indian contract act- 1872- ii - thelegal.co.in notes/llb books main/contract...marupaka...

Marupaka Venkateshwarlu

M.A,B.Ed,L.L.BTheLegal.co.in

Indian Contract Act- 1872- II

1. Define the Contract of Indemnity. Distinguish between contract of Indemnity &contract of guarantee. And explain the rights of indemnity holder. Introduction: - A Contract of indemnity is a direct engagement between two parties whereby onepromises to save another from harm. According to section 124 of the Indian Contract Act a contract ofindemnity means,” a contract by which one party promises to save the other from loss caused to himby the conduct of the promisor himself or by the conduct of any other person.” This gave a very broad scope to the meaning of indemnity and it included promise ofindemnity due to loss caused by any cause whatsoever. Thus any type of insurance except lifeinsurance was a contract of indemnity however Section 124 of Indian Contract Act 1872 makes thelife insurance was a contract of indemnity. However the Contract Act -1872 makes the scope narrowerby defining the contract of indemnity.DEFINITION: - As provisions made in section 124 of the Indian Contract Act-1872 says that,“whenever one party promises to save the other from loss caused to him by the conduct of thepromisor himself or by the conduct of other by the conduct of the any other person is called aContract of Indemnity.”New India Assurance Company Ltd. Vs Kusumanchi Kameshwra Rao & Others, 1997, AContract of indemnity is a direct engagement between two parties thereby one promises to save theother harm. It does not deal with those classes of cases where the indemnity arises from loss causedby events or accidents which do not or may not depend on the conduct of indemnifier or any otherperson.ESSENTIAL ELEMENTS:- The following are the essentials of the Contract of Indemnity:-

1. There must be a loss.2. The loss must be caused either by he promisor or by any other person.3. Indemnifier is liable only for the loss.

Thus it is clear that this contract is contingent in nature and is enforceable only when the loss occurs. RIGHTS OF INDEMNITY HOLDERThe promisee in a contract of indemnity acting within the scope of his authority is entitled to recoverfrom the promisor so under Section 125 of the Act defines the rights of an indemnity holder which areas under :-

1. Right of recovering Damages: - All the damages that he is compelled to pay in a suit in respect of anymater to which the promise of indemnity applies.

2. Right of recovering Costs: - All the costs that he is compelled to pay in such suit if in bringing odefending it he did not contravene the orders of the promisor and has acted as it would have beenprudent for him to act in the absence of the contract of indemnity or if the promisor authorised him inbringing or defending the suit.

Marupaka Venkateshwarlu MA,B.Ed,LLB.

3. Right of recovering sums :- All the sums which he may have paid under the terms of a compromise inany such suite if the compromise was not contrary to the orders of the promisor and was one whichwould have been prudent for the promisee to make in the absence of the contract of indemnity.In another case of Mohit Kumar saha v/s New India Assurance Co.-1997 It was held that theindemnifier must pay the full amount of the value of the vehicle lost to theft as given by the Surveyor.Any settlement at the lesser value is arbitrary and unfair and violates art.14 of the constitution. DIFFERENCE BETWEEN INDEMNITY & GUARANTEE INDEMNITY1. In indemnity there are two, one who isindemnified and the other indemnifier.2. It consists of only one contract under whichindemnifier promises to pay in the event ofcertain loss.3. The contract of indemnity is made to protectthe promise against some likely loss.4. The liability of the indemnifier in a contract ofindemnity is a primary one.

GUARANTEEThere are three parties, Principal debtor, suretyand the Creditor.

There are three contracts between surety,principal debtor and creditor.

The object of contract of guarantee is the securityof the creditor.

In guarantee the liability of surety is only asecondary, when principal debtor default.

CONCLUSTION:- It has been noted above that section 124 recognises only such contract as contractof indemnity where there is a promise to save another person from loss which be caused by theconduct of the promisor himself or by conduct of any other person. It does not cover a promise tocompensate for loss not arising due to human agency. If under a contract of insurance an insurerpromises to pay compensation in the event of loss by fire. Such contracts are valid contracts as beingcontingent contracts under sec.31.

2. Discuss the nature, rights and liabilities of a surety.INTRODUCTION:- The surety who is entitled to be reimbursed by the principal debtor for theamount paid by him on his behalf. The liability of the surety is co-extensive with that of the principaldebtor unless it is otherwise provided by the contract under section 128.NATURE OF SURETY:- Section 128 surety liability is co-extensive with that of the principal debtorwhich means that on a default having been made by the principal debtor the creditor can recover fromsurety the all what he could have recovered from the principal debtor.Example:- The principal debtor makes a default in the payment of a debt of Rs.10,000.00, theCreditor may recover from the surety the sum of Rs.10000/- plus interest becoming due thereon aswell as the amount spent by him in recovering that amount.LIABILITY OF SURETY:- A bare perusal of section 128 of the Contract Act would make it clearthat the liability of a surety is co-extensive with that of he principal debtor. The word co-extensivedenotes that extent and can relate only to quantum of the principal debt. Refer a case of IndustrialFinancial Corporation of India v/s Kannur Spinning & Weaving Mills Ltd, 2002: However theliability of the surety does not cease merely because of discharge of the principal debtor from liability.

Bank of Bihar Ltd. v/s Damodar Prasad, 1969: The Supreme Court held that the liability ofthe surety is immediate and cannot be defended until the creditor has exhausted all his remediesagainst the principal debtor.Maharashtra Electricity Board Bombay v/s Official Liquidator andAnother, 1982: under a letter of guarantee the bank undertook to pay any amount not exceedingRs.50000/- to the Electricity Board. It was held that the Bank is bound to pay the amount due underthe letter of guarantee given by it to the Board.


RIGHTS OF SURETY:- The surety has certain rights against the principal debtor, the creditor andthe co-sureties. His right against each one of them are being discussed as under :-

1. Right of Subrogation: Under section 140 when a principal debtor makes a default in the performanceof his duty and on such default the surety makes the necessary payment or makes performance of allwhat he is liable. Firstly the surety can claim indemnity from the principal debtor secondly he is alsoentitled to the benefits of every security which the creditor has against the principal debtor. Caseof Mukesh Gupta v/s Sicorn Ltd. Mumbai, 2004.

2. Right of Indemnity against the principal debtor: Similarly as above when a principal debtor makes adefault the surety has to make the payment to the creditor. After making the payment he can recoverthe same from him under section 145 of the act.

3. Right against Creditor to take back the securities deposited by the Principal debtor:- Aftermaking the dues the surety has all the rights which are available to the creditor against the principaldebtor under section 141 of the act. He is entitled to the benefit of every security which the creditorhas against the principal debtor.

4. Surety has no right to goods in hypothecation:- In case there is hypothecation of the goods the goodsremain in the possession of the borrower the surety cannot invoke the provision of section 141 in suchcase. Refer a case of Bank of India v/s Yogeshwar Kant Wahhera, 1987.CONCLUSION:- Keeping in view the above facts it is revealed that the surety’s nature, liabilitiesand rights are of such types once he stands surety for any debt he will remain bound till the amount isrepaid by the principal debtor. Although the surety has some rights such as right of subrogation,indemnity and to taking back the securities but even though there are more complications in thisregard. So one should stand surety for a person who have some qualities of good pay master.

3 The liability of the surety is co-extensive with that of Principal debtor.INTRODUCTION:- Surety’s Liability : The liability of the surety is co-extensive with that of theprincipal debtor, unless it otherwise provided by the contract for example A guarantees to B for thepayment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable not only forthe amount of the bill but also for any interest and charges which may have become due on it.DEFINITION OF CO-EXTENSIVE:- Section 128 of the Indian contract Act provides thefollowing definition in respect of the surety liability:- “It says that the liability of the surety is co-extensive with that of the principal debtorunless it otherwise provided by the Contract.” A case of law in this regard is of Andhra Bank Soryapeet v/s Anantnath Goel-1991: It was held bythe court that where there were joint promisors and consideration was paid by only one of them theother piomisors were equally liable to pay amount. The liability of son was co-extensive with hisfather who was principal debtor in view of section 127 and 128 of the Indian contract Act.


The gist of some the leading cases in which the liability of the surety is co-extensive are givenbelow to strengthening the answer of the question:-

Kellappan Nambiar v/s Kanhi Raman-1957: In this case that if the principal debtor happens to be aminor and the agreement made by him is void, the surety too cannot be made liable in respect of thesame because the liability of the surety is co-extensive with that of principal debtor. It has been heldthat the guarantee of the loan or an overdraft to an infant is void because the loan to the infant itself isvoid.

That in case of State Bank of India v/s V.N. Anantha Krishnam-2005: that in view of the provisionof section 128 of Act the Presiding officer was not correct in giving directions to the Bank to proceedagainst the property because cash credit facility and the liability of surety was co-extensive with thatof principal debtor.

In a case of Bank of Bihar Ltd. v/s Dr.Damodar Prasad -1969: The Supreme Court held that theliability of the surety is immediate and cannot be defended until the creditor has exhausted all hisremedies against the principal debtor.

A case of Industrial Financial Corporation of India v/s Kannur Spining & Weaving Mills Ltd .-2002: It was held that the liability of surety does not cease merely because of discharge of theprincipal debtor from liability.

In a case of Harigobind Aggarwal v/s State Bank Of India-1956: It was held that the principaldebtor liability is reduced e.g. after the creditor has recovered a part of the sum due from him out ofhis property the liability of the surety is also reduced accordingly. CONCLUSION:- On deeply going into depth of provisions laid down in the Act it is revealed thatsurety liability is co-extensive with that of principal debtor means that his liability is exactly the sameas that of the principal debtor. Suppose if the default having made by the principal debtor the creditorcan recover the same from the surety all what he could have recovered from the principal debtor.

4. What do you understand by contract of guarantee? How does it differ from contract ofIndemnity?


INTRODUCTION: - The contract of guarantee may be an ordinary or some different type ofguarantee which is different from an ordinary guarantee. Guarantee may be either oral or written.Basically it means that a contract to perform the promise or discharge the liability of third person incase of his default and such type of contracts are formed mainly to facilitate borrowing and lendingmoney which based on the following facts :-

i) Surety is the person by the whom the guarantee is given.ii) Principal debtor is the person from whom the assurance is given.iii) Creditor is the person to whom the guarantee is given.

DEFINITION: - “A contract of guarantee is a contract to perform the promise or to discharge theliabilities of a third person in case of his default. The person who gives the guarantee is called surety,the person in respect of whose default the guarantee is given is called Principal Debtor and the personto whom the guarantee is given is called creditor. A guarantee may be either oral or written.”ILLUSTRATION: - A promises to a shopkeeper C that A will pay for the items being bought by B ifB does not pay this is a contract of guarantee. In case if B fails to pay C can sue A to recover thebalance the same was held in the case of Birkmyr v/s Darnell-1704, the court held that when twopersons come to shop one person buys and to give him credit the other person promises, “ if he doesnot pay, I will”, this type of a collateral undertaking o be liable for the default of another is called acontract of guarantee.ESSENTIALS: - The following are the essential elements of Guarantee:-

1. Existence of Creditor, Surety, and Principal debtor: - The economic function of a guarantee is toenable a credit-less person to get a loan or employment or something else. Thus there must exist aprincipal debtor for a recoverable debt for which the surety is liable in case of the default of theprincipal debtor. In the case of Swan v/s Bank of Scotland -1836, It was held that a contract ofguarantee is a triplicate agreement between the creditor, the principal debtor and the surety.

2. Distinct Promise of Surety: - There must be distinct promise by the surety to be answerable for theliability of the Principal debtor.

3. Liability must be legally enforceable: - Only if the liability of the principal debtor is legallyenforceable, the surety can be made liable. For example a surety cannot be made liable for a debtbarred by Statute of Limitation.

4. Consideration: - As with any valid contract the contract of guarantee also must have a consideration. The consideration in such contract is nothing but anything done or the promise to do something forthe benefit of the principal debtor. The section 127 of the Act clarify as under :-“Anything done or any promise made for the benefit of principal debtor is sufficientconsideration to the surety for giving the guarantee.”Illustrations: - 1. A agrees to sell to B certain goods if C guarantees for payment of the price of thegoods. C promises to guarantee the payment in consideration of A’s promise to deliver goods to B. This is sufficient consideration for C’s promise.2. A sells and delivers goods to B. C afterwards requests A to forbear to sue B for an year and promiseif A does so he will guarantee the payment if B not pay. A forbears to sue B for one year. This issufficient consideration for C’s guarantee.5. It should be without misrepresentation or concealment: - Section 142 of the Act specifies that aguarantee obtained by misrepresenting facts that are material to the agreement is invalid, and section143 specifies that a guarantee obtained by concealing a material fact is invalid as well.Illustration :- 1. A appoints B for collecting bills to account for some of the bills. A asks B to get aguarantor for further employment. C guarantees B’s conduct but C is not made aware of B previousmis-accounting by A. B afterwards defaults. C cannot be held liable.Illustration: 2- A promise to sell Iron to B if C guarantees payment. C guarantees payment however,C is not made aware of the fact that A and B had contracted that B will pay Rs.5/- higher that themarket price. B defaults. C cannot be held liableA case of London General Omnibus V/s Holloway- 1912: A person was invited guarantee anemployee, who was previously dismissed for dishonesty by some employer. This fact was not told tothe surety. Later on the employee embezzled funds but the surety was not held liable. CONCLUSION


It is noted from the above mentioned facts that the contract of guarantee is a triplicate agreementbetween Creditor, Surety and the Principal debtor. A person who stands for surety known as guarantorfor a third person (principal debtor) who in case of his default to fulfil his promise or to discharge theliabilities. The surety or guarantor has to make a distinct promise for payment of the liabilities of thePrincipal debtor which must be legally enforced.

5. What is continuing Guarantee? Under what circumstances it can be revoked?INTRODUCTION: - A guarantee which extends to a series of transactions is called continuingguarantee. A guarantee may be an ordinary guarantee or a continuing guarantee is almost differentfrom an ordinary guarantee.EXAMPLE:- A in consideration that B will employ C in collecting of Rent of B’s Zamidari. Bpromises that he is responsible to the amount of Rs.5000/- for due collection and payment by C ofthose rents. This is a continuing guarantee.2. A guarantees payment to B, a tea-dealer, for any tea that C may buy from him from time to timeamount of Rs.100/-. Afterwards, B supplies C tea for the amount of Rs.200/- and C fails to pay. A’sguarantee is a continuing guarantee and so A is liable for Rs.100/-. It is clearly noted from the above examples that continuing guarantee is given to allow multipletransactions without having to create a new guarantee for each transaction.DEFINITION:- Section 129 of the Contact Act, continuing guarantee means a guarantee whichextends to a series of transactions without creating a new guarantee for another transaction is calledcontinuing guarantee.Illustration:- A guarantees payment to B for 5 sacks of rice to be delivered by B to C over the periodof one month. B delivers sacks to C and C pays for it. Later on B delivers 4 more sacks but C fails topay. A’s guarantee is not a continuing guarantee and so he is not liable to pay for the 4 sacks.REVOCATION OF CONTINUING GUARANTEE:- Section 130 of the Act a continuingguarantee can be revoked at any time by the surety by a notice to the creditor. Once the guarantee isrevoked the surety is not liable for any future transaction however he is liable for all the transactionsthat happened before the notice of revocation is given.

1. A promises to pay B for all groceries bought by C for a period of 12 months if he fails to pay. In thenext three months C buys 2000/- worth of groceries. After 3 months, A revokes the guarantee bygiving a notice to B. C further purchases 1000 Rs of groceries. C fails to pay. A is not liable for1000/- rupees of purchase that was made after the notice but he is liable for 2000/- of purchase madebefore the notice

2. Lloyd’s v/s Harper-1880: It was held that employment of a servant is one transaction. The guaranteefor a servant is thus not a continuing guarantee and cannot be revoked as long as the servant is thesame employment. Wingfield v/s De St Cron-1919: it was held that a person who guaranteed the rentpayment for his servant but revoked it after the servant left his employment was not liable for therents after revocation.

3. A guarantees to B to the amount of Rs.10,000/- that C shall pay for the bills that B may draw uponhim. B draws upon C and C accepts the bills. Now A revokes the guarantee. C fails to pay the billupon its maturity. A is liable for the amount upto Rs. 10,000.00.

4. As per provisions laid down in Section 131 of the Act that the death of the surety acts as a revocationof continuing guarantee with regards to future transactions if there is no contract to the contrary. It is pertinent to mention here that there must not be any contract that keeps theguarantee alive even after the death. In the case ofDurga Priya v/s Durga Pada -1928 : It was heldby the court that in each case the contract of guarantee between the parties must be looked into todetermine whether the contract has been revoked due to the death of the surety or not. It there is aprovision that says that death does not cause the revocation then the contract of guarantee must beheld to continue even after the death of the surety.Conclusion:- A guarantee which extends to a series of transactions is called continuing guarantee. Aguarantee may be an ordinary guarantee or a continuing guarantee is almost different from an ordinaryguarantee. In Contract of guarantee between the parties must be looked into to determine whether the


contract has been revoked due to the death of the surety or not. It there is a provision that says thatdeath does not cause the revocation then the contract of guarantee must be held to continue even afterthe death of the surety.

UNIT-II6 EXPLAIN THE STANDARD OF CARE REQUIRED OF A BAILEE IN RESPECT OFGOODS BAILED TO HIM.INTROUCTION: - The standard of care is required is that of a reasonable man. The amount of careto be taken should be such as a man of ordinary prudence would under similar circumstances take ofhis own goods of the same bulk quantity and value as the goods bailed.DEFINITION OF STANDARD OF CARE:- While going through the contents of the provisionslaid down in Section 151 of the Contract Act it is noticed that “in all cases of bailment the bailee isbound to take as much as care of the goods bailed to him as a man of ordinary prudence would undersimilar circumstances take of his own goods of the same bulk and quality and value and value as thegoods bailed.” On perusal of the definition it is revealed uniform duty of maintaining the standard of carein respect of the goods bailed to him. However the following steps may also be taken to maintain thestandard of care:-

1. The Bialee should act as a prudent man: When the goods are bailed to him then he should take suchstandard way of care as a man of ordinary prudence would like to take of his own goods. If the baileehas not acted like an ordinary prudent man he cannot be excused. A case of Union Bank of India v/sUdho Ram & sons-1963: It was held railway did not take proper care and failed to keep an eye onwagons which resulted theft.

2. In Calcutta Credit Corportation Ltd. v/s Prince Peter of Greece-1964: A car was received forrepairs by a garage which was damaged by fire. The car was parked in a garage which was apartitioned by wooden walls, it also stored the paint and thinners. When the fire open the car where itwas kept could not opened for fifteen minutes when the fire was notice. It was held that the baileehad not taken a standard of care and he is liable.

3. Barbant & Comp. v/s King, 1895: The House of Lords held that the only cases where the baileewould be immune are laid down expressly in section 152 of the contract act, If he has taken theamount of standard of care of it as described in section 151 of act that the degree of care needed mustbe maintained. 4. Laxmi Narayan v/s The Secretary for State for India:1923: that when a carrier ofgoods transports jute in a boat which has leaks on its side and the goods get damaged as a resultsof un attended and unsafe place and lack of standard of care.CONCLUSION:- The facts and factors mentioned above it is observed that the degree of care neededvaries with the kind of engagement and therefore when a person undertakes such a job the law notonly requires that he should possess the requisite skill but also that he has the requisite plants and


appliances and well acquitted about maintaining the standard of care. and also that his premises arealso reasonable suitable for doing that job.7. What can be pledged and who can make a valid pledge? Differentiate Pledge and Lien.INTRODUCTION: - Section 172 says pledge is a bailment the delivery of the goods from thepawnor to the pawnee which is essential. There must be delivery of the goods i.e. the transfer ofpossession from one person to another. The delivery however, be either actual or constructive. Mereagreement to transfer of possession in future is not enough to constitute a Pledge. Revenue Athority v/s Sunderasanam Pictures, 1968: It was held that an agreement wherein theproducer of a film agrees to deliver final prints of the film under production when the same are readyto a financier distributor in return for the finance provided by the latter is not pledge because there isno deliver of goods.WHAT CAN BE PLEDGED:- Pledge is a kind of bailment where the goods are delivered by oneperson to another as security for payment or performance of a promise. If the goods are in thepossession of a third person there is deemed to be no delivery of the goods unless and until the thirdperson acknowledges to the transferee that he holds the goods. The following things can be pledged:-

i) Only the moveable goods can be pledged.ii) The goods which are in possession of the True Owner should have a clear title and valid documents.

WHO CAN MAKE A VALID PLEDGE:- Ordinarily he should be the owner of the goods, or anyperson authorised by him in that behalf who can pledge the goods. If a servant has the custody of thegoods or a tenant gets the possession of a furnished house, the servant cannot pledge the goods norcan a tenant pledge the furnishing materials in his possession.

A person obtaining the goods fraudulently does not have any right to pledge them asdescribed in a case of Purshotam Das v/s Union of India-1967. In the following exceptional cases aperson who is neither the owner nor having any authority from the owner for pledging the goods, buthaving possession with the owner’s consent can make a pledge and confer rights on the pledgee.These are as under:-

1. Pledge by Mercantile Agent: Section 178 of the Act a mercantile Agent having the possession ofthe goods with the consent of the owner but having no authority to pledge them can make a pledgeprovided the pledgee or pawnee is acting in good faith. He must pledge the goods while acting inthe ordinary course of his business of a mercantile agent.

2. PLEDGE BY PERSON IN POSSESSION UNDER A VOIDABLE CONTRACT: The Actrecognises another exception to the rule that either the owner or his duly authorised agent can pledgethe goods. According to this a person who has obtained the possession of the goods under a voidablecontract. Voidable contract is a valid contract until it has been rescinded and becomes void afterthe same has been rescinded. If the pawnor has obtained the possession of the goods under avoidable contract but the contract has not yet been rescinded, the pledgee is capable of having a goodtitle to such goods. Thus if a person has obtained the possession of goods by fraud, misrepresentation,coercion or undue influence, he could make a valid pledge of the goods if the same is done before thecontract has been rescinded. A case of Phillips v/s Brooks Ltd., 1919: It was in this case that pledgewas valid.

3. Pledge by a person with a limited interest: - This Provision have been given in the section 179 of theact that a person having limited interest in the goods may make a valid pledge. For example : Apledges the goods to B for Rs.5000/- and B makes a sub pledge of those goods for Rs.8000/- A gets aright to take back those goods only by paying Rs.5000/-as held in case of Belgawn Poiner UrbanCo-op Credit Bank v/s Satyaparmoda-1962. Difference between Pledge & Lien

Pledge Lien

Pledge is a kind of bailment andsecurity.

In right of lien it is not so as in Pledge.


In a pledge pawne acquires a specialinterest in the property pledged.

Right to lien gives only a right to detain the subject matter of the lien until payment. Lien is not transferable to a third person.

Pledge is deliver of goods to thecreditor as security for the debt.

Lien is a right of a creditor to retain the goods until his debt is paid or satisfied

CONCLUSION:- In Pledge which a kind of bailment and also to be considered as security for thedebt of the creditor. It is also essential in the Pledge that there must be delivery of the moveable goodsfrom pawnor to pawnee and transfer of possession from one fellow to another. A person who is havingthe possession of goods and consent of the true owner and acting in good faith can make a validpledge.

8. What is bailment? Explain its essential ingredients of Bailment? What are the duties & rightsof Finder of the goods as a Bailee?INTRODUCTION:-Means delivery of goods i.e. moveable property by one person who is generallythe owner thereof, to another person for some purpose. The goods are to be returned to the owner afteraccomplished the purpose to take further action as per directions of the owner of the goods.A.T.TrustLtd., v/s Trippunhura Devaswomi-1954. In a contract of bailment the person who delivers the goodscalled the “Bailor” and to whom the goods are delivered is called as “Bailee”.DEFINITION:- Section 148 of the Indian Contract Act, A bailment is the delivery of goods by oneperson to another for upon a contract that they shall when purpose is accomplished be returned orotherwise disposed of according to the directions of the person delivering them. The person deliveringthe goods is known as BAILOR and the person to whom goods are delivered is known as theBAILEE.ESSENTIAL INGREDIENTS OF BAILMENT:- The following are the essentials of the bailmentunder the Contract Act:-(a) DELEVERY OF GOODS FOR SOME PURPOSE:- Delivery means transfer of the goods fromthe possession of one person to another person. Delivery need not always be actual, sometimes it maybe constructive or symbolic as per instructions laid down in section 149 of the Act, and this sectionrecognises it other than actual delivery. However section 149 also provides below in this regard:-The delivery to the bailee may be made by doing anything which has the effect of putting the goods inthe possession of the intended bailee or any other person authorized to hold them on hisbehalf.” i) Jagdish chand Trikha v/s Punjab National Bank, 1998 : It was held by the court that the position ofthe bank was that of a Bailee and it failed in its duty to take care of the goods and return them to theBailor. The Bank was held liable to pay the cost of Rs. 3,72,400/- along-with simple interest @12%from the date of institution of the suit.ii) Ultzen v/s Ni coles, 1894:- It was held that the defendant was the bailee of the coat as his servanthad assumed the possession of the same and he was therefore liable for its loss which was occurreddue to his negligence.(b) IF THE OWNER MAINTAINS CONTROL OVER THE GOODS THERE IS NOBAILMENT: When the person keeps his goods in the premises of others but himself continues to


have the control over them, this is not sufficient delivery for being considered to bebailment. Kaliaporumal Pillai v/s Visalakshmi, 1938 : It was held that there was no bailment as shehad not handed over the possession of the jewels to the goldsmith, and therefore the goldsmith couldnot be made liable for the loss. Punjab National Bank v/s Sohan Lal, 1962, It was held that thelocker could be operated even without the key with the consumer. The consumer’s control over thevaluable things in the locker had gone and the same with the bank, therefore the bank was liable beingbailee and thus Bank is liable for the loss of the belonging of the consumer in the locker.(c) THERE CAN BE BAILMENT WITHOUT CONTRACT:- In some cases there can be abailment when the person obtains the possession without a contract of the bailment as it was done inthe case of :Ram Gulam v/s Govt. Of Uttar Pradesh- 1950, The court expressed that the property ofplaintiff was stolen and the same was recovered by the Police, Police kept the same in the Malkhana.Property was again stolen from the Maalkhana and could not be traced out. Here the point ofbailment raised since no contract of bailment was made for which conviction is announced but the lawitself recognises the finder of the goods as bailee under section 71 of contract Act, hence it was heldthat bailment can be even there when there is no contract of bailment. L.M. Co-operative Bank v/sPrabhudass HathiBhai-1966:- It was held that the government stood in the position of a Bailee totake due care of the goods. Govt., duty to prove that they had taken proper care as was possible forthem and the damage was due to reasons beyond their control.RETURN OF GOODS AFTER THE PURPOSE IS ACHIEVED: ORTHEIR DISPOSAL ACCORDING TO THE BAILOR DIRECTIONS:- The delivery of thegoods in a bailment is only for some purpose i.e. for safe custody, for carriage, for repair etc., whenthe purpose is accomplished the goods are to be returned or otherwise disposed of according to thedirections of the person delivering them. According to Section 148, the goods shall be when purposeis achieved returned to the bailor or disposed of as per his directions i.e. when the cloth is given forbeing stitched in to suit or gold for being converted into ornaments or wheat for being converted intoflour there is a bailment in each case. When the money is deposited into a Bank, when the agentreceives some payment on behalf of Principal, he is not the bailee thereof because he is only bound topay an equivalent of it to the principal rather than the same currency as done in the case of:- Secretary of State for India Council v/s Sheo Singh-1880: Some notes were given to Treasury forbeing cancelled, there is no bailment as the same notes are not to be returned. Constructive bailmentdoes not confer any right to a stranger. Bailment regarding hiring of a locker will not createrelationship of Land lord and the tannent, as the Bank can always open the locker with a Master Key. The hirer of the locker is not in a position to open the locker without the assistance of the Bank. TheHirer has to operate the locker only within the Bank’s time but the bank has no such limitationCONCLUSION:- Keeping in view the above stated facts and the gist of the decisions of the Courts itis noticed that the goods are to be returned to their original owner after the purpose is accomplished orthey are to be disposed of as per the directions of the Bailor in same condition as these were bailed.

POSITION OF FINDER OF GOODSA person who finds goods belonging to another and takes them into his custody is subject to the sameresponsibility as a bailee as provided in sec.71. Since the position of the finder of goods is that of abailee. He is supposed to take the same amount of care with regard to the goods as is expected of abailee under section 151. He is also subject to all duties of a bailee including a duty to return thegoods after the true owner is found.Section 168 and 169 confer certain rights on the finder of goods which are as under:

1. May sue for specific reward offered: The finder of goods has no right to sue the owner forcompensation or trouble and expenses voluntarily incurred by him to preserve the goods, but he mayretain the goods until he receives such compensation and a specific reward offered by the owner forreturn of the goods. Refer sec. 168 of the Act.

2. If true owner is diligence not found or he refuses to pay the lawful charges of the finder of the goods,the finder may sell it on the following conditions:-

i) When the thing is in danger of perishing or losing part of its value.ii) When the lawful charges of the finder, in respect of the found goods amount to two-third of its value.


iii) Right of Lien: He can retain the Lien on the found goods until his expenses on find goods are paid.iv) Right to sell the goods found:- Finder of the goods has the right to sell the goods found by him under

certain circumstances provided in section 169 of the act with a reasonable notice mentioning theintention to sale the goods found.

9. Define Pledge and distinguish between Pledge and Bailment.INTRODUCTION:-- Section 172 of the Act: Since pledge is a bailment the delivery of the goodsfrom the pawnor to the pawnee which is essential. There must be delivery of the goods i.e. the transferof possession from one person to another. The delivery however, be either actual or constructive. Mere agreement to transfer of possession in future is not enough to constitute a Pledge. Revenue Athority v/s Sunderasanam Pictures-1968: It was held that an agreement wherein theproducer of a film agrees to deliver final prints of the film under production when the same are readyto a financier distributor in return for the finance provided by the latter is not pledge because there isno deliver of goods.DEFINITION OF PLEDGE:- Section 172 of the Contract Act, “Pledge is the bailment of goods assecurity for the payment of a debt or for the performance of a promise.” The delivery may be actualor constructive. The possession in a pledge must be judicial possession. Mere physical possession innot sufficient.DEFINITION OF BAILMENT:- The delivery of the goods by the bailor to the bailee is the essenceof the bailment. Unless there is actual delivery there is no contract of bailment.Section 148 of the contract act defines bailment as under:- “ A bailment is a delivery of goods by oneperson to another for some purpose upon a contract that they shall when the purpose is accomplishedbe returned or otherwise disposed of according to the directions of the person delivering them.” DIFFERENCE BETWEEN PLEDGE & BAILMENT PLEDGEPledge is a species of bailment.

Pledge is bailment of goods as security forthe payment of debt or for the performanceof a promise.

Moveable property is subject-matter ofpledge under the contract Act.

BAILMENTBailment is a genus.

Bailment is a delivery of goods by one person toanother for some purpose upon a contract.

In the contract of bailment after theaccomplishing of the purpose the goods are to bereturned or otherwise disposed of according tothe directions of the Bailor.

CONCLUSION:- In Pledge which a kind of bailment and also to be considered as security for thedebt of the creditor. It is also essential in the Pledge that there must be delivery of the moveablegoods. Whereas in the contract of bailment there is a delivery of goods by one person to another forsome purpose and when the purpose is accomplished the goods are to be returned or to disposed of asper the directions of the Bailor.


10. Explain the Rights and the Duties of BAILEE.INTRODUCTION: - Bailee is one of the most important character of the Bailment Contract. Baileeis of that to whom the goods are delivered by the Bailor with some directions and to complete somecertain purpose. Bailee receives only the moveable things and he has to returned the goods which hereceives after accomplishing the purpose or he has to disposed of that things with the directions of theowner of that goods.RIGHTS OF BAILEE:- Under the provisions of Indian Contract Act 1872, the following are therights to the bailee in Bailment contract:-

1. RIGHT TO RECOVER NECESSARY EXPENSES INCURRED ON BAILMENT:- Accordingto section 158 of the Act when a contract of bailment is made some remuneration is to be paid to thebailee for the services he renders in respect of them. So he has the right to recover the same. In caseof gratuitous of bailment the bailee has no right even not entitled to receive any remuneration for theservices he renders. Section 158 says that, “Where by the conditions of the bailment the goods are to be kept or to becarried or the work to be done upon them, the bailee for the bailor and the bailee is to receive noremuneration the bailor shall pay the necessary expenses incurred by the bailee for the purpose ofbailment.”Illustration: - A leaves his horse with the neighbour for safe custody for a week. B is entitled torecover the expenses incurred by him in feeding the horse.

2. RIGHT TO RECOVER THE COMPENSATION:- According to section 164 of the act, “TheBailor is responsible to the Bailee for any loss which the bailee may sustain by reason that the bailorwas not entitled to make the bailment or to receive back the goods or to give directions in respect ofthem.” From the definition it is noticed that when the Bailor sometime not entitled to make thebailment or to receive back the goods which may results a loss to the bailee, then the bailee is entitledto recover the loss from the Bailor.

3. RIGHT OF LIEN ON THE GOODS BAILED:- According to section 170-171 of the Act the baileecan retain the lien on the goods of the Bailor and can refuse to deliver them back to Bailor until hisdue remuneration for services he renders or any amount due is paid by the Bailor.

4. Compensation for the loss caused by non-disclosure of faults in goods Bailed:- The goods so bailedcontain a fault which is known to the bailor but he does not convey it to the bailee and as a resultthereof bailee sustains some injury. The bailee can ask for the compensation.

5. Loss caused by the defects of thing bailed:- When the things bailed for hire or on rent the bailee canask for compensations for the loss or injury caused by both latent or patent defects of the thing bailedirrespective of awareness of bailor about those defects as provided in sec.150 of the Act.

6. Right to sue: The bailee has the right to sue the wrong-doer who wrongfully deprives the bailee of theuse or possession of the goods bailed or does them any injury on the basis of instructions in Sec.180of the Act.DUTIES OF THE BAILEE:- A bailee has to observe the following duties:-

1. Duty to take reasonable care of the goods bailed: under section 151-152 of the act bailee is bound totake reasonable care of goods bailed to him as man of ordinary prudent under similar circumstances ashe is taking care of his own goods.

2. Duties not make unauthorised use of the goods bailed: Section 153-154 of the act bailee is notauthorised to make unauthorised use of the goods bailed to him.

3. Duty not to mix bailor’s goods with his own goods: Act says through its section155 and 157 thatbailee may not mix the bailed goods with his own goods which will create a problem at the time ofreturn of the goods to bailor.

4. Duty to return the goods on fulfilment of the purpose: Section 159-161and 165-167 provides thatwhen the purpose is accomplished the bailee has to return the goods to bailor or to disposed of as perhis directions.

5. Duty to deliver to the bailor increase or profit on the goods bailed:- Under secion 163 of the Act itis the duty of the bailee to pay to bailor the profits earned through the goods bailed or any increasethereby.


CONCLUSION:- If the bailee performed his duties with entire of his dedications, honesty and ingood-faith and also to enjoy his rights on the basis of the provisions laid down in the Contact Act thenthere will be no creation of any problem and the agreement will also be fulfilled.

UNIT- III 11. Explain various ways in which an agency relationship is created. Also describe about thedifferent kinds of Agent?INTRODUCTION:- An agent is a person employed to do any act for another or to represent anotherin dealing with third parties. The person for whom such act is done or who is so represented is calledthe principal. Where one person mere gives advice to another in matter of business agency does notarise because of such advice only does not create an Agency. Sayed Abdul Khader v/s RamiReddy,1979. The following are the various ways in which a relationship of agency is created:-WHO MAY EMPLOY AGENT:- No person can employ an agent if he does not possess capacity tocontract. So a minor or person of unsound mind cannot become the principal under section 183 of theIndian Contract Act.WHO MAY BE AN AGENT:- According to section 184 of the Act any person can be appointed asan agent but a person who is not of age of majority and of sound mind cannot be made personallyliable for the act done on behalf of the principal. Minor can create contractual relation but a minoragent cannot be made personally liable to the principal for the misconduct like an adult agent.CONSIDERATION: No consideration is required for the creation of an Agency under section 185 ofthe Act. A case of Digvijay Cement Co.Ltd. v/s State Trading Corpn., 2006.KINDS OF AGENT:- On the basis of provisions available in the Contract Act the following are kindsof Agent in the business of Agency:-

1. Del-Credere Agent:- Such type of Agent who for extra remuneration undertakes the liability ofguarantee the due performance of the contract by the other party. He is also responsible for thesolvency and performance of their contracts by the other parties.

2. COMMISSION AGENT:- A commission agent is person who purchases and sells goods in the marketon behalf of his employer on the best possible terms and who gets commission for his labor.

3. FACTOR:- He is such type of agent who is given the possession of the goods for the purpose ofselling them. He is entitled to sell the goods in his own name. A factor has a right to retain the goodsfor a general balance of accounts.

4. BROKER:- He is also to be known in the name of Mercantile Agent employed for the purpose of saleand sale of goods. The main duty of a broker is to establish privity between two parties for atransaction and he gets commission for his labour. He is not entrusted with the possession of thegoods. He merely brings two parties together and if the deal is materialized he becomes entitled to thecommission.

5. CO-AGENT:- Where several persons are expressly authorized with no stipulation that anyone or moreof them shall be authorized to act in name of the whole body. They have a joint authority and they arecalled co-Agents.

6. Sub-Agent:- The sub-agents are usually appointed by the original Agent in the business of Agency. Heworks under the control of original Agent.

7. PACCA- AARTIA:- He is also known by this name only and he works in the open market to sell thegoods on commission basis. He only sells the goods.CONCLUSION:- As regards to determine whether relationship is that of Agent and Principal or thatof Master and servant. Agent has to remain faithful to his principal and has work in good faith in thebusiness of Agency. There must be relation in between principal and the agent. Merely giving adviceto another person in the matter of business does not arise any business of agency. The main object ofthe agency business that the agent makes the principal answerable to third person.


12. What are the circumstances in which Agency is terminated?INTRODUCTION:- Contract entered into through an Agent and obligations arising from the actsdone by an agent be enforced in the same manner and will have the same legal consequences as if thecontract has been entered into and the acts done the principal in person as described in section 226 ofthe Act. Where a Agent does not work in good faith and is not loyal to his principal and tries tocommit fraud or misrepresent in the business of Agency then principal is bound to take steps towardstermination of the agency.

The following may the reasons which can be responsible for the termination of the Agency:-1. By the principal revoking his authority: Under section 203 of Contract Act-1872 lays down that, the

principal may save or otherwise revoke the authority given to his agent at any time before the authority has been exercised so to bind the principal.

2. By the Agent renouncing the business of the Agency:- Section 206 of Indian Contract Act, 1872provides that, principal can revoke the agent’s authority so also the agent can renounce the agency bygiving a reasonable notice of renunciation otherwise he will be liable to make the loss good for anydamage. Sec. 207 further mentions that like revocation the renunciation may also be express orimplied in the conduct of agent.

3. By the business of the agency being completed:- In term of contract where the period of completionof the business is made the agency automatically stands terminated.

4. By either the principal being adjudicated an insolvent: Section 201 of the Act clearly indicatesthat, the agency which may be validy created stands revoked in the event of different situationsincluding the death or insanity of the principal or the agent or by insolvency of the principal.

5. Principal should give reasonable notice of revocation:- Provisions says that a reasonable notice ofthe revocation when he have the justification to revoke the authority under sec.206.

6. By either the principal or Agent dying or becoming unsound mind: Section 201 also describes that,when principal dying or becoming of unsound mind agent is bound o take on behalf of therepresentatives of his late principal all reasonable steps for the protection of interests of agency.

7. By the happening of any event rendering the agency unlawful: - Whenever there is declaration ofwar the principal and agent may become alien enemies also comes in the way of termination of theagency.

8. If a limited period is given:- If the agency is for a fixed term, although with the possibility of freshappointment after the expiry of the term it automatically terminates on expiry of the said term suchagency cannot be said to be irrevocable as in the case of P. sukhdev v/s Commissioner ofEndowments-1997. Under sec.205.

9. MANNER AND CIRCUMSTANCES OF REVOCATION:- The principal may have where theagent has himself an interest in the property which forms the subject matter of the agency, revoke theauthority given to his agent at any time before the authority has been exercised so as to bind theprincipal under section 203 of the Act. The Principal cannot revoke the authority given to his agent after the agent has partly exercised hisauthority so far as regards such acts and obligations as arise from acts already done in the Agency aslaid down in the section 204 of the Act.The reasonable notice of revocation is essential. Revocation may be express or implied in the Contractof the business under section 206 of the act.The revocation and renunciation may be expressed or may be implied in the conduct of the principal or agent respectively under section 207 of the act.ILLUSTRATION: - A empowers B to let A’s house. Subsequently A lets it himself. This implied revocation of B’s authority.


CONCLUSION:- The effect of termination of Agency is on the maximum level to the Agent abouthis earnings and also put the principal in financial losses. Agent must remain faithful in the businessof Agency. He should rendered the accounts, financial matters, appointment of sub-agents and otheractivities relating to Agency to the notice of his principal failing which it leads to termination ofAgency.

13. Discuss fully the extent of Principals liabilities to third parties for the Act of the Agent.INTRODUCTION:- Agent is a person employed to do any act for another or to represent another indealing with third persons. There one of the most essential characteristics of Agency is that the agentmakes the principal answerable to third persons. Principal is held bound by the obligations incurredon his behalf by his agent. Section 226 to 228 of the Act deals with the law regarding the obligationsof principal for the contract of his Agent.

We will find from the following provisions and illustrations that how the Principal’s liabilities andis bound answerable to the third parties for the acts done by his agent:-

1. Principal’s obligation for acts of Agents:- Section 226 of the Indian Contract Act provides thatcontract entered into through an Agent and obligations arising from acts done by an Agent and willhave the same legal consequences as if the contract has been entered into and the acts done by theprincipal in person. This section is based on the principle act as in Maxim which means that the act ofan Agent is the act of the principal.ILLUSTRATION:- A being B’s Agent with the authority to receive money on his behalf receivesfrom C a sum of money due to B. C is discharged of his obligation to pay the sum in question to B.

2. When an agent does more than he is authorized to do and when the part of what he does, which iswithin his authority, can be separated from the part which is beyond his authority the principal isliable only for so much part of what he does as is within Agent’s authority as provided in Section227 of the Act.ILLUSTRATION:- A being the owner of a ship and cargo authorizes B to procure an insurance forRs.4000/- on the ship. B procures a policy for Rs.4000/- on the ship and another for the like sum onthe cargo. A is bound to pay the premium for the policy on the ship but not the premium for thepolicy on the cargo.

3. An agent does more than he is authorized to do and what he does beyond the scope of his authority isnot separable from what is within it the principal is not liable for the transaction as provided in thesection 228 of the Act.ILLUSTRATION:- Where A authorizes B to buy 5000 sheep for him and B buys 5000 sheep and 200lambs for a sum rupees 6000/- . A may repudiate the whole transaction.

4. OSTENSIBLE AUTHORITY:- Section 237 of the Contract Act embodies the principle of ostensibleauthority. The section lays down When an agent has without authority done acts or incurredobligations to third persons on behalf of his principal, the principal is bound by such acts or


obligations if he has by the words or conduct induced such third persons to believe that such acts andobligations were within the scope of the Agent’s authority.”ILLUSTRATION:- A being B’s agent for the sale of goods induces C to buy them bymisrepresentation which he was not authorized by B to make. The contract is voidable as between Band C, at the opinion of C. Undersection 238 of the Act misrepresentation or fraud committed by anAgent may be classified into two categories:-

i) Under his actual or ostensible authority.ii) Which is not covered within his authority, the principal is liable for the acts which fall under actual or

ostensible authority.5. A leading case on this subject is of Lloyds v/s Grace Smith in which it was held that a principal is

liable for the fraud of his agent within the scope of his authority whether the fraud is committed forthe benefit of the Principal or for the benefit of Agent.CONCLUSION:- On the perusal studies of the above provisions and the illustrations it is seen thatthe liabilities of the Principal towards third persons are based on the acts done by his agents. However in some cases it is also seen and Principal is not liable for any wrongful act or omission ofhis Agent while acting without the principal authority outside the ordinary course of employment orwhile not acting nor purporting to act on his principal’s behalf.

14. Define the term Sub-Agent. How for is principal bound by the acts of Sub-Agents. Distinguish between Sub-Agent and Substituted Agent.INTRODUCTION:- A rule which based on the principle that Agency is a contract based on trust andmutual confidence between the parties. A principal may have the mutual confidence in his Agent butnot in the subsequent sub Agent appointed by the Agent. There is a provision regarding ‘delegatesnon-protest delegare’ which means of this maximum is that an agent to whom another has delegatedhis own authority cannot delegate that authority to a third person.PROVISIONS MADE IN THE ACT:- Under section 190 of the Contract Act which deals withdelegation of an authority by the Agent describes as under:- “An agent cannot lawfully employ another to perform acts which he has expressly or impliedlyundertaken to perform personally unless by the ordinary custom or trade a sub-agent may or from thenature of the agency a sub-agent must be employed.”However the general principle is that the agent cannot delegate his authority to a third person but thereare two exceptions to this general rule. These are:-

i) When the ordinary custom of trade permits employment of a sub-agent.ii) When the nature of agency demands that employment of a su-agent is necessary by the Agent.

Although there are two exceptional conditions no agent is authorized to delegate his authority itthe nature of his act is purely managerial and he is supposed to use his personal skill in discharge ofhis duty or where he is personally required to perform his duties.SUB-AGENT:- Sub agent is a person employed by and acting under the control of the original Agentin the business of Agency under section 191 of the Act.LEGAL POSITION OF SUB-AGENT PROPERLY APPOINTED:- Sub Agent may be eitherproperly appointed or improperly appointed. If he is appointed by the Agent with the authority of hisprincipal he is called sub-agent properly appointed. If he is appointed without the authority ofprincipal he is improperly appointed.When the sub-agent is appointed properly with the consent of the principal, the principal is bound by his acts and is responsible for his action as if he was an agent appointed by the principal. The sub-agent is not responsible for his acts to principal. He is responsible only for such acts to the original Agent.


But if the sub-agent is guilty of fraud or willful wrong against the principal he becomes directlyresponsible to the principal under section 192 of the Act. Difference between sub-Agent & substitute Agent SUB-AGENTSub Agent is a person employed by and acting under the control of the original agent in the business of agency.

A sub-agent is not generally responsible to the principal but he is responsible to the agent.

There is no privity of contract between sub-agent and principal.

SUBSTITUTED AGENTSubstituted agent can be nominated by the original Agent to act for the principal for a certainpart of the business of agency.A substituted agent by his mere appointment becomes immediately responsible to his principal.

A privity of contract is created between the principal and the substituted Agent.

CONCLUSION:- There is lot of difference in between sub-agent and substituted agent one isappointed by the original agent is immediate responsible to the original whereas the substituted agentis directly responsible to the principal. He is appointed for some part of the business of agency.

UNIT-IV15. Sharing of Profits in business is not conclusive evidence of the existence of partnership.

INTRODUCTION:- The object of every partnership must be to carry on a business for the sake ofprofits and share the same. Therefore clubs, societies which do not aim at making profits are not saidto be a partnership. The definition of term ‘Profits’ in the Partnership Act is that ‘net- gains’ i.e. heexcess of the returns over outlay. At one time it was thought that a person who shared the profits mustincur the liability also as he was deemed to be a Partner as it was held in a case of Grace v/s Smith,1775. This principle was again confirmed in a case of Waugh v/s Carver, 1793, it was held that theperson sharing the profits does not always incur the liability of partners unless the real relationbetween them is that of partners.ESSENTIALS:- Although sharing of profits is one of the essential elements of every partnership butevery person who shares the profits need not always be a partner.Example No.1: - I may pay a share of profits to the manager of my business instead paying him fixedsalary so that he may takes more interest in the progress of the business, such person sharing theprofits is simply my servant or agent but not my partner. Example No. 2:- A share of profits may bepaid by a business man to a money-lender by way of payment towards the return of his loan andinterest thereon, such a money-lender does not thereby become a partner.

a. The principle laid down in Cox v/s Hickman-1860: this principle forms the basis of the provisionsof section 6 of the Partnership Act which gives a caution that the presence of only some of essentialsof partnership does not necessarily result in partnership. For determining the existence ofpartnership there must be had to thereal relation between the parties after taking all the relevantfacts into consideration.

b. In determining whether a group of persons is or not a firm or whether a person is or is not a partner in afirm. To answer this query an explanation is given below:

(i) Sharing of profits or of gross returns arising from property by persons holding a joint or commoninterest in that property does not of itself make such persons as partners.

(ii) Receipt by a person of a share of the profits of a business or of a payment contingent upon the earningof profits or varying with the profits earned by a business does not of itself make him a partner with


the persons carrying on the business and in particulars the receipt of such a share by a servant or agentas remuneration a case of McLaren v/s Verschoyle-190l, or by a widow or child of a deceasedpartner.

(iii) Mollow March & Co. v/s Courts of Wards-1872: In this case a Hindu Raja advanced a large amountto a firm. Raja was given extensive powers of control over the business and he was to get commissionon profits until the repayment of loan with 12% interest. It was held by the Raja could not be madeliable for the debts contracted in the agreement was not to create Partnership but simply to providesecurity.

(iv) In a case of Walker v/s Hi4sch-1884: A person was working as clerk. The served a notice by thedefendants terminating his services. Clerk contented that he was a partner and claimed dissolution offirm. I was held that though he shared the profits he was having the capacity of a servant only. He wasnot a partner and could not see dissolution of the firm.CONCLUSION:- On nut-shell it could be concluded that just sharing the profits in the business is not conclusive existence of the partnership till it create some relationship between the persons who have entered into Partnership.

16. How the firm is registered? What is the effect of Registration & Non-Registration of firms?INTRODUCTION: - In the Contract Act it is not necessary that the firm should be registered at thetime of its formation. However a firm may be got registered at any-time after the creation ofPartnership. Act does not lay down any-time limit within which the firm should be registered providedinsection 63 of Partnership Act. The act does not impose any penalties for non registration offirms.There are some disabilities are provided in sec.69 of the Act for unregistered firms and theirpartners.HOW THE FIRM IS REGISTERED:- The partnership agreement or any transaction between thepartners and third parties is void on the basis of non-registration of partnership firm and the partnersthemselves. In addition to the above no prudent partner or firm should hesitate to get his or its nameregistered at the earliest possible opportunity. The procedure of registration is very simple as providedin section 58 and 59 of the Act.A registration of firm may be affected by submitting to the Registrar of Firms a statement in theprescribed form and accompanied by the prescribed fee. The application must bear the followinginformation:-The firm’s name. Place of business and the name of other places where the firm can carry on business.Date of joining of each partner with their permanent addresses. The duration of the firm.When the Registrar is satisfied that the above mentioned requirements have been complied with and then he shall record an entry of statement in the register. This amounts to the registration of the firm.Section 69 of the Act imposes certain claims in the Civil Courts. This section provides pressurewhich is to be brought to bear on partners to have the firm and themselves registered. The pressureconsists in denying certain right of litigation to the firm or partners not registered under this act. Acause of action arose when the firm was unregistered but was registered at the time of filing the suit. It was held in the case of State of U.P., v/s Hamid Khan & Bros. and othrs-1986: it was held thatsection 69 to be inapplicable in this case. EFFECTS OF NON-REGISTRATION& REGISTRATION ON REGISTRATION OF FIRM ON NON-REGISTERED FIRM


Any partner, nominee and authorized agent can bring a suit to enforce a right arising from a contract against any past or present partner and for the third parties too.

No partner, nominee and agent can bring a suit to enforce a right arising from a contract against anyfirm or any past or present partner of the firm or third parties.

Registered firm can claim of set-off or other proceedings to enforce a right arising from a contract u/s 69 of the Act.

The disabilities as provided in sec.69 of the act i.e.to claim of set-off or other proceedings to enforce a right arising from a contract.

Filing of the return every year is necessary. It is not required to file the return by the un-registered firm.

Loonkaran v/s Ivan E. John, 1977, it was held that sec.69 is mandatory and unregistered partnershipfirms cannot bring a suit to enforce a right arising out of a contract falling within the ambit of sec.69void.In M/s Balaji Constructions co., Mumbai v/s Mrs. Lira Siraj Sheikh, 2006 It was observed that the firm was not registered on the date of filing of suit and person suing as partners were not shown inregister of firm and suit by such firm hit by section 69(2) of Partnership Act and was liable to be dismissed.CONCLUSION :- It is very well established that the partnership agreement or transaction between the partners and third parties is void on the ground of Non-Registration of the firm as well as of Partners. To enforce any right arising out of a contract the registration of both firm and partners are necessary for the benefit of the both.

17. Distinguish between partnership business and Joint Hindu family business.INTRODUCTION: According to Partnership Act persons who have entered into partnership are individually called partners and coactively a firm and the name under which their business is carried on Is called firm name. In the eyes of law a firm is merely a collective name of individuals who have entered into a partnership. Whereas in Joint Hindu family business it is based on status of persons by virtue of his being born in the particular family. The distinctions between these two can be made on the basis of following facts:- DIFFERENCEORDINARY PARTERNSHIP JOINT HINDU FAMILY BUSINESSAn agreement between the parties to join the partnership is necessary.

No such agreement is required. A joint family business is created by operation of law.

The members of ordinary partnership have no interest in the partnership by birth.

The members of the joint family have their interest & become shareholders and entitled to profits in the business by birth.

The partnership in ordinary partnership is automatically dissolved in case of death of any partner.

On the death of one or more members the joint family business does not dissolve.

In case of ordinary partnership each partner has torender accounts to his co-partners.

In case of joint family business there is noaccounting between the member and neither anyof them can ask for the account regarding profitsand losses of the business.

In ordinary partnership each partner is the agent In joint family business the manager or managers


of the firm for the purpose of business of the firm. has as implied authority to contract, debts andpledge the property and credit of the family forthe ordinary purposes of family business.

In case of ordinary partnership the relationshipbetween partners arises out of a contract.

In joint family business the coparceners are thejoint owners of the family property and theirmutual rights are the result of a status and not acontract.

CONCLUSION:- After going through the facts mentioned above it are clear that there are lot and lotof difference in between an ordinary Partnership and Joint Hindu family business. Ordinarypartnership is a result of agreement between the parties to join partnership to share the profits earnedby the business being carried out from partnership whereas in joint family business there is no need ofan agreement it is created by operation of law. In ordinary partnership each of the partners has torender the account and to work as an agent. In joint business there is no need to render account ofprofit and loss.

18. Discuss the essentials of Partnership Firm.INTRODUCTION: - Indian partnership Act was enacted in 1932 and it came into force on Ist day ofOctober, 1932. A partnership arises from a contract and therefore such a contract is governed not onlyby the provisions of the Partnership Act but also by general law of contract.DEFINITION OF PARTNERSHIP:- Kent’s view “Partnership as a contract of two or morecompetent persons to place their money, efforts, labour and skill or some of them in lawful commerceor business and to share the profit and bear the loss in certain proportions. “Dixon defines partnershipas, “Group of Persons”. According of Pollock, “Partnership is a relation which subsists betweenpersons who have agreed to share the profits of a business carried on by all or any of them on behalfof all of them.”Definition:- Section 4 of the Indian Partnership Act defines the ‘Partnership’ as under:-Partnership isthe relation between persons who have agreed to share the profits of a business carried on by all orany of them acting for all.”NATURE OF PARTNERSHIP:- Partnership is a form of business organization, where two or morepersons join together for jointly carrying on some business. It is an improvement over the ‘Sole-trade’business, where one single individual with his own resources, skill and effort carries on his ownbusiness. Any two or more persons can join together for creating Partnership. In certain respects a partnership is a more suitable form of business organization than a Company. Forthe creation of partnership just an agreement between various persons is required. Whereas in thecase of company there are a lot of procedural formalities which have to be gone through to create aCompany. In the case of company the control over regarding distribution of profits, holding ofmeetings, maintaining of accounts runs through a statutory control. Whereas in partnership firm thepartners are the master of their affairs. ESSENTIALS OF PARTNERSHIP: THE FOLLOWING ARE THE ESSENTIALS OF THEPARTNERSHIP:-

1. PERSONS WHO HAVE AGREED:- A question is arises at the preliminary stage is that, “ who are the persons and who can agree for partnership:

(i) MINORS: - A minor is incompetent to contract case of Mohori Bibi v/s Damodardass Ghosh-1903: Minor may not become partner but he can be admitted to benefit of partnership and can share the profits. He cannot be liable for the losses.

(ii) CORPORATION: - A corporation is a legal person therefore corporation may enter into a partnershipwith the condition only if the constitution of the corporation must empowers it to form a partnershipand not otherwise.

(iii) FIRM: - Firm is also recognized as a legal person in India and it cannot enter into a partnership. A firmwhich is proprietorship firm or a company registered under the Company’s Act can very well enterinto a partnership but here is mentioned that partnership firm is not a legal person therefore it is notcompetent to enter into a partnership. Duli chand v/s CIT, 1956.

(iv) ALIEN: - A national of other country may be a friendly alien or an enemy alien. A friendly Alien canenter into Partnership but latter Cannot except when he is under the protection of that country.


2. TO SHARE THE PROFITS OF A BUSINESS:- This line consists the two parts: 1. To share theprofit and 2. Of a business. However the explanation of these two terms are as under :-

(i) Business:-This definition is not exhaustive. The existence of business is essential unless there is nointention to carry on business and to share the profits, there can be no partnership. Therefore theobjects of the partnership and business must be lawful. Case of R.R.Sharma v/s Ruben, 1946.

(ii) Sharing of Profits:- A case of Cox v/s Hickman, 1860: though sharing of the profits of business isessential. The definition leave it opens as to how and when these profits are to be shared. In order tocontinue the partnership the actual existence of a business carried on by partners with an agreement toshare profits of such business is essential.

(iii) Sharing of losses Grace V/s Smith-1775, Mutual Agency and Acting for all and to carry on thebusiness are the essential terms of the partnership.CONCLUSION:- In order to constitute partnership there must not only be sharing of profits but theremust be also the relationship and the principle of agency. Section 4 of the act that there must be actualexistence of a business carried on by the partners with an agreement to share the profits of suchbusiness is essential.

19. Principle/Doctrine of Holding Out.INTRODUCTION:-Every partner is liable for all acts of the firm done while he is a partner.Therefore generally a person who is not a partner in the firm cannot be made liable for an act of thefirm. In certain cases however a person who is not a partner in the firm may be deemed to be a partneror held out to be a partner for the purpose of his liability towards a third party. The basis of liability of such a person is not that he was himself a partner or was sharing the profitso4 was taking part in the management of the business but the basis is the application of the law ofestoppels because of which he is held out to be a partner or deemed to be a partner by “holding out” DEFINITION OF HOLDING OUT Section 28 of the Partnership Act makes the following provision under this doctrine:-(1)Anyone who by words spoken or written or by conduct represents himself or knowingly permitshimself to be represented to be a partner in a firm is liable as a partner in that firm to anyone who hason the faith of any such representation given credit to the firm, whether the person representinghimself or represented to be a partner does or does not know that the representation has reached theperson so giving credit.(2) Where after a death of the partner the business is continued in the old firm name the continueduse of that name or of the deceased partner’s as a part thereof shall not itself make his legalrepresentative or his estate liable for any act of the firm done after his death. ESSENTIAL INGREDIENTS: 1. Representation: - The representation may be in any of thethree ways:- i) By words written or spoken: - In case of Bevanv/s The National Bank Ltd., a person permittedhis name to be used in the title of the firm. Therefore he was held liable under this principle.ii) By conduct:- In the case of Parter v/s Lincell: a person by his conduct represented as a partnerand was held liable. Martyn v/s Gray-1863: It was held that by knowingly permitting himself orsuffering himself to be represented as a partner.iii) Alleged Representation relied:- In the case of Munton v/s Rutherford: it was held thatMrs.Ruherford was not liable as a partner by estoppels or holding out.iv)Credit to Firm on Representation:- In the case of Oriental bank of Commerce v/s S.R.Kishore& Co.-1992: It was held he was liable for the acts of the firm on the basis of the principle of “holdingout”. Section 28 of the Act is based upon the principle of estoppels by conduct. Where a man holdshimself out as a partner or allows others to do it, he is then properly stopped from denying thecharacter he has assumed, and upon the faith of which creditors may be presumed to have acted. Aman doing so may be rightly held liable as a partner by estoppels as held in a case of Mollwo March& Co. v/s Court of Wards-1872.


The representation on which a case of “Holding Out” is sought to be established may be express or implied it may consist of verbal or written statements or even may be by conduct. Form of representation is not material in such case.EXCEPTIONS TO THE DOCRINE OF HOLDING OUT:-1. Tort: The principle of holding a person liable for act of a firm on the ground of holding out cannotbe extended to include liability arising out of tort.2. Liability of Retired Partner: - The rule of holding-out provided in this section is also applicable tothe retired partner who retires from the firm without giving proper public notice of his retirement. Insuch case person who even subsequent to the retirement give credit to the firm on the belief that hewas a partner will be entitled to hold him liable as held in a case ofScrarf v/s Jardine-1882.3. Insolvency of Partner: - Insolvency of the partner extinguished as the liability of a partner and he cannot be held liable even upon this doctrine.4. Dormant Partner: His retirement does not require a public notice for bringing end to his liability. According to proviso to section 45(1) of the partnership Act a dormant partner is not liable for the actsdone after the date on which he ceases to be a partner. CONCLUSION: Anyone who by words spoken or written or by conduct represents himself orknowingly permits himself to be represented to be a partner in firm is liable as a partner in that firm toanyone who has on the faith of any such representation given credit to the firm, he must bear theconsequences u/s28.

REGISTRATION OF PARTNERSHIP FIRMIn the Act of Partnership there are provisions of registration of the partnership firm but there

is no where mention about the penalties for non-registration of firm. It is therefore quite optional for afirm to get itself registered or not. It is also obvious that registration of the partnership firm will notless than a boon when there arisen of the legal consequences at the later stage. Section 69 of the Partnership Act imposes certain claims in the Civil Courts, this section alsoprovides the pressure which is to be brought to bear on the partners to have the firm and themselvesregistered. The pressure consists denying of certain rights of litigation to the firm or partners notregistered under this Act. A case of State of U.P v/s Hamid Khan & Bros and others-1986. In a case of Vatyapuri v/s M. Sundaresan-2002: It was held by the Court that the suit is notmaintainable as one of two remaining partners of an un-registered firm retired resulting in dissolutionof the firm and surviving sole partner filed suit for recovery of dues to dissolved partnership.In another case of CIT v/s Jayalakshmi Rice and Oil Mills-1971: It was held by the Court that the unregistered firm can bring a suit after getting the firm registered.It was held by the Court that in the case where the suit is brought by the un-registered firm subsequentregistration of firm while suit is pending would cure this defect in the case of M/s Samy Uktha Cotton Trading Co. v/s B.V.Suhhaiah-2005.CONCLUSION:- Registration of the firm as well as of the partners is quite essential part of thebusiness of partnership. It also held the firm and the partners to avoid un-necessary hurdles forsmooth running of the business. The registration of the firm as well as of the partners is optional in thePartnership Act.

CONTINUING GUARANTEE:- A guarantee may be an ordinary guarantee or a continuingguarantee. A continuing guarantee is different from an ordinary guarantee, as described in a case ofSyndicate Bank v/s Channaveerappa Beari-2006: in this case in ordinary guarantee the surety is liableonly in respect of a single transaction whereas in case of continuing guarantee the liability of thesurety extends to any successive transactions which come within its scope.


DEFININATION:- Section 129 of the Contract Act which provides that, “A guarantee whichextends to a series of transactions is called a “continuing guarantee.”

Such guarantee may be in respect of a series transactions during a fixed period e.g. for one year. It hasbeen done in the case of Eastern Bank Ltd., v/s Parts Services of India Limited-1986:

A in consideration that B will employ C in collecting the rent of B’s zamidari promises B to beresponsible, to the amount of Rs.5000/- for due collection and payment by C of those rents. This is acontinuing guarantee.

A guarantees payment to B, a tea-dealer, to the amount of 100 pounds for any tea he may from time totime supply to C. B supplies C with tea to the above value of l00 pounds and C pays B for it.Afterwards B supplies C with a tea to the value of 200 pounds. C fails to pay. The guarantee givenby A was a continuing guarantee and he accordingly liable to pay extent of l00 pounds.

A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paidfor in a month. B delivers five sack to C. C pays for them. Afterwards B delivers four sacks to Cwhich C did not pay for it. The guarantee given by A was not a continuing guarantee, and accordinglyhe is not liable for the price of the four sacks. CONCLUSION No doubts the continuing guarantee is a different from the from an ordinary guarantee. In continuingguarantee the liability of surety extends to a series of transactions. In continuing guarantee the suretyhas been empowered to revoke a continuing guarantee for future transactions by giving a notice to thecreditor as it has been provided in section 130 of the Act. However his liability in respect of thetransactions which have already been made continues to exists. Whereas his liabilities for the futuretransactions comes to an end.

CO-SURITIESSometimes there may be conditions in a contract of guarantee that there shall be a co-surety also. Where a person gives a guarantee upon a contract that the creditor shall not act upon it until anotherperson has joined in it as co-surety, the guarantee is not valid if the other person does not join. (It hasalso been provided in section 144 of the act.) It means that in such a contract liability of the surety isdependent on the condition precedent that a co-surety will join. The surety can be made liable undersuch a contract only if the co-surety joins, otherwise not. On the basis of provision under section128. LIABILITY OF CO-SURETYFrom the above statement it has been noticed that the liability of sureties isco-extensive with that ofthe principal debtor. It implies that the creditorcan proceed against the principal debtor or the suretyat his discretion unless it is otherwise provided in the contract. The same principle is applicable with regard to the rights and liabilities of the co-sureties. Since theliability of the co-surety is joint and several a co-surety cannot insist that the creditor should proceedeither against the principal debtor or against any other surety before proceeding against him.A case in this regard is of State Bank of India v/s G.J.Herman-1998: It was held that neither thecourt nor a co-surety can insist that the creditor should first proceed against another surety beforeproceeding against him. Such direction would go against the co-extensiveness.In the case of Bank of Bihar Ltd. v/s Dr. Damodar Prasad-1969: It was held that the liability of thesurety is immediate and cannot be defended until the creditor has exhausted all his remedies againstthe principal debtor. CONCLUSIONIt has already been noted that section 128 declares that the liability of the surety is co-extensive withthat of principal debtor. The word co-extensive denotes that extent and can relate only to the quantumof the principal debt. However the liability of the surety does not cease merely because of discharge


principal debtor from liability. Refer a case of Industrial Financial Corp. of India v/s KannurSpinning & Weaving Mills Ltd.-2002.

FEATURE OF BAIMENT:- Bailment consists in delivery of goods i.e. movable property by oneperson who is generally the owner thereof to another person for some purpose. The goods are to bereturned to their owner after the purpose is accomplished or they are to dispose of according to thedirections of person delivering the goods.For example :- When you take a fan on hire or give your suit for dry cleaning or you give your wristwatch for repairs or give a parcel to a carrier for being transported to some place there is bailment ineach of above cases.DEFINITION:Section 148 of the Indian Contract Act defines the bailment asunder:- The bailment is a delivery of goods by one person to another for some purpose upon a contractthat they shall return the goods bailed to him when the purpose of contract is accomplished or todisposed of the goods as per the directions of the bailor.FEATURE OF BAILMENT:-The following are the feature of the bailment:-

1. Delivery of the goods for some purpose:- The delivery to the bailee may be made by doing anythingwhich has the effect of putting the goods in the possession of the intended bailee or of any personauthorised to hold them on his behalf. Refer a case of Jagdish Chandra Trikha v/s Punjab NationalBank:1998: the plaintiff deposited the jewellery worth Rs 3,72,000/- the bank as a bailee failed totake due care of the goods hence bank was held liable to pay a sum of Rs.3,72,000.00 plus interest @12% p.a.

2. There can be bailment without a contract:- In a case of Ram gulam v/s Govt. Of UP-1950: Theproperty of the plaintiff was stolen and recovered by the bank and kept in Maalkhana. It was againstolen and could not be traced out. The court in point of decision in the case that bailment contractcannot arise without a contract. The law itself recognises the finder of goods as bailee in somesubsequent cases so it was held that the bailment can be there even without a contract.

3. Return of goods after the work is achieved: Section 148 says that the bailee has to return the goodsas and when the purpose is accomplished or to disposed of them as per the directions of the bailor.Case of Secy. Of State for India in Council v/s Sheo Singh-1880.

It is very easy to make sure that in the bailment of contract there is a delivery of the goods byone person to another for some purpose. When the work or the purpose is accomplished it is the dutyof the Bailee to return back the goods so bailed to the Bailor.

KINDS OF AGENT:- ‘Agent’ is a person employed to do any act for another or to represent anotherin dealing with third person. The person for whom such act is done or who is so represented is calledthe ‘Principal’. The agent acts on behalf of the principal depending upon on the authority he has beengiven. The agent is of following kinds:-

1. Auctioneers: - Auctioneer is an agent whose business is to sell goods or other property by auction i.e.by open sale. The authority vested in him is to sell the goods only and not to give warranties on behalfof the seller.

2. Del credere Agent: - Such type of agent who works for extra remuneration. He takes the liability toguarantee the due performance of the contract. He is responsible for the solvency and performance oftheir contracts by the other parties and thus indemnifies employer against loss.

3. Commission Agent: Such type of agent who purchases and sells goods in the market on behalf of hisemployer on the best possible terms and who paid commission for the labour of this agent.


4. Factor :- A Factor is an agent who is given the possession of goods for the purpose of selling them. Heentitled to sell the goods in his own name. He has the right to retain the goods for a general balanceof accouts.

5. Broker :- Broker is a mercantile agent employed for the purpose of sale and sale of goods. The mainduty of a broker is to establish privity between two parties for a transaction and he gets commissionfor his labour.

6. Co-Agent: Where several persons are expressly authorised with no stipulation that anyone or more ofthem shall be authorised to act in the name of whole body. They have a joint authority and they arecalled co-agents.

7. Sub-Agent: such type of a person who employed and acting under the control of original agent in thebusiness of agency.

8. Pacca Artia: He also works on commission basis. He gets the goods from his principal and sells themin the market.

Keeping in view the above facts we can conclude that an agent is a person employed to do any actfor another or represent another in dealing with third persons. Where one person mere gives an adviceto another in matter of business of agency does not arise because of such advice agency does notcreate.

NATURE OF PARTNERSHIP:- Section 4 of Indian Partnership Act 1932, Thatpartnership is the relations which subsist between persons who have agreed to combine their property,labour and skill in some business and to share the profits thereof between them. The Presentdefinition is wider than one contained in the Partnership Act.DEFINITION:- According to Partnership Act 1932 the definition of the Partnership is asunder: “Partnership is the relation between persons who have agreed to share the profits ofbusiness carried on by all or any of them acting for all.” NATURE OF PARTNERSHIPOn the basis of provisions laid down in the act of partnership the nature of the partnership is of the following aspects :-

i) There should be an agreement between the persons who wants to be partners.ii) The purpose of creating partnership should be carrying on of business.iii) The motive of creating of partnership should be earning and sharing of the profits.iv) The business of the firm should be carried on by all of them or any of them acting for all.

The partnership Act is very much clear about it concept and it gives the directions regardingcreation of a partnership by having an agreement for sharing of their property, labour and skill in somebusiness which aimed to share the earning and profits.

TERMINATION OF AGENCYINTRODUCTION:- The agency which may be validly created stands terminated in the event ofdifferent situations as the principal revoked his authority, or by the agent renunciation of business ofthe agency or the death or unsound mind any of the i.e. principal or of the agent. Even when theprincipal being adjudicated in insolvent. DEFINATION OF TERMINATION OF AGENCY


On the basis of provisions laid down in the Act under section 20, “That the agency is terminated bythe principal revoking his authority or by the Agent renouncing the business of the agency beingcompleted or either the principal or agent dying or becoming of unsound mind or by the principalbeing adjudicated an insolvent under the provisions of any act for the time being in force in the reliefof insolvent debtors.” DIFFERENT MODES OF TERMINATION OF AGENCYThe following are the modes under which an Agency can be terminated:-

1. By Revocation of Agent’s Authority:- The revocation of agent’s authority can be made by the principalsubject to the condition:-

i) Revocation may be express or implied as provided in section 207 of the Act.2. By the Principal revoking his authority: Provisions have been made in the section 203 of the Act

that Principal may revoke his authority given to his agent.3. By the Agent renouncing the business of the Agency:- Under section 207 of the Act, It is mentioned

that theAgent should give a reasonable notice to his Principal, otherwise Agent can be made liable tomake good any damage caused to Principal.

4. By the completion of Business of Agency:- When the agency is created for the fixed time by anexpress or implied contract and after expiry of the term it automatically terminates on the expiry ofthe said term u/s 205 of Act.

5. By either death or Unsound mind of Principal or of Agent:- Section 201 of the Act laid down thatthe agency is stands terminated on the death of the Principal or of the Agent.

6. By the Principal being adjudicated an Insolvent:- Section 201 also says that the agency can beterminated if principal being adjudicated as an insolvent.In addition to above as provided in section 210 that all the sub-agencies shall remain terminatedon the termination of original agency.CONCLUSION:- Agency can be terminated on the above mentioned reasons.

ExtraaaaaaaaaaaaaaaaQuestion No.6: What are the provisions regarding dissolution of partnership firm?INTRODUCTION:- Dissolution of partnership means coming to an end of the relation known as Partnership between various partners. It may also can be defined as the breaking up or extinction of the relationship which subsisted between all the partners of the firm as held in a case of Santdas v/s sheodyal-1971:Here we are to note the significance of words in definition is, “between all partners “means every one of the members of the firm cease to carry on business of partnership. Thus where one or more members ceased to be partners in such firm while others remain the firm is not said to be dissolved.DEFINITION: - The term dissolution of the Partnership firm has been defined in Section 39 of the Partnership Act which lies as, “the dissolution of partnership between all the partners of a firm is called the, ‘dissolution of the firm’.”MODES OF DISSOLUTION: - There are five different modes of the dissolution of a firm:Dissolution: = I without the interference of Court. Ii. With the orders of the Court. 1. Without the interference of the Court: - there are four modes of dissolution of firm:-1.By Agreement under section 40 of the Act. 2, Compulsory dissolution u/s-41. 3. on the happening ofcertain contingencies u/s 42. 4. by Notice u/s 44 of Act.1. Dissolution by Agreement: - As partners can create partnership by making a contract as between them, they are also similarly free to end this relationship and thereby dissolve the firm by their mutualconsent. Sometimes there may have been a contract between the partners indicating as to when and how a firm may be dissolved, such firm can be dissolved in accordance to such contract. A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners as provided in section 40 of the Act. A case in this regard is of, EFD.Mehta v/s MFD Mehta-1971.


2.Compulsory dissolution:- Under Section 41 of the Act, if by the happening of any event which makes it unlawful for the business of the firm or for the partners to carry it on in partnership.(a)If by the adjudication of all the partners or of all the partners but one as insolvent declared by the court.3.On he happening of certain contingencies:- On the grounds of the gist of contract made between the partners of a firm may dissolved :- i) If the partnership firm constituted for a fixed term. By the expiry of the term firm can be dissolved. Ii) By the death of a partner may results dissolution unless rest of partners agrees to contrary. iii) It firm is constituted to carry out one or more adventures or undertaking by the completion thereof. On completion of the same firm may be dissolved.4.Dissolution by Notice of Partnership:- If the partnership is azt will the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention dissolve the firm as provided in section 44 of this act, with the following conditions:- a). The notice for dissolution of partnership must contain the clear intention of dissolving the firm which must be a final one. The date on which firm is dissolved must be indicated in the notice. A case of Mir Abdul Khaliq v/s Addul Gaffar Serifff-1985. b). Notice must be given in writing. c). Written notice must be given to all other partners of the firm.5. Dissolution By Court:- A firm may be dissolved at the suit of a partner on any of grounds which provided in Section 44 of Act:-i. That the partner has become of an unsound mind.ii. That the partner has become in any way permanent incapable of performing his duties as a partner but in the case of Whitewell v/s Arthur- 1885: it was held partial incapacity cannot be a ground for dissolution of partnership firm.iii. That a partner is guilty of such misconduct as would prejudicially affect the business of the firm, acase of Harrison v/s Tenent-1856.iv. That the business cannot be carried on except at loss.


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