. Formation of
company in India cannot take place without the same. No company can legally
undertake activities that are not contained in its Memorandum of Association. The
Memorandum of Association contains different clauses, which are given as follows:
(i) The name clause: This clause contains the name of the company with which
the company will be known, which has already been approved by the Registrar
of Companies. This is considered as the first step towards the Formation of
company.
(ii) Registered office clause: This clause contains the name of the state, in which
the registered office of the company is proposed to be situated. The exact address
of the registered office is not required at this stage but the same must be notified
to the Registrar within thirty days of the incorporation of the company. It is also
clear that the formation of company in India cannot take place without a valid
address.
(iii) Objects clause: This is probably the most important clause of the
memorandum regarding formation of company in India. It defines the purpose
company is not legally entitled to undertake an activity, which is beyond the
objects stated in this clause. The object clause is divided into two sub-clauses,
which are:
 The main objects: The main objects for which the company is formed are listed
in this sub-clause. It must be observed that an act which is either essential or
incidental for the attainment of the main objects of the company is deemed to be
valid, although it may not have been stated explicitly in the sub-clause.
Other objects: Objects not included in the main objects could be stated in this
sub-clause. However, if a company wishes to undertake a business included in
this sub-clause, it has to either pass a special resolution or pass an ordinary
resolution and get central government’s approval for the same.
(iv) Liability clause: This clause limits the liability of the members to the amount
unpaid on the shares owned by them in the Formation of company in India.
For example, if a shareholder has purchased 100 shares of Rs. 10 each and has
already paid Rs. 6 per share, his/her liability is limited to the Rs. 4 per share.
Thus, even in the worst case, he/she may be called upon to pay Rs. 4, 00 only.
(v) Capital clause: This clause specifies the maximum capital which the
company will be authorized to raise authorized share capital of the proposed
company along with its division into the number of shares having a fixed face
value is specified in this clause. For example, the authorized share capital of the
company may be Rs. 25 with divided into 2.5 lakh shares of Rs. 10 each. The
said company cannot issue share capital in excess of the amount mentioned in
this clause. This is also considered as an important step towards the Formation of
company in India.
(vi) Association clause: In this clause, the signatories to the Memorandum of
Association state their intention to be associated with the company and also give
their consent to purchase qualification shares. The Memorandum of Association
must be signed by at least seven persons in case of a public company and by two
persons in case of a private company during the process of formation of company
in India.

B. Articles of Association: Articles of Association are the rules regarding internal

management of a company. These rules are subsidiary to the Memorandum of
Association and hence, should not contradict or exceed anything stated in the
Memorandum of Association. A public limited company may adopt Table A which
is a model set of articles given in the Companies Act. Table A is a document
containing rules and regulations for the internal management of a company. If a
company adopts Table A, there is no need to prepare separate Articles of Association
for the formation of company in India. For companies not adopting Table A, a copy
of the Articles of Association, stamped and duly signed by signatories to the
Memorandum of Association is required for registration. This is another important
aspect of the Formation of company in India.
C. Consent of Proposed Directors: Apart from the Memorandum and Articles of
Association, a written consent of each person named as a director is required
confirming that they agree to act in that capacity and undertake to buy and pay for
qualification shares, as mentioned in the Articles of Association.

D. Agreement: The agreement, if any, which the company proposes to enter with
any individual for appointment as the Managing Director or a whole time Director
or Manager is another document which required to be submitted to the Registrar for
formation of company in India.

E. Statutory Declaration: A declaration stating that all the legal requirements

pertaining to registration have been complied with is to be submitted to the Registrar
with the above mentioned documents for formation of company in India. This
statement can be signed by an advocate of High Court or Supreme Court or by a
Chartered Accountant in full time practice or by a person named in the articles as a
director or manager or secretary of the company. The formats are prescribed under
the Companies Act, 1956.
F. Payment of fee: Along with the above-mentioned documents, necessary fees
have to be paid for the registration of the company. The amount of such fees shall
depend on the authorized share capital of the company. This being the final stage in
the Formation of company in India thereafter the company comes into existence.

Capital subscription Stage

1. SEBI approval
2. Filling of prospectus
3. Appointment of bankers, broker, underwriters
4. Minimum subscription
5. Application to stock exchange
6. Allotment of shares

Capital Subscription
A public company can raise the required funds from the public by means of issue
of shares and debentures. For doing the same, it has to issue a prospectus which is
an invitation to the public to subscribe to the capital of the company and undergo
various other formalities. The following steps are required for raising funds from
the public.
(i) SEBI Approval: SEBI (Securities and Exchange Board of India) which is the
regulatory authority in our country has issued guidelines for the disclosure of
information and investor protection. A company inviting funds from the general
public must make adequate disclosure of all relevant information and must not
conceal any material information from the potential investors. This is necessary for
protecting the interest of the investors. Prior approval from SEBI is, therefore,
required before going ahead with raising funds from public.
(ii) Filling of Prospectus: A copy of the prospectus or statement in lieu of
prospectus is filed with the Registrar of Companies. A prospectus is any document
described or issued as a prospectus including any notice, circular, advertisement or
other document inviting deposits from the pubic or inviting offers from the public
for the subscription or purchase of any shares or debentures of, a body corporate. In
other words, it is an invitation to the public to apply for shares or debentures of the
company or to make deposits in the company. Investors make up their minds about
investment in a company primarily on the basis of the information contained in this
document. Therefore, there must not be a miss-statement in the prospectus and all
significant information must be fully disclosed.
(iii) Appointment of Bankers, Brokers, and Underwriters: Raising funds from
the public is a stupendous task. The application money is to be received by the
bankers of the company. The brokers try to sell the shares by distributing the forms
and encouraging the public to apply for the shares. If the company is not reasonably
assured of a good public response to the issue, it may appoint underwriters to the
issue. Underwriters undertake to buy the shares if these are not subscribed by the
public. They receive a commission for underwriting the issue. Appointment of
underwriters is not necessary.
(iv) Minimum Subscription: In order to prevent companies from commencing
business with inadequate resources, it has been provided that the company must
receive applications for a certain minimum number of shares before going ahead
with the allotment of shares. According to the Companies Act, this is called the
minimum subscription. The limit of minimum subscription is 90 per cent of the size
of the issue. Thus, if applications received for the shares are for an amount less than
90 per cent of the issue size, the allotment cannot be made and the application money
received must be returned to the applicants.
(v) Application to Stock Exchange: An application is made to at least one stock
exchange for permission to deal in its shares or debentures. If such permission is not
granted before the expiry of ten weeks from the date of closure of subscription list,
the allotment shall become void and all money received from the applicants will
have to be returned to them within eight days.
(vi) Allotment of Shares: In case the number of shares allotted is less than the
number applied for, or where no shares are allotted to the applicant, the excess
application money, if any, is to be returned to applicants or adjusted towards
allotment money due from them. Allotments letters are issued to the successful allot-
tees. Return of allotment, signed by a director or secretary is filed with the Registrar
of Companies within 30 days of allotment.
A public company may not invite public to subscribe to its shares or debentures.
Instead, it can raise the funds through friends, relatives or some private arrangements
as done by a private company. N such cases, there is no need to issue a prospectus.
A ‘Statement in Lieu of Prospectus is filed with the Registrar at least three days
before making the allotment.

Commencement of Business
if the amount of minimum subscription is raised through new issue of shares, a
public company applies to the Registrar of Companies for the issue of Certificate
of Commencement of Business. The following documents are required:
1. A declaration that shares payable in cash have been subscribed for and
allotted up to the minimum subscription mentioned in the prospectus;
2. A declaration that every director has paid in cash, the application and
allotment money on his shares in the same proportion as others;
3. A declaration that no money is payable or liable to become payable to the
applicants because of the failure of the company to either apply for or obtain
permission to deal in its securities on a stock exchange; and
4. A statutory declaration as per the format. This declaration can be signed by
a director or secretary of the company.
A public company raising funds privately, which has earlier filed a
Statement in lieu of prospectus, has to submit only documents 2 and 4 listed
above.

The Registrar shall examine these documents. If these are found satisfactory,
a Certificate of Commencement of Business will be issued. This certificate is
conclusive evidence that the company is entitled to do business. With the grant
of this certificate the formation of a public company is complete and the
company can legally start doing business.
It is thus clear that the Formation of company in India involves several steps
which are associated with filing of documents for the Formation of company
in India and getting the requisite clearances.
Form and contents of a Memorandum of Association as prescribed under Company Law
Memorandum of Association
What is the Companies Act, 2013?
The Companies Act, 2013 (hereby referred to as the “Act”) is a Parliamentary Act on Indian
Company Law that regulates the affiliation, authority and disintegration of a company along with
laying concrete rules about the roles and responsibilities of the directors, board members,
stakeholders, investors, creditors and other members of the company

What is a Memorandum of Association?

According to Section 2(56) of the Companies Act 2013, the “Memorandum” refers to the
memorandum of the company as drawn up initially during the formation of the company or as
changed periodically to carry out any action as per any other law of the Act.
Memorandum of Association is a document of prime importance for a company. It depicts the
objectives, extent of authority, competency, liabilities and legal rights of the company. The
memorandum acts as a legal code or constitution for a company and regulates the relationships
between the company and its shareholders, investors, beneficiaries and other members.

Why is a Memorandum of Association necessary for a Company?

A memorandum of association allows people like the shareholders, creditors, investors and other
members of a company to know the purpose for which a company has been formed. It allows them
to know the range of activities that the company is permitted to be involved in and authorizes them
to learn about the company’s objectives.

Contents of Memorandum of Association

Under Section 4 of the Companies Act 2013, a Memorandum of Association should comprise of
the following clauses as discussed below:
Name Clause: It is mandatory to mention the name of the company while drafting the
Memorandum of Association. A company may select any name that it prefers but it should not be
identical to an existing company. The chosen name of the company as it appears in the
Memorandum of Association should be exactly the same as the one approved by the Registrar of
Companies. A Public Limited Company should end with the word “Limited” and likewise, a
Private Limited Company should end with the words “Private Limited”.
A company should restrain from using words like “King, Queen, Emperor, Government Bodies
and names of World Bodies like U.N.O., W.H.O., World Bank etc.” In order not to mislead the
public a company must not use a name which is prohibited under the Emblems and Names
(Prevention of Improper Use) Act of 1950. A company is restricted from using any name which
may connect it to the government of the state, without obtaining prior permission from the
government.

Situation Clause: The Memorandum of Association of a company must contain the name of the
state where the company operates and the jurisdiction of the Registrar of Company must be
specified. It is mandatory for the company to have the registered office within 15 working days.
Likewise, the verification of the registered office must be completed in 30 days. This procedure is
done to fix the domicile of the company which may or may not be the place where the company is
operating. In the event of a change in location of the registered office the memorandum needs to
be altered, the procedure for the same is mentioned below.
Object Clause: The objective for which the company is formed must be mentioned in the
Memorandum of Association. It is one of the key clauses and should be drafted carefully
mentioning all the types of businesses that the company may possibly engage in the future. A
company is legally prohibited from carrying out any activity that is not specified in the object
clause. The objects are classified as ‘Main Objects’, ‘Ancillary Objects’ and ‘Other Objects’. The
objects must be stated articulately and must not be ambiguous in nature. The objects must not also
be illegal or against the prohibition of the Act or the public policy of the country.

Liability Clause: The liabilities of the members of the company must be clearly stated in the
Memorandum of Association. They may be limited by shares or by guarantee. In case of unlimited
liability company, the entire clause can be eliminated.
When a company is limited by shares, the liability of its members remains limited to any unpaid
amount on the shares owned by them. When it is limited by guarantee the members of the company
are liable to pay the amount stated in the memorandum at the time of liquidation of the company.
In case of unlimited companies, the liability of the members is unlimited, involving personal assets.

Capital Clause: The maximum amount of authorized capital that can be generated by the members
of the company is ought to be specified in the Memorandum of Association. Stamp duty is
applicable on this amount. Although there is no legal limit to the maximum amount of capital that
can be raised by a company, it cannot increase the authorized share capital once it has been
incorporated. The denomination for each such share has to be either RS 10 or RS 100 in case of
equity and preference shares respectively. A company should make sure that the raised authorized
capital is sufficiently high for further expansion of business in the future. All other rights and
privileges, as agreed upon by shareholder, creditors, and investor and other members of the
company may also be specified in this charter.

Association or Subscription Clause: The amount of authorized capital and the number of shares
owned by each member of the company should be mentioned in the Memorandum of Association
of the company. The subscribers to the memorandum must own a minimum of one share each.
Each subscriber must write the number of shares owned by him and sign the memorandum in the
presence of at least one witness who is required to attest the signature.

Form of Memorandum
The memorandum of a company should be formulated in accordance with the respective forms as
mentioned in the tables A, B, C, D & E under Schedule 1 of the Companies Act, 2013.
 Form in Table A is applicable to companies that are limited by shares.
 Form in Table B is applicable to companies that are limited by guarantee and do not
have an authorized share capital.
 Form in Table C is applicable to companies limited by guarantee and have an authorized
share capital.
 From is Table D is applicable to unlimited companies that do not have an authorized
share capital.
 Form in Table E is applicable to unlimited companies that have an authorized share
capital.
Alteration, Amendment & Change in Memorandum of Association under Companies Act 2013
A memorandum of association needs to be amended if any of the following changes occur in the
company:
An alteration in the name of the business.

 Special resolution
 Written approval of central government
 No approval of central government is necessary if the change of name involves only
the addition or deletion of the word private
 Change by ordinary resolution and approval of central government when name is
identical or too closely resemble the name of an existing company
A change in the office of registration.
 From one premises to another premises in the same city, town or village
 By passing a resolution of board of directors
From one town or city or village to another town or city or village in the same state
 Special resolution
 Confirmation re regional director – when jurisdiction of registrar of companies is
changed
 Copy f (i) and (ii) to be filled with ROC
 Notice of new location of Roc within 30 days
Form one state to another state
 Special resolution
 Confirmation of central govt
 For certain purpose only
An alteration in the object clause of the business.
 special resolution
 alteration is sought on any of these grounds
 To carry on its business more economically and more efficiently
 To attain its main purpose by new or improved means
 To enlarge or change the local area of its operation
 To carry on some business which under existing circumstances any conveniently
or advantageously be combined with the business of the company.
 To restrict or undone any of the objects specified in the memorandum
 To sell or dispose of the whole or any part of the undertaking
 To amalgamate with any other company
 C. copy of (A) is filed with ROC within 30 days
 An alteration in the authorized capital of the business.
 A company can reduce share capital by first passing a special resolution for
reduction of capital but powers to reduce share capital must be guaranteed in the
articles of the company, otherwise the share capital can be altered by special
resolution giving such powers.
 The company can apply to the court by petition for getting confirmation from the
court for reducing the share capital. The main duty of the court is to look after the
interest of the creditors and different classes of shareholders, and then decide
whether the company should be allowed to reduce share capital
Alteration of liability clause

 The liability of a member of a company cannot be increase unless the member agrees in
writing
 Form unlimited liability , it can be made limited by re registration of the company

Any adjustments made in the legal liabilities of the members of the business.

 alteration of capital clause

 doctrine of ‘ultra vires’
The words: Ultra means beyond Vires means the powers Ultra Vires means beyond the
powers
A company which owes its incorporation to statutory authority cannot effectively do
anything beyond the powers expressly or impliedly conferred upon it by the statute or
Memorandum of Association

Conclusion
A Memorandum of Association is a document of vital importance in the incorporation of a
company. It should be drafted with utmost sincerity. To amend and alter the name of the
organization, the office of registration, object clause, the authorized share capital of the company
and any other legal liabilities, the company is required to a follow a complicated legal procedure
as mentioned in the scope of this article. All other social responsibilities and supporting activities
and range of other related activities should also be clearly stated in the Memorandum of
Association to provide flexibility to undertake new projects as and when the opportunities arise.
Hence it is advisable to present the company’s scope of activities in a more generic manner instead
of mentioning any particular area of focus.
Article of Association

Articles of association is a secondary document (primary document – memorandum) containing

the law regarding internal management of the company.

According to sec 2(5) OF THE Companies Act 2013 ‘articles’ means the ‘article of association of
a company as originally framed or as altered from time to time in pursuance of any previous
companies law or of this Act.”

Articles of association is a public document which can be examined from the registered office of
the company. Articles help to establish the relation between the company and internal
management.

According to companies Act 2013, it is compulsory for every company to have its own article of
association and file the same with registered office for organization

The following companies must have their own articles of association:

1. Unlimited Companies
2. Companies limited by guarantee
3. Private companies limited by shares

Contents of Articles of Association

Section 5(1) and section 5(2) of the Companies Act, 2013 provide for the contents of the articles
of association.[4] The articles must contain the regulations for the management of the company
along with the matters prescribed by the Central Government. Further, the articles of association
must also contain the following:

1. Share capital including sub-division, rights of various shareholders, the relationship

of these rights, payment of commission, share certificates.
2. Lien of shares: Lien of shares means to retain possession of shares in case the member
is unable to pay his debt to the company.
3. Calls on shares: Calls on shares include the whole or part remaining unpaid on each
share which has to be paid by the shareholders on the company’s demand.
4. Transfer of shares: The articles of association include the procedure for the transfer
of shares by the shareholder to the transferee.
5. Transmission of shares: Transmission includes devolution of title by death,
succession, marriage, insolvency, etc. It is not voluntary but is in fact brought about by
operation of law.
6. Forfeiture of shares: The articles of association provide for the forfeiture of shares if
the purchase requirements such as paying any allotment or call money, are not met with.
7. Surrender of shares: Surrender of shares is when the shareholders voluntary return the
shares they own to the company.
 8. Conversion of shares in stock: In consonance with the articles of association, the
company can convert the shares into stock by an ordinary resolution in a general
meeting.
9. Share warrant: A share warrant is a bearer document relating to the title of shares and
cannot be issued by private companies; only public limited companies can issue a share
warrant.
10. Alteration of capital: Increase, decrease or rearrangement of capital must be done as
the articles of association provide.
11. General meetings and proceedings: All the provisions relating to the general meetings
and the manner in which they are to be conducted are to be contained in the articles of
association.
12. Voting rights of members, voting by poll, proxies: The member’s right to vote on
certain company matters and the manner in which voting can be done is provided in the
articles of association.
13. Directors, their appointment, remuneration, qualifications, powers and
proceedings of the boards of directors meetings.
14. Dividends and reserves: The articles of association of a company also provide for the
distribution of dividend to the shareholders.
15. Accounts and Audits: The auditing of a company shall be done subject to the
provisions of the articles of association of the company.
16. Borrowing powers: Every company has powers to However, this must be done
according to the articles of association of the company.
17. Winding up: Provisions relating to the winding up of the company finds mention in
articles of association of the company and must be done accordingly.

Types of ultra vires

1. Ultra vires the directors
2. Ultra vires the articles
3. Ultra vires torts committed by employees of the company

Alteration of articles
Articles may be altered by a company by passing special resolution at a general body meeting of
shareholders

Doctrine of construction notice

According to section 610 every person dealing with the company is deemed to have read M/A and
A/A and understood the content thereof in the correct perspective

Doctrine of indoor management

Rule of indoor management is an exception to the doctrine of constructive notice.
Alteration of articles
Section 31 empowers every company to alter its articles at any time with the authority of a
special resolution of the company and filing copy with the Registrar. Since it is a statutory power
a company will not be deprived of the power of alteration by a contract with anyone.

The power of alteration of articles conferred by sec 31 is almost absolute. It is subject only to
two restrictions-
> It must not be in contravention with the provisions of the Act.
> It is subject to the conditions contained in the memorandum of association.

The proviso to sub-section (1) says that an alteration which has the effect of converting a public
company into a private company would not have any effect unless it is approved by the Central
Government.

1) Alteration against memorandum- in Hutton v. Scarborough Cliff Hotel Co, a resolution

was passed in a general meeting of a company altered the articles by inserting the power to issue
preference shares which did not exist in the memorandum. It was held inoperative. However,
after Andrews v. Gas Meter Co Ltd this view has been changed where a company was allowed
by changing articles to issue preference shares when its memorandum was silent on the point.
The power of alteration of art is subject only to what is clearly prohibited by the memorandum,
expressly or impliedly.

2) Alteration in breach of contract- a company may change its articles even if the alteration
would operate as a breach of contract. If the contract is wholly dependent on the articles, the
company would not be liable in damages if it commits breach by changing articles. But if the
contract is independent of the articles, the co will be liable in damages if it commits breach by
changing articles. Thus in Southern Foundries Ltd v. Shirlaw, where a Managing Director was
appointed for a term of ten years, but was removed earlier under the new articles on
amalgamation with another company, the company was held liable for breach of contract.

3) Alteration as fraud on minority shareholders- and alteration must not constitute a fraud on
the minority. It should not be an attempt to deprive the company or its minority shareholders of
something that in equity belongs to them.

4) Alteration increasing liability of members- no alteration can require a person to purchase

more shares in the company or to increase his liability in any manner except with his consent in
writing. Thus, the power of alteration should be exercised in absolute good faith in the interest of
the company.

Conclusion: It is a settled company law principle that the articles of association of a company cannot
override the provisions of the Companies Act, 2013. Further, the articles of association of a particular
company are also bound to observe the memorandum of association of the company as the articles are
subordinate to the charter which is the memorandum of the company as well as any other company law in
force at that time. Thus, it is of primary importance that when a company is being incorporated, and the
articles of association of the company are being prepared, the same must be done in consonance with
memorandum of association, the Companies Act, 2013 and any other company law which is in
force at that time.
Meaning of Prospectus:

Prospectus means any document described or issued as prospectus and includes- any notice,
circular, advertisement or any other communication, inviting offers from the public for the
subscription or purchase of any shares in or debentures of, body corporate, inviting deposits from
the public other than deposits invited by a banking company or a financial institution approved
by the Federal Government whether described as prospectus or otherwise.
DEFINITION: (Companies Act 2013) Clause (70) of Section 2 of the Act define
“prospectus” means any document described or issued as a prospectus and includes a red herring
prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any notice,
circular, advertisement or other document inviting offers from the public for the subscription or
purchase of any securities of a body corporate.
Section 26 deals with matters to be stated in prospectus.
Company prospectus is release by company to inform the public and investors of the various
securities that are available. These documents describe about mutual funds, bond. Stocks and other
forms of investments offered by the company. A prospectus is generally accompanied by basic
performance and financial information about the company.

Prospectus is a formal legal document, which is required by and filed with the SECP that provides
details about an investment offering for sale to the public, it should contain the facts that an investor
needs to make an informed investment decision.
REQUIREMENTS OF A PROSPECTUS
A document would be considered a prospectus only if it meets the following requirements, viz.
 it should be in writing
 it should be issued by or on behalf of a body corporate
 it should be issued to public
 It should contain invitation to public for making deposits or for subscription of shares in or
debentures of a body corporate.

Which companies are required to issue prospectus

 Every public listed company who intends to offer shares or debentures of the company to
the public.
 Every private company who ceases to be a private company and converts into a public
company and intends to offer shares or debentures of the company to the public

Contents of a prospectus:
1. Address of the registered office of the company.
2. Name and address of company secretary, auditors, bankers, underwriters etc.
3. Dates of the opening and closing of the issue.
4. Declaration about the issue of allotment letters and refunds within the prescribed time.
5. A statement by the board of directors about the separate bank account where all monies received
out of shares issued are to be transferred.
6. Details about underwriting of the issue.
7. Consent of directors, auditors, bankers to the issue, expert’s opinion if any.
8. The authority for the issue and the details of the resolution passed therefore.
9. Procedure and time schedule for allotment and issue of securities.
10. Capital structure of the company.
11. Main objects and present business of the company and its location.
12. Main object of public offer and terms of the present issue.
13. Minimum subscription, amount payable by way of premium, issue of shares otherwise than on
cash.
14. Details of directors including their appointment and remuneration.
15. Disclosure about sources of promoter’s contribution.
16. Particulars relation to management perception of risk factors specific to the project, gestation
period of the project, extent of progress made in the project and deadlines for completion of the
project

Types of prospectus
1. Red-herring prospectus: a prospectus that contains most of the information that will be
presented in the final prospectus but often does not mention a price and/or the number of securities.
A red-herring prospectus is alternatively known as a preliminary prospectus. It can be distributed
to potential investors after the registration statement for a securities offering has been filed with
the securities commission.
The public limited companies, which are yet to obtain the certificate of commencement of
business, without filing of business, require the SLP (Statement in lieu of prospectus). It must be
filed when a Private company becomes a Public company.
2. Abridged prospectus: a shorter version of the prospectus that includes all the most key
elements of the typical prospectus. An abridged prospectus contains information very similar to
the typical prospectus but in a concise and compact form. Both versions of the prospectus must
comply with the disclosure requirements prescribed by the relevant securities commission.
3. Deemed prospectus: a prospectus that is deemed to have been made by the issuer, though it is
actually offered to the public by a third party or the so-called issue house (Indian terminology).
The issuer saves the underwriting expenses in selling its securities.
4. Shelf prospectus: a prospectus that describes a set of unissued, but registered securities. It is
used in situations where securities are issued in consecutive stages over a period of time because
the size of issue is too large (and funds to be raised are enormous, making the filing of prospectus
each time very expensive). Later on, an issuer will only need to file the so- called information
memorandum with the relevant securities commission.
5. Pink-herring prospectus: a prospectus that is issued without disclosure of the number of
securities being offered or, in an initial public offering, the estimated or indicative price range. It
is a preliminary prospectus that precedes the filing of a red-herring prospectus.

The features and characteristics of the prospectus are:

(i) It is a document issued as a prospectus;
(ii) It is an invitation to the member of the public;
(iii) The public is invited to subscribe to the shares or debentures of the company;
(iv) It includes any notice, circular, advertisement inviting deposits from the public;
(v) It is a document by which the company procures its share capital needed to carry on its
activities.

Forms and Contents of the Prospectus:

Sec. 56 states that every prospectus must
i. State the matters specified in Part I of Schedule II, and
ii. Set out the reports specified in Part II of Schedule II.

Part I of Schedule II—Matters to be Specified:

(a) The contents of the Memorandum:
It expresses the name of the company, objects, nature of business, share capital and its division,
liability of members, names and addresses of the signatories and the number of shares subscribed
by them.

(b) The qualification shares of the Directors:

If the Articles of the company provides that certain minimum number of shares to be possessed by
the directors as qualification, in that case, a person shall not be qualified to act as a director unless
he holds such number of shares.

(c) No. of redeemable preference shares:

Particulars regarding debentures and redeemable preference shares with their date of redemption
must be stated.

(d) Remuneration of the Directors and Promoters:

The prospectus must contain the rate of remuneration for attending meetings and for other services
of the Directors and Promoters.

(e) The names, descriptions and addresses of the Directors and Managing Directors:
The names, addresses, descriptions, occupations of the Directors, Managing Directors, Managers
and the provisions regarding their appointment must be stated.

(f) The Minimum Subscription:

The minimum subscription on which the directors may proceed to allotment and the amount
payable on application, allotment etc. on each share should also be stated in the prospectus.

(g) Time of opening:

The time of the opening of subscription list should also be stated.

(h) Names and Addresses:

The names and addresses of vendors, if any, and the mode of payment of purchase price and
goodwill should also be contained in the prospectus.
(i) Underwriting Commission, Brokerage etc.:
The names of underwriters and the opinion of the directors regarding their financial position and
business integrity should also be stated clearly.

(j) Names of the auditors with their addresses:

The reputation of the auditors is also an important factor necessary for public patronage.

(k) Particular of Contracts:

The dates of and parties to every material contract, and reasonable time and place of its inspection
are also significant.

(l) Preliminary Expenses:

The estimated amount of preliminary expenses to be incurred should also be furnished.

(m) Particulars of Directors:

Full particulars of the nature and interest of every director or promoter in the promotion of or in
the property proposed to be acquired by the company within two years with statement of all sums
paid or agreed to be paid to him in cash or shares for service rendered.

(n) Disclosure:
Full disclosure on these matters should also be made in the prospectus.

(o) Expected rate of dividend and voting rights:

The rights of shareholders relating to voting, meeting and dividends along with the nature and
extent of restrictions to be imposed by Articles on their right to transfer shares should also be stated
in clear and convincing terms.

(p) Capitalization of Profits and Surplus from revaluation of assets:

Capitalization of profits/reserves of a company or if any of its subsidiaries have been capitalized
(i.e. issuing bonus shares) — particular of such capitalization and also surplus, if any, assets from
the revaluation of assets should also be stated.

(q) Inspection of Balance Sheet and Profit and Loss Account:

The following reports are to be annexed:

Part II of Schedule II— Reports to be set out:

(A) Report by the Auditor:
An audit report of the company relating to:
(i) Its profits .and losses, assets and liabilities,

(ii) The dividend paid by the company during the five financial years preceding the issue of
prospectus should also be furnished.

(B) Report by the Accountant:

The accountant should also state a report relating to profits or losses and assets and liabilities on a
date which must not be more than 120 days before the date of issue of the prospectus.

Miss-Statements in Prospectus:

Miss-statements and false statements in the prospectus are instruments by which dishonest
company promoters may practice fraud on the public money. In order to prevent this practice the
law imposes certain duties and liabilities on those persons who are responsible for such issues.

If, however, the prospectus contains any miss-statement of a material fact or if the prospectus
wants in any material fact, two types of liabilities will arise.

They are:
(1) Civil Liability
(2) Criminal Liability

Before discussing the above we are to know the liability which may arise for Untrue Statement. It
is the duty of the authors of the prospectus to see that the prospectus does not contain any untrue
statement which may mislead the public.

According to Sec. 65 of the Companies Act, Untrue Statement’ in connection with a

prospectus shall deem to include:
I. A statement which is misleading in the form and context in which it is included, and
II. An omission which is calculated to mislead.
In short, untrue statement means and includes any statement which is not only a false statement
but also a statement which creates a wrong impression of actual fact. Concealment of material fact
is also treated as miss-statement or untrue statement.

Now we are going to highlight the civil and criminal liabilities that may appear due to miss-
statement in the prospectus:

(1) Civil Liability:

Sec. 62(1) of the Companies Act states that such persons are liable to pay compensation for any
loss or damage which any person may suffer from the purchase of any share or debenture on the
basis of the untrue statement. Consequently, a person who has suffered a loss may claim
contribution from the others who were associated relating to issue of prospect until it appears that
he was guilty of fraud while the others were not proved to be guilty.

(2) Criminal Liability:

According to Sec. 63(1) of the Companies Act, every person who has authorized the issue of a
prospectus containing untrue statements shall be punishable with imprisonment which may extend
to two years or with fine which may extend to Rs. 5,000—or both.

Penalty:
Sec. 68 of the Companies Act provides that a person shall not, either knowingly or recklessly, by
making any statement, promise or forecast which is false, deceptive or misleading or, by any
dishonest concealment of material facts, induce or attempt to induce another person to enter into
or to offer to enter into any

(i) agreement for acquiring, disposing-off, subscribing for or underwriting shares or

debentures;

(ii) Agreement, the purpose or pretended purpose of which is to secure a profit to any of the
parties from the yield of shares or debentures, or by inference to fluctuations in the value of
shares or debentures.

Otherwise, he shall be punishable with imprisonment for a term which may extend to 5 years or
with fine which may extend to Rs. 10,000—or with both.

Persons who are liable for untrue statements in the prospectus:

According to Sec. 62 (1) of the Companies Act, the following persons are liable and
punishable for untrue statements in the prospectus:
(a) Every person who is a director of the company at the time of the issue of the prospectus;

(b) Every person who has authorized himself to be named and is named in the prospectus either
as a director or as having agreed to become a director, either immediately or after an
interval of time;

(c) Every person who is a promoter of the company; and

(d) Every person who has authorized the issues of the prospectus.

Defense available in an action on the prospectus:

The parties against whom the proceeding have been taken for miss-statement in the prospectus
may use certain pleas as their defense:
1. Defenses against the Civil Liability:
According to Sec. 62(2) of the Companies Act, no decree for damage shall be passed if the person
charged can prove any one of the followings:
(a) Withdrawal of consent:
A person is not liable if he withdrew his consent before the issue of the prospectus.

(b) Issue without knowledge and consent:

If the person can prove that the prospectus was issued without his knowledge or consent and, after
becoming aware of its issues, he gave public notice that the same was issued without his knowledge
and consent.
(c) Statement of an expert:
If the statement which is alleged to be untrue purports to be a statement of an expert or a copy or
of a valuation report of an expert, the person charged can be discharged from his liability if he can
prove:
1. It is a fair and correct copy or representation or extract of the expert’s statement;

2. He had reasonable grounds to believe;

3. The expert had given his consent to the issue of the prospectus;

4. The expert had not withdrawn his consent before registration.

(d) True Statement:

The person charged can escape from his liability if he can prove that he had reasonable ground to
believe and did, up to the time of the allotment of shares or debentures, believe that the statement
was true.

2. Defenses available to an expert:

Sec. 62(4) states that an expert whose opinion was included in the prospectus can use the following
as defense:
(a) Withdrawal of consent:
After giving consent, he withdrew it in writing before delivery of a copy of the prospectus for
registration.

(b) Knowledge of untrue statement:

If the person, on becoming aware of the untrue statement, withdrew his consent in writing and
gave public notice with reasons thereof, after delivery of the copy of the prospectus to and before
allotment.

(c) True statement:

He was competent to make such statement and he had reasonable grounds to believe and did up to
the time of the allotment of shares and debentures, believe that the statement was true.

3. Defense’s against Criminal Liability:

Sec. 63(1) states that a person charged in a criminal court will be acquitted if he can prove any one
of the following:
1. That the statement was immaterial, or
2. That he had reasonable grounds to believe and did, up to the time of the issue of the
prospectus, believe that the statement was true.

Conclusion
Prospectus is a mandatory document for limited organization to commence their business, but its
complicated procedure delays the operation any business. Therefore a no. of organization hesitate
to issue prospectus to general public for subscription of share capital and debenture.
SHARE CAPITAL (Companies Act, 2013)

We have discussed earlier post The Company under the Companies Bill 2012which
is still relevant when the bill become Act; all companies do not have share capital.
Only companies limited by shares have share capital.
KIND OF SHARE CAPITAL (SECTION 43):
The share capital of companies limited by share shall be of two kinds, namely;
(a) equity share capital;
(b) Preference share capital.
Here, use of two terms “Shall be” and “and” denote this is a requirement to have
both kind of share capital but, according to further reading, company may have zero
equity or preference share capital.
Equity Share Capital:
For this Section, “Equity share capital” means all share capital which is not
preference share capital. Equity share capital may be of divided into;
(i) Equity share capital With voting right; or
(ii) Equity share capital with differential rights.
This differential rights may have difference related to dividend, voting or otherwise
in accordance with rules. The term otherwise bring scope for innovation with in limit
of rules. It may be difference related to managing control, power to appoint director,
or power to appoint proxy and so on.
Preference Share Capital:
Preference share capital of the issued share capital of the company which carries or
would carry a preference right with respect to –
(a) Payment of dividend, either as a fixed amount or an amount calculated at a fixed
rate. Which may be either be free of or subject to income tax; and
(b) Repayment of amount of share capital or share capital deemed to be paid up,
whether or not, there is preferential right specified in the memorandum or article of
the company.
This Act does not interfere in rights of preference shareholders who are entitled to
participate in the proceeds of winding up before commencement of this Act.
NATURE OF SHARES OR DEBENTURES (SECTION 44):
The shares or debentures or other interest of any member in a company shall be
movable property transferable in the manner provided by the articles of the
company.
NUMBERING OF SHARES (SECTION 45):
Every share in a company having a share capital shall be distinguished by its
distinctive number. This is not required for shares held by beneficial owner of shares,
which are in the record of a depository.
CERTIFICATE OF SHARES (SECTION 46):
A certificate, issued under the common seal of the company, specifying the shares
held by any person, shall be prima facie evidence of the title of the person to such
shares.
Duplicate Certificate of Shares:
A duplicate certificate of shares may be issued, if such certificate —
(a) is proved to have been lost or destroyed; or
(b) has been defaced, mutilated or torn and is surrendered to the company.
Shares held in depository form:
Where a share is held in depository form, the record of the depository is the prima
facie evidence of the interest of the beneficial owner.
Caution: Duplicate Certificate:
If a company with intent to defraud issues a duplicate certificate of shares, the
company shall be punishable with fine which shall not be less than five times the
face value of the shares involved in the issue of the duplicate certificate but which
may extend to ten times the face value of such shares or rupees ten crores whichever
is higher and every officer of the company who is in default shall be liable for action
under section 447.
Voting Rights (Section 47):
Voting rights are subject to provision of Section 43 regarding differential rights and
Section 50 regarding denying voting rights on uncalled capital.
Every member of a company limited by shares and holding equity share capital
therein, shall have a right to vote on every resolution placed before the company.
This voting right on a poll shall be in proportion to member’s share in the paid-up
equity share capital of the company.
Limited Voting Rights to Preference Shareholder:
A preference shareholder shall also be a member of the company. Preference
Shareholder shall have a right to vote only on resolution
(a) which directly affect the right attached to his preference shares;
(b) resolution for winding up of the company; and
(c) resolution for repayment or reduction of its equity or preference share capital.
In these cases his voting right on a poll shall be in proportion to his share in the paid
– up preference share capital of the company.
Where the dividend in respect of a class of preference shares has not been paid for a
period of two years or more, such class of preference shareholders shall have a right
to vote on all the resolutions placed before the company.
The proportion of the voting rights of equity shareholders to the voting rights of the
preference shareholders shall be in the same proportion as the paid-up capital in
respect of the equity shares bears to the paid-up capital in respect of the preference
shares.
This is explained here:
Total paid up share capital 400,
Equity share capital 300,
Preference share capital 100
A person holding 20 shares shall have voting right 20% under preference share
capital but 5% for total capital.
VARIATION OF SHAREHOLDERS’ RIGHTS (SECTION 48):
Where share capital of the company is divided into different classes and the company
want to vary the rights attached to shares of that class this section apply. There must
be a provision with respect to such variation is contained in the memorandum or
articles of the company. In absence of any such provision in the memorandum or
articles, such variation should not be prohibited by the terms of issue of the shares
of that class.
Any variation in the right attached to a particular class of share may be varied with
the written consent of holders of not less than three – fourth of the issued shares of
that class. Alternatively, this consent may be through a special resolution passed at
a separate meeting of the holders of that particular class.
If variation by one class of shareholders affects the rights of any other class of
shareholders, the consent of three-fourths of such other class of shareholders shall
also be obtained in same manner.
Right of Dissenting shareholder:
Where, the holders of not less than 10 percent of issued shares of a class did not
consent to such variation or vote in favour of the special resolution for the variation,
they may apply to the tribunal to have the variation cancelled. Where such
application is made before tribunal, the variation shall have no effect unless and until
it is confirmed by the tribunal.
Any application before tribunal under this section shall be made within twenty – one
days after the date on which the consent was given or the resolution was passed. This
application may be made by any one or more person as these shareholders may
appoint in writing for this purpose.
The decision of the tribunal shall be binding on the shareholders. Is it means, there
will be no appeal against such decision of the tribunal except a special leave petition.
The company shall within thirty days of the date of the order of the Tribunal, file a
copy of the order with the Registrar.
Caution for this Section:
Where any default is made in complying with the provisions of this section, the
company shall be punishable with fine which shall not be less than twenty-five
thousand rupees but which may extend to five lakh rupees and every officer of the
company who is in default shall be punishable with imprisonment for a term which
may extend to six months or with fine which shall not be less than twenty-five
thousand rupees but which may extend to five lakh rupees, or with both.
We will discuss provisions related to calls, unpaid capital, premium, discount etc. in
a future post.

Please note: I welcome your comments and feedback. This blog post is not a
professional advice. Readers may share this post on social media by using buttons
given here. Fines and Infringements for defaults on Shares

 If the company is found liable for defaulting or misappropriating shares, a

minimum of INR 25,000 to INR 5,00,000 would have to be paid by the
company.
 For every officer of the company liable, the same fine and/or imprisonment
up to 6 months is considered.

Bonus Shares
A bonus share is a free share that is given to a current shareholder of a company.
Issue of such shares does not increase the value of the company. Bonus shares can
be issued if:

 authorisation by Articles of Association

 there is Board and shareholders’ approval
 there is no default in interest or principal on debt
 there is no default on dues to employees
 there are no partly paid-up shares

Further Issue of Additional Share Capital

 To existing shareholders on a proportional basis. An example is pro-rata

allotment of shares.
 ESOPs to employees. Esops are employee stock options that employees have
the option to convert to company stock at a future date at a predetermined
price. Sweat equity is an example of esops.
Preferential Offer: offer of equity or equity convertibles such as PCD/FCD to
selected people or group of people. Allotment be completed within 12 months from
the date of SR. In case of convertible securities, the price of the share will be
determined beforehand. Issue of capital on Preferential Basis:

 Special resolution is passed

 Price determined by registered valuer
Private Placement: is made through the issue of an offer letter to individuals.

 In a financial year, an offer can be made up to 50 people at any time and not
more than 200 during the course of a financial year.
 The investment size is minimum INR 50,000 per person
 No cash payment can be made. Only through bank account
 Allotment must be completed within 60 days of share application.
 If an offer is made to more than 50 people, then the offer made will be deemed
a public offer.
LegalDesk.com undertakes all sorts of documentation such as incorporation of
companies, and other business documentation. Expert legal advice will help any
business with understanding regulatory laws, strategic planning, statutory
compliance or any other big business decision. Luckily, everything is now available
at the click of a button.
Membership in a Company
According to section 41

I. The subscriber of MoA of a co. shall be deemed to have agreed to become member
of the co., & on its registration, shall be entered in its register of member.

II. Every person who agree [in writing] to become member of a company and whose
name is entered in the register of member shall be a member of the co.

III. Every person holding equity share capital of a company and whose names are
recorded as beneficial owner in the depository records are considered as members
of the concerned company.

Ways of Membership A person may become a member of the company in any

following ways:

1. By subscribing to the memorandum of association.

2. By application and allotment.

3. Agreeing to become director:

4. By transfer of shares.

5. By transmission of shares.

6. By holding out as a member or by estoppels

Termination of Membership A person will cease to be a member of the company

when his name is removed from the register of members. It may take place in any of
the following ways:

1. When a person transfers his shares. In such a case the transferor ceases to be a
member as soon as the transferee is registered but not before.

2. When his shares are validly forfeited by the company.

3. When a person makes a valid surrender of his shares of the company.

4. When a company sells the shares in exercise of its right of lien over them.

5. When he dies.

6. When he is declared insolvent.

7. When he repudiates the contract on the ground of false or misleading statement in

the prospectus of the company.

8. When he is holding redeemable preference shares and such shares are redeemed.

9. When share-warrants are issued in exchange of fully paid-up shares and the
articles do not recognize holders of share-warrants as members.

10. When the company is wound-up. But he remains liable as a contributory.

Register of members

(a) The name, address, and occupation of each member.

(b) In the case of a company having a share capital, the shares held by each member
with numbers and amount paid or considered to be paid on them.

(c) The date on which each member’s name was entered in the register.

(d) The date on which any person ceased to be a member; and

(e) If the shares have been converted into stock, and notice of conversion given to
the registrar, it will
Rights of members
1. Claiming Share certificate
2. Duplicate certificate
3. Transfer of shares
4. Legal heir
5. Voting regarding dividend
6. Attending meetings
7. Appointing auditors
8. Appointing proxy
9. Copies of P&L A/c
10. Appointing & removing directors

Who can become a member?

The company law does not prescribe any disqualification, which would depart a
person from becoming a member of a company. It appears that any person who is
competent to enter into valid contract can become a member of a company. The
reason is obvious. Subscribing for shares is basically a contract between the
company and the shareholder. However, the Memorandum or Articles may impose
certain restrictions or restrain certain persons from acquiring membership in a
company. In the absence of any express provision regarding the capacity of a person,
the provisions of the Contract Act shall apply.

As regards to certain special category of persons, the judiciary has laid down certain
principles for acquiring membership in a company. They are as follows:
1. Minors: A minor, is not a competent person to enter into a valid contract. As such,
he is disqualified to acquire membership. However, minors may be allotted shares.
On attaining majority, the minor can avoid the contract. But the minor should
repudiate the contract within a reasonable time.
2. Lunatic and Insolvent: A lunatic cannot become a member. An insolvent,
however, can become a member and is entitled to vote at the meetings of the
company. But his shares vest in the Official Receiver when he is adjudged insolvent.
3. Partnership Firm: A partnership firm may hold shares in a company in the
individual name of partners as joint holders. But the shares cannot be issued in the
name of the partnership firm, as it is not a legal person in the eye of law.
4. Company: A company, being a legal person, can become the member of another
company in its own name. But a company can subscribe for the shares of another
company only when it is authorized by Memorandum. Similarly, a subsidiary
company cannot buy the shares of its holding company.
5. Foreigners: Foreign national can be members of companies registered in India.
For that permission of RBI is mandatory. When he turns an alien enemy, his right as
a member will be suspended.
6. Fictitious Person: A person who takes the shares in the name of fictitious person
becomes liable as a member. Besides, such a person can be punished for
impersonation under section 68-A.
 Rights of the Members
The members of a company enjoy several rights and they are the ultimate authority
in the matters of the company and its management. Their rights can be grouped under
three heads. They are detailed below:
1. Statutory Rights: These are the rights conferred upon the members by the
Companies Act. These rights cannot be taken away by the Articles of
Association or Memorandum of Association. Some of the important statutory rights
are given below
i. Right to receive notice of meetings, attend, to take part in the discussion and
vote at the meetings.
ii. Right to transfer the shares [in case of public companies].
iii. Right to receive copies of the Annual Accounts of the company.
iv. Right to inspect the documents of the company such as register of members,
annual returns, etc.
v. Right to participate in appointments of directors and auditors in the Annual
General Meetings.
vi. Rights to apply to the Government for ordering an investigation into the affairs
of the company.
vii. Right to apply to the Court for winding up of the company.
viii. Right to apply to the National Company Law Tribunal for relief in case of
oppression and mismanagement under Secs. 397 and 398.
2. Documentary Rights: In addition to the statutory rights, there are certain rights
that can be conferred upon the shareholders by the documents like the Memorandum
and the Articles of Association.
3. Legal Rights: These are the rights, which are given to the members by the General
Law.

Difference between Member & Shareholder

MATTER Member Shareholder

Meaning A person whose name is A person who owns the

entered in the register of shares of the company.
members of a company.

Definintion Companies Act, 2013 defines Shareholder is not listed

‘Member’ under section 2(55) under the Companies Act,
2013
 Share The holder of the share warrant The holder of the share
Warranges is not a member. warrant is a Shareholder.

Company Every company must have a The Company limited by

minimum number of members. shares can have shareholders

Memorandum A person who signs the After signing the

memorandum of association memorandum, a person can
with the company becomes a become a shareholder only if
member. shares are allotted to him.

Removal of Membership
The term ‘Cessation’ means ‘Termination’. Just as there’s a process to add a member
of the company, there’s a process to terminate that member. Terminating a member
of the company can result in removal from the ‘Register of Members’. The following
are the modes of removing a member of the company:

Transfer of Membership

 Here, the shares of a member are transferred to another person by the company
in the name of the transferee.
 The name of the transferor is removed from the Register of Members.
 After transferring all the shares from the person to another person, the person
is legally removed from the company.

Transmission of Membership

 On the death of a shareholder/member of the company, his/her legal heir or

representative becomes a member.
Surrender of Membership

 A person is removed from the membership once he/she surrenders his shares,
which requires ‘Acceptance on part of Board’.
Forefeiture of Membership

 On account of Loss or selling of a share, the member is terminated from the

company.
Share Buy Back

 The person is terminated from the company if the company buys back its
shares.
Liabilities of Members
A ‘Liability’ is a state of being legally responsible for something. This term is
usually used in an organization to emphasize the responsibilities of a member of the
company. The following are the liabilities of the member of a company:

 To make shares if he/she is allotted as per the Act.

 To pay call money or pay the due amount of shares.
 To abide by the decision of majority when they act ‘bonafide’.
 To contribute to the Asset of the company in case of winding up and when the
shares are partly paid up.
Difference Between Transfer and Transmission of Shares

Last updated on May 16, 2017 by Surbhi S

One of the most important features of the securities is that they are transferable,
which facilitates the company in acquiring permanent capital and liquid investments
to the shareholders. Transfer of shares is a voluntary act of a member that takes
place by way of contract. It is not exactly same astransmission of shares, as the two
differ in their meaning and concept as well. The transmission of shares occurs due
to the operation of law i.e. in case if the member passes away or becomes
insolvent/lunatic.

Transfer of shares requires and instrument of transfer, whereas no such instrument

is required in the transmission of shares. To further understand, the difference
between transfer and transmission of shares, you need to have a glance at the article
excerpt, provided below.
Content: Transfer of Shares Vs Transmission of Shares

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion
Comparison Chart
BASIS FOR TRANSMISSION OF
TRANSFER OF SHARES
COMPARISON SHARES

Meaning Transfer of shares refers to Transmission of shares means

the transfer of title to shares, the transfer of title to shares by
voluntarily, by one party to the operation of law.
another.

Affected by Deliberate act of parties. Insolvency, death, inheritance

or lunacy of the member.

Initiated by Transferor and transferee Legal heir or receiver

Consideration Adequate consideration No consideration is paid.

must be there.

Execution of valid Yes No

transfer deed

Liability Liabilities of transferor Original liability of shares

cease on the completion of continues to exist.
transfer.

Stamp duty Payable on the market value No need to pay.

of shares.

Definition of Transfer of Shares

Transfer of shares refers to the intentional transfer of title (rights as well as duties)
to shares by one person to another. There are two parties to transfer of shares, i.e.
transferor and transferee.

The shares of the public company are freely transferable unless there is an express
restriction provided in the articles of association. However, the company can refuse
the transfer of shares, if it has a valid reason for the same. In the case of a private
company, there is a restriction on the transfer of shares subject to certain exceptions.
Definition of Transmission of Shares

There are some cases when the transfer of shares occurs due to the operation of law,
i.e. when the registered shareholder is no more, or when he is insolvent or lunatic.
Transmission of shares also occurs when the shares are held by a company, and it is
wound up.

The shares are transferred to the legal representative of the deceased and the official
assignee of the insolvent. The transmission is recorded by the company when the
transferee gives the proof of entitlement of shares.
Key Differences Between Transfer and Transmission of Shares

The significant differences between transfer and transmission of shares are provided
below:

1. When the shares are transferred by one party to another party, voluntarily, it
is known as transfer of shares. When the transfer of shares happens due to the
operation of law, it is referred to as transmission of shares.
2. Transfer of shares is done intentionally whereas death, bankruptcy and lunacy
are the reasons for transmission of shares.
3. The transfer of shares is initiated by the parties to transfer, i.e. transferor and
transferee. Unlike transmission of shares which is initiated by the legal
representative of the concerned member.
4. Transferee pays an adequate consideration to the transferor for the transfer of
shares. In the case of transmission of shares, no consideration shall be paid.
5. Execution of valid transfer deed is necessary when there is the transfer of
shares, but not in the transmission of shares.
6. When the transfer is completed, the liability of the transferor is over. On the
other hand, the original liability of shares exists.
7. Stamp duty is payable on the market value of shares in case of transfer while
in the transmission of shares no stamp duty is to be paid.
Conclusion

By and larger, transfer of shares is the normal course of transferring property, while
the transmission of shares takes place only on demise or insolvency of the
shareholder. Moreover, Transfer of shares is very common, but the transmission of
shares takes place only on the happening of the certain event.
Persons involved in the transfer

o Subscribers to the memorandum.

o Legal Representative, in case of a deceased.
o Transferor.
o Transferee.
o Company (whether listed/ unlisted).

Procedure for transfer of shares as per the Companies Act, 2013

1. Firstly, the transfer deed needs to be obtained in the prescribed form i.e. Form
SH-4, endorsed by the prescribed authority.
2. The instrument of transfer may not be in the prescribed form (Form SH-4) in
the following cases:-
a. Where a director or nominee transfers shares on behalf of another body corporate
under section 187 of the Companies Act, 2013;

b. Where a director or nominee transfers shares on behalf of a corporation owned or

controlled by the central or state Government;

c. Shares transferred by way of deposit as a security for repayment of any loan or

advance If they are made with any of the following:-

i. State Bank of India; or

ii. Any scheduled bank; or
iii. Any other banking company; or
iv. Financial Institution; or
v. Central Government; or
vi. State Government; or
vii. Any corporation held by the Central or State Government; or
viii. Trustees who have filed the declarations.

d. For transferring debentures, a standard format can be used as the instrument of

transfer.
 3. Get the Articles of Association in case of shares, trust deed in the case of
debentures and transfer deed registered either by the transferor and the
transferee or on their behalf in accordance with the provisions of the
Companies Act, 2013.
4. According to Indian Stamp Act and stamp duty notification in force in the
state concerned, the transfer deed should need to have stamps. The present
stamp duty rate for transfer of share is 25 paise for every one hundred rupees
of the value of the share or part thereof. That means for shares valued Rs.
1050, the stamp duty will be Rs. 2.75.
5. Check that the stamp affixed on the transfer deed is cancelled at the time of
or before the signing of the transfer deed.
6. A person who gives his signature, name and address as approval for transfer
must see the transferor and the transferee sign the share/debentures transfer
deed in person.
7. The relevant share/debenture certificate or allotment letter with the transfer
deed must be attached and sent to the company.
8. In case the application made by the transferor, is for partly paid shares, the
company has to duly notify the amount due on shares/debentures to the
transferee. Also, a no objection from the transferee is required within two
weeks from the date of receipt of the said notice.
9. Affix the same value stamp on a written application if signed transfer deed
has been lost. In this case, the board may register the transfer on specific terms
of indemnity as it thinks fit.
10.If the shares of the company are listed in a recognized stock exchange, then
the company cannot charge any fee for registration of transfers of shares and
debentures.
Note: A company shall not register a transfer of partly paid shares in these two cases:

 The company has given a notice in Form No. SH.5 to the transferee
 Till the transferee has given a no objection certificate to the transfer within
two (2) weeks from the date he recieved the notice from the company.

Time limits

 A Company having share capital:- The Company shall not register transfer of
securities of the Company or member’s interest in the Company other than
beneficial owners without a proper instrument of transfer within a period of
60 days from the date of execution.
  Application by transferor alone:- The transfer shall not be registered until and
unless the company gives notice of the application to transferor and transferee
gives no objection certificate within 2 weeks from receipt of the notice.
 Company shall deliver certificates of all securities allotted/ transferred/
transmitted in the following cases and within the following mentioned time
limits:-
o In case of subscribers to memorandum – within a period of 2 months
from the date of incorporation.
o In case of allotment of any of its shares – within a period of 2 months
from allotment date.
o Receipt by the company of the instrument of transfer/ intimation of
transmission – within a period of 1 month from the date of receipt.
o Allotment of debenture – within a period of 6 months from the date of
allotment.

Penalties
For company – Minimum is Rs. 25,000 and maximum is Rs. 5,00,000 For an officer
In default – Minimum is Rs. 10,000; and maximum is Rs. 1,00,000

Procedure for Transmission of Shares under Companies Act, 2013

 TG Team
 | Company Law - Articles- Featured
 11 Sep 2014
 152,017 Views
 34 comments

CS Ankur Garg

In my previous article I shared the procedure for Transfer of Shares under

Companies Act, 2013. Now it is time to discuss Procedure for Transmission of
Shares under Companies Act, 2013. Through this write up we shall discuss the
meaning of Transmission of Shares and procedure to execute Transmission. The
word ‘transmission’ means transfer of title by operation of law. It may be by
succession or by testamentary transfer.
Transmission of shares
A transmission of interest in shares of a company, of a deceased member of the
company, made by the legal representative of a deceased member shall be
considered as transmission of shares by operation of law. This transmission will be
registered by a company in the Register of Members.
For statutory provisions related to Transmission of share one should refer the
following sources:
1. Section 56 of Companies Act, 2013
2. Provisions given in model articles of association given in Table ‘F’ of Schedule-
I
“Relevant” Text of Section 56 and Rule 11 are reproduced below for ready reference:
Transfer and transmission of securities
Section 56 (2) Nothing in sub-section (1) shall prejudice the power of the company
to register, on receipt of an intimation of transmission of any right to securities by
operation of law from any person to whom such right has been transmitted.
(3) Where an application is made by the transferor alone and relates to partly paid
shares, the transfer shall not be registered, unless the company gives the notice of
the application, in such manner as may be prescribed, to the transferee and the
transferee gives no objection to the transfer within two weeks from the receipt of
notice.
(4) Every company shall, unless prohibited by any provision of law or any order of
Court, Tribunal or other authority, deliver the certificates of all securities allotted,
transferred or transmitted—
(a) within a period of two months from the date of incorporation, in the case of
subscribers to the memorandum;
(b) within a period of two months from the date of allotment, in the case of any
allotment of any of its shares;
(c) within a period of one month from the date of receipt by the company of the
instrument of transfer under sub-section (1) or, as the case may be, of the intimation
of transmission under sub-section (2), in the case of a transfer or transmission of
securities;
(d) within a period of six months from the date of allotment in the case of any
allotment of debenture:
Provided that where the securities are dealt with in a depository, the company shall
intimate the details of allotment of securities to depository immediately on allotment
of such securities.
(5) The transfer of any security or other interest of a deceased person in a company
made by his legal representative shall, even if the legal representative is not a holder
thereof, be valid as if he had been the holder at the time of the execution of the
instrument of transfer.
(6) Where any default is made in complying with the provisions of sub-sections (1)
to (5), the company shall be punishable with fine which shall not be less than twenty-
five thousand rupees but which may extend to five lakh rupees and every officer of
the company who is in default shall be punishable with fine which shall not be less
than ten thousand rupees but which may extend to one lakh rupees.
Main Provisions related to Transmission of Share
1. Person eligible to apply for transmission:The survivors in case of joint holding
can get the shares transmitted in their names by production of the death certificate
of the deceased holder of shares. In other words in case of joint holding, the survivor
or survivors shall only be entitled for registration and the legal heir of the deceased
member shall have no right or claims.
2. Share transfer deed not required for Transmission: Execution of transfer deed
not required in case of transmission of shares. Intimation/application of
Transmission accompanied with relevant documents would be enough for valid
transmission request.
3. Documents required for Transmission of Shares:In case of transmission of
sharesby operation of law, it is not necessary to execute and submit transfer deed. A
simple application to the company by a legal representative along with the following
necessary evidences is sufficient:—
a. Certified copy of death certificate;
b. Succession certificate;
c. Probate;
d. Specimen signature of the successor.
4. Liability on shares shall continue: In the case of a transmission of shares, shares
continue to be subject to the original liabilities, and if there was any lien on the shares
for any sums due, the lien would subsist, notwithstanding the devaluation of the
shares.
5. Payment of consideration or stamp duty not required: Since the transmission
is by operation of law, payment of consideration or payment of stamp duty would
not be required on instruments for transmission.
6. Time limit for issue of share certificate on transmission (Section-56(4)): Every
company, unless prohibited by any provision of law or of any order of any Court,
Tribunal or other authority, shall, within One month deliver, the certificates of all
shares transmitted after the application for the registration of the transmission of any
such shares received.
7. Time Limit for Refusal of registration of Transmission:Provisions related to
Refusal of registration and appeal against refusal is given in Section 58 of
the Companies Act, 2013.Power of refusal to register transmission of shares is to
be exercised by the company within thirty (30) days from the date on which the
intimation of transmission is delivered to the company.
8. Time Limit for appeal against refusal to register Transmission by Private
Company:As per section 58(3), the person who gave intimation of the transmission
by operation of law,may appeal to the Tribunal against the refusal within a period of
thirty (30) days from the date of receipt of the notice from the Company or in case
no notice has been sent by the company, within a period of sixty (60) days from the
date on which the intimation of transmission was delivered to the company.
9. Time Limit for appeal against refusal to register Transmission by Public
Company: As per section 58(4), the person who gave intimation of the transmission
by operation of law may, within a period of sixty (60) days of such refusal or where
no intimation has been received from the company, within ninety (90) days of the
delivery of the intimation of transmission, appeal to the Tribunal against such
refusal.
10. Penalty for Non-compliance: Where any default is made in complying with the
provisions related to transmission of shares, the company shall be punishable with
fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/-
and every officer of the company who is in default shall be punishable with fine
which shall not be less than Rs. 10,000/- but which may extend to Rs. 1,00,000/-.
Extremely useful Information and knowledge about Transmission documents:
i. Meaning of Probate: If a member of a company dies and he leaves after him a
will or letter of administration then the survivors shall get a copy of ‘will’ certified
under the seal of a Court of competent jurisdiction. The certified copy of the will is
called a ‘probate’. Succession certificate is not required when probate or letter of
administration is issued.
ii. If a member of a company dies without leaving a will, then succession certificate
issued by a Court of competent jurisdiction shall be submitted to the company. Once
succession certificate is granted, it provides full indemnity to the company regarding
transmission of shares by operation of law.
iii. The survivors in case of joint holding can get the shares transmitted in their names
by production of the death certificate of the deceased holder of shares.
Basic Procedure for Transmission of Share
Generally articles contain the detailed provisions as regards the procedure for
transmission of shares. Usually following steps shall be followed in order to give
effect to the transmission of shares:—
1. The survivor in case of joint holding or legal heir, as the case may be, who want
transmission by operation of law in his/her favour, shall filea simple application with
the Company with relevant documents such as death certificate, succession
certificate, probate, etc., depending upon various circumstances may be considers
necessary for transmission by the Company.
2. The company records the particulars of the death certificate and a reference
number of recording entry is given to the shareholder so as to enable him to quote
such number in all future correspondence with the company.
3. The company review and verify the documents submitted with transmission
request. In case all the documents are in order, company shall approve the
transmission request and register the shares in the name of the survivor or legal heir
as the case may be.
4. However in case documents submitted with transmission request are not in order
and it is the case of refusal, company shall within thirty (30) days, from the date on
which the intimation of transmission is delivered to the company, communicate
refusal to the concerned person.
5. Dividend declared before the death of the shareholder will be payable to legal
representative but dividend declared after the death of a member can be paid to him
only after registration of his name and till that period it has to be kept in abeyance.
Meetings under Companies Act, 2013
What is a Meeting?
In common parlance, the word meeting means an act of coming face to face, coming
in company or coming together.

Company meeting – Essentials, Kinds

The Oxford Dictionary defines a meeting as

An assembly of number of people for entertainment, discussion or the like.

A meeting therefore, can be defined as a lawful association, or assembly of two or
more persons by previous notice for transacting some business. The meeting must
be validly summoned and convened. Such gatherings of the members of companies
are known as company meetings.
Essentials of Company Meetings
The essential requirements of a company meeting can be summed up as follows:

1. Two or More Persons: To constitute a valid meeting, there must be two or more
persons. However, the articles of association may provide for a larger number of
persons to constitute a valid quorum.
2. Lawful Assembly: The gathering must be for conducting a lawful business. An
unlawful assembly shall not be a meeting in the eye of law.
3. Previous Notice: Previous notice is a condition precedent for a valid meeting. A
meeting, which is purely accidental and not summoned after a due notice, is not at
all a valid meeting in the eye of law.
4. To Transact a Business: The purpose of the meeting is to transact a business. If
the meeting has no definite object or summoned without any predetermined object,
it is not a valid meeting. Some business should be transacted in the meeting but no
decision need be arrived in such meeting.
Kinds of Company Meetings
1. Statutory Meeting.
2. Annual General Meeting.
3. Extra Ordinary General Meeting.
Kinds of Company Meetings
The meetings of a company can be broadly classified into four kinds.

1. Meetings of the Shareholders.

2. Meetings of the Board of Directors and their Committees.
3. Meetings of the Debenture Holders.
4. Meetings of the Creditors.
1. Meeting of the Share Holders
The meetings of the shareholders can be further classified into four kinds namely,

1. Statutory Meeting,
2. Annual General Meeting,
3. Extraordinary General Meeting, and
4. Class Meeting.
 1. Statutory Meeting.
2. Annual General Meeting.
3. Extra Ordinary General Meeting.
A. Statutory Meeting :
Statutory meeting is the first meeting which company conducts afters its
commencement. Conduction of statutory meeting is compulsory. Public limited
company is required to hold such meeting within a period not less than one month
and not more than six months from the date of commencement.The directors of
company also need to make statutory report. Every members also must be given a
copy of report at least 21 days before the date of the meeting and a copy is also to
be sent to the Registrar for registration.
Section 165(3) provides that the Statutory Report must contain the following
particulars:
(i) The total number of fully paid-up and partly paid-up shares allotted;
(ii) The total amount of cash received ;
(iii) the receipts, classifying them and also the expenses incurred for
commission, also brokerage etc.
(iv) The names, addresses and also occupations of directors, auditors, managers and
secretaries and also changes of the names, address etc.
(v) Particulars of contracts with proposed modifications presented at meeting for
approval;
(vi) The arrears of calls;
(vii) Commissions and brokerages paid to directors and managers.
Every director or any other officer of the company who is in default shall be
punishable with a fine which may extend to Rs. 500.
B. Annual General Meeting (AGM)
Under Section 96 of the companies act, every company shall hold a general meeting
as annual general meeting every year. Except one person company. There should not
be a gap of more than fifteen months between two AGM.
Notice of AGM can be either in writing or also in electronic form. The member
should get the notice at least fore 21 clear days. . The notice should consist of place,
day, date and the proper hour of the meeting. It should also contain agenda of
meeting. Every member of the company, legal representative of deceased and
assignee of insolvent member, auditor and every director of the company should get
notice. Section 101 of the Companies act 2013, deals with the provision of Notice
for the AGM.
C. Extra ordinary meeting (EGM)
Every meeting which is not a AGM or statutory meeting meeting is EGM. An EGM
is held for some special business which can not be transacted at AGM. It is also held
to transact some urgent business. This meeting may be called by the Directors or by
the member’s according to Sec.169 of the Companies Act, 1956.

3. Extra-ordinary General Meetings (EOGM)

Statutory Meeting and Annual General Meetings are called the ordinary meetings of
a company. All other general meetings other than these two are called Extraordinary
General Meetings. As the very name suggests, these meetings are convened to deal
with all the extraordinary matters, which fall outside the usual business of the Annual
General Meetings.

EOGMs are generally called for transacting some urgent or special business, which
cannot be postponed till the next Annual General Meeting. Every business transacted
at these meetings is called Special Business.
Persons Authorized to Convene the Meeting
The following persons are authorized to convene an extraordinary general meeting.

1. The Board of Directors.

2. The Requisitionists.
3. The National Company Law Tribunal.
4. Any Director or any two Members.
4. Class Meetings
Class meetings are those meetings, which are held by the shareholders of a particular
class of shares e.g. preference shareholders or debenture holders.

Class meetings are generally conducted when it is proposed to alter, vary or affect
the rights of a particular class of shareholders. Thus, for effecting such changes it is
necessary that a separate meeting of the holders of those shares is to be held and the
matter is to be approved at the meeting by a special resolution.

For example, for cancelling the arrears of dividends on cumulative preference

shares, it is necessary to call for a meeting of such shareholders and pass a resolution
as required by Companies Act. In case of such a class meeting, the holders of other
class of shares have no right to attend and vote.

2. Meetings of the Directors

Meetings of directors are called Board Meetings. These are the most important as
well as the most frequently held meetings of the company. It is only at these meetings
that all important matters relating to the company and its policies are discussed and
decided upon.

Since the administration of the company lies in the hands of the Board, it should
meet frequently for the proper conduct of the business of the company. The
Companies Act therefore gives wide discretion to the directors to frame rules and
regulations regarding the holding and conduct of Board meetings.

The directors of most companies frame rules concerning how, where and when they
shall meet and how their meetings would be regulated. These rules are commonly
known as Standing Orders.

3. Meetings of Debenture Holders

The debenture holders of a particular class conduct these meeting. They are
generally conducted when the company wants to vary the terms of security or to
modify their rights or to vary the rate of interest payable etc. Rules and Regulations
regarding the holding of the meetings of the debenture holders are either entered in
the Trust Deed or endorsed on the Debenture Bond so that they are binding upon the
holders of debentures and upon the company.

4. Meetings of the Creditors

Strictly speaking, these are not meetings of a company. They are held when the
company proposes to make a scheme of arrangements with its creditors. Companies
like individuals may sometimes find it necessary to compromise or make some
arrangements with their creditors, In these circumstances, a meeting of the creditors
is necessary.