Negotiable Instrument:

S e c t i o n 1 3 o f t h e N e g o t i a b l e I n s t r u m e n t A c t , 1 8 8 1 , d e f i n e s a negotiabl
e instrument as: “A negotiable instrument means a promissory note, bill of exchange or cheque
payable either to order or to bearer.” [Sec. 13(1)].
Explanation:
A promissory note, bill of exchange or cheque is payable to order,w h i c h i s e x p r es s e d t o
b e s o pa y a bl e, o r w hi c h i s ex pr es s e d t o be pa y a bl e t o a particular person, and does
not contain words prohibiting transfer or indicating an intention that it shall not be
transferable.‘N e g o ti a b l e ’ l i te r a l l y me a ns ‘ tr a ns f er a b l e ’. ‘ Ins tr u me n t’ m e a n s a ‘docum
ent.’ Therefore, negotiable instrument means an ‘a transferable
document’.H o w e v e r , i t d o e s n o t m e a n t h a t a n i n s t r u m e n t i n o r d e r t o b e v a l i
d must benegotiable. Instruments may be marked ‘not negotiable’ yet th
e y a r e v a l i d instruments and governed by the provisions of the Act.The Act narrows down the
meaning of instrument. It regulates only three types of instruments, viz., Promissory Notes, Bills
of Exchange and Cheques.A negotiable instrument is one which entitles the holder to the
receipto f m o n e y . I t g i v e s h i m t h e r i g h t t o t r a n s f e r t h e s a m e b y m e r e
d e l i v e r y o r endorsement thereon. The negotiability of the instrument continues till its
maturity.
Essential Elements of Negotiable Instrument :
To be negotiable an instrument must have the following elements :
1.A negotiable instrument must be in writing, which includes typing, printing and engraving.
2.The instrument must be signed by the maker or drawer.
3.There must be a promise if it is a promissory note or order to pay if it is a bill of exchange.
4.The promise or order must be unconditional. If it is conditional the instrument is not negotiable.
5.A negotiable instrument must call for payment in money. If the promise or order is
for anything else, the instrument is not negotiable.
6.The instrument must not only call for payment in money but also for a certain sum.
Characteristics of NIA 1881
1. Freely transferable. The property is a negotiable instrument passes from the one person to
another by delivery, if the instrument is payable to bearer, and endorsement and delivery if it is
payable order
2. The title of holder free from all defects .a person taking in an instrument bona fide and for
value, known as the holder in due course, gets the instrument free from all defects in the title of
the transferor. He is not in any way affected by any defect in the title of the transferor of any
prior party .he is not affected by certain defense which might be available against the previous
holder, for example, fraud, provided he him self is not a party to it
3. Recovery, the holder in due course can sue upon a negotiable instrument in his own name for
the recovery of the amount further he need not give notes of the instrument to pay
 4. Presumption. The Certain presumption applies to all negotiable instruments unless the
contrary is provided. This presumption is dealt with in secs, 118 and 119 and are as follows
(a) Consideration. Every negotiable is presumed to have been made drawn, accepted, indorsed,
negotiable or transferred for consideration. This would help a holder to get a decree from a court
without any difficulty.
(b) Date. Every negotiable instrument bearing a date is presumed to have been made or drawn
on such date.
(c) Time of acceptance. When a bill of exchange has been accepted, it is presumed that it was
accepted within a reasonable time of its date and before its maturity
(d) Time of transfer. Every transfer of negotiable instrument is presumed to have been made
before its maturity.
(e) Order of endorsements. the endorsement appearing upon a negotiable are presumed to
have been made in the order in which they appear thereon
(f) Stamp. When an instrument has been lost it is presumed that it duly stamped.
(g) Holder a holder in due course. Every holder of a negotiable instrument is presumed to be
holder in due course (sec 118)
(h) Proof of protest .in a suit upon an instrument which has been dishonor, the court, on proof of
the protest presumes the fact of dishonor, unless and such fact is disproved (sec 119).

So, as per Negotiable Instruments Act, 1881 there are just three types of negotiable instruments i.e.,
 Promissory note
 Bill of exchange
 Cheque
But apart from these, many other documents are also recognized as Negotiable Instruments on the
basis of custom and usage, like Negotiable Instruments 29 treasury bills, share warrants, hundis, etc.
(only if they possess the features of negotiability)
Promissory Note
Section 4 of The Negotiable Instruments Act, 1881 defines Promissory Note as:
“A ‘Promissory note’ is an instrument in writing (not being a bank-note or a currency-note)
containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only
to, or to the order of, a certain person, or to the bearer of the instrument.”
A promissory note is a financial instrument which contains a written promise by one party to pay
another party a definite amount of money, either on demand or at a specified future date. It typically
contains all the terms pertaining to the indebtedness, such as the principal amount, interest rate,
date, maturity date, and place of issuance, and issuer’s signature. This document, once signed by the
specified person, duly stamped and handed over to another person involved, becomes a Negotiable
Instrument.
There are mainly two parties involved in a promissory note.
The Maker or Drawer: the person who makes the promissory note and promises to pay the amount
stated therein.
The Payee: the person to whom the amount is to be paid.
Features of a Promissory Note
 Written Instrument
 Duly Signed and Stamped by the maker
 Contain undertaking or Promise to pay
 Conditional
 Sum of money
 Promise to pay ‘money’ only
 Payable on demand or after a certain date
 Maker must be certain
 Payee must be certain
 Sum payable must be certain, i.e. can be calculated
Bill of Exchange
Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange a
‘an instrument in writing containing an unconditional order, signed by the maker, directing a certain
person to pay a certain sum of money only to or to the order of a certain person, or to the bearer of
the instrument’.
There are three parties involved in a bill of exchange. They are
1. The Drawer: The person who makes the order for making payment.
2. The Drawee: The person to whom the order to pay is made.
3. The Payee: The person to whom the payment is to be made.
Features of Bill of Exchange
 Written
 Duly Signed by drawer
 Drawee
 Duly Stamped
 Order to pay
 In terms of Money only
 Parties must be Certain
 Sum payable must be Certain
 Unconditional
 Date
Cheque
Transactions through cheques are quite common these days. Cheques are a type of bill of
exchangeand were developed as a way to make payments without the need to carry large amounts
of money. It is a document that orders a bank to pay a specific amount of money from a person’s
account to the person in whose name the cheque has been issued. The person writing the cheque is
known as a drawer. The amount is transferred only to the person to whom a cheque is addressed.
Section 6 of The Negotiable Instruments Act, 1881 defines cheque as:
“A ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque
in the electronic form.”
There are various types of cheques and these are described in the following sections.
 Order Cheque
 Bearer Cheque
 Blank Cheque
 Counter cheque
 Stale Cheque
 Multilated Cheque
 Post Dated Cheque
 Open Cheque
 Crossed Cheque
 Gift Cheque
 Traveller’s Cheque
 Self Cheque, etc.
For Details, Refer:
Types of Cheques and Crossing of Cheques
Features of a Cheque:
 Written
 Duly Signed by the drawer
 Unconditional order
 Issued by Specified banker
 Amount must be Certain
 Amount mentioned both in figures and words
 Payee must be Certain
 Payable on Demand
 Must be Dated

Difference Between Cheque and Bill of Exchange

‘Cheque‘ is an instrument which contains an unconditional order, drawn on a banker, directing to
pay a certain sum of money to the person whose name is specified in the instrument. In contrast,
‘Bill of Exchange‘ is a document contains an unconditional order, directing a person, to pay a
certain amount to a specified person.

A negotiable instrument is a written document, which entitles a certain amount and is transferable
from one person to another, by simple delivery or by endorsement and delivery. There are three
types of a negotiable instrument as per statute, i.e. cheque, bills of exchange and promissory note.
There are many instances when people juxtapose cheque for a bill of exchange, but they are
different, in the sense that a bill of exchange requires acceptance, whereas there is no need for
acceptance in cheque.

Go through with this article to learn some more differences between cheque and bill of exchange.

Content: Cheque Vs Bill of Exchange

1. Comparison Chart
2. Definition
3. Key Differences
4. Similarities
5. Conclusion

Comparison Chart

BASIS FOR
CHEQUE BILL OF EXCHANGE
COMPARISON

Meaning A document used to make easy A written document that

payments on demand and can be shows the indebtedness of
transferred through hand the debtor towards the
delivery is known as cheque. creditor.

Defined in Section 6 of The Negotiable Section 5 of The

Instrument Act, 1881 Negotiable Instrument
Act, 1881

Validity Period 3 months Not Applicable

Payable to Always Cannot be made payable

bearer on on demand as per RBI Act,
demand 1934

Grace Days Not Applicable, as it is always 3 days of grace are

payable at the time of allowed.
 BASIS FOR
CHEQUE BILL OF EXCHANGE
COMPARISON

presentment.

Acceptance A cheque does not require Bill of exchange needs to

acceptance. be accepted.

Stamping No such requirement. Must be stamped.

Crossing Yes No

Drawee Bank Person or Bank

Noting or If the cheque is dishonoured it If a bill of exchange is

Protesting cannot be noted or protested dishonoured it can be
noted or protested.

Definition of Cheque

A cheque is a type of bill of exchange, used for the purpose of making payment to any person. It is an
unconditional order, addressing the drawee to make payment on behalf the drawer, a certain sum of
money to the payee. A cheque is always payable on demand, i.e. the amount is paid to the bearer of
the instrument at the time of presentment of the cheque. It is always in writing and signed by the
drawer of the instrument.
There are three parties involved in case of cheque:

 Drawer: The maker or issuer of the cheque.

 Drawee: The bank, which makes payment of the cheque.
 Payee: The person who gets the payment of the cheque or whose name is mentioned on the
cheque.

It should be noted that the issuer must have an account with the bank. There is a specified time limit
of 3 months, during which the cheque must be presented for payment. If a person presents the
cheque after the expiry of 3 months, then the cheque will be dishonored. The various types of
cheques are:

 Electronic Cheque: A cheque in electronic form is known as an electronic cheque.

 Truncated Cheque: A cheque in paper form is known as truncated cheque.

Definition of Bill of Exchange

A bill of exchange is a negotiable instrument, contains an unconditional order, directing the drawee to
pay a certain sum of money to payee addressed in the instrument. The bill is made and signed by the
drawer and accepted by the drawee. It contains a pre-determined date on which the payment is to be
made to the payee. It can be payable on demand when the bill is discounted with the bank. The
parties to the bill of exchange must be certain.
There are three parties involved in the bill of exchange, they are:

 Drawer: The maker of the bill of exchange.

 Drawee: A person on whom the bill is drawn, i.e., the person who gives acceptance to make
payment to the payee.
 Payee: The person who gets the payment.

There are three days of grace allowed to the drawee, to make payment to the payee, when it
becomes due. You might wonder about the days of grace, let’s understand it with an example: A bill is
drawn on 5-10-2014 in the name of X, to make payment to Y after 3 months. The bill will become due
on 5-01-2015 while the date of maturity is 8-01-2015 because of 3 days of grace are added to it. The
following are the types of bill of exchange:

 Inland Bill
 Foreign Bill
 Time Bill
 Demand Bill
 Trade Bill
 Accommodation Bill
Key Differences Between Cheque and Bill of Exchange

1. An instrument used to make payments, that can be just transferred by hand delivery is known
as the cheque. An acknowledgment prepared by the creditor to show the indebtedness of the
debtor who accepts it for payment is known as a bill of exchange.
2. A Cheque is defined in section 6 while Bill of Exchange is specified in section 5 of the Negotiable
Instrument Act, 1881
3. The drawer and payee are always different in the case of a cheque. In general, drawer and
payee are the same persons in the case of a bill of exchange.
4. The stamp is not required in cheque. Conversely, a bill of exchange must be stamped.
5. A cheque is payable to the bearer on demand. As opposed to the bill of exchange, it cannot be
made payable to the bearer on demand.
6. The cheque can be crossed, but a Bill of Exchange cannot be crossed.
7. There is no days of grace allowed in cheque, as the amount is paid at the time of presentment
of the cheque. Three days of grace are allowed in the bill of exchange.
8. A cheque does not need acceptance whereas a bill needs to be accepted by the drawee.

6 Persons who are Disqualified by Law from Entering into a Contract in India
1. Alien enemy:
All persons other than Indian citizens are aliens. When the sovereign or the state of that alien is at
peace with India, he is an alien friend. Contrary to it, he will be an alien enemy.An alien friend living in
India has full contracting competency subject to certain restrictions, which may be imposed by the
Government of India, e.g., an alien cannot acquire any ownership interest in Indian shipping. In case
of outbreak of war between India and the alien country, the following rules apply for the
performance of agreements:-

No contract can be made with an alien enemy during the subsistence of war, except with the prior
approval of the Government of India.Performance of the contracts made before the outbreak of war
will be suspended during the course of war. They can be performed only when the war is over. Even
then, the government can put restrictions on the performance of such contracts, if it considers them
necessary for national interest.

2. Foreign sovereigns and ambassadors:

Foreign sovereigns and accredited representatives of a foreign state or ambassadors enjoy special
privilege, by which they cannot be sued in Indian courts. However, they can, if they choose, enter into
contracts and can enforce such contracts in Indian courts. Ex-kings are not entitled to this privilege
and therefore, can be sued in Indian courts just as ordinary citizens.In India, under Sec. 86 of the Civil
Procedure Code, previous sanction of the Central Government is to be obtained, for suing the rulers
of foreign states, ambassadors and envoys.

3. Convicts:
A convict is a person, who is sentenced by a competent court to the death sentence or imprisonment.
A convict cannot enter into a valid contract while undergoing sentence, nor can sue. His
incompetency is over, when the period of his sentence is over or he is pardoned.Thus, the
competency right to make a contract or sue is only suspended during the course of his sentence and
is not lost. Whenever he is freed, he regains such rights.

4. Professional persons:
It is only in England, where the barristers cannot sue their clients for their professional fees. In India,
no such rule exists.In India, every barrister, who has got himself enrolled as an advocate of an Indian
High Court can sue his clients for his fees. Under Indian Bar Councils Act, 1927, enrolment of an
advocate is necessary before he can practice.

5. Corporations:
Corporations include registered companies, local bodies and city corporations. Corporations are legal
artificial persons. Since they have legal existence, they can acquire property, transact their business
and are capable of suing and being sued. But they cannot do so without their seals.Powers of a
corporation are limited by its Memorandum of Association, beyond which it cannot do anything. This
is because contracts which are ultra vires of the objects of the company, shall not be binding. Even
such contracts cannot be ratified by passing a resolution in the general meeting of the company
members.

6. Married women:
Law has not made any distinction regarding contractual capacity of males and females. A woman,
whether married or unmarried, enjoys the same contractual capacity as a man. Whatever property a
woman possesses, she has absolute ownership over it.She is free to deal with her personal property
in the way in which she likes. Her husband is not at all responsible for her contracts.

QUASI CONTRACT

A quasi contract is a contract that is created by a court order, not by an agreement made by the
parties to the contract. For example, quasi contracts are created by the court when no official
agreement exists between the parties, in disputes over payments for goods or services. The goal in
the court’s creation of these contracts is to prevent unjust enrichment to any party. To explore this
concept, consider the following quasi contract definition.

The word ‘Quasi’ means pseudo. Hence, a Quasi contract is a pseudo-contract. When we talk about a
valid contact we expect it to have certain elements like offer and acceptance, consideration, the capacity
to contract, and free will. But there are other types of contracts as well.

There are cases where the law implies a promise and imposes obligations on one party while conferring
rights to the other even when the basic elements of a contract are not present. These promises are not
legal contracts, but the Court recognizes them as relations resembling a contract and enforces them like
a contract. These promises/ relations are Quasi contracts. These obligations can also arise due to
different social relationships which we will look at in this article.

The core principles behind a Quasi Contract are justice, equity and good conscience. It is based on the
maxim: “No man must grow rich out of another persons’ loss.”

Let’s look at an example of a Quasi contract: Peter and Oliver enter a contract under which Peter agrees
to deliver a basket of fruits at Oliver’s residence and Oliver promises to pay Rs 1,500 after consuming all
the fruits. However, Peter erroneously delivers a basket of fruits at John’s residence instead of Oliver’s.
When John gets home he assumes that the fruit basket is a birthday gift and consumes them.

Although there is no contract between Peter and John, the Court treats this as a Quasi-contract and
orders John to either return the basket of fruits or pay Peter.

Features of a Quasi Contract

1. It is usually a right to money and is generally (not always) to a liquated sum of money
2. The right is not an outcome of an agreement but is imposed by law.
3. The right is not available against everyone in the world but only against a specific person(s). Hence
it resembles a contractual right.
Sections 68 – 72 of the Indian Contract Act, 1872 detail five circumstances under which a Quasi contract
comes to exist. Remember, there is no real contract between the parties and the law imposes the
contractual liability due to the peculiar circumstances.

Section 68 – Necessaries Supplied to Persons Incapable of Contracting

Imagine a person incapable of entering into a contract like a lunatic or a minor. If a person supplies
necessaries suited to the condition in life of such a person, then he can get reimbursement from the
property of the incapable person.

John is a lunatic. Peter supplies John with certain necessaries suited to his condition in life. However,
John does not have the money or sanity and fails to pay Peter. This is termed as a Quasi contract and
Peter is entitled to reimbursement from John’s property.

However, to establish his claim, Peter needs to prove two things:

1. John is a lunatic
2. The goods supplied were necessary for John at the time they were sold/ delivered.

Section 69 – Payment by an Interested Person

If a person pays the money on someone else’s behalf which the other person is bound by law to pay,
then he is entitled to reimbursement by the other person.

Peter is a zamindar. He has leased his land to John, a farmer. However, Peter fails to pay the revenue
due to the government. After sending notices and not receiving the payment, the government releases
an advertisement for sale of the land (which is leased to John). According to the Revenue law, once the
land is sold, John’s lease agreement is annulled.

John does not want to let go of the land since he has worked hard on the land and it has started yielding
good produce. In order to prevent the sale, John pays the government the amount due from Peter. In
this scenario, Peter is obligated to repay the said amount to John.

Section 70 – Obligation of Person enjoying the benefits of a Non-Gratuitous Act

Imagine a person lawfully doing something or delivering something to someone without the intention of
doing so gratuitously and the other person enjoying the benefits of the act done or goods delivered. In
such a case, the other person is liable to pay compensation to the former for the act, or goods received.
This compensation can be in money or the other person can, if possible, restore the thing done or
delivered.

However, the plaintiff must prove that:

 The act that is done or thing delivered was lawful

 He did not do so gratuitously
 The other person enjoyed the benefits

Section 71 – Responsibility of Finder of Goods

If a person finds goods that belong to someone else and takes them into his custody, then he has to
adhere to the following responsibilities:

 Take care of the goods as a person of regular prudence

 No right to appropriate the goods
 Restore the goods to the owner (if found)
Peter owns a flower shop. Olivia visits him to buy a bouquet but forgets her purse in the shop.
Unfortunately, there are no documents in the purse to help ascertain her identity. Peter leaves the
purse on the checkout counter assuming that she would return to take it.

John, an assistant at Peter’s shop finds the purse lying on the counter and puts it in a drawer without
informing Peter. He finished his shift and goes home. When Olivia returns looking for her purse, Peter
can’t find it. He is liable for compensation since he did not take care of the purse which any prudent man
would have done.

Section 72 – Money paid by Mistake or Under Coercion

If a person receives money or goods by mistake or under coercion, then he is liable to repay or return it.

Let us see an example. Peter misunderstands the terms of the lease and pays municipal tax erroneously.
After he realizes his mistake, he approached the municipal authorities for a reimbursement. He is
entitled to be reimbursed since he had paid the money by mistake.Similarly, money paid by coercion
which includes oppression, extortion or any such means, is recoverable.

No Consideration No Contract Explain answer

Exceptions to the Rule, "No Consideration, No Contract"

Consideration being one of the essential elements of a valid contract the general rule is
that "an agreement made without consideration is void. But there are a few exceptions
to the rule, where an agreement without consideration will be perfectly valid and
binding. These exceptions are as follows:1. Agreement made on account of natural love
and affection[Sec. 25 (1)]: An agreement made without consideration is enforceable. If it
is(i) Expressed in writing(ii) Registered under the law for the time being in force for the
registration of documents(iii) Is made on account of natural love and affection(iv)
Between parties standing in a near relation to each other.
Thus there are four essential requirements which must be complied with to enforce an
agreement made without consideration, as per Section 25 (1).Let us now study some
some illustrations in this behalf(a) A promises, for no consideration, to give to B Rs
1,000. This is a void agreement(b) A for natural love and affection, promises to give his
son B, Rs 1,000. A puts his promise to B into writing and registers it This is a contract.(c)
A registered agreement, whereby an elder brother, on account of natural love and
affection, promised to a the debts of his younger brother, was held to be valid and
binding an the younger brother cause the elder brother in the event of his not carrying
out the agreement (Venkatasamy vs Rangasami)

It should, however, be noted that mere existence of a near relation between the parties
does not necessarily import natural love and affection. Thus where a Hindu husband,
after referring to quarrels and disagreement between him and his wife, executed a
registered document in favour of his wife, agreeing to pay for separate residence and
maintenance, it was held that the agreement was void for want of consideration
because it was not merely out of natural love, and affection. (Rajlakhi Devi vs
Bhootnath)
2. Agreement to compensate for past voluntary service (Sec.25 (2)].A promise made
without consideration is also valid, if it is a promise to compensate, wholly or in part, a
person who has already voluntarily done something for the promisor,' or done
something which the promisor was legally compelled to do.Illustrations(a) A finds B's
purse and gives it to him. B promises to give A Rs 50. This is a contract.(b) A supports B's
infant son. B promises to pay A's expenses in so doing. This is a contract. (Note that B
was legally bound to support his infant son).(c) A rescued B from drowning in the river,
and B, appreciating the service that had been rendered, promises to pay Rs 1,000 to A.
There is a contract between A and B.
In order to attract this exception, the following points should be noted:(i) The service
should have been rendered voluntarily for the promisor. If it is not voluntary but
rendered at the desire of the promisor, then it is covered under 'past consideration' [as
per Sec. 2(d) and not under this exception].(ii) The promisor must be in existence at the
time the service was, rendered. Thus where services were rendered by a promoter for a
company not then in existence, a subsequent promise by the company to pay for them
could not be brought within the exception. (Ahmedabad Jubilee Spinning Co. vs
Chhotalal).(iii) The promise must be to compensate a person who has himself done
something for the promisor and not to a person who has done nothing for the promisor.
Thus, where B treated A during his illness but refused to accept payment from A; they
being friends; and A in gratitude promises to pay Rs 1,000 to B's son D, the agreement
between A and D is void for want. of consideration as it is not covered under the
exception.(iv) The intention of the promisor ought to be to compensate the promisee. A
promise given for any motive other than the desire to compensate the promisee would
not fall within the exception. (Abdulla Khan vs Parshottam)(v) The promisor to whom
the service has been rendered needed competence to contract at the time the service
was rendered. Thus a promise- made after attaining majority to pay for goods supplied
voluntarily to the promisor during his minority has been held valid and the promisee
could enforce it ,(Karam Chand vs Basant Kaur).

The court in that case ob-served that they failed to see how an agreement made by a
person of full age to compensate wholly or in part a promisee, who had already
voluntarily done something for the promisor, even at a time when the promisor was a
minor, did not fall within the purview of Sec. 25(2) of the Contract Act. The reasoning of
the court is, that at the time the thing was done the minor was unable to contract, and
therefore the person who did. it for the minor must in law be taken to have done it
voluntarily. In their opinion the 'provisions of Sec. 25(2) applied equally to a contract by
a major, as well as by a minor, to pay for past services. In this connection it is important
to note that this exception does 'not cover a promise by a person on attaining majority
to repay the money borrowed during his minority because such a promise cannot be
said to be a promise to compensate a person who has already voluntarily (without any
promise of compensation) done something for the promisor. 'Advancing money as a
loan' necessarily implies a promise to compensate (i.e., a promise to repay the loan) on
the part of the borrower, Thus a promise made by a minor after attaining majority to
repay money advanced during his minority has been held invalid and beyond the
purview of Section 25(2) of the Contract Act (Indran Ramaswami vs Anthappa).
(vi) The service rendered must also be legal. Thus past cohabitation will not make a
promise to pay for it enforceable under this exception (Sabava vs Yamanappa).

3. Agreement to pay a time-barred debt (Sec. 25 (3)]. Where there is an agreement,

made in writing and signed by the debtor or by his authorised agent, to pay wholly or in
part a debt barred by the law of limitation, the agreement is valid even though It is not
supported by any consideration. A time barred debt cannot be recovered and therefore
a promise to repay such a debt is without consideration, hence the importance of the
present exception.
But before the exception can apply, it is necessary that:(i) The debt must be such of
which the creditor might' have enforced payment but for the law for the limitation of
suits.(ii) The promisor himself must be liable for the debt. So a promissory note executed
by a widow in her personal capacity in payment of time-' barred debt of her husband
cannot be brought within the exception (Pestonji vs Maherbai28);(iii) There must be an
'express promise to pay' a time barred debt as distinguished from a mere
'acknowledgement of a liability' in respect of a debt. Thus. a debtor's letter to his
creditor, "I owe you Rs. 1,000 on account of my time-barred promissory note" is not a
 contract. There must be a distinct promise to pay; and(iv) The promise must be in
writing and signed by the debtor or his agent. An oral. promise to pay a time-barred
debt is unenforceable.
The logic behind this exception is that by lapse of time the debt is not destroyed but only
the remedy is" lost. The remedy is revived by a new promise under the exception.

Illustration. A owes B Rs 1,000, but the debt is barred by the Limitation Act. A signs a
written promise to pay B Rs 500 on account of the debt. This is Ii contract (Appended to
Sec. 25).4. Completed gift. A gift (which is not an agreement) does not require
consideration in order to be valid "As between the donor and the done any lift actually
made will be valid I and binding even though without consideration" [Explanation 1, to
Section 25]. In order to attract this exception there need not be natural love and
affection or nearness of relationship between the donor and done. The gift must,
however, be complete.5. Contract of agency. Section 185 of the Contract Act lays down
that no consideration is necessary to create an agency.6. Remission by the promisee, of
performance of the promise (Sec. 63). For compromising a due debt, i.e., agreeing to
accept less than what is due, no consideration is necessary. In other words, a creditor
can agree to give up a part of his claim and. there need be no consideration for such an
agreement. Similarly, an agreement to extend time for performances of a contract need
not be supported by consideration (Sec.63).
7. Contribution to charities. A promise to contribute to charity, though gratuitous,
would be enforceable, if on the faith of the promised subscription, the promisee takes
definite steps in furtherance of the object and undertakes a liability, to the extent of
liability incurred, not exceeding the promised amount of subscription. In Kedar Nath vs
Ghorie Mohammad, the defendant had agreed to subscribe Rs 100 towards the
construction of a Town Hall at Howrah. The plaintiff (secretary of the Town Hall) on the
faith of the promise entrusted the work to a contractor and undertook liability to pay
him. The defendant was held liable. But where the promisee had done nothing on the
faith on the promise, a promised subscription is not legally recoverable. Accordingly, in
Abdul Aziz vs Masum Ali, the defendant promised to subscribe Rs 500 to a fund started
for building, a Mosque but steps had been take to carry out the repairs. The defendant
was held not liable and the suit was dismissed.

Indorsement or Endorsement :
A cheque or a bill is endorsed when the transferer puts his signature on the back or on an along with
a cheque and a bills as a part of negotiation. If the cheque is bearer it needs no endorsement.
Requirements Of Valid Endorsement :-
Following are the main requirements :
1. It must be signed by the holder.
2. In case of illiterate, a thumb impression should be fixed.
3. It must be on the back of the cheque or bill or on an along of them.
4. It may be in ink, print or with a stamp.
5. Partial endorsement is not valid legally it must be of the entire value of the cheque or bill.
6. If the number of payee are more then one then all the payees will sign or that person who is
authorized.
7. The endorsee can also add, the proper signatures if the endorse is not clear.
8. If the payee are more than two the endorsement should be in the same order which is opened
down on the back of the bill.
9. It should be completed by the delivery.
10. The intention must be clearly expressed.
Kinds of Endorsement
1. Conditional Endorsement :-

If the endorsement makes the payment of a bill subject to the fulfillment of a condition the
endorsement is called conditional. The bank or payee can disregard the condition and the payment
will be considered valid.
Example :- Mr. James holder of the bill , makes an endorsement on the bill saying, pay to Miss. Reema
if she wins the match.
2. Blank Endorsement :-
If the endorser signs, but does not give his name to whom he wishes to transfer the cheque is called
blank endorsement.
Example :- Bill is payable to "Y" "Y" signs and endorses it without mentioning the name of the
endorsee. It is a blank endorsement.
3. Special Endorsement :-
An endorsement which specifies the name of the transferee for the payment of the bill is called
special endorsement.
Example :- Mr. Tanu makes endorsement by writing the word "Pay to Mr. Sidu or order and signs it. It
is a special or full endorsement.
4. Restrictive Endorsement :-
An endorsement which restrict the further negotiation of the bill.
Example :- "Y" the holder of the bill, makes an endorsement on the bill saying to pay "X" only. It
means "X" cannot negotiate the bill further.
5. Partial Endorsement :-
If the bill purposes to be endorsed for a part of the amount payable, the endorsement is called
partial. It is legally ineffective.
Example :- Mr. Anthony holds the bill for ten thousands and endorses infavour of Mr. Qazi for Rs. 5
thousand and also in favour of Mr. Hyden for Rs. 5 thousand. It is a partial and invalid.
6. Facultative Endorsement :-
Under the negotiable instrument, when an endorsee give up some of his rights it is called facultative
endorsement.
The endorsee is relieved of his duty by giving the notice of dishonour to the endorser. The endorser
remains liable to the endorse for non-payment.
Example :- Pay Mr. Mash or order, notice of dishonour waived is a fluctative endorsement.
7. Sans Recourse Endorsement :-
While endorsing the instrument endorser expresses that he would not be liable for any expenses
incurred by indorsee or any holder, in case of dishonour of the instrument the endorsement is called
sans recourse.
Example :- Mr. Jhon endorses a bill to Miss. Sarah by writing pay Miss. Sarah or order sans recourse.

ESSENTIALS OF A VALID PROPOSAL

1. CLEAR IN TERM: A proposal must be clear in terms and understandable by all the persons. It
means that proposal must be made in such a way that everyone can understand It easily. Until
proposal is not understood by the offeree, its acceptance is not possible and there cannot be a
promise. So it is compulsory for a valid offer that it must be clear in terms and conditions.
Illustration: A offers to sell his watch to B either for Rs. 500 or for Rs. 1000. It cannot be a valid
offer because its price is not clear.
2. LAWFUL OBJECT: The object of the offer must be lawful and not illegal or against the
interests of the general public. As the proposal is the starting point of the contract, so if its
object is unlawful then the binding contract is impossible.
Illustration: A offers to B Rs. 100,000, if he kills C. it is not a valid offer because its object is
unlawful and illegal.
3. MESSAGE OF PROPOSAL: The message of the proposal is always about to do or to abstain
from doing something. Actually, the proposal is an expression of willingness of proposer to do
or not do something.
Illustration: A essentials offers to B to sell his watch for Rs. 500. It is an expression to do
something. X offers not to go to court against Y for a claim for of damage if Y pays Rs. 5000 to
him. It is an expression not to do something.
4. INTENTION OF PROPOSER: The proposer always made a proposal to get the consent of the
offeree. If it is made without such object,’ there cannot be a promise and proposal cannot be a
valid one.
Illustration: A says to B that the price of his bicycle is Rs.2000 00 it is an information and not a
valid offer because its object is not to get the consent of B.
5. LEGAL RELATIONSHIP: The proposal must be made with the intention of creating a legal
relationship, otherwise, it will not be a proposal. It may be an invitation or something like this.
Illustration: A invites his friend B at dinner at his home and B accept the invitation. it is not a
valid offer because it does not create a relationship. If any of them commits a default, the other
party cannot go to the court and cannot enforce the other.
6. MODE OF PROPOSAL: The proposal may be made in writing, orally or by the conduct of the
proposer. When it is made clear in words spoken or written then it is an expressed offer and if
it is conveyed by the conduct or behaviour of the party then it is called an implied offer. An
offer is either expressed or implied it is a valid one if it fulfils all the other conditions of a valid
offer.
Illustration: P offers to sell his mobile phone by words spoken to• Q for Rs. 3000, It is an
expressed and valid offer.
Illustration: When A opens his shop to sell goods to customers then it is an implied offer to sell
goods at a prescribed rate and is also a valid one.
7.POSSIBILITY OF ACCEPTANCE: The acceptance of the proposal must be possible. If the
acceptance of the proposal is not possible, it will not be a valid offer.
Illustration: A person offers to pay Rs. 10000 if anyone makes alive a dead body. It will not be a
valid offer because its acceptance is impossible,
8 NATURE OF OFFEREE: The proposal may be made to a specific person or class of persons, or
to the general public but in both cases, the offer is a valid one. When it is made to a specific
person or class of persons it is a specific offer and when it is made to the general public then it
is called general offer. Either the proposal is specific or general, it is valid if it fulfils all the other
conditions of a valid offer.
Illustration: A offers to sell his watch to B for Rs. 100 is a specific offer and is a valid one.
Illustration: X offers to pay Rs. 50000 to a person who provides information to him about his
stolen car. It is a general offer and is a valid one.
9.COMMUNICATION OF PROPOSAL: The proper communication of the proposal is necessary.
The proposal must be communicated so that it must come into the knowledge of the offeree. If
a person ignorant of the Proposal performs an act. There cannot be a contract.
Illustration: A advertised in a newspaper that he will pay Rs. 5000 to a person who will provide
information about his lost horse. B on ignorant of A’s proposal provides information about the
horse. A is not bound to pay him Rs. 5000.
10.PROPOSAL DISTINGUISHED FROM INVITATION: The proposal is an expression of willingness
of the proposer and it becomes promise when it is accepted by the offeree. The invitation of
the proposal is not a final expression and does not bind the parties. Therefore, the invitation
often offers an advertisement for sale of goods by auction, call of tenders and quotations is not
an offer.
Illustration: A essentials calls tender for the erection of his building is an invitation to offer end,
not an offer.
11.SILENCE OF OFFEREE IS NOT ACCEPTANCE: The silence of the offeree about the offer cannot
be treated as acceptance of the offer. So’ the clear acceptance of the proposal from the
 proposee is required. If the proposed attached a condition with the proposal that if its
acceptance is not communicated to the offered up to a particular date, he will assume that
proposal has been accepted, is not valid. There can only be a contract when the proposee
positively reply and accept the proposal.
Illustration: A says to B; “l want to purchase 100 units of your k product for Rs. 50 each. Please
reply up to June 30, otherwise, I will assume that my proposal has been accepted.” It is invalid
offer because no negative condition can be attached to the offer.
12.REVOCATION OF PROPOSAL POSSIBLE: A valid offer can be revoked at any time before its
acceptance is completed as against the proposer and not afterwards. Sometimes after giving an
offer, the proposer v wants to cancel his proposal. It is possible only before the completion of
the communication of its acceptance against the proposer and not afterwards.
Illustration: A offers to sell his bicycle to B for Rs. 2000. Later on, A withdraws his proposal
before the dispatch of a message of acceptance by B. the proposal will stand cancelled.

ESSENTIALS OF A VALID ACCEPTANCE

1. Acceptance must be given by the person to whom the proposal is made:
An acceptance to be valid must be given only by a person to whom offer has been given. In other
words, acceptance must move from the offeree and no one else.
2. Acceptance can be given only when the acceptor has the knowledge of the offer:
Acceptance therefore cannot be given without the knowledge of offer, as in case of Lalman Shukla v
Gauri Dutt.

3. The acceptance must be absolute and unconditional:

It is another important essential element of a valid acceptance. A valid contract arises only if the
acceptance is absolute and unconditional. It means that the acceptance should be in total (i.e. of all
the terms of the offer), and without any condition.

Thus, an acceptance with a variation is no acceptance. It is simply a counter offer. A counter offer
puts an end to the original offer, and it cannot be revived by subsequent acceptance.

4. The acceptance must be given within the time prescribed or within a reasonable time:
Sometimes, the time limit is fixed within which an acceptance is to be given. In such cases, the
acceptance must be given within the fixed time limit. In case, no time is prescribed, the acceptance
should be given within a reasonable time. The term ‘reasonable time’ depends upon the facts and
circumstances of each case.

5. The acceptance must be given before the lapse of offer:

A valid contract can arise only when the acceptance is given before the offer has elapsed or
withdrawn. An acceptance which is made after the withdrawal of the offer is invalid, and does not
create any legal relationship.

6. The acceptance must be communicated:

It is an important and essential element of a valid acceptance. The definition of acceptance as given in
Sec. 2(b) emphasises this requirement. According to this, the consent to the offer should be signified
(i.e. indicated or declared).

In other words, the acceptance is completed only when it has been communicated to the offeror. It
may be noted that until the acceptance is communicated, it does not create any legal relations.

7. The acceptance must be communicated to the offer or himself:

A valid contract arises only if the acceptance is communicated to the offeror himself. If acceptance is
communicated to the person, other than the offeror, it will not create any legal relationship. In fact,
such communication is no communication at all.

8. The acceptance must be in the prescribed manner:

It is the legal rule of the acceptance that it must be accepted in the prescribed manner. If the offer is
not accepted in the prescribed manner, then the offeror may reject the acceptance within reasonable
time.

It may, however, be noted that, if the offeror does not reject the acceptance within a reasonable time
then he becomes bound by acceptance. [Sec. 7(2)]

9. The acceptance must be given in some usual and reasonable manner:

It is another important legal rule of an acceptance that where no mode is prescribed, acceptance
must be given in some usual and reasonable manner. In such cases, the mail course is considered, a
very reasonable manner.

10. The acceptance must show an intention that acceptor is willing to fulfil the terms of the offer:
A valid contract can arise only when the acceptance is given with the intention of fulfilling the terms
of the contract. An acceptance which is made jokingly and without any intention of entering into a
contract is invalid and does not create any legal relationship.

11. The acceptance may be express or implied:

An acceptance, which is expressed by words written or spoken, is called an express acceptance.
12. The acceptance cannot be presumed from silence:
Sometimes, the acceptor does not convey his decision to the offer or/and keeps silent. In such a case,
his silence does not amount to acceptance. Similarly, the offeror does not have the legal rights to say
that if no answer is received within a certain time, the offer shall be deemed to have been
accepted.He (the offeror) cannot impose a condition that offeree’s silence will be regarded as
equivalent to acceptance.

1. VALID CONTRACT :-
Valid contract is that which is enforceable at law. It creates legal obligations between the
parties. It enables one party to compel another party to do something or not to do something.
Parties Obligations :-
In case of valid contract all the parties to the contract are legally responsible for the
performance of a contract. If one party breaks the contract other has right to be enforced
through the court.
Example :- Amun proposes sell his one acre land to Nasir for one lac and the parties are
capable to do the contract by law. So this contract is valid. If Amun fails to deliver the land
Nasir can sue him in the court for the delivery of land. On other hand Nasir fails to make the
payment, Amun can sue him for the recovery of payment.
2. VOID CONTRACT :-
Definition :- "An agreement not enforceable at law is a void contract".
Originally it is a valid contract but due to certain reasons it becomes void after its formation. A
void contract cannot be enforced by either party.
Features of Void Contract :-
a. It is not enforceable by law.
b. It creates no legal rights.
c. It creates no obligations on any party.
d. An agreement which is against the public policy or against any law is also void.
e. Under this contract no compensation can be paid to any party.
An agreement in restraint of marriage and trade are common examples of void contract.
Example :- Sachin and Isha contract to marry on next Sunday. Isha dies before the Sunday. The
contract becomes void.
Rights and Duties :-
In this case the parties are not legally responsible to fulfill the contract. If any party has
received any benefit is bound to return.
This contract takes place when consent of one of the parties is not free.

Memorandum of Association is the most important document of a company.

It states the objects for which the company is formed. It contains the rights,
privileges and powers of the company. Hence it is called a charter of the company.
It is treated as the constitution of the company. It determines the relationship
 between the company and the outsiders. The whole business of the company is
built up according to Memorandum of Association. A company cannot undertake
any business or activity not stated in the Memorandum. It can exercise only those
powers which are clearly stated in the Memorandum.

“The memorandum of association of a company is the charter and defines the

limitation of the power of the company established under the Act”.

Thus, a Memorandum of Association is a document which sets out the constitution of the company. It clearly displays
the company’s relationship with outside world. It also defines the scope of its activities. MoA enables the shareholders,
creditors and people who has dealing with the company in one form or another to know the range of activities.

Contents of Memorandum of Association

According to the Companies Act, the Memorandum of Association of a company must contain the following clauses:

1. Name Clause of Memorandum of Association

The name of the company should be stated in this clause. A company is free to select any name it likes. But the name
should not be identical or similar to that of a company already registered. It should not also use words like King, Queen,
Emperor, Government Bodies and names of World Bodies like U.N.O., W.H.O., World Bank etc. If it is a Public
Limited Company, the name of the company should end with the word ‘Limited’ and if it is a Private Limited Company,
the name should end with the words ‘Private Limited’.

2. Situation Clause of Memorandum of Association

In this clause, the name of the State where the Company’s registered office is located should be
mentioned. Registered office means a place where the common seal, statutory books etc., of the
company are kept.The company should intimate the location of registered office to the registrar
within thirty days from the date of incorporation or commencement of business.

The registered office of a company can be shifted from one place to another within the town with a
simple intimation to the Registrar. But in some situation, the company may want to shift its registered
office to another town within the state. Under such circumstance, a special resolution should be
passed. Whereas, to shift the registered office to other state, Memorandum should be altered
accordingly.

3. Objects Clause of Memorandum of Association

This clause specifies the objects for which the company is formed. It is difficult to alter the objects
clause later on. Hence, it is necessary that the promoters should draft this clause carefully. This clause
mentions all possible types of business in which a company may engage in future.

The objects clause must contain the important objectives of the company and the other objectives
not included above.
4. Liability Clause of Memorandum of Association
This clause states the liability of the members of the company. The liability may be limited by shares
or by guarantee. This clause may be omitted in case of unlimited liability.

5. Capital Clause of Memorandum of Association

This clause mentions the maximum amount of capital that can be raised by the company. The division
of capital into shares is also mentioned in this clause. The company cannot secure more capital than
mentioned in this clause. If some special rights and privileges are conferred on any type of
shareholders mention may also be made in this clause.

6. Subscription Clause of Memorandum of Association

It contains the names and addresses of the first subscribers. The subscribers to the Memorandum
must take at least one share. The minimum number of members is two in case of a private company
and seven in case of a public company.

Thus the Memorandum of Association of the company is the most important document. It is the
foundation of the company.

The articles of association is a document that specifies the regulations for a company's operations
and defines the company's purpose. The document lays out how tasks are to be accomplished within
the organization, including the process for appointing directors and handling of financial records.

Articles of association often identify the manner in which a company will issue stock shares,
pay dividends and audit financial records and power of voting rights. This set of rules can be
considered a user's manual for the company because they outline the methodology for
accomplishing the day-to-day tasks that must be completed. While the content of the articles of
association and the exact terms used vary from jurisdiction to jurisdiction, the document is quite
similar everywhere, The articles of association generally contain provisions on the company name,
the purpose of the company, the share capital, the organization of the company and provisions
regarding shareholder meetings.

While the Memorandum deals with the external affairs of a company, the Articles essentially deal
with the internal working of a company. Table F to J of Schedule 1 of the Companies Act, 2013 contain
the model articles that companies can refer to. Companies may adopt wholly or in part these tables,
i.e. tailor their articles depending upon specific requirements. Some of the common affairs
mentioned in the Articles of a company are:
1. Share Capital
2. Alteration of Capital
3. Calls on shares
4. Rights of shareholders
5. Variation of shareholders' right
6. Issue of preference shares
7. Lien on shares
8. General Meetings
9. Proxy

10. Board of Directors and their responsibilities

11. Dividend distribution
12. Buy back of shares
13. Transmission of Shares
14. Dematerialization
15. Winding up
16. Accounts and Auditing
17. Company Seal
18. Borrowing powers
19. Company's Key Managerial Personnel - Whole-time director, manager, secretary
Articles can be altered according to Section 14 of the Companies Act. The entrenchment provision for
Articles of a company protects the interest of minority shareholders by allowing amendment in the
articles after getting required prior approval of the shareholders. In cases of any conflict, the
Memorandum supersedes the Articles and the Companies Act supersedes both Memorandum and
Articles of a company.

BASIS FOR MEMORANDUM OF ARTICLES OF

COMPARISON ASSOCIATION ASSOCIATION

Memorandum of
Articles of Association
Association (MOA) is a
(AOA) is a document
document that contains all
Definition containing all the rules and
the fundamental data which
regulations that govern the
are required for the
company
company incorporation.

MOA must be registered at The articles may or may

Registration
the time of incorporation. not be registered.

Scope The Memorandum is the The articles demonstrate

charter, which obligations, rights, and
 characterizes and limits
powers and constraints of
the organization.
powers of individuals, who
are endowed with the
responsibility of running
the organization and
administration.

It is subordinate to the
Status Supreme document.
memorandum.

The articles are constrained

The memorandum cannot
by the act, but they are
give the company power to
also subsidiary to the
Power do anything opposed to the
memorandum and cannot
provision of the companies
exceed the powers
act.
contained therein.

The articles can be drafted

A memorandum must
Contents according to the decision of
contain six clauses.
the Company.

The articles provide the

The memorandum contains
regulations by which those
Objectives the objectives and powers
objectives and powers are
of the company.
to be conveyed into impact.

The memorandum is the Any provision, as opposed

Validity dominant instrument and to a memorandum of
controls articles. association, is invalid.

According to Article 1(4) of the Consumer Protection Law (2251/1994) (as amended by Law
3587/2007), a 'consumer' is considered to be any natural person or legal entity to which a product or
service offered on the market is addressed. The person or legal entity deemed to be a consumer in this
sense should make use of the product or service, provided that it constitutes the end user of such product
or service.

Whether a particular consumer is subject to protection under Law 2251/1994 depends on the
circumstances and factual background of each particular case. In each case, a person or entity is declared
to be a consumer (or not otherwise a consumer) based on two criteria:

 the power of the supplier to negotiate with the person or entity; and
 the possibility of abusive use of legal protection by the particular person or entity.(1)
The substantive criterion in order for a person or entity to be deemed a consumer, and thus able to enjoy
the protection of the law, is whether the particular user of the product or services is professionally
involved in the supply of the product or service. The end user of the product should not be professionally
involved in supplying products or services. Consequently, it should not repeat transactions of a particular
kind and should not have obtained knowledge, experience or specialist negotiating ability in comparison
to the supplier.(2) Accordingly, in order to outline and limit the definition of a 'consumer', the protective
scope of the law should be taken into consideration – that is, the need to protect the consumer where it is
the weaker contracting party.(3)

Facts

The plaintiff – who claimed to be a housewife – and her husband – a businessman engaged in
international transactions – conducted long-term transactions with the defendant – a Swiss-based bank
– which, as well as carrying out common banking transactions, was active in portfolio management and
modern banking products. The plaintiff opened two bank accounts in order to deposit her own money
and invest in securities (eg, bonds and shares), while appointing her husband as her proxy to manage her
portfolio. Some time thereafter, the plaintiff decided to borrow additional funds from the bank in order
to proceed with further investments and securities transactions, and offered as security a pledge over her
accounts and the securities and investments which she acquired from the loan proceeds. In other words,
the plaintiff entered into a combination of credit agreements (with a right to overdraw) and pledge
agreements with the bank. The purpose of such borrowing was to use the credit amounts for systematic,
long-term and repeated speculation through the purchase of securities on the international stock
markets; as admitted in the lawsuit, the exclusive purpose of the loans was to carry out investment
activities (ie, to purchase shares, bonds and precious metals). This type of loan, having investment as its
object, is known as 'leverage'. This means that the money borrowed by the investor will be used as a lever
to maximise profits.

According to the plaintiff's claims, such leverage entailed no risks to her own funds deposited in the
bank. She entered into two loan agreements, while in both agreements it was agreed that as security, any
debt balance of the accounts should be covered by the assets pledged in favour of the bank. In both the
loan agreements and the pledge agreements, the parties submitted any disputes to the jurisdiction of the
Swiss courts and selected Swiss law as applicable law.

Furthermore, although the plaintiff admitted that she had not assigned the management of her portfolio
to the bank, she claimed that the bank did not notify her of the risks that such investments entailed, and
that throughout the transactions, the bank did not provide her with adequate information about the
investment of her portfolio. The plaintiff further alleged that the bank sent her only the accounts
statements, which did not include the actual value of her portfolio and accounts, which had sustained
damages amounting to several million dollars. In addition, she claimed that the bank, despite being
aware of the actual state of her accounts, intentionally withheld the truth and that due to the above
allegedly erroneous and misleading information, she entered into the aforementioned loan agreements,
as well as entering into two loan extensions based on her belief that the accounts had not sustained any
damage. Moreover, she claimed that as a result of the two loan extensions, her credit limit was increased.
When the bank requested additional security to cover its exposure, the plaintiff claimed that she was then
notified for the first time of the damage sustained and refused to offer additional security. The bank The
bank called in the pledges, but there was still a balance due to it in the amount of several million dollars..

The plaintiff knew that the bank would commence proceedings against her before the Swiss courts in
order to pursue its claims, so she filed a lawsuit with the Greek courts seeking the issuance of a negative
declaratory order to confirm that she owed nothing to the bank. In her attempt to establish the
jurisdiction of the Greek courts, she claimed that she was a 'consumer' in her transactions with the bank
and the bank was a service provider to her.

Decision

Both the first instance court and the appeal court dealt with the preliminary issue of whether the plaintiff
was a 'consumer', as this was crucial for the deviation from the agreed jurisdiction of the Swiss courts and
the establishment of the jurisdiction of the Greek courts under Article 14 of the Lugano Convention
(ratified by Law 2460/1997). Both courts considered that the plaintiff has never acquired the status of a
consumer and rejected the lawsuit. Following a petition for cassation filed by the plaintiff, the Supreme
Court heard the case and ratified the judgment issued by the Court of Appeals. The Supreme Court
examined whether the plaintiff could be characterised as a consumer in order to move the case to the
Greek courts. According to the court, the plaintiff could not be considered to be a consumer and therefore
could not bring the case before the courts of the consumer's place of residence (ie, the Greek courts).
Human has been a consumer since time immemorial. When there was no technology, no modern goods, it was
the nature and natural products that were consumed by the humans. Now we are constantly surrounded by
different kinds of goods that we consume. These goods are those that we have developed and was sold to us by
somebody. When it comes to nature, there is no one to complain to. Whereas, in case of goods that are provided
by the human, to the human and may or may not be for the human, the legislation has provided us the forum
where we can go and file the complaint about the same and they are Consumer Forums established
under Consumer Protection Act, 1986[The Act]
Section 2(c) of the Act defines the meaning of the term complaint and it requires to have minimum one of the
following allegations:

1. Unfair trade practice or a restrictive trade practice by the trader

2. Defect in the product
3. Deficiency in Service
4. Offering goods which are hazardous to life
5. Selling the goods in excess of the fixed price.

Unfair & Restrictive Trade Practice

As per the Act, ‘unfair trade practice’ will mean the trade practice wherein the trader uses any unfair method for
promoting sale and having larger profit. This method can include false representation of the product including its
quality and standard, false and misleading statement about the warranty and guarantee of the product.
E.g.: If a trader is representing the weight of a packet of sugar to be 500gm whereas actually the weight is 400gm,
then it is an unfair trade practice.
If the option of the consumer is restricted by some precondition/s applied by the trader, then it will be considered
as ‘restrictive trade practice’. It is a method by way of which the trader tries to restrict the choice of the
consumer in a way wherein the consumer can’t buy the product that he wishes to unless the precondition of the
trader is satisfied.
E.g.: If a consumer wishes to buy a chair and the trader says that he can’t buy a chair unless he buys the table.
This is a pre-condition and it will be considered as a ‘restrictive trade practice’. But, in case the price of the chair is
Rs. 1000 and table is Rs. 2000 and if someone buys them both he will have to pay only Rs. 1500; this won’t be a
pre-condition as the consumer can either buy a chair or a table at their individual prices or together.

Defect
‘Defect’ has been defined in the Act as any fault, imperfection or shortcoming in the quality or any other standard
of the product which is required to be maintained by the trader as per certain laws or terms of contract. There are
two kinds of defects- a) General and b) Manufacturing.
General Defect
These are the defects that are either inconsistent with any law or with the benchmark that has been set by the
law. In the case of Ramesh Chandra v Commercial Tax Officer [1993] 3 CPR 182 (Ori.) failure to handover
registration book along with the purchased jeep was held to be a defect.
Manufacturing Defect
Generally, the trader in the contract agrees that if there is any kind of manufacturing defect in the goods, the
standard that has been lowered by the defect will be restored by the trader. Whenever there is any dispute
regarding manufacturing defect, the trader tries to prove that the defect is not a manufacturing defect and it is
either due to negligence of the consumer or due to normal use. In the case of Maruti Udyog Limited vs Hasmukh
Lakshmichand, it was said that in order to prove a manufacturing defect one will have to take an opinion of the
Expert. It further defined ‘manufacturing defect’ as:
‘A fundamental basic defect which creeps while manufacturing a machinery’.
Or
‘An unintended aspect of finished product due to error or omission in assembly or manufacture, that
causes injury.’
Deficiency in Service
‘Service’ means service of any description which is made available to the potential users. The Act while defining
the term has given a list of sectors which come under the purview of the Act. Whenever the service is not
performed in the correct manner and has lacuna as described in Section 2(1)(g) of the Act, it will be considered as
deficiency in service. This deficiency can be either because of the negligence of the person who is assigned to
perform the service or due to circumstances wherein the service will be impossible to perform. If the service is
impossible to perform due to certain conditions then, non-performance won’t be considered as deficiency in
service, except in the case where negligence is involved.
So the main conditions in order to prove deficiency of service are:
 1. There must be a service to perform.
2. There must have been a non-performance or any fault, imperfection, shortcoming or inadequacy in the
quality, nature and manner of performance.
3. The condition must not be such that the performance becomes impossible.

Offering goods which are hazardous to life

The Act nowhere defines the term ‘hazardous’ but as per the Black’s Law Dictionary hazardous is something that
is risky or involves any kind of danger. In case the seller is selling any kind of hazardous material or giving any
hazardous service the consumer has a right to complain about the same. The main rationale behind this provision
is to ensure that the safety of the consumer is not compromised. This is to ensure that while the goods are in the
care of the trader it is not rendered unsafe through improper handling or storage and in case there is any kind of
risk involved the risk must be conveyed to the consumer by the trader.
Selling the goods in excess of the fixed price
The price of any product or goods is displayed on the package of the product that is fixed by the manufacturer.
Sometimes, the trader charges a price in excess of the fixed priceand the price is fixed either under any law or by
the manufacturer and is displayed on the goods or on its packaging. It has to be keep in mind that this ground in
the complaint can only be taken if the price of the product is fixed. In case, there is no fixed price this allegation
can’t be made.
Consumer Disputes Redressal Agencies
Redressal Forums have been established at three different levels :-
- "District Forum" by State Government. At least one in each district or in certain cases one District Forum may cover
2 or more districts.
- "State Commission" by State Government.
- "National Commission" (National Consumer Disputes Redressal Commission ) by Central Government.
District Forum
This shall consist of :
1. a person who is, or has been, or is qualified to be a District Judge, its President
2. two other members shall be persons of ability, integrity and standing and have adequate knowledge or experience or
have shown capacity, in dealing with problems relating to economics, law, commerce,accountancy, industry, public
affairs or administration,one of whom shall be a woman.
Jurisdiction of the District Forum
The District Forum shall have jurisdiction to entertain complaints where the value of services and compensation claimed
does not exceed Rupees Five Lakhs. Manner in which complaint shall be made
A complaint may be filed with a District Forum by -
1. the consumer to whom such service is provided or is agreed to be provided;
2. any recognised consumer association, whether the consumer to whom the service is provided or is agreed to be
provided is a member of such association or not ;
3. one or more consumers, where there are numerous consumers having the same interest, with the permission of the
district forum, on behalf of or for the benefit of all consumers so interested ;
4. The Central or the State Government.
Procedure on receipt of Complaint
The District Forum shall on receipt of a complaint -
1. refer a copy of such complaint to the opposite party directing him to give his version of the case within a period of 30
days or such extended period not exceeding 15 days as may be granted by the District Forum ;
2. Where the opposite party, on receipt of a copy of the complaint, denies or disputes the allegations contained in the
complaint, or omits or fails to take any action to represent his case within the time given by the District Forum, the
District Forum shall proceed to settle the consumer dispute,
(i) On the basis of evidence brought to his notice by the complainant and the opposite party, where the opposite denies
or disputes the allegations contained in the complaint ; or
(ii) On the basis of evidence brought to its notice by the complainant where the opposite party omits or fails to take any
action to represent his case within the time given by the Forum ;
(iii) Where the complainant or his authorised agent fails to appear before the District Forum on such day, the District
Forum may in its discretion either dismiss the complaint in default or if a substantial portion of the evidence of the
complainant has already been recorded, decide it on merits. Where the opposite party or its authorised agent fails to
appear on the day of hearing, the District Forum may decide the complaint ex-parte.
(iv) Where any party to a complaint to whom time has been granted fails to produce his evidence or to cause the
attendance of his witnesses or to perform any other act necessary to the further progress of the complaint, for which time
has been allowed, the District Forum may notwithstanding such default :-
(a) If the parties are present, proceed to decide the complaint forthwith ; or
(b) if the parties or any of them is absent, proceed as mentioned above in (b) (iii) ;
(v) The District Forum may, on such terms as it may think fit at any stage, adjourn the hearing of the complaint but not
more than one adjournment shall ordinarily be given and the complaint should be decided within 90 days from the date
of notice received by the opposite party where complaint does not require analysis or testing of the goods and within
150 days if it requires analysis or testing of the goods.
Findings of the District Forum
If, after the proceedings, the District Forum is satisfied that any of the allegations contained in the complaint about the
services are proved, it shall issue an order to the opposite party directing him to do one or more of the following things :
1. To return to the complainant the charges paid.
2. Pay such amount as may be awarded by it as compensation to the consumer for any loss or injury suffered by the
consumer due to the negligence of the opposite party.
3. To remove the deficiency in the services in question.
4. To provide for adequate costs to parties.
Appeal against orders of the Dist. Forum
Any person aggrieved by an order made by the District Forum may appeal against such order to the State Commission
within a period of 30 days from the date of the order. The State Commission may entertain an appeal after 30 days if it is
satisfied that there was sufficient cause for not filing it within that period.
State Commission
It shall consist of -
1. a person who is or has been a Judge of a High Court , who shall be its President ;
2. two other members ( as for District Forum).
Jurisdiction of the State Commission
The State Commission has jurisdiction to entertain -
1. Complaints where the value of services and compensation claimed exceeds rupees 5 lakhs but does not exceed rupees
20 lakhs;
2. appeals against the orders of any District Forum within the state ;
3. revision petitions against the District Forum.
Procedure to be followed by State Commission
Same as for District Forum.
Procedure for hearing appeals
The State Commission may, on such terms as it may think fit and at any stage, adjourn the hearing of appeal, but not
more than one adjournment shall ordinarily be given and the appeal should be decided within 90 days from the first date
of hearing.
Appeals against orders of State Commission
Any person aggrieved by an order made by the State Commission may appeal against such order to the National
Commission within a period of 30 days. The National Commission may entertain an appeal after 30 days if it is satisfied
that there was sufficient cause for not filing it within that period
National Commission
This shall consist of -
1. a person who is or has been a Judge of the Supreme Court, who shall be its President. (No appointment under this
clause shall be made except after consultation with the Chief Justice of India) .
2. 4 other members ( qualifications : As for District Forum /State Commission ).
Jurisdiction of the National Commission
The National Commission shall have jurisdiction -
(a) to entertain
(i) complaints where the value of services and compensation claimed exceeds rupees 20 lakhs ; and
(ii) appeals against the orders of any State Commission.
(b) to entertain revision petition against the State Commission.
Procedure to be followed by the National Commission
A complaint containing the following particulars shall be presented by the complainant in person or by his agent to the
National Commission or be sent by registered post, addressed to the National Commission :-
1. the name, description and the address of the complainant;
2. the name, description and address of the opposite party or parties, as the case may be, so far as they can be ascertained
;
3. the facts relating to the complaint and when and where it arose ;
4. documents in support of the allegations contained in the complaint ;
5. the relief which the complainant claims.
The remaining procedure and the procedure for hearing the appeal is similar to that for State Commission.
Appeal against orders of the National Commission
Any person, aggrieved by an order made by the National Commission, may appeal against such order to the Supreme
Court within a period of 30 days from the date of the order. The Supreme Court may entertain an appeal after 30 days if
it is satisfied that there was sufficient cause for not filing it within that period.
Limitation Period
The District Forum , the State Commission or the National Commission shall not admit a complaint unless it is filed
within 2 years from the date on which the cause of action has arisen. In case there are sufficient grounds for not filing
the complaint within such period, extension may be granted.
Dismissal of frivolous or vexatious complaints
Where a complaint instituted before the District Forum, the State Commission or the National Commission, as the case
may be, is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, dismiss the complaint and
make an order that the complainant shall pay to the opposite party such cost, not exceeding 10,000 rupees, as may be
specified in the order.
Penalties
Where a person against whom a complaint is made or the complainant fails or omits to comply with any order made by
the District Forum, the State Commission or the National Commission, as the case may be, such person or complainant
shall be punishable with imprisonment for a term which shall not be less than one month but which may extend to three
years, or with fine which shall not be less than 2,000 rupees but which may extend to 10,000 rupees or with both. In
exceptional circumstances the penalties may be reduced further.

# What are the principles on which damages are assessed for breach of
contract?
Answer:
Damages for breach of contract are assessed in accordance with the following rules laid down in Hadley Vs. Baxendale
case and which are embodied in section 73 of the contract act1872:
1. when a party sustain a loss by reason of a breach of contract, he is entitled, (so far as monetary compensation is
concerned) to be put in the same situation with regard to damages, as if the contract has been performed, subject to the
qualification that loss or damage is such- (a) as has arisen naturally in the usual course of things, or (b) as the parties new
when they made the contract to be likely to result from the breach of it, and (c) which is not remote and indirect.
2. When a party claims special damages, (which would not ordinarily flow from the breach) he must prove that such loss
was in the contemplation of both the parties at the time of the contract and expressly provide for.
3. In estimating the loss or damage, the means which existed of remedying the inconvenience caused by the breach must be
taken into account. (explanation of section 73)
4. When no loss arises from the breach of contract, only nominal damages are to be given.
5. It is also to be noted that damages are given by way of restitution and compensation only, and not by way of punishment.
Therefore, the aggrieved party can recover the actual loss caused to him, and not exemplary damages.
6. The above rules relating to damages apply to quasi-contracts also.

Who is an agent and a principle (Sec. 182)

An “agent” is a person employed to do any act for another, or to represent another in dealing with
third persons. The person for whom such act is done, or who is so represented, is called the
“principal”.

The relationship between an agent and a principal is called an “Agency.” An agent therefore brings
together his principal and a third person. Ex- A appoints B to Purchase a house for him. A is the
principal, B is an agent and the relationship between them is that of Agency.

GENERAL RULES OF AGENCY

1. Whatever a person competent to contract may do by himself, he may do through an agent, except
for acts involving personal skill and qualifications. Like, a person cannot marry through an agent, a
person cannot paint a picture through agent.
2. The acts of an agent are acts of a principal for all legal purposes.
3. WHO MAY EMPLOY AN AGENT (Sec 183)- According to law, any person who is of the age of
majority and who is sound mind, may employ an agent. Any person competent to contract may
employ an agent, and a minor, a lunatic or a drunken person cannot employ an agent.

Who can be an agent (Sec 184)- “as between principle and third person any person may become
agent” . thus even a minor, a lunatic or a drunken person can be employed as an agent. However, in
such case because runs a great risk as he cannot hold such an agent liable for misconduct or
negligence.

Creation of Agency The following are different modes of creation of agency.

1. Agency by Express agreement.

2. Agency by Operation of law.
3. Agency by Ratification.
4. Agency by Implied authority.

1. Agency by Express agreement:Number of agency contract come into force under this method. It
may be Oral or documentary or through power of attorney.

2. Agency by operation of law:At times contract of agency comes into operation by virtue of law.

For example: According to partnership act, every partner is agent of the firm as well as other parties.
It is implied agency. On account of such implied agency only a partner can bind over firm as well as
other partners, to his activities. In the same way according to companies act promoters are regarded
as agents to the company

3. Agency by Ratification: Ratification means subsequent adoption of an activity. Soon after

ratification principal – agent relations will come into operation. The person who has done the activity
will become agent and the person who has given ratification will become principal.

 Ratification can be express or implied. In case where adoption of activity is made by means of
expression, it is called express ratification. For example: Without A`s direction, B has purchased
goods for the sake of A. There after A has given his support (adoption) to B`s activity, it is called
Ratification. Now A is Principal and B is agent.
 The ratification where there is no expression is called implied ratification. For example: Mr. Q has
P`s money with him. Without P`s direction Q has lent that money to R. There after R has paid
interest directly to P. Without any debate P has taken that amount from R. It implies that P has
given his support to Q`s activity. It is implied ratification.

4.Agency by implied authority:This type of agency comes into force by virtue of relationship between
parties or by conduct of parties.
For example: A and B are brothers, A has got settled in foreign country without any request from A, B
has handed over A`s agricultural land on these basis to a farmer and B is collecting and remitting the
amount of rent to A. Here automatically A becomes principal and B becomes his agent. Agency by
implied authority is of three types as shown below;

 Agency by Necessity
 Agency by Estoppel
 Agency by Holding out.

(i)By Necessity: At times it may become necessary to a person to act as agent to the other in
emergency situation where the property or interest of another is in danger . the conditions which
enables a person to act as an agent of another in necessity are as follows:

1. There should be a real necessity for acting on behalf of the principal.

2. It should be impossible to communicate with the principle within the time available.
3. The alleged agent should act bonafide in the interest of the principal.

For example: A has handed over 100 bags of butter for transportation, to a road transport company.
Actually it is bailment contract assume that in the transit all vehicles has got stopped where it takes
one week for further movement. So the transport company authorities have sold away the butter in
those nearby villages. Here agency by necessity can be seen.

(ii)By Estoppel: Where a person, by his conduct or words spoken or written, willfully leads another to
believe that a certain person is acting as his agenct, he is estopped later on from denying the truth of
the fact that such a person is dealing as his agent.

Example: In presence of A , B says to C that he (B) is A`s agent though it is not so actually. A has not
restricted B from making such statement. It is agency by estoppel.

(iii)By Holding out: the principal is bound by the act of agent if on an earlier occasion he has made
others believe that other person doing some act on his behalf is doing with his authority.

Example: Y is X`s servant and X has made Y accustomed to bring goods on credit from Z. On one
occasion X has given amount to Y to bring goods from Z on cash. B bought goods on credit as usually
and runs away with the money. This is agency by holding out and therefore X is liable to pay amount
to Z.

Rights and Duties of Agent (Agency: Indian Contract Act,1872)

Introduction :
An “agent” is a person employed to do any act for another, or to represent another in dealing with
third persons. The person for whom such act is done, or who is so represented, is called the
“principal”. The contract between Principal and Agent is called 'Contract of Agency'. The rights and
duties of the Agent are corresponding to the duties. Rights and Duties of an Agent are as follows A)
Duties of an Agent :
1) Agent's duty in conducting principal's business (Section 211) :
An agent is bound to conduct the business of his principal according to the directions given by the
principal, or, in the absence of any such directions, according to the custom which prevails in doing
business of the same kind at the place where the agent conducts such business. When the agent acts
otherwise, if any loss be sustained, he must make it good to his principal, and, if any profit accrues, he
must account for it.
Illustrations :
(a) A, an agent engaged in carrying on for B a business, in which it is the custom to invest from time to
time, at interest, the moneys which may be in hand, on its to make such investments. A must make
good to B the interest usually obtained by such investments.
(b) B, a broker in whose business it is not the custom to sell on credit, sells goods of A on credit to C,
whose credit at the time was very high. C, before payment, becomes insolvent. B must make good the
loss to A.
2) Skill and diligence required from agent (Section 212) :

An agent is bound to conduct the business of the agency with as much skill as is generally possessed
by persons engaged in similar business, unless the principal has notice of his want of skill. The agent is
always bound to act with reasonable diligence, and to use such skill as he possesses; and to make
compensation to his principal in respect of the direct consequences of his own neglect, want of skill
or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such
neglect, want of skill or misconduct.
Illustrations
(a) A, a merchant in Calcutta, has an agent, B, in London, to whom a sum of money is paid on A’s
account, with orders to remit. B retains the money for a considerable time. A, in consequence of not
receiving the money, becomes insolvent. B is liable for the money and interest, from the day on which
it ought to have been paid, according to the usual rate, and for any further direct loss - as, e.g., by
variation of rate of exchange — but not further.
(b) A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit, without
making the proper and usual inquiries as to the solvency of B. B at the time of such sale is insolvent. A
must make compensation to his principal in respect of any loss thereby sustained.
(c) A, an insurance-broker employed by B to effect an insurance on a ship, omits to see that the usual
clauses are inserted in the policy. The ship is afterwards lost. In consequence of the omission of the
clauses nothing can be recovered from the underwriters. A is bound to make good the loss to B.
(d) A, a merchant in England, directs B, his agent at Bombay, who accepts the agency, to send him
100 bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The
ship arrives safely in England. Soon after her arrival the price of cotton rises. B is bound to make good
to A the profit which he might have made by the 100 bales of cotton at the time of ship arrived, but
not any profit he might have made by the subsequent rise.
3) Duty to render proper accounts (Section 213)
According to Section 213 of Indian Contract Act 1872, An agent is bound to render proper accounts to
his principal on demand.

4) Duty to communicate with principal (Section 214) :

It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with
his principal, and in seeking to obtain his instructions.

5) Not to deal on his own Account :

Section 215 of the Indian Contract Act 1872 deals with right of principal when agent deals, on his
own account, in business of agency without principal's consent. Section 215 runs as follows -
If an agent deals on his own account in the business of the agency, without first obtaining the consent
of his principal and acquainting him with all material circumstances which have come to his own
knowledge on the subject, the principal may repudiate the transaction, if the case shows either that
any material fact has been dishonestly concealed from him by the agent, or that the dealings of the
agent have been disadvantageous to him.
Illustrations
(a) A directs B to sell A’s estate. B buys the estate for himself in the name of C. A, on discovering that
B has bought the estate for himself, may repudiate the sale, if he can show that B has dishonestly
concealed any material fact, or that the sale has been disadvantageous to him.
(b) A directs B to sell A’s estate. B, on looking over the estate before selling it, finds a mine on the
estate which is unknown to A. B informs A that he wishes to buy the estate for himself, but conceals
the discovery of the mine. A allows B to buy, in ignorance of the existence of the mine. A, on
discovering that B knew of the mine at the time he bought the estate, may either repudiate or adopt
the sale at his option.

6) Not to make Secret Profits

Section 216 of Indian Contract Act, deals with Principal's right to benefit gained by agent dealing on
his own account in business of agency. An Agent, without the knowledge of his principal, should not
deal in the business of agency on his own to make secret profit.
Section 216 of the Indian Contract Act,1872 reads as - "If an agent, without the knowledge of his
principal, deals in the business of the agency on his own account instead of on account of his
principal, the principal is entitled to claim from the agent any benefit which may have resulted to him
from the transaction."
Illustration
A directs B, his agent, to buy a certain house for him. B tells A it cannot be bought, and buys the
house for himself. A may, on discovering that B has bought the house, compel him to sell it to A at the
price he gave for it.
7) Duty to pay sums received for principal :
According to Section 218 of the said Act, An agent is bound to pay to his principal all sums received on
his account.
8) Not to Disclose Secret :

It is duty of an agent to maintain secrecy of the business of agency and should not reveal the
confidential matters.

B) Rights of an Agent
1) Right to Receive Remuneration : According to Section 219 of the Indian Contract Act, An agent is
entitle to his remuneration.But Section 220 of the said Act says that, an agent who is guilty of
misconduct in the business of the agency is not entitled to any remuneration in respect of that part of
the business which he has misconducted.
2) Right of Lien (Section221) : Agent's lien on principal's property
In the absence of any contract to the contrary, an agent is entitled to retain goods, papers, and other
property, whether movable or immovable, of the principal received by him, until the amount due to
himself for commission, disbursements and services in respect of the same has been paid or
accounted for to him.
3) Right to Indemnity : Agent to be indemnified against consequences of lawful acts. Indemnity
means promise make good the loss (See.. Contract of indemnity ) According to Section 222 of the
Indian Contract Act, 1872 "The employer of an agent is bound to indemnify him against the
consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.
Illustrations
(a) B, at Singapure, under instructions from A of Calcutta, contracts with C to deliver certain goods to
him. A does not send the goods to B, and C sues B for breach of contract. B informs A of the suit, and
A authorities him to defend the suit. B defends the suit, and is compelled to pay damages and costs,
and incurs expenses. A is liable to B for such damages, costs and expenses.
(b) B, a broker at Calcutta, by the orders of A, a merchant there, contracts with C for the purchase of
10 casks of oil for A. Afterwards A refuses to receive the oil, and C sues B. B informs A, who
repudiates the contract altogether. B defends, but unsuccessfully, and has to pay damages and costs
and incurs expenses. A is liable to B for such damages, costs and expenses.
4) Right to Compensation :
According to section 225 of the said Act, an agent is entitled to claim compensation for the injuries
suffered as a consequence or want of skill of the principal. Section 225 reads as follows -
"The principal must make compensation to his agent in respect of injury caused to such agent by the
principal’s neglect or want of skill.
Illustration
A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The scaffolding is
unskillfully put up, and B is in consequence hurt. A must make compensation to B.

UNPAID SELLER

According to section 2(1) of Sale of Goods Act, 1930 (hereinafter referred to as SOGA) Seller is a
person who sells the goods or agrees to sell the goods. Unpaid implies payment is not made or
without payment.

Definition of an unpaid seller has been given under section 45 of SOGA[1]. It says that an unpaid
seller is a person who has not been paid yet either by cash or other negotiable instruments. In the
case of negotiable instruments, the mere fact that it has been tendered by the buyer doesn’t
mean that seller is not anymore an unpaid seller. He becomes an unpaid seller when even after
tendering it, it is rejected by the bank or as the case may be. Section also provides that any person
who is in the position of a seller e.g. his agent is also considered seller for the purposes of SOGA.

Rights of Unpaid Seller Against Buyer

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

1] Suit for Price

Under the contract of sale if the property of the goods is already passed but he refuses to
pay for the goods the seller becomes an unpaid seller. In such a case. the seller can sue
the buyer for wrongfully refusing to pay him his due.

But say the sales contract says that the price will be paid at a later date irrespective of the
delivery of goods,. And on such a day the if the buyer refuses to pay, the unpaid seller
may sue for the price of these goods. The actual delivery of the goods is not of
importance according to the law.

2] Suit for Damages for Non-Acceptance

If the buyer wrongfully refuses or neglects to accept and pay the unpaid seller, the seller
can sue the buyer for damages caused due to his non-acceptance of goods. Since the
buyer refused to buy the goods without any just cause, the seller may face certain
damages.

The measure of such damages is decided by the Section 73 of the Indian Contract Act
1872, which deals with damages and penalties. Take for example the case of seller A. He
agrees to sell to B 100 liters of milk for a decided price. On the day, B refuses to accept
the goods for no justifiable reason. A is not able to find another buyer and the milk goes
bad. In such a case, A can sue B for damages.

3] Repudiation of Contract before Due Date

If the buyer repudiates the contract before the delivery date of the goods the seller can
still sue for damages. Such a contract is considered as a rescinded contract, and so the
seller can sue for breach of contract. This is covered in the Indian Contract Act and is
known as Anticipatory Breach of Contract

4] Suit for Interest

If there is a specific agreement between the parties the seller can sue for the interest
amount due to him from the buyer. This is when both parties have specifically agreed on
the interest rate to be paid to seller from the date on which the payment becomes due.

But if the parties do not have such specific terms, still the court may award the seller with
the interest amount due to him at a rate which it sees fit.
Remedies of Buyer Against the Seller
Just as the seller can rescind the contract, then so can the seller. When the
seller breaches the contract the buyer also has certain remedies against the
seller. Let us take a look at some remedies that the Sales Act prescribes for the
buyer.

1] Damages of Non-Delivery

If the seller wrongfully or neglectfully refuses to deliver the goods to the buyer, then the
buyer can sue for non-delivery of the goods. According to Section 57 of the Sale of
Goods Act, if the buyer faces losses due to the wrongful actions of the seller (non-
delivery) he can sue for damages caused due to this.

Let’s take for example A whose agrees to sell to B 10 pair of shoes for 1000/- each. B
was going to sell the same shoes to C for 1100/- a pair. A neglects to deliver the goods to
B. Now, B can sue A for non-delivery. He can sue for the amount of 100/- per pair, i.e.
1000/- (the difference between B’s cost price and sale price)

2] Suit for Specific Performance

If the seller commits a breach of contract, the buyer can approach the court to ask the
seller for specific performance. The court after deliberation can command the seller for
specific performance. One important point to keep in mind is that this remedy is only
available if the goods are ascertained or specific.

Example: There was a contract between A and B, that A will sell to B a very expensive
painting on a specific date. On the said day A refuses to sell. B can approach the court,
who orders A to sell the painting to B at the ascertained price.

3] Suit for Breach of Warranty

When the seller breaches the warranty of the goods, the buyer cannot simply reject the
goods on such basis. The buyer has two options in such a case,

 set up against the buyer the said breach of warranty in the extinction of the price
 or sue the seller for breach of warranty
4] Repudiation of Contract

If the seller repudiates the contract, the buyer does not have to wait until the date of the
contract. He can treat the contract as rescinded and sue for damages immediately. This
will be an anticipatory breach of contract.

5] Sue for Interest

The Act specifically states that nothing in the act will affect the right of the seller or the
buyer to recover interest or special damages due to him by the contract. And if there is no
specific clause in the contract, the court can come to the rescue of the affected party.

Rights of Unpaid Seller Against Goods

An unpaid seller has certain rights against the goods and the buyer. In this article, we will
refer to the sections of the Sale of Goods Act, 1930 and look at the rights of an unpaid
seller against goods namely rights of lien, rights of stoppage in transit etc.

Rights of Lien
Seller’s Lien (Section 47)

According to subsection (1) of Section 47 of the Sale of Goods Act, 1930, an unpaid
seller, who is in possession of the goods can retain their possession until payment. This is
possible in the following cases:

1. He sells the goods without any stipulation for credit

2. The goods are sold on credit but the credit term has expired.
3. The buyer becomes insolvent.
Subsection (2) specifies that the unpaid seller can exercise his right of lien
notwithstanding that he is in possession of the goods acting as an agent or bailee for the
buyer.

Part-delivery (Section 48)

Further, Section 48 states that if an unpaid seller makes part-delivery of the goods, then
he may exercise his right of lien on the remainder. This is valid unless there is an
agreement between the buyer and the seller for waiving the lien under part-delivery.

Termination of Lien (Section 49)

According to subsection (1) of Section 49 of the Sale of Goods Act, 1930, an unpaid
seller loses his lien:

 If he delivers the goods to a carrier or other bailee for transmission to the buyer
without reserving the right of disposal of the goods.
 When the buyer or his agent obtain possession of the goods lawfully.
 By waiver.
Further, subsection (2) states that an unpaid seller, who has a lien, does not lose his lien
by reason only that he has obtained a decree for the price of the goods.

Right of Stoppage in Transit

This right is an extension to the right of lien. The right of stoppage in transit means that
an unpaid seller has the right to stop the goods while they are in transit, regain
possession, and retain them till he receives the full price. If an unpaid seller has parted
with the possession of the goods and the buyer becomes insolvent, then the seller can ask
the carrier to return the goods back. This is subject to the provisions of the Act.

Duration of Transit (Section 51)

Goods are in the course of transit from the time the seller delivers them to a carrier or a
bailee for transmission to the buyer until the buyer or his agent takes delivery of the said
goods.

Some scenarios of the transit ending:

 The buyer or his agent obtain delivery before the goods reach the destination. In such
cases, the transit ends once the delivery is obtained.
 Once the goods reach the destination and the carrier of bailee informs the buyer or
his agent that he holds the goods, then the transit ends.
 If the buyer refuses the goods and even the seller refuses to take them back the
transit is not at an end.
 In some cases, goods are delivered to a ship chartered by the buyer. Depending on the
case, it is determined that if the master is functioning as an agent or carrier of the
goods.
 If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his
agent, the transit ends.
 If a part-delivery of the goods has been made and the unpaid seller stops the
remaining goods in transit, then the transit ends for those goods. This is provided that
there is no agreement to give up the possession of all the goods.
How Stoppage is Affected (Section 52)

There are two ways of stopping the transit of goods:

1. The seller takes actual possession of the goods

2. If the goods are in the possession of a carrier or other bailee, then the seller gives a
notice of stoppage to him. On receiving the notice, the carrier or bailee must re-
deliver the goods to the seller. The seller bears the expenses of the re-delivery.
Effect of Stoppage

Even if the unpaid seller exercises his right of stoppage in transit, the contract stays valid.
The buyer can ask for delivery of the goods after making the payment.

Pledge by the Buyer (Section 53)

Unless the seller agrees, the right of lien or stoppage is unaffected by the buyer selling or
pledging the goods. The principle is simple: the second buyer cannot be in a better
position that the seller (first buyer). However, if the buyer transfers the document of title
or pledges the goods to a sub-buyer in good faith and for consideration, then the right of
stoppage is defeated.

There are two exceptions to make note of:

a. The seller agrees to resale, mortgage or other disposition of the goods

If the seller agrees to the buyer selling, pledging or disposing of the goods in any other
way, then he loses his right to lien.

b. Transfer of the document of title of goods by the buyer

When the seller transfers the document of title of goods to the buyer and the buyer further
transfers it to another buyer who purchases the goods in good faith and for a price, then:

 If the last mentioned transfer is by way of sale, the original seller’s right of lien and
stoppage is defeated.
 If the last mentioned transfer is by way of a pledge, the original seller’s right of lien or
stoppage can be executed subject to the rights of the pledgee.

Right of Resale (Section 54)

The right of resale is an important right for an unpaid seller. If he does not have this right,
then the right of lien and stoppage won’t make sense. An unpaid seller can exercise his
right of resale under the following conditions:

 Goods are perishable in nature: In such cases, the seller does not have to inform the
buyer of his intention of resale.
 Seller gives a notice to the buyer of his intention of resale: The buyer needs to pay
the price of the goods and ask for delivery within the time mentioned in the notice. If
he fails to do so, then the seller can resell the goods. He can also recover the
difference between the contract price and resale price if the latter is lower. However,
if the resale price is higher, then the seller keeps the profits.
 Unpaid seller resells the goods post exercising his right of lien or stoppage: The
subsequent buyer acquires a good title to the goods even if the seller has not given a
notice of resale to the original buyer.
 Resale where the right of resale is reserved in the contract of sale: If the contract of
sale specifies that the seller can resell the goods if the buyer defaults, then the seller
reserves his right of sale. He can claim damages from the original buyer even if he
does not give a notice of resale to him.
 Property in the goods has not passed to the buyer: The unpaid seller can exercise his
right of withholding delivery of goods. This is similar to the right of lien and is called
quasi-lien.
DIFFERENCE BETWEEN SALE AND AGREEMENT TO SALE

A ‘Contract of Sale‘ is a type of contract whereby one party (seller) either transfers the ownership
of goods or agrees to transfer it for money to the other party (buyer). A contract of sale can be a sale
or an agreement to sell. In a contract of sale, when there is an actual sale of goods, it is known
as Sale whereas if there is an intention to sell the goods at a certain time in future or some
conditions are satisfied, it is called an Agreement to sell.

Both sale and agreement to sell are types of contract, wherein the former is an executed contract
whereas the latter represents an executory contract. Many law students get confused amidst these
two terms, but these are not one and the same. Here, in the article given below, we’ve explained the
difference between sale and agreement to sell, check it out.

Content: Sale Vs Agreement to sell

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart

BASIS FOR
SALE AGREEMENT TO SELL
COMPARISON

Meaning When in a contract of When in a contract of sale the

sale, the exchange of parties to contract agree to
goods for money exchange the goods for a price
consideration takes place at a future specified date is
 BASIS FOR
SALE AGREEMENT TO SELL
COMPARISON

immediately, it is known known as an Agreement to

as Sale. Sell.

Nature Absolute Conditional

Type of Contract Executed Contract Executory Contract

Transfer of risk Yes No

Title In sale, the title of goods In an agreement to sell, the

transfers to the buyer title of goods remains with
with the transfer of the seller as there is no
goods. transfer of goods.

Right to sell Buyer Seller

Consequences of Responsibility of buyer Responsibility of seller

subsequent loss or
damage to the goods

Tax VAT is charged at the No tax is levied.

time of sale.

Suit for breach of The buyer can claim Here the buyer has the right
contract by the seller damages from the seller to claim damages only.
and proprietary remedy
from the party to whom
the goods are sold.

Right of unpaid Right to sue for the price. Right to sue for damages.
seller
Definition of Sale

A sale is a type of contract in which the seller transfers the ownership of goods to the buyer for a
money consideration. Here the relationship amidst the seller and buyer is of creditor and debtor. It is
the result of an agreement to sell when the conditions are fulfilled and the specified time is over.

Types of Sale

The following are the essential conditions regarding Sale:

1. There must be at least two parties; one is the buyer, and other is the seller.
2. The subject matter of the sale is the goods.
3. Payment should be made in the country’s legal currency.
4. The goods should pass from seller to buyer.
5. All the necessary conditions of a valid contract should be present like free consent,
consideration, a lawful object, capacity of parties, etc.

If the goods are being sold and the property is transferred to the buyer, but the seller is not paid.
Then, the seller can go to the court and file a suit against the buyer for the damages and the price too.
On the other hand, if the goods are not delivered to the buyer then he can also sue the seller for
damages.

Definition of Agreement to Sell

An agreement to sell is also a contract of sale of goods, in which the seller agrees to transfer goods to
the buyer for a price at a later date or after the fulfilment of a condition.

When there is a willingness of the both the parties to constitute a sale i.e. the buyer agrees to buy,
and the seller is ready to sell the goods for monetary value. In an agreement to sell the performance
of the contract is done at a future date, i.e. when the time elapses or when the necessary conditions
are satisfied. After the contract is executed, it becomes a valid sale. All the necessary conditions
required at the time of sale should exist in the case of an agreement to sell too.

If the seller rescinds the contract, then the buyer can claim damages for the breach of contract. On
the other hand, the unpaid seller can also sue the buyer for damages.

Key Differences Between Sale and Agreement to Sell

The following are the major differences between sale and agreement to sell:

1. When the vendor sells goods to the customer for a price, and the transfer of goods from the
vendor to the customer takes place at the same time, then it is known as Sale. When the seller
agrees to sell the goods to the buyer at a future specified date or after the necessary conditions
are fulfilled then it is known as Agreement to sell.
2. The nature of sale is absolute while an agreement to sell is conditional.
3. A contract of sale is an example of Executed Contract whereas the Agreement to Sell is an
example of Executory Contract.
4. Risk and rewards are transferred with the transfer of goods to the buyer in Sale. On the other
hand, risk and rewards are not transferred as the goods are still in possession of the seller.
5. If the goods are lost or damaged subsequently, then in the case of sale it is the liability of the
buyer, but if we talk about an agreement to sell, it is the liability of the seller.
6. Tax is imposed at the time of sale, not at the time of agreement to sell.
1.7. In the case of a sale, the right to sell the goods is in the hands of the buyer. Conversely,
in agreement to sell, the seller has the right to sell the goods.

CONSIDERATION
Consideration is essential for a valid contract. It is the price for a promise – a quid pro
quo. It is the value received as incentive for the promise. A contract without
consideration is not binding on the parties.

Blackstone defined consideration as “the recompense given by the party contracting to

the other”.

Pollock took consideration to be “the price for which the promise of the other is bought,
and the promise thus given for value is enforceable”.
Section2 (d) of the Indian Contract Act,1872 defines consideration in the following
words:

“When at the desire of the promisor, the promisee or any other person has done or
abstained from doing, or does or abstains from doing , or promises to do or abstain
from doing something, such act or abstinence or promise is called a consideration for
the promise.”

Illustration: X promises to deliver 10 kgs of basmati rice to Y and Y promises to pay Rs.
500 upon delivery. In this contract, Y’s promise to Rs. 500 upon delivery is the
consideration for X’s promise. Similarly, X’s promise to deliver 10 kgs of basmati rice is
the consideration for the promise Y made.

Essentials

In accordance with Section 2(d), the essential features of a valid consideration are as
follows:

1) It is given ‘at the desire of the promisor’;

2) It may move from any person;

3) It can be past, present or future consideration;

4) It must be real and possess value. It must not be illusory;

5) It must be something other than the Promisor’s existing obligation;

6) It must be lawful.

1) It is given ‘at the desire of the Promisor’

The action or abstinence from action must be done at the desire of the promisor. If the
promisee has does something or abstains from doing something at the desire of a third
party or voluntarily, it is not valid consideration. The consideration has to be done at the
instance of the promisor or the promise will not be able to enforce the same.

Illustration: At the request of the collector of the District, X spent money and
constructed some shops. Y, a shopkeeper who occupied one of those shops, promised
to pay to X commission on the sale of goods made by him as consideration for the
money X spent on the construction. X sued Y to recover the promised commission.
Since, X had not constructed the shops at the desire of the Y (the promisor here); there
was no valid consideration as required by Section 2 (d). Thus, the agreement was void
and Y was held not liable to pay the promised amount. The facts are similar to the case
of Durga Prasad vs. Baldeo[1]

2) It may move from any person.

It does not matter who furnishes the consideration. The consideration may be moved
by the promise himself or any other person including.

In the case of Chinnaya v Ramaya[2], X – an old woman, gave away certain immovable
property to her daughter through by a registered deed. She also directed her daughter
to pay an annuity to Y – the old woman’s sister. The same day, the daughter executed
a deed in writing and undertook to pay annuity to Y. Subsequently, the daughter failed
to pay annuity and Y brought a suit for its recovery. The daughter pleaded that she was
not liable because no consideration had moved from Y. The Court held that the words’
the promisee or any other person’ in Section 2(d) made it clear that consideration need
not move from the promise only and Y was entitled to maintain the suit for recovery.

3) It can be past, present or future consideration.

a) Past Consideration. Consideration is the price for a promise and thus, it is usually
given in response to and as an inducement for the promise. If the consideration is given
earlier than the date of promise by the promisor, then it is known as past consideration.

For instance, the promise to pay a debt that one is already under an obligation to pay is
past consideration. Past consideration is usually not considered to be consideration for
the new promise because it has not been given in exchange for the ‘new’ promise.

Past consideration as good consideration under Indian Law as long as it was given at
the desire of the promisor.

Illustration: X renders service to Y during months of agricultural harvesting. Y promises

to pay Rs 1000 to X for his past services when the new crop is being sown in the fields.
The past services of X constitute valid consideration.

English law does not recognise past consideration. However, the English law treats an
act done at request to be good consideration for a subsequent promise. In the case of
Lampleigh vs. Brathwait[3], X – guilty of committing murder, requested Y to try and get
him a pardon from the King. Y travelled at his own expense and put in effort to secure a
pardon. X promised to pay him a certain sum of money but refused subsequently. It
was held that Y had a right to enforce the promise.

Past voluntary services. A person may render voluntary services to another without
any request or promise. In some cases, the receiving party may subsequently make a
promise to pay for the services rendered. Such a promise in enforceable in India under
Section 25(2) that provides that “a promise to compensate, wholly or in part, a person
who has already voluntarily done something for the promisor” is enforceable.

Illustration: X found Y’s purse on the road. He returns the same to Y who promises to
give Rs 100 to X for his services. This is a valid contract.

Section 25(2) also covers acts done at request and for which a promise to pay is given
later. Every request for an act carries an implied promise to pay.

In Sindha Shri Ganpatsingji vs Abraham[4], it was held that services rendered to a

minor at his request and also continued after his majority at the same request were
good consideration for the minor’s promise to pay

b) Present Consideration. When consideration and promise take place simultaneously,

it is called present or executed consideration. For example, in cash sales, the promise
to pay the price and promise to deliver the goods are performed at the same time.
Executed consideration is good consideration.

Illustration: X goes to a shop and buys a bottle of water from there. He also pays the
price on the spot.

c) Future Consideration. If the consideration for a promise moves after the formation of
the contract, it is called future or executory consideration.

Illustration: X promises to deliver 10 bags of rice to Y after 10 days and Y promises to

pay for the rice 10 days after the delivery by X.

It is a promise to do, abstain or suffer which is made by one party in return for a similar
promise from the other party. Even is the promise given for a promise is dependent on
a condition, it serves as valid consideration.
Illustration: X promises to landscape the garden of Y and Y agrees to pay X as long as
the landscape plans are approved by Z, a third party. Y’s promise is valid consideration
for X’s promise.

4) It must be real and possess value. It must not be illusory

Consideration must have some value in the eyes of law. A worthless act cannot satisfy
the spirit of the definition.

Illustration: While the consideration must be real, it does not need to be adequate for
the promise. It is for the parties to consider what is adequate consideration for them?
This principle of English Law is also enforced in India.

Explanation 2 to Section 25 provides that a contract which is supported by

consideration is valid irrespective of the fact that the consideration is in adequate.

A contract is not invalid merely due to inadequacy of consideration. However, the

Courts may look into inadequacy of consideration to ascertain whether the consent of a
party was free or not. Consideration need not be adequate but it must be sufficient in
the eyes of law.

‘Forbearance to sue’ refers to a scenario where a party has a right of action against the
other party or a third person and he refrains from bringing action in consideration of
promise by the other or third party. Forbearance to sue is valuable consideration
provided such action does not give rise to an illegal contract.

In Kasturi Devi v Chiranji Lal[5], X – the wife of Y, withdrew her suit against Y in return
for his promise to pay her maintenance. It was held that it was good consideration.

English common law insists on real and valuable consideration.

In the case of White v Bluett[6], X – the son of Y, used to constantly complain to his
father that his brothers had received more property than X. Y promised to release him
from an outstanding debt if X promised to stop complaining. It was held that the
promise by X to not bore Y in the future did not constitute good consideration for Y’s
promise to release him from a debt.

5) It must be something other than the Promisor’s existing obligation;

Performance of an existing obligation or legal duty is no consideration for a promise.

Illustration: X receives summons to appear before court of law as a witness for Y. He is

promised certain amount of money by Y for appearing in Court. The promise to pay X is
void because of lack of consideration for Y as X was already under a legal duty to
appear as a witness before the Court. (Collins vs. Godefroa)

6) It must be lawful.

The consideration must not be unlawful or opposed to public policy.

Illustration: X offers Rs 1000 to Y for beating up Z, his enemy. Y beats up Z but X

refuses to pay him. Y cannot recover the money promised to him because the
consideration is unlawful.

Section 24. Agreement void, if considerations and objects unlawful in part.-If any part of
a single consideration for one or more objects, or any one or any part of any one of
several considerations for a single object, is unlawful, the agreement is void.

Illustration

A promises to superintend, on behalf of B, a legal manufacture of indigo, and an illegal

traffic in other articles. B promises to pay to A a salary of 10,000 rupees a year. The
agreement is void, the object of A’s promise, and the consideration for B’s promise,
being in part unlawful.

In the Pinnel[7] case, it was held that a promise to pay less than what is due under a
contract cannot be regarded as consideration. This rule was affirmed in Foakes v
Beer[8].

X, a doctor, was ordered to pay 2000 pounds to Y, a lady, by a judgment decree. He

was unable to pay the entire amount together, so he entered into an agreement with
her that he would 200 pounds immediately and the rest 1800 pounds in installments.
After the last installment was paid, she sued for recovery of interest on judgment debt.
It was held that Y was entitled to the payment of judgment debt as well as the interest
till the date of final payment because there was no consideration for her promise to
accept anything less than the sum to which she was entitled.

CONTRACTS OF BAILMENT
Bailment is “the delivery of goods by one person to another for some purpose, upon a contract
that they shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the direction of the person delivering them. The person delivering the goods is
called the ‘bailor’. The person to whom they are delivered is called the ‘bailee’.
Examples:-
(i) A lends his motor cycle to B for his use.
(ii) A gives a piece of cloth to a tailor to make it into a coat. (iii) A gives his radio set to a
mechanic for repairs.
Essential characteristics
The essentail elements of the definition of bailment can be summed up as under:-
(a) Bailment is always based upon a contract. In exceptional cases it can also be implied by
law, e.g., finder of goods.
(b) There can be a bailment of moyable properties only but money is not included in the
category of movable goods.
(c) In Bailment the possession of goods must change. It thus requires temporary delivery of
goods. Mere custody of goods without possession will not be sufficient to constitute bailment.
A servant or a guest using his master’s or host’s goods will not be a bailee.
In bailment the delivery of goods may be actual or constructive.
Example:
(i) A delivers his radio set to B for repair. This s a case of actual delivery of goods by A to B. A
is the bailor and B is the bailee.
(ii) A employed a goldsmith to melt old jwellery and prepare new jewels. Everyday she used
to receive half-made jewels from the goldsmith and put them in a box and leave the box in the
goldsmith’s room. She kept the key of the room with her. On one night-the jewels were stolen.
It was held that there was redelivery of jewels to the lady and the goldsmith could not be
regarded as bailee. The lady herself must bear the loss (Kaliapurimal v. Visalakshmi).
(d) In bailment, ownership is not transferred. The bailor continues to be the owner of the
goods. (e) Goods are delivered upon a condition that they are to be returned in specie.
Deposit of money in a bank is not a case of bailment since the return of money will not be of
the identical coins deposited. Moreover the money handed over to the bank is not for safe
custody but to be credited to some kind of account. The relation between the bank and the
depositor of money is that of a borrower and the lender and not that of a bailor and bailee.

5.2 RIGHTS AND DUTIES OF THE BAILEE

RIGHTS AND DUTIES OF THE BAILEE
Rights of the bailee
1. Rights to interplead (Sec. 165). If a person, other than the bailor, claims the goods
bailed, bailee may apply to the court to stop the delivery of the goods to the bailor and to
decide the title to the goods.
2. Rights against third person (Sec. 180). If a third person wrongfully deprives the bailee
of the use or possession of the goods bailed, or causes them any injury, the bailee is entitled
to use such remedies as the owner might have used in a like case if no bailment has been
made. Bailee can thus bring a suit against a third person for such deprivation or injury.
3. Right of particular lien for payment for services (Sec. 170). Where the bailee has (a)
in accordance with the purpose of bailment, (b) rendered any service involving the exercise of
labour of skill, (c) in respect of the goods, he shall have (d) in the absence of a contract to the
contrary, right to retain such goods, until he receives due remuneration for the services he has
rendered in respect of them. Bailee has, however, only a right to retain the article and not to
sell it. The service must have entirely been formed within the time agreed or a reasonable
time and the remuneration must have become due.
This right of particular lien shall be available only against the property in respect of which skill
and labour has been used.
Examples
(i) A delivers a rough diamond to jeweller, to be cut and polished, which is accordingly done.
B is entitled to retain the stone till he is paid for the services he has rendered.
(ii) A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as
it is finished, to give A three month’s credit for the price. B is not entitled to retain the coat
until he is paid.
4. Right of general lien (Sec. 171). Bankers, factors, wharfingers, attorneys of a High Court
and policy brokers will be entitled to retain, as a security for a general balance of amount, any
goods bailed to them in the absence of a contract to the contrary. By agreement other types of
bailees excepting the above given five may also be given five may also be given this right of
general lien.
5. Right to indemnity (Sec. 166). Bailee is entitled to be indemnified by the bailor for any
loss arising to him by reasons that the bailor was not entitled to make the bailment or to
receive back the goods or to give a directions respecting them. If the bailor has not title to the
goods, and the bailee in good faith, delivers them back to, or according to the directions of
the bailor, the bailee shall not be responsible to the owner in respect of such delivery. Bailee
can also claim all the necessary expenses incurred by him for the purpose of gratuitous
bailment.
6. Right to claim compensation in case of faulty goods (Sec. 150): A bailee is entitled
to receive compensation from the bailor or any loss caused to him due to the failure of the
bailor to disclose any faults in the goods known to him. If the bailment is for hire, the bailor
will be liable to compensate even though he was not aware of the existence of such faults.
7. Right to claim extraordinary expenses (Sec. 158) : A bailee is expected to take
reasonable care of the gods bailed. In case he is required to incur any extraordinary expenses,
he can hold the bailor liable for such expenses.
8. Right of delivery of goods to any one of the several joint bailor of goods. Delivery
of goods to any one of the several joint bailors of goods will amount to delivery of goods to all
of them in the absence of any contract to the contrary.
Duties of the bailee
1. To take reasonable care (Sec. 151 & 152): Bailee is bound to take as much care of the
goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of
his own goods of the same bulk, quality and value as the good bailed. It will not make any
difference whether the bailment is gratuitous for reward. If any loss is caused to the goods, in
spite of such reasonable care by the bailee, he shall not be liable for the loss. Bailee shall be
held liable for losses arising due to his negligence.
Example (i): A delivered to B certain gold ornaments for safe custody. B kept the ornaments
in a locked safe and kept the key in the case box in the same room. The room was on the
ground and was locked from outside, and therefore, was easily accessible to burglars. The
ornaments were stolen. It was held that the bailee did not take reasonable care, and
therefore, was liable for the loss (Rampal V. Gauri Shanker, 1952).
(ii) A deposited his goods in B’s godown. On account of unprecedented floods, a part of the
goods were damaged. Held, B is not liable for the loss (Shanti Lal V. Takechand).
A bailee is liable to compensate the bailor for any damages done to the thing bailed by the
negligence of his servants acting in the course of the employment.
2. To return the goods. Bailee must return or deliver the goods bailed according to the
direction of the bailor, on the expiry of the time of bailment or on the accomplishment of the
purpose of bailment (Sec. 160).
Bailee shall be responsible to the bailor for any loss, destruction or deterioration of the goods
from of the date of the expiry of the contract of bailment, if he fails to return deliver or
tender the goods at the proper time (Sec. 161).
3. To return any increase or profit from the goods (Sec. 163). Bailee is bound to deliver
to the bailor any increase or profit which might have came from the goods bailed, provided the
contract does not provide otherwise.
Example: A leaves a cow in the custody of B. The cow gives birth a calf. B is bound to deliver
the calf as well as the cow to A.
4. To use goods according the conditions of bailment (Sec. 154). Bailee must use the
goods according to the conditions of the contract of bailment or the directions of the bailor.
He shall be held liable for compensation to the bailor if any damage is caused to the goods
because of his unauthorised use. Bailee must not do any act with regard to the goods bailed
which is inconsistent with the terms of the bailment, otherwise the contract shall become
voidable at the option of the bailor and bailee shall be held liable to compensate and damages
caused to the goods.
Example: A lends his horse to B for his own riding only. B allows C, a member of his family,
to ride the horse. C, rides with care but the horse accidently falls and is injured. What remedy
has A against B ?
A can claim damages from B for the injury caused to the horse from an unauthorised use. B in
this case has failed to use the horse according to the conditions of bailment, and therefore, he
shall be liable to pay compensation to the bailor for the damages caused to the horse because
of his unauthorised use.
5. Must not mix up the goods with his own goods (Sec. 155 & 156-157). Bailee is not
entitled to mix up the goods bailed with his own goods except with the consent of the bailor. If
he, with the consent of the bailor, mixes the goods bailed with his own goods, both the parties
shall have an interest in proportion to their respective shares in the mixture thus produced
(Sec. 155).
If the bailee, without the consent of the bailor, mixes the goods bailed with his own goods and
the goods can be separated or divided, the property in the goods remains in the parties
respectively bailee is bound to bear the expenses of separation and division and any damage
arising from the mixture (Sec. 156).
If the bailee, without the consent of the bailor mixes the goods of the bailor with his own
goods in such a manner that it is impossible to separate the goods bailed from the other goods
and to deliver them back, the bailor is entitled to compensation by the bailee for loss of the
goods (Sec. 157).
Examples : (i) A bails two bales of cotton marked with a particular mark to B. B, without A’s
consent, mixes the 100 bales of his own, bearing a different mark. A is entitled to have his 100
bales returned, and B is bound to bear all the expenses in the separation of the bales and any
other incidental damages.
(ii) A bails a barrel of cape flour worth Rs. 45 to B. B withouth A’s consent, mixed the flour
with country flour with country flour of his own, worth only Rs. 25 a barrel. B must
compensate A for his flour.
6. Must not set up an adverse title. Bailee must not set up a title adverse to that of the
bailor. He must hold the goods on behalf of and for the bailor. He cannot deny the title of the
bailor.

Duties and Rights of the Bailor

1. Duty to disclose faults
In case of gratuitous bailment, the bailor is expected to disclose to the bailee all the
defects known to him and which would get in the way with the use of goods bailed.
A non-gratuitous bailment or bailment for reward, however, carries a greater
responsibility on the part of bailor. He will be liable even if he was not in the know of
the defects. The following instances drive home the points.
Example 1
A lends his horse, which he knows to be frisky, to B. He does not disclose the fact that
the horse is frisky. When B tries to ride it, the horse throws him off its back, and B is
injured. A is responsible to B for injury sustained.
Example 2
A hires a carriage of B, The carriage is unsafe, though B is not aware of it, and A is
injured. B is still responsible to A for the injury.
2. Duty to repay bailee’s expenses
A bailor is duty bound to repay to the bailee expenses incurred by him for work done on
the goods received under conditions of bailment, and for which he is not receiving any
remuneration or deriving any benefit. In this regard,
3. Duty to indemnify the bailee
The bailor is bound to make good the loss suffered by the bailee that is in excess of the
benefit actually derived, where he had delivered the goods gratuitously and compelled
the bailee to return them before the expiry of the period of bailment.

4. Duty to compensate bailee for breach of warranty

Every contract of bailment warrants the bailee about the bailor’s title being defect free.
Thus, if bailee subsequently suffers any loss by the reason of the bailor’s title being
defective, it is the duty of the bailor to compensate the bailee for breach of warranty.

5. Duty to claim back the goods

The bailor is bound to accept the goods upon being returned by the bailee in accordance
with the terms of bailment. If he refuses or fails to accept back the goods, if offered at a
proper time and at a proper place, without any reasonable ground, he shall be
responsible for any loss or damage to the goods and not the bailee.

Moreover, the bailee, in such a case, can also claim from the bailor all necessary and
incidental expenses that he might have incurred to keep and protect the goods.

Rights of the Bailor

A bailor has the following rights.

1. Right to enforce bailee’s performance

Since the bailor delivers goods to the bailee for some specific purpose, the former,
especially in case of non-gratuitous bailment, has an elemental right to achieve that
purpose or obtain the benefit (i.e., performance) through the latter.
For example, if X delivers a suit length to Y, his tailor, to stitch a suit for him, X(bailor)
will see that the tailor does the needful in the desired manner.
3. Right to claim damages
In all cases of bailment, the bailor has the right to claim for damages against the loss, if
any, caused to the goods bailed due to the bailee’s negligence or misconduct.

4. Right to claim compensation against unauthorized use of goods

A good example for this is this situation, A lets B use his car but with a condition that
only B shall drive. B allows C, a member of his family, to drive the car. C rides with
care, but the car meets with some accident. Now B is liable to compensate for the
damages caused.
5. Right to demand return of goods along with accretion to, if any
The bailor enjoys the exclusive right to have the goods bailed delivered back to him in
safe and sound condition after the time of bailment has expired or the purpose behind
the bailment has been achieved. Moreover, in the absence of any contrary term in the
contract, the bailor is also entitled to any accretion to the goods bailed if it occurred
while the goods were in the study of bailee.

For example, A leaves his brooding hen in the custody of B to be taken care of for a
week. The hen has hatched the chicks. A is entitled not only to the hen but also to the
chicks.
In addition to the above mentioned right, A bailor has Right to terminate the contract
under certain conditions too.

5.3 Rights of Bailor and Bailee against Third Parties

Rights of Bailor and Bailee against Third Parties
1. Suit by bailor or bailee against a wrong-doer (Sec. 180). If a third person wrongfully
deprives the bailee of the use of possession of the goods bailed, or does them any injury, the
bailee is entitled to use such remedies as the owner might have in a like case if no bailment
had been made; and either the bailor or the bailee may bring a suit against a third person for
such deprivation or injury.
2. Appointment of compensation obtained by such suits (Sec. 181). Whatever is
obtained by way of relief or compensation in any such suit shall as between the bailor and
bailee, be dealt with according to their respective interests.
Rights and liabilities of the finder of goods
One who finds goods belonging to another and takes them in his possession is called the finder
of the goods. He rights and liabilities have been discussed in Secs. 168 and 169 of the Contract
Act as follows:
(i) A finder of the goods is free to take or not to take the goods found out under his custody.
A person who finds goods belonging to another and takes them into his custody is subject to
the same responsibility as a bailee.
(ii) Finder of goods is not entitled to bring a suit for the realisation of compensation for the
trouble and expenses voluntarily incurred by him in preserving the goods and in finding out the
real owner. However, he can exercise his right of particular lien on the goods found out and
may refuse to deliver them to the real owner until he receives the compensation for his
trouble and expenses.
(iii) In case where the real owner of the goods has offered a specific reward for their return of
goods lost, the finder of the goods may sue for the realization of such rewards and may also
retain his possession ever the goods until he received the reward with all other necessary
costs.
(iv) Finder of the goods has no right to sell the goods found out except when all the following
conditions are satisfied.
(a) When the thing found out is commonly the subject of sale.
(b) When the owner cannot be found out with reasonable diligence or when the owner refuses
to pay the lawful charges of the finder.
(c) When the thing is in danger of perishing or losing the greater part of its value or when the
lawful charges of the finder in respect of thing found out exceed two-thirds of the value of the
goods.

5 Important Remedies that are Available

to an Aggrieved Party on the Breach of a
Contract
Important remedies those are available to an aggrieved party on the breach of a contract are:

1. Rescission of the Contract

2. Claim for Specific Performance of the Contract

3. Claim for Injunction

4. Claim for Quantum Merit, and

5. Claim for Damages.

1. Rescission of the Contract:

When there is breach of contract by one party, the other party may rescind the contract and thus, is absolved
from all his obligations under the contract.

Example:
X promises Y to supply him a scooter on 27th, and Y promises to pay its price on receipt of the scooter. X
does not supply the scooter on 27th, Y is absolved from paying its price.

Rules for Rescission:

In this connection, there are two rules, viz,-

(i) Sec. 65:

When a party treats a contract as rescinded, he makes himself liable to restore any benefits; he has received
under the contract to the party from whom such benefits were received.

(ii) Sec. 75:

But if a person rightfully rescinds a contract, he is entitled to compensation for any damage which he has
sustained through the non-performance by the other party.

Powers of the Court:

The court may grant rescission of the contract:-

(i) Where the contract is voidable by the plaintiff, or

(ii) When the contract is unlawful for some unforeseen reasons’ and the defendant is more to blame than the
plaintiff.

The court may refuse to grant rescission of the contract:-

(i) When the plaintiff has expressly or impliedly ratified the contract, or

(ii) When owing to the circumstances, parties cannot be restored to their original position, or

(iii) Where the third parties acquire rights in good faith, or

(iv) Where only a part of the contract is rescinded and that is not separable from the rest of the contract.
2. Claim for Specific Performance of the Contract:
In certain cases, when the damages are not adequate remedy, the court may direct the party in breach for
specific performance of the contract and the promise is carried out as per terms of the contract.

The Court may grant specific performance in the following cases:-

(i) When the act agreed to be done is such that compensation in money for its nonperformance is not an
adequate relief;

(ii) When it is probable that compensation in money cannot be got for the nonperformance of the act agreed
to be done;

(iii) When there exists no standard for ascertaining the actual damage caused by the nonperformance of the
act agreed to be done.

Specific performance is not granted in the following case, when :-

(i) Damages are an adequate remedy;

(ii) The contract is not certain;

(iii) The contract is inequitable to either party;

(iv) The contract is of revocable nature;

(v) The contract is made by the trustee in breach of trust;

(vi) The contract is of personal nature, i.e., contract to marry;

(vii) The contract made by a company ultra vires of its Memorandum of Association; and

(viii) The court cannot supervise its carrying out.

3. Claim for Injunction:

An injunction may be defined as an order passed by a competent court restraining a person from doing some
act. It is a mode of securing the specific performance of the negative terms of a contract.

Here, the negative term of contract means doing something, which a party has promised not to do. Therefore,
where a party is in breach of a negative term of a contract, the court may grant an order, restraining him to do
what he had promised not to do. Such an order of the court is known as ‘injunction’. The restoration of
injunction can be ordered by the court:-
If the contract is voidable,

If the contract becomes void, or

On discovering the contract as void.

A negative term of contract may be:-

(i) When a promisor undertakes not to do something, or

(ii) Which is negative in substance, but not in form.

4. Claim for Quantum Merit:

The phrase quantum merit means payment in proportion to the amount of work done. When a person has
started the work and before he could complete it, if the other party discharges the contract or does something
which makes it impossible for the other party to accomplish the contract, he can claim for the work under the
contract, value of the work can be recovered from the cases where further performance is not possible.

The claim on quantum merit must be brought by the party who is not in default. Following are the cases in
which the claim may arise:-

(i) Sec. 65 of the act states that, a contract which is subsequently discovered to be void has been performed
and accepted then the person who has performed the contract is entitled to claim the amount for the work
done and the party who receives, and accepts the benefit under the contract, must make compensation to
other party.

(ii) Where a party to the contract does some act or delivers something to another party with the intention of
receiving the payment for the same, in such a case, the other party is bound to make the payment, if he
accepts such services or goods or enjoys their benefit (Sec. 70)

(iii) Where the contract is divisible and a party performs part of the contract and refuses to perform the
remaining part, in such a case, the party in default may sue the other party who has enjoyed the benefit of
performance and can claim the compensation.

5. Claim for Damages:

Damages are a monetary compensation awarded by the court to the injured party, for the loss or injury
suffered by him. When one party breaches the contract, the other party can claim damages under the
contract.

The object of awarding the damages is to put the injured party into the position, in which he would have been,
had there been performance and not breach of the contract.
Sec. 73 of the Indian Contract Act, 1872 deals with “compensation for loss or damages caused to a party by
breach of contract.”

Damages may be of the following four types:-

(i) Ordinary Damages

(ii) Special Damages

(iii) Vindictive or Exemplary Damages

(iv) Nominal Damages

SALOMAN VS SALOMAN
The case of Salomon v Salomon revolves around Mr. Salomon, a businessman who incorporated his
business; and given the requirements put forth in the Companies Act 1862 which require the
presence of at least seven shareholders, he made his family members as business partners issuing
one share to each of them (Keenan & Riches 2009).

The business was bought at £39,000. Mr. Salomon held some 20,000 shares and since £10,000 was
not paid for, he was paid the remaining amount by debentures and granted a floating charge on the
company’s assets as part payment (Keenan & Riches 2009). Soon after the business had been
incorporated, the shoe industry witnessed a series of strike which led to the government’s decision to
split contracts with several other firms with the aim of diversifying and reducing the risk of its few
suppliers, given the ongoing strikes (Keenan & Riches 2009).

Since the company was in need of more funds, they sought £5,000 from Broderip. Salomon’s
debenture was then assigned to Broderip and secured by a floating charge (Keenan & Riches 2009). In
the end, however, the business failed and Broderip sued to enforce his security.

Given that, at the time, the company was indebted to unsecured creditors; an action against the
appellant was brought by the company’s liquidator and the case tried before Vaughan Williams, J. of
the high court (Keenan & Riches 2009). Vaughan Williams J declared Broderip’s claim to be valid
arguing that the signatories were just but mere dummies and that Mr. Salomon was acting as an
agent of the company (Keenan & Riches 2009). Thus the company was entitled to indemnity from the
principal who in this case was Mr. Salomon (Keenan & Riches 2009).

The ruling made by the Court of Appeal further confirmed the earlier decision made by Vaughan
William. The Court of Appeal ruled that Broderip’s claim was valid on grounds that the Appellant had
abused the privileges of incorporation (Macintyre 2012). According to the Court of Appeal, the
incorporation of the company was improper as the Act only contemplated the incorporation of
independent bona fide shareholders with the will and minds of their own and not mere puppets
(Macintyre 2012)

This decision was, however, unanimously overturned by the House of Lords and the arguments of
fraud and agency rejected (Macintyre 2012). They held that the Act had to be the sole guide for
determining whether a company had been validly constituted. According to the Companies Act 1862,
just a share was enough for one to be named as a member. It was therefore not in order to label
shareholders as dummies or mere puppets since the company had been duly constituted by law and
thus had a separate legal entity (Macintyre 2012).

The House of Lords remarked that it was improper for the judges to read into the statute limitations
based on their personal opinion (Macintyre 2012). The House further noted that while the company
remained precisely the same even after being incorporated with the same hands receiving profits; by
law, the company was not an agent nor a trustee of the subscribers and the subscribers were also not
liable for any of the company’s liabilities (Macintyre 2012).

Since then, legislatures and courts have followed the separate entity principle. This principle which is
enshrined in article 16 of the Companies Act 1997 have since been followed in company proceedings
in court. Salomon’s case has become a landmark company case law in the UK and is often cited in
most cases within the area of company law.

The principle established in Salomon vs. Salomon & Co Ltd has stood the test of time, given that this
doctrine has formed the basis of company law (Puig 2000). As noted in Salomon’s case, a company is
at law a legal entity separate from its members and can neither be an agent nor a trustee of the
subscribers.

The decision made by the House of Lords in Salomon’s case confirms Gooley’s observations that the
doctrine of separate legal personality was a ‘double-edged sword’ (Puig 2000). While this decision
was good as it promoted capitalism, the decision also extended the benefits of incorporation to
private businesses thereby providing for fraud and evasion of legal obligations (Puig 2000). This
criticism will be examined in detail in the next section.

Criticism against Salomon’s case

Despite having been cited in court, Salomon’s case has met considerable criticism. Much of the
criticism has been based on the fact that corporate veil may at times lead to injustice. For example, in
the article 7 Modern Law Review 54, Kahn-Freund described the decision made in Salomon’s case as
“calamitous”. Kahn-Freund further called for the abolition of private companies.

Criticism is also mounted against Salomon’s case on the basis that priority is given to the separate
identity principle over the economic reality of a one-person company. In the article, The Law
Quarterly Review, Goulding explains that criticism laid against Salomon’s case is two-fold. First, the
unanimous ruling made by the House of Lords in this case gives incorporators the benefit of limited
liability even in situations where it may be deemed unnecessary. Second, this decision affords
unscrupulous promoters opportunities to abuse the privileges provided for under the Corporations
Act.

Piercing of the corporate veil

Despite the seemingly categorical statement made by Lord Halsbury in Salomon’s case, a few years
later, the English court held that in certain situations it was permissible to disregard this principle and
to ‘pierce the corporate veil’ (Mugambwa 2007). In this context, ‘piercing of corporate veil’ describes
situations wherein the separate entity principle may be deemed unfair and the courts may make
decisions contrary to this principle on various grounds. The court often does this so as to reach the
person behind the veil and to reveal the true nature of the company (Mugambwa 2007)

It has however become a hard task for academics and practitioners to find a basis in which courts may
lift the veil. This is an area which is said to be ill-defined, inconsistent and quite unpredictable. In
Briggs v James Hardie & Co Pty Ltd, Rogers AJA point out to the lack of a common and unifying
principle underlying the court’s decision to lift or ignore the corporate veil (Macintyre 2012).

In determining when to disregard the separate entity principle, commentators have often divided
their instances into several distinct categories and often there is no consensus as to the number or
type of categories, with some similar cases being placed in different categories. The ultimate policy
for lifting the veil also remains elusive with some arguing that it depends on ‘policy’ while others
arguing that it depends on ‘justice’ (Mugambwa 2007).

Attempts have been made by commentators to categorize cases with the view of predicting the
outcome of future cases but this has proved difficult largely due to the fact that this is an area where
case facts have significant influence on the outcome. It has also proved difficult to rationalize and
categorize cases since this is an area in which the personal views of judges have a bearing on what
justifies lifting the corporate veil (Karasz 2012).

Statutory and judicial exceptions

Despite being enshrined in the Companies Act 1997, significant exceptions have been made to the
separate entity principle (Macintyre 2012). In other words, there are certain situations in which the
courts can legitimately disregard the separate legal entity principle. According to Bourne (2001),
there are two main exceptions to the separate entity principle. These are statutory and judicial
exceptions.

In this context, statutory exceptions include provisions that penalize office holders by imposing
personal liability. Several statutory provisions have introduced exceptions to the separate legal entity
principle. One such statute is the Insolvency Act 1986 which involves fraudulent or rather wrongful
trading (Roach 2012). In pursuant to the ‘fraudulent trading’ provision, if it appears that fraud has
been used in carrying out business transactions, the court may on application of the liquidator
declare any of the parties to the business liable for making contributions as may be deemed
necessary by the court (Roach 2012).

Judicial exceptions, on the other hand, are concerned with the company’s separate legal personality.
These exceptions have, however, proven hard to define. Justification for making such exceptions also
differs greatly. Sealy & Worthington (2010) gave an example wherein court may make such
exceptions. They argued that members can be declared by court liable where their acts constitute
them as ‘principals’ and the company acting as merely an agent.

This example, however, does not encompass all the judicial exceptions. One major group to this type
of exception relates to fraud. In this respect, Linklater (2006) identifies three cases where fraud had
significant influence on the court’s decision to lift the corporate veil:Kensington International Ltd v
Congo, R v K and Trustor v Smallbone.

A common feature in all these cases is that they would all have passed Salomon’s test that – ‘either
the limited company was legal entity or it was not’ (Linklater 2006). There is, however, one element in
all these cases which set them apart from Salomon: the fact that all the three cases were being used
for fraud and to disguise the true state of affairs rather than being used for legitimate trading
(Linklater 2006).

Another group encompassing judicial exceptions relates to a group structure, wherein both the
parent and subsidiary company are viewed as one. This can be seen in the case of Adams v Cape
Industries Plc. The court of Appeal ruled that the subsidiary company acted as an agent to the parent
company and thus had to be indemnified by the parent company.

Another practical example wherein courts can disregard the doctrine of separate entity can be seen
with certain court cases. In UK, courts may disregard Salamon’s precedent especially when public
funds are at stake. In such cases, courts may decide to impose financial liability on the shareholders
and directors of the company.

While these exceptions have been viewed by many as undermining the doctrine of separate legal
personality embodied in Salomon’s case, it should be noted that these exceptions serve to further
define the doctrine by narrowing its scope and stipulating additional guidelines.

Conclusion

There is no doubt that the decision in Salomon’s case established the separate legal personality of a
company, allowing shareholders to carry on trading with minimal exposure to the risk of personal
insolvency in the event of a collapse. There are, however, exceptions to this principle wherein the
court may justifiably disregard and make rulings contrary to this principle.

It remains, however, a daunting task for academics and practitioners to find a basis in which the
courts may be justified to lift the corporate veil. This is largely due to the fact that this is an area
where case facts and personal views of judges have a bearing on the outcome. Nonetheless, the
principle in Salomon case is widely recognized and followed in courts. This principle which is
enshrined in article 16 of the Companies Act 1997 have since been followed in company proceedings
in court. Salomon’s case has become a landmark company case law in the UK and is often cited in
most cases within the area of company law.

The Principle of Salomon

1.Salomon v Salomon & Co Ltd [1897] AC 22 (lawcite link) was the case that got me interested in corporate
law. The principle from the case is very simple – a company is a separate legal entity and thus a juristic
“person” in the eyes of the law. As with all simple things, the case is complex and has many layers. Aaron
Salomon was a Jewish leather merchant in Victorian England. He set up a company with the required seven
shareholders (his wife and kids). He lent the company money (as a secured creditor) and then borrowed more
money and got into financial trouble. The question of law was who should be paid first, unsecured creditors
(like employees and utility bills) or himself as a secured creditor.

The UK Court of Appeal was anti-semetic and felt Salomon was a fraud and his company was a “sham”. But
the House of Lords court stated that the company was properly set up, there was no fraud and thus Mr
Salomon was a distinct entity from his company, his directorship, his shareholding and his rights as a secured
creditor.

This principle has been applied in many, many cases ever since. When I first read the case in 1983 while at
Law School in Coventry (UK) I fell in love (if that is the right expression) with corporate law. Many of you know
I wanted to be a “lawyer” from about 14 years old, but in 1983 I decided “corporate law” was going to be “my
area of expertise” – over 25 years later, it still is! Also, within corporate law, my area of interest has been
directors’ duties and securities markets fraud (in particular the confusion over insider trading and market
manipulation).

Piercing The Corporate Veil

One of the most uncertain areas in company law today is the situation in which a court is willing to set aside
the separate legal personality of a company. Separate legal personality i.e. where a company is regarded by
the courts as a legal person with its own rights and responsibilities and that it is capable of owning property
amongst other things. Laffoy J stated in Fyffes Plc v Dcc Plc & Ors ,

“It has been a fundamental principle of Irish company law since the decision of the House of Lords in
Salomon v. Salomon and Company Limited [1897] A.C. 22 that a company registered under the Companies
Acts is an artificial legal entity separate and distinct from the members, whether natural or corporate persons,
of which it is composed.”

In Salomon v. Salomon and Company Limited as stated by Marc Moore in his recent article, the House of
Lords,
“emphasised that the formally separate personality of a company should prevail in the eyes of the law and,
consequently, in the opinion of a court, regardless of any economic or moral considerations that might
otherwise justify regarding a registered company as the mere extension of its de facto incorporators.”

The facts of the Salomon case were that Mr. Salomon ran a successful leather business as a sole trader. He
then set up a company in which he was the main shareholder. He loaned the company money which he
secured with the assets of the company. He observed the tenets of company law at all times. He was also the
main shareholder and further to that the main creditor due to the loan. The question in this case was whether
Mr. Salomon debts should take precedence over the unsecured creditors when the company was wound
up. If Mr. Salomon won the case, the creditor would receive no money.

In the High Court, Mr. Salomon lost the case and was ordered to pay the debts. This decision was founded in
the idea that the company was his nominee or agent.

Mr. Salomon appealed the decision, where he once again lost the…

Salomon Principle

THE IMPACT OF SALOMON V SALOMON & Co. Ltd. (1987)

The most important decision ever made by the English courts in Relation to company law is Salomon v A
Salomon & Co. Ltd (1897). The vital perception to become familiar with when starting a business is the idea
that the business has a legal personality in its own right, mostly when it assumes the form of a Limited
Liability Company. This basically means that if someone starts a business as a Limited Liability Company, then
the Company is a legal entity with separate legal personality, would be separate to that of the owners,
members, or shareholders. As a separate entity, the company is different from the directors, employees and
shareholders. The House of Lords in the Salomon case confirmed the legal principle that, upon incorporation,
a company is generally considered to be a new legal entity separate from its shareholders. The court did this
in relation to what was essentially a one person Company, which is Mr Salomon. At a specific level, however, it
was a bad decision. By extending the benefits of incorporation to small private enterprises, Salomon’s case
has upheld fraud and the evasion of legal obligations, (this will be looked at into depth later). The main areas
this essay will be focus on are; the discussion on the Salomon’s case which will include the corporate veil
{whether or not it is a legal fiction}; if the corporate veil is consistently acknowledged, look behind the veil or
piecing the corporate veil and the situations of which the government expressed itself on its intention in
piecing the veil, including a reasonable conclusion.

The concept that prevail the Salomon’s case is nothing else but a company is separate from the shareholder,
which means that the company is independent and separate from any other entities that are related to the
company. In Salomon v Salomon and Co Ltd. (1897), Mr Aron Salomon has been operated his business as a
sole proprietor for many years, he then decide to…

Case Study on Company as Separate Legal Entity

A corporation is a separate legal entity from its owners. In other words, if a corporation, in the course of
doing business, is involved in any legal action, then the corporation, for legal purposes, is its own person. The
corporation is liable for its taxes – not the owner. This is how corporations may sue and be sued, and their
assets are tracked separately. If a corporation is sued, then the owners will not have their personal belongings
at risk unless those belongings were purchased with illegal returns from the corporation.

In a sole proprietorship or partnership, the owners personally liable. For all intents and purposes, all acts
taken by these two company types are taken by the owners themselves. The company becomes a legal
person in its own right, distinct from the

Shareholders and management:

This was seen in the famous case of Salomon v Salomon & Co Ltd (1897). Separate personality means that the
artificial legal person, the company, can do almost everything a human person can do; it can make contracts,
employ people, borrow and pay money, sue and be sued, among other things.

The ‘veil of incorporation’ is the rather poetic term given to this separation of the company from its
shareholders or members. This separation of a company from its members was established in the House of
Lords in the famous case.

Salomon v Salomon & Co Ltd (1897)

Mr. Salomon had a boot manufacturing business which he decided to incorporate into a private limited
company. He sold his business to the newly formed company, A Salomon & Co Ltd, and took his payment by
shares and a debenture or debt of £10,000. Mr Salomon owned 20,000 £1 shares, and his wife and five
children owned one share each. Some years later the company went into liquidation, and Mr Salomon
claimed to be entitled to be paid first as a secured debenture holder. The liquidator and the other creditors
objected to this, claiming that it was unfair for the person who formed and ran the company to get paid first.
However, the House of Lords held that the company was a different legal person from the shareholders, and
thus Mr Salomon, as a shareholder and creditor, was totally separate in law from the company A Salomon &
Co Ltd. The result was that Mr Salomon was entitled to be repaid the debt as the first secured creditor.

In this case, Mr Salomon was the major shareholder, a director, an employee and a creditor of the company
he created. It is quite common in Ireland for one person to have such a variety of roles and still be a different
legal entity from the company.