Professional Documents
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Meaning of Contract
A contract is an agreement between two or more parties to
perform a service, provide a product or commit to an act and
is enforceable by law. There are several types of contracts,
and each have specific terms and conditions.
Formation of a Contract
Contract is a branch of the law of obligations in jurisdictions
of the civil law tradition. A contract arises when the parties
agree that there is an agreement. Formation of a contract
generally requires an offer, acceptance, consideration, and a
mutual intent to be bound.
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Essentials of a Contract
1.Offer & acceptance.
2.Intention to create legal relationship.
3.Consensus - ad - idem.
4.Consideration.
5.Capacity to contract.
6.Free consent.
7.Legality of object.
8.Possibility of performance.
9.Writing & registration.
Definition of Contract
An agreement enforceable by Law is a contract.
Therefore, there must be an agreement and it should be
enforceable by law.
Agreement + Enforceability = Contract
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Types of Contracts
VALID CONTRACTS
Contingent contract - In a contract to do or not to do
something, if an event is collateral, does or doesn't happen.
Express contract - When contracts are either in writing or in
oral.
Implied contract - When contracts are neither in writing nor in
oral.
Absolute contract - A contract which is not dependent on
fulfillment of any condition.
INVALID CONTRACTS
Void contract
Is void(Void - ab - initio) - An agreement which is not valid
from the beginning.
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Becomes void - An agreement which is valid in the
beginning but due to some supervening impossibility the
contract becomes void
Voidable contract - A contract which is valid unless until
avoided by either the party.
Illegal contract - An agreement forbidden by law
Unenforceable contract - It is valid but due to some
technical defect the contract becomes void. In case
defects are removed the contract is enforceable.(lack of
registration, lack of signature etc.,)
OTHER TYPES OF CONTRACTS
• Executed contract - In a contract where both the parties
have performed their obligation, there is remaining
nothing to perform.
• Executory contract - In a contract where both the parties
are yet to perform their obligation.
• Unilateral contract - In a contract one party has performed
his obligation and other person is yet to perform his
obligation.
• Bilateral contract - In a contract where both the parties
have performed their obligation. Bilateral & Executory are
same and inter - changeable.
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Offer
Definition
Cross offer - When both the persons are making identical offers
to each other in ignorance of other’s offer.
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Standing offer - An offer which remains continuously
enforceable for a certain period of time.
Acceptance
Definition
According to sec.2(b), when a person made a proposal to
another to whom proposal is made, if proposal is assented
there to, it is called acceptance.
LEGAL RULES FOR ACCEPTANCE
• Acceptance must be given as per the mode prescribed by
the offeror.
• Acceptance must be given before the lapse of time or
within reasonable time.
• Acceptance must be unconditional.
• Acceptance may be given by any person in case of general
offer.
• Acceptance may be given by any specific person in case of
specific offer.
• Acceptance must be communicated. (Bordgon Vs.
Metropolitan Rly. Co.)
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• Mental acceptance is no acceptance or acceptance must
not be derived from silence.
• Acceptance must not be precedent to offer.
Consideration
Definition
According to sec 2(d) consideration is defined as “when at
the desire of the promisor , or promisee or any other
person has done or abstained from doing or does or
abstains from doing ,or promises to do or to abstain from
doing , something , such an act or abstinence or promise is
called a consideration for the promise .
LEGAL RULES AS TO CONSIDERATION
1)It must move at the desire of the promisor.
[Durga Prasad v. Baldeo ]
2)It may move by the promisee .
[Chinnaya v. Ramayya ]
3)It must be past ,present or future .
4)It need not be adequate .
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5)It must be real .
6)It must not be illegal , immoral or opposed to public
policy .
Capacity to Contract
The parties to an agreement must have the capacity at law to
enter into a valid contract. Section 11 states that every person
is competent to contract if-
a) he is of the age of majority,
b) he is of sound mind and
c) he is not disqualified from entering into a contract by any
law, to which he is subject.
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Unsound person
Free Consent
According to Sec 10 of the Indian Contract Act one of the
essentials of a valid contract is “Free Consent”
Sec 13 defines “consent” as “Two or more persons are
said to consent when they agree upon the same thing in the
same sense.” According to Sec 14, consent is said to be free
when it is not caused by:
1.Coercion
2.Undue influence
3.Fraud
4.Misrepresentation
5.Mistake
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COERCION
According to Sec 15 coercion means “Committing or
threaten to commit any act forbidden by Indian Penal Code
1860 or unlawful detaining or threating to detaining any other
persons property with a view to enter into an agreement. It is
immaterial whether the IPC is or is not in force where the
coercion is employed”
The threat amounting to coercion need not necessarily be
from a party to contract , it may also proceed from a stranger
to the contract.
UNDUE INFLUENCE
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1. There are two persons
2. The relations are satisfying between them
3. One must dominate the other
4. There must be unfair advantage
5. It involves the moral pressure
Examples of Undue Influence
-Principal and agent
-Superior and and subordinate
-Doctor and patient
-Father and son
-Teacher and student
-Promoter and company
-Master servant
-Spiritual advisor and devotee
FRAUD
According to Sec 17 fraud means and includes any of those
acts committed by a party to contract or with his connivance or
by his agent with an intent to deceive or induce a person to
enter a contract:
1. The suggestion that a fact is true when it is not true and the
person making it does not believe in itto be true
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2. The active concealment of a fact by a person having
knowledge or belief of the fact
3. A promise made without any intention of performing it
4. Any other act fitted to deceive
5. Any such act or omission as the law specially declares to be
fraudulent
Essentials of fraud
1. There must be a representation or assertion and it must be
false
2.The representation must relate to a fact
3.The representation must have been made with the intention
of inducing the other party to act upon it
4.the representation must have been made with a knowledge
of its falsity
5.the other party must have subsequently suffered some loss
MISREPRESENTATION
According to Sec 18 there is misrepresentation:
1. When a person positively asserts a fact is true when his
information does not warrant it to be so, though he
believes it to be true
2. When there is any Breach of duty by a person which brings
an advantage to the person committing it by misleading
another to his prejudice
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3. When a party causes however innocently the other party
to the agreement to make a mistake as to the substance of
the thing which s the subject of the agreement
Performance of Contract
ACTUAL PERFORMANCE
When both parties perform their promises & there is nothing
remaining to perform.
ATTEMPTED PERFORMANCE
When the promisor offers to perform his obligation ,but
promisee refuses to accept the performance. It is also known
as tender.
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Discharge of Contract
DISCHARGE BY PERFORMANCE
DISCHARGE BY AGREEMENT OR CONSENT
DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE
DISCHARGE BY LAPSE OF TIME
DISCHARGE BY OPERATION OF LAW
DISHARGE BY BREACH OF CONTRACT
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Unit–II: The Sale of Goods Act, 1930
Goods
• ‘Goods’ means every kind of movable property, other than
actionable claims and money; and includes stocks and
shares, growing crops, grass and things attached to or
forming part of the land which are agreed to be severed
before sale or under the contract of sale
• Trademarks, patents, copyright, goodwill, water, gas,
electricity are all goods
• In general, it is only the movables that form goods
• The term goods excludes money
• Money means legal tender and not the rare coins which
can be sold and purchased as goods
• Money itself cannot be subject of a sale
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• The actionable claims are things which a person cannot
make use of, but which can be claimed by him by means of
a legal action
Kinds of Goods
• Goods may be classified as:
1. Existing
2. Future
3. Contingent
Existing goods are those which are owned or possessed by the
seller at the time of the contract
Instances of goods possessed but not owned by the seller are
sales by agents and pledgees
• Existing goods may be either:
a) Specific or ascertained
b) Generic and unascertained
Specific goods means goods identified and agreed upon at the
time a contract of sale is made
Ascertained goods, though normally used as synonym for
specific goods may be intended to include goods which have
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become ascertained subsequently to the formation of the
contract
Generic or unascertained goods are goods indicated by
description and not specifically identified
SALE :
It is a contract where the ownership in the goods is
transferred by seller to the buyer immediately at the
conclusion contract
EXAMPLE: A sells his house to B for Rs. 10,00,000. It is a sale
since the ownership of the house has been transferred from A
to B.
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AGREEMENT TO SELL :
It is a contract of sale where the transfer of property in
goods is to take place at a future date or subject to some
condition thereafter to be fulfilled.
EXAMPLE: A agreed to buy from B a certain quantity of nitrate
of soda. The ship carrying the nitrate of soda was yet to arrive.
This is `an agreement to sell`. In this case, the ownership of
nitrate of soda is to be to transferred to A on the arrival of the
ship containing the specified goods (i.e. nitrate of soda)
[Johnson V McDonald (1842) 9 M & W 600, 60 RR 838]
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Price: The consideration for the contract of sale called
price must be money.
Essential elements of a valid contract: All the essential
elements of a valid contract must be present in the
contract of sale.
The Price
Sec.2(10) defines price “as money consideration for a sale of
goods”.
It forms an essential part of the contract.
It must be expressed in terms of money.
It is not essential that the price should be fixed at the time
of sale. It must, however, be payable, though it may not
have been fixed.
Ascertainment of price
Price in a contract of sale may be
fixed by the contract itself, or
left to be fixed in an agreed manner, or
determined by the course of dealing between the
parties[Sec. 9(1)]
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In the absence of this, the buyer must pay to seller a
reasonable price. What is the reasonable price is a
question of fact dependent on the circumstances of
each particular case[Sec. 9(2)]
IMPORTANCE OF TRANSFER OF OWNERSHIP
It is important to know the precise moment of
time at which the property in goods passes from
the seller to the buyer for the following reasons:-
1. Risk prima facie passes with ownership: In case of
destruction of or damage to the goods, it is the owner who
has to bear the loss because the general rule is ‘res perit
domino’ risk follows ownership or whosoever is the owner must
bear the loss. The payment of the price or possession of goods
is immaterial.
2. Action against third parties: In case the goods have damaged
by a third party, it is the only the owner who can take action
against him.
3. Insolvency of the seller or the buyer: In the
event of insolvency of either the seller or the buyer, the
question whether the Official Receiver or Assignee can take
over the goods or not depends on whether the property in the
goods has passed from the seller to the buyer.
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Conditions and Warranties
MEANING OF CONDITION AND WARRANTY
A stipulation in a contract of sale with reference to goods
which are the subject thereof may be a condition or a
warranty[Sec. 12(1)].
Condition:
A condition is a stipulation essential to the main purpose of
the contract, the breach of which gives rise to a right to treat
the contract as repudiated. [Sec 12(2)]
Warranty:
A warranty is a stipulation collateral to the main purpose of
the contract, breach of which gives rise to a claim for damages,
but not a right to reject the goods and treat the contract as
repudiated. [Sec 12(3)]
Transfer of Title
For Specific goods(Sec. 20 to 22)
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Passing of property at the time of contract(Sec.20)
Where there is an unconditional contract for the sale of
specific goods in a deliverable state, the property in the goods
passes to the buyer when the contract is made.
Passing of property delayed beyond the date of the
contract
Goods not in a deliverable state(Sec.21)
Where there is a contract for sale of specific goods not
in a deliverable state, i.e., the seller has to do something
to the goods to put them into the deliverable state, the
property does not pass until such thing is done and the
buyer has notice of it.
When the price of goods is to be ascertained by weighing
Where there is a contract for sale of specific goods in a
deliverable state, but the seller is bound to weigh,
measure, test or do some other act or thing with
For unascertained/ ‘future’ goods Sec.23
In the case of a contract for a sale of unascertained or future
goods by description , property will pass from the seller to the
buyer when the goods of the same description, in a deliverable
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state, are unconditionally appropriated to the contract by one
party with the consent of the other.
Goods sent on approval or ‘sale or return’ Sec.24
When the goods are delivered to the buyer on ‘approval’ or
on ‘sale or return’ basis, the property in the goods will pass
from seller to the buyer, when any of the following conditions
are satisfied.
The buyer accepts the goods, or
The buyer does something which is similar to his
act of accepting the goods, e.g., pledges the
goods or sells away the goods, or
The buyer retains the goods without giving
notice of rejection beyond the period fixed or
reasonable period if no time is fixed.
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Definition of Unpaid Seller
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1.RIGHT OF LIEN[Sec 46(1)(a) and 47 to 49]
The right of lien means lawfully right to retain the goods
possession until the full priceis received. An unpaid seller can
exercise his right of lien in following cases
Where the goods have been sold on the cash basis.
I. Where the goods have been sold on credit basis and the
term of credit has expired.
II. Where the buyer has become insolvent even if the period
of credit has not been expired.
2.RIGHT OF STOPPAGE IN TRANSIT
It means stoppage of goods while they are in transit to take
possession until the price is paid (sec.50-52)
Unpaid seller can stop the goods in transit in the following
cases.
1. While the buyer becomes insolvent.
2. While the goods are out of actual possession of seller,
but have not reached buyer’s possession i.e. goods
are in transit with career.
3. The unpaid seller can stop the goods in transit only
for payment of the price of the goods and not for any
other charges.
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3.RIGHT TO RE-SALE
If a buyer fails to pay or offer the price within a reasonable
time, the unpaid seller has the right to resell the goods in
the following circumstances.
1. Where the goods are of perishable nature.
2. Where the unpaid seller has exercised his right of lien
or stoppage in transit and gives a notice to buyer of
his intension of resell the goods.
3. Where the unpaid seller has expressly reserved his
right of resale.
4. Where seller gives notice to the buyer of his intension
to resell and the buyer does not pay within a
reasonable time, he can-
a. Recover loss on resale of the goods, if any
b. Retain any surplus on resale of goods, if any
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Unit–III: The Negotiable Instruments Act,
1881
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previous holders of the instrument. This is the main distinction
between a negotiable instrument and other subjects of
ordinary transfer. The general rule of nemo dat quod non habet
does not apply to negotiable instruments.
3. Rights
(7) The sum payable must be certain and must not be capable
of contingent additions or subtractions.
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(8) Payment must be in legal tender money only. “I promise to
pay B Rs. 3,000 and one quintal of paddy,” is not a promissory
note.
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Essentials of a Bill of Exchange
1. It must be in writing-The Bill of Exchange must be in
writing.
2. Order to pay-There must be an order to pay. It is the
essence of the bill that the drawer orders the drawee to
pay money to the payee. The term order means any
request or direction, which show an intention of the
drawer to pay.
3. Unconditional order-This order must be unconditional.
The bill is payable at all events. The order of the payment
of the bill must not dependent on a contingent event. A
conditional bill of exchange is invalid.
4. Signature of the drawer-The drawer must sign the
instrument. The instrument without the proper signature
will be unclear and ineffective. It is permissible to add the
signature at any time after the issue of the bill.
5. Parties -There must be three parties in a bill of exchange
and the parties must be certain. The drawer, drawee and
the payee are the parties in a bill of exchange.
6. Certainty of amount-The order must be to pay a certain
sum of money.
7. Payment medium-The instrument must contain an order
to pay money and money only. The distinctive order to pay
anything is invalid.
8. Stamping-A Bill of Exchange is valid when it is duly
stamped as per the Stamp Act.
9. Cannot be made payable to bearer on demand-A Bill of
Exchange as originally drawn cannot be made payable to
the bearer on demand.
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Cheque– Definition
Section 6 of the Act defines “A cheque is a bill of exchange
drawn on a specified banker, and not expressed to be payable
otherwise than on demand”. A cheque is bill of exchange with
two more qualifications, namely, (i) it is always drawn on a
specified banker, and (ii) it is always payable on demand.
Consequently, all cheque are bill of exchange, but all bills are
not cheque. A cheque must satisfy all the requirements of a bill
of exchange; that is, it must be signed by the drawer, and must
contain an 17 unconditional order on a specified banker to pay
a certain sum of money to or to the order of a certain person or
to the bearer of the cheque. It does not require acceptance.
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4. A grace of three days is allowed in the case of time bills while
no grace is given in the case of a cheque.
5. The drawer of the bill is discharged from his liability, if it is
not presented for payment, but the drawer of a cheque is
discharged only if he suffers any damage by delay in presenting
the cheque for payment.
6. Notice of dishonour of a bill is necessary, but no such notice
is necessary in the case of cheque.
7. A cheque may be crossed, but not needed in the case of bill.
8. A bill of exchange must be properly stamped, while a cheque
does not require any stamp.
9. A cheque drawn to bearer payable on demand shall be valid
but a bill payable on demand can never be drawn to bearer.
10. Unlike cheques, the payment of a bill cannot be
countermanded by the drawer.
Bank Draft
It is a bill of exchange in which a bank orders its branch or
another bank, as the case may be, to pay a specified amount to
a specified person or to the order of the specified person.
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8. Drawee in case of need: When in the bill or in any
endorsement, the name of any person is given, in addition to
the drawee, to be resorted to in case of need, such a person is
called ‘drawee in case of need’. In such a case it is obligatory on
the part of the holder to present the bill to such a drawee in
case the original drawee refuses to accept the bill. The bill is
taken to be dishonored by non-acceptance or for nonpayment,
only when such a drawee refuses to accept or pay the bill.
9. Acceptor for honor: In case the original drawee refuses to
accept the bill or to furnish better security when demanded by
the notary, any person who is not liable on the bill, may accept
it with the consent of the holder, for the honor of any party
liable on the bill. Such an acceptor is called ‘acceptor for honor’.
Parties to a Promissory Note
1. Maker. He is the person who promises to pay the amount
stated in the note. He is the debtor.
2. Payee. He is the person to whom the amount is payable i.e.
the creditor.
3. Holder. He is the payee or the person to whom the note
might have been indorsed.
4. The indorser and indorsee (the same as in the case of a bill).
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Parties to a Cheque
1. Drawer. He is the person who draws the cheque, i.e., the
depositor of money in the bank.
2. Drawee. It is the drawer’s banker on whom the cheque has
been drawn.
3. Payee. He is the person who is entitled to receive the
payment of the cheque.
4. The holder, Endorser and Endorsee (the same as in the case
of a bill or note).
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Unit–IV: Laws pertaining to Business
Organizations:
Sole proprietorship
Sole proprietorship is a form of business entity where a single
individual handles the entire business organization. He is the
sole recipient of all profits and bearer of all loses. There is no
separate law that governs sole proprietorship.
Partnership
Partnership is “the relation between persons who have agreed
to share the profits of the business carried on by all or any one
of them acting for all”. It is governed by the Indian Partnership
Act 1932.
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Co-operatives
Co-operatives is a form of voluntary organization, wherein the
members work together for the promotion of the interests of
its members. There is no restriction to the entry or exit of any
member. It is governed by Cooperative Societies Act 1912.
Liaison Office
Liaison Office is a kind of representative office which is set up
to understand the business and investment environment. It is
barred from taking up any commercial/industrial/trading
activity and its role is limited to aggregation of information and
promotion of exports/imports. It has to maintain itself out of
inward remittances received from the parent company.
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Branch Office
Foreign companies which are into manufacturing and trading
activities abroad are permitted to set up branch offices in India
for various purposes like rendering of professional and
consultancy services, export/import of goods etc. Branch
offices are not permitted to carry out manufacturing activities
on their own. RBI is the statutory body that grants permission
to foreign companies for setting up branch offices in India.
Project Office
Foreign companies can set up temporary project offices in India
for carrying out activities related to that specific project. - See
more at: http://business.mapsofindia.com/doing-business-in-
india/types-of-business-entities-in-
india.html#sthash.iVYV2LQ1.dpuf
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Types of Registered Companies
Private Limited Company
Partnership
Limited Liability Partnership
Proprietorship
One Person Company
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2. Partnership
Partnership business entities are quite similar to sole
proprietorship. The basic difference between partnership and
sole proprietorship is that more than one individual is involved
in a partnership. The roles, responsibilities and the share of
each partner are specifically defined in a legal partnership
agreement.
Any profit earned by the business is shared between partners
according to the legal partnership agreement. In case there are
losses, each of the partners is personally responsible. Personal
assets of partners may be used to compensate the losses
incurred, if any.
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4. Proprietorship
A business registered in the name of an individual is called Sole
Proprietorship. A single person is completely responsible for
the entire business with the business and the owner not being
separate from each other. The owner funds the business, takes
any profits and bears any losses.
It does not involve any complex rules or accounting. Personal
assets and business assets are not separated from each other.
Any profits from the business are just added to the business
owner’s income for taxation purposes.
Similarly, any losses become the personal losses of a business
owner. In case the business starts incurring losses and
additional money is needed to compensate those losses, the
personal assets of the owner itself are put at risk.
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Partnership Firms – Formation
Section.4 of the Indian Partnership Act, 1932 defines
Partnership in the following terms:
“ Partnership is the relation between persons who have agreed
to share the profits of a business carried on by all or any of
them acting for all.”
Essentials of Partnership
a.) There must be a contract.
b.) Between two or more persons.
c.) Who agree to carry on business.
d.) With the object of sharing profits.
e.) The business must be carried on by all or any of them
acting for all.
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An application in the prescribed format along with the
prescribed fees has to be submitted to the Registrar of firms of
the State in which the place of business of the firm is situated.
The application must be signed by all the partners and must
contain the following particulars:
a.) The name of the firm.
b.) The place of business of the firm.
c.) The names of any other places where the business of the
firm is carried on.
d.) The date when each partner joined the firm.
e.) The names in full and permanent addresses of the partners.
Duties of Partners
1. To be Sincere and faithful :-
Every partner should be fair and faithful in dealing to other
partners.
3. Common Advantage :-
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Every partner should performs his duties for the common
advantage of all the partners.
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If a partner commits a fraud his co-partner he must
compensate the loss.
Liabilities of Partners
1. Loss Liability :-
In case of loss each partner will equally contribute the loss. If
there is no agreement.
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A new partner is liable for all the acts of the firm done after he
becomes a partner.
7. Liability of Fraud :-
If any partner commits fraud the other partners will also be
equally liable.
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b.) If constituted to carry out one or more
adventures or undertakings, by the completion thereof.
c.) By the death of the partner.
d.) By the adjudication of partner as an insolvent.
4. Compulsory Dissolution: A firm may be compulsorily
dissolved if:
a.) When all the partners, or all the partners but one,
are adjudged insolvent.
b.) When some event has happened which makes it
unlawful for the business of the firm to be carried on.
5. Dissolution by the Court: Dissolution by the court is
necessitated when there is a difference of opinion
between the partners regarding the matter of dissolution
in cases of:
a) Insanity
b) Permanent Incapacity
c) Misconduct
d) Persistent breach of agreement
e) Transfer of interest
f) Just and Equitable
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Distinction between a Firm and a Company
BASIS FOR PARTNERSHIP COMPANY
COMPARISON
FIRM
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Registration Voluntary Obligatory
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