Indian Contract Act Definition of a contract: Sec. 2(h) : "An agreement enforceable by law is a contract.”
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Indian Contract Act
Definition of a contract: Sec. 2(h) :
"An agreement enforceable by law is a contract.”
'Every contract is an agreement but every agreement may not be a contract'
Essentials of a valid contract:
Offer and acceptance
Lawful consideration
Competent parties
Free consent
Consideration and object to be legal
Definition Of a offer: Sec. 2(a)
When one person, signifies to another,his willingness to do or to abstain from doing anything,
with a view to obtaining the assent of that other to such act or abstinence,
he is said to make a proposal/offer.
Modes of making an offerExpress offer: offer made by words (written
or oral)Implied offer: offer made by conductOffer by abstinence: offer made by party
by omission to do somethingSpecific and General offers: offer can be
made either to (1) a definite person or group of persons, or to (2) the public at large.
EXAMPLESA real estate company proposes, by a letter or over telephone, to sell the flat to Rajiv at a certain price
A company owns a fleet of motorboat for taking people from Mumbai to Goa. The boats are in water at gateway of India.
Akbar, a creditor, offer not to file a suit against Begum, a debtor, if the latter pays him the amount of Rs 2000 outstanding.
CASE
A patent medicine company advertised that it would give a reward of $100 to anyone who will contact influenza after using smoke balls of the company for a certain period according to printed directions. Mrs Carlill purchased the advertised smoke ball and contacted influenza by using the same according to printed guidelines. She claimed the reward of $100. the company resisted the claim on the ground that advertisement was only invitation to offer and no offer was made to her and she had not communicated her acceptance assuming the advertisement was an offer. She filed the suit for the recovery of reward.
Rules of a valid offer:
It must contemplate to give rise to legal relationship.
Terms must be certain and unambiguous.Invitation to offer is not an offer.Offer must be communicatedSpecial terms must be communicated in a
special mannerOffer should not contain a term the non-
compliance of which would amount to acceptance.
Definition Of acceptance: Sec. 2(b)
When a person to whom the offer is made, signifies his assent thereto, the offer is said to be accepted.Rules of a valid acceptance:
The person to whom the offer is made must give it.It must be absolute and unqualified.ExampleA offered to sell his land to B for Rs 50,000. B replied
purporting to accept and enclosed Rs 10,000 promising to pay the balance of Rs 40,000 by monthly installment
A offers to sell his house to B for Rs 5,00,000. B replies, “ I am prepared to buy your house for Rs 5,00,000 provided you purchase my Maruti car for Rs 2,00,000
A, a real estate company, offers to sell a flat to B and B agrees to purchase it subject to the title of the flat being approved by B’s solicitor.
Rules of a valid acceptance:
Mental acceptance is ineffectual.
It must be expressed in the prescribed
manner or in some usual manner.
It must be given within a reasonable time.
It must succeed the offer.
Consideration: Sec. 2 (d) When, at the desire of the promisor, the
promisee or any other person;has done or abstained from doing, or
does or abstains from doing, or promises to do or abstain from doing something,
such act or abstinence or promise is called as Consideration for the promise.
ExampleA agrees to sell his motorcycle to B for Rs
20,000. Here, B’s promise to pay the sum of Rs 20,000 is the consideration for A’s promise to deliver the motorcycle, and A’s promise to deliver the motorcycle is the consideration for B’s promise to pay Rs 20,000.
Essentials of valid consideration: Consideration must move at the desire of the
promisor Consideration may move from the promisee or any
other person It may be past, present or future Consideration need not be adequate Consideration must be real and competent Example: A received summon to appear as a
witness at trial. B, a party to the suit, promises to pay A Rs 1000 in addition to A’s expenses. However, B declined to pay the amount later. Can A enforce the B’s promise.
Consideration must be legal Sec 23 defines illegal agreements as one the
consideration or object of which (1) is forbidden by law (2) defeats the provision of any law (3) is fraudulent (4) involves or implies injury to the person or property of another (5) the court regard it as immoral or opposed to public policy
Voidable contracts
A voidable contract is one which may be repudiated (i.e., avoided) at the will of one or more of the parties, but not by others.
Until it is so repudiated it remains valid and binding
It is affected by a flaw (misrepresentation, fraud, coercion, undue influence), and the presence of any of these defects enables the party aggrieved to repudiate the contract.
Characteristics of voidable contractValid and binding on both the parties until
avoided by aggrieved partyCan be avoided only by aggrieved party within a
reasonable timeExample: A purchased certain goods from B by
making misrepresentation of some facts. Later B come to know about the representation made by A. However, B does not within a reasonable time, repudiate the contract. A sells those goods to C.
The party at whose option the contract is voidable, is not bound to repudiate it
The party repudiating the contract is entitled to get damages for any loss that he may have suffered
Aggrieved party has two-fold rights (a) to repudiate the contract and therefore not to be bound there under (b) to carry out the transaction as stipulated in spite of flaw therein.
Void contractsAn agreement which is not enforceable by either of
the parties to it is void. (sec 2 (j))Sometimes contract is valid at the time of formation,
but may become void afterwardsThe act has declared certain type of agreements to
be void, viz., (1) agreements entered into through a mutual mistakes of facts between the parties (s.20) (2) agreements the object or consideration of which is unlawful (s.23) (3) agreements part of the consideration or object of which is unlawful (s.24) (4) agreements made without consideration (s.25) (5) agreements in restraint of trade (s. 27) (6) agreements in restraint of legal proceedings (s. 28) (7) agreements in restraint of marriage (s. 26) (8) uncertain agreements (s. 30) (9) wagering agreements (s.30) (10) impossible agreements (s. 56) (11) an agreement to enter into agreement in future
Distinction between void agreements and voidable contractsLegality: a void agreement is without any legal
effect, a voidable contract can be enforced by the party at whose option it is voidable
Enforceability: a void agreement is uneforceable from very beining, whereas voidable contract become unenforceable only when the party at whose option the contract is voidable rescinds it
Example:A pays B Rs 10000 in consideration of B’s promise
to sell him some goods. The goods had been destroyed at the time of promise.
A, a doctor, by exercising undue influence over his patient B induces him to sell his car woth RS 1,50,000 for Rs 1,00,000
Contd…
Compensation: under voidablee contracts, any person who has received any benefit must compensate or restore it to the other party, however compensation in the event of non performance of void agreement does not arise
Competency of parties to a
contract:
Sec.10 states:
“Essential ingredient of a valid
contract is that the contracting
parties must be competent”
Competency of parties to a contract:
Sec 11 says:
“Every person is competent to
contract;
who is of age of majority according
to the law to which he is subject,
and who is of sound mind,
and is not disqualified from
contracting by any law to which he
is subject”
Who is a Minor?
As per Indian Majority Act:
a person below age of eighteen years under normal circumstances
and
a person below age of twenty one years in case of a guardian being appointed for his person or property
Effects of agreement with or by a
minor
Usually it is Void – ab - initio
(absolutely void and inoperative)
No ratification on attaining age of
majority
Effects of agreement with or by a minor
Minor is however responsible for necessaries provided to him during his minority
Minor can be admitted to benefits of partnership
Beneficial agreements are valid
minor is eligible to get benefits but can not be responsible towards liabilities
Sound mind: Sec. 12:
“A person is said to be of sound
mind for the purpose of making a
contract, if, at the time when he
makes it, he is capable of
understanding it and of forming a
rational judgement as to its effects
on his interests”
Disqualified from contracting:
Alien enemies
Foreign sovereigns
Convicts
Insolvent
As per any other law applicable
Consent
i.e. 'Agreeing upon the same thing in the same sense'
Free Consent: Section 14-- Consent is said to be free when it NOT
caused by any one of the following
Coercion . Undue influence
Misrepresentation . Fraud Mistake
Coercion: (Sec 15):" It is a) Committing or threatening to commit, any
act forbidden by Indian Penal Code, or b) unlawful detaining or threatening to detain
any property, to the prejudice of any person whatever, with the intention of causing any person to
enter into an agreement“Example:A threatens to kill B if he does’nt transfer his
house in A’s favour for a very low priceA threatens to kill B (C’s son) if C does not let
his house to A and thereupon C gives his consent.
Coercion: (Sec 15)
Effect of Coercion:
Contract is voidable at the option of
the party whose consent was so
obtained
Burden of proof that coercion was
used lies on the aggrieved party.
Undue Influence: Sec 16(1)
"A contract is said to be induced by undue influence where,
i) the relations subsisting between the
parties are such that one of the parties
is in a position to dominate the will of
the other, and
ii)he uses the position to obtain an unfair
advantage over the other."
Undue Influence: Sec 16(1)
Effects of Undue influence
Agreement is voidable at the option of
the party whose consent is so caused
Example: A, a man enfeebled by disease
or age, is induced by B’s influence over
him as his medical attendant to agree to
pay B an unreasonable sum for his
professional service.
Undue InfluenceIn a position to dominate the will of the other means:
a) Where he holds a real or apparent authority over
the other, for eg. lawyer & client, trustee &
beneficiary, master & servant, judge and the
accused, doctor and a patient etc.
b) where he stands in a fiduciary relation to the other
(fiduciary relation = relation of mutual trust and
confidence) eg. Father & son, Guru & disciple
c) where he makes a contract with a person whose
mental capacity is temporarily or permanently
affected by reason of age, illness, or mental or
bodily distress.
Misrepresentation: Sec 18— "It means and includes-a) the positive assertion in a manner not
warranted by the information of the person making it, of that which is not true, though he believes it to be true, or
b) any breach of duty, which without any intent to deceive, gains an advantage to the person committing it, by misleading other person to his prejudice, or
c) causing, however innocently, a party, to make a mistake as to the substance of the thing which is the subject of the agreement
Fraud: Sec 17—
It means and includes any of the following acts committed by a party to the contract—
i)The suggestion that a fact is true when it is not true, by the one who does not believe it to be true
ii)The active concealment of a fact by a person who has knowledge or belief of the fact
iii)A promise made without any intention of performing it
iv)Any other act fitted to deceive
v)Any such act or omission as the law specially declares to be fraudulent
Representation =
statement of fact made by one party to
another
either before or at the time of contract
relating to some matter essential to the
formation of the contract
with an intention to induce the party to
enter into the contract
An innocent wrong statement
= Misrepresentation
A deliberate or intentional statement to
deceive the other = Fraud
Effects of Misrepresentation
The aggrieved party has two options
1. He can rescind the contract, treating it as
voidable
2. He may affirm the contract and insist that he
shall be put in a position in which he would
have been, if the statement was true.
EXAMPLE
A, by a misrepresentation leads B erroneously to believe that 500 kilos of indigo are made annually at A’s factory. B examines the account of the factory, which shows only 400 kilos of indigo have been made. After this, B buys the factory. Is contract voidable on account of A’s mispresentation.
Effects of Fraud:
The aggrieved party has three remedies
1. He can rescind (set aside) the contract, treating it as voidable
2. He may affirm the contract and insist that he shall be put in a position in which he would have been, if the statement were true.
3. He can also sue for damages, if any, because
fraud is a civil wrong and hence compensation is payable
Mistake= erroneous belief concerning something Mistake can be of Law Or of Fact
Mistake of law | | |
Mistake of Law Mistake of law
of the country of foreign country
Mistake of Fact |
| | Bilateral
Unilateral Mistake Mistake
Mistake of law of one's own country is no excuse.
Mistake of foreign law however stands on the same
footing as mistake of fact
Bilateral mistake =
a) Both parties to an agreement misunderstood each other and are at cross purposes
b) Mistake relates to a fact and not to judgment or opinion etc.
c) The fact must be essential to the agreement
Bilateral mistake:
Ø Mistake as to the existence of the subject matter of the agreement
Ø Mistake as to the identity of the subject matter
Ø Mistake as to the title of the subject matter
Ø Mistake as to the quantity of the subject matter
Ø Mistake as to the quality of the subject
matter
CASESA, who owns two fiat cars, offers to sell his white
fiat for Rs 80,000. B accepts the offer thinking A is selling his brown fiat.
P wrote to H inquiring the price of the rifle of particular make and suggested that he might buy as many as 30. on receipt of the information, he telegraphed, “send three rifles”. But because of the mistake of telegraph authorities message transmitted was “send the rifles”. H dispatched 30 rifles.
A buys an article thinking it is worth Rs 10,000 while actually it is worth Rs 5,000 only. Later he wants to avoid the agreement on the ground of mistake as to the price of subject matter. Can he avoid.
A agrees to sell B a specific cargo of goods supposed to be on its way from London to Mumbai. It turns out that before the date of bargain the ship carrying the cargo had been cast away and the goods lost. Neither party was aware of the facts.
Unilateral Mistake :only one of the contracting parties is
mistaken as to a fact of material to the contract
CASE: A sold rice to B by sample, and B thinking that they were old rice, purchased them. Infact, the the rice were new. Can B avoid the contract.
Effect of Unilateral Mistake:Contract remains valid unless caused by
misrepresentation or fraud.Where the mistake is caused by
misrepresentation or fraud the contract becomes voidable at the option of the aggrieved party.
Cases where agreement does not give rise to any
contract in spite of a unilateral mistake:
Ø Mistake as to the identity of the person contracted with, where such identity is important
Ø Mistake as to nature and character of the
written document. Reason for these two exceptions is that the
mistake is so fundamental as to go to the roots of the agreement
Agreement against public policy An agreement which conflicts with morals of time
and contravenes any established interest of society is void as being against public policy.
The agreement declared void as against public policy are:
a) Trading with enemy: all contracts made with alien enemy are illegal unless made with govt. permission
b) Agreements for stifling prosecution: agreement for compounding or suppression of criminal charges and for offences of public natureCASE: A, knowing that B has committed a murder obtains a promise from B to pay A Rs 10,000 in consideration of not exposing B
Contd…c) Contracts in the nature of champerty
and maintenance: Where, a person, having no interest, agrees to maintain a suit on behalf of another against a third party, it is known as maintenance. Champerty is a bargain whereby one party is to assist another in recovering property, and in return, is to share in the proceeds of the action. Champerty and maintenance are not illegal but court refuses to enforce it, when
i. They are found to be extortionate and unconscionable
ii. Not made with the bonafide object of assisting the claims of the person unable to carry on litigation himself.
CASES
A, a financier, promises to spend Rs 30,000 for the consideration that a part of the estate recovered through litigation will be conveyed to him, the value of which amounted to Rs 90,000
A promises to render services for the conduct of litigation in consideration of payment of 10 percent of the amount recovered through court
Contd..
a) Agreements for the sale of public offices and titlesExample: A promises to pay B Rs 5,000 if B secures him an employment in public office
b) Agreements in restraint of parents rightc) Agreements in restraint of marriage of any person
other than a minord) Marriage brokerage e) Agreements in restraint of legal proceedingsf) Agreements interfering with the course of justice:
any agreement for the purpose of using any influence of any kind with judges or officers of justice
g) Agreements in restraint of trade
Agreements in restraint of tradeSec 27 provides that “every agreement by which
anyone is restrained from exercising a lawful profession, trade or business of any kind is void”
CASE29 out of 30 manufacturers of combs in the city of Patna
agreed with R to supply him with combs and not to anyone else. Under the agreement R was free to reject the goods if he founds there was no market for them. Is agreement void.
J, an employee of company, agreed not to employ himself in a similar concern within a distance of 800 miles from Chennai after leaving the company’s service. Is agreement void.
A and B carried on business of readymade garments in a certain locality in calcutta. A promised to stopped business in that locality if B paid him Rs 900 which he had paid to his workmen as advances. A stopped his business but B did not paid him the promised money. Is agreement void.
Cases in which restraint of trade is valid Sale of a goodwill of business
Example: S, a seller of imitation jewellery, sells his business to B and promises not to carry on business of imitation jewellery and real jewellery. Is agreement valid?
Partner’s agreement: partners may agree that1) A partner shall not carry on any business other than that
of a firm while he is a partner2) A partner on ceasing to be a partner will not carry on
similar business to that of the firm within specified period or within specified local limits
3) Partners may , upon or anticipation of the dissolution of firm, make an agreement that some or all of them will not carry on business similar to that of a firm within a specified period or within a specified local limits and such an agreement shall be valid if the restriction imposed are legal
4) A partner, may upon the sale of a goodwill of the firm, make an agreement that such a partner will not carry on any business similar to that of a firm within a specified period or within a specified local limits and such an agreement shall be valid if restriction imposed are legal
Contd…
Restrictive trade agreements: if restrictive trade agreement is not against public interest, it is valid.
Service agreements: an agreement of service by which a person binds himself during the term of agreement not to take service with anyone else or directly or indirectly take part in promotion of any business in direct competition with that of his employer.
Wagering agreementsA promise to give money or money’s worth upon the
determination of an uncertain eventExample:
A and B bet as to whether it would rain on aprticular day or not - A promises to pay Rs 100 to B if it rained and B promising an equal amount to A, if it did not.
A borrows Rs 500 from B and payed to C, to whom A has lost bet.
Wagering agreements void and not illegal: unless the wager amounts to a lottery, which is crime under the Indian Penal Code S. 294 A, its not illegal.
However, supreme court upheld lotteries as legal where prior permission of Govt. is obtained and winner of the lottery has a right to receive the prize and sale of lotteries is subject to the payment of sales tax.
ExceptionsTransactions for the sale and purchase of stocks
and sharesPrize competitionsAn agreement to contribute a plate or prize of the
value of Rs 500 or above to be awarded to the winner of horse race
Contracts of insurance
Quasi contract
A situation in which law imposes on one person, on grounds of natural justice, an obligation similar to that which arises from a true contract, although not contract, express or implied, has infact been enterd into by them
ExampleX supplies goods to his customer Y, goods
are delivered by a servant of X to Z, mistaking Z for Y. Is Z liable to pay compensation to X.
CASES WHICH ARE TREATED AS QUASI CONTRACTS
Claim for necessaries supplied to a person incapable of contracting or on his account
Examples:A supplies B, a lunatic, with necessaries suitable
to his condition in life. A is entitled to be reimbursed from B’s property.
A who supplies the wife and children's of B, a lunatic, with necessaries suitable to their conditions in life, is entitled to be reimbursed from B’s property
Contd…Reimbursement to a person paying money due by
another in payment of which he is interested: A person who is interested in payment of money which another is bound by law to pay, and who, therefore, pays it, is entitled to be reimbursed by the other (S. 69)
EXAMPLE:B holds land in Bengal, on lease granted by A, the
Zamindar. The revenue payable by A to the govt being in arrear, his land is advertised for sale by the govt. Under the revenue law, the consequence of such sale will be the annulments of B’s lease. B, to prevent the sale and consequent annulment of his own lease, pays the govt, the sum due from A. A is bound to make good to B the amount so paid.
Contd…Obligation of person enjoying benefits of non-
gratuitous act: where the person lawfully does anything for another person, or delivers anything to him, not intending to do it gratuitously, and such another person enjoys the benefit thereof, later is bound to make compensation to the former (s. 70)
ExampleA, a tradesman, leaves goods at B’s house by
mistake. B treats the goods his own. Is B bound to pay for them.
A saves B’s property from fire. Is A entitled to get compensation from B.
Responsibility of finder of goods: A person who finds goods belonging to another and take them into his custody, is subject to the same responsibility as bailee.
CONTD…
Liability of person to whom money is paid or things delivered by mistake or under coercion: A person to whom money has been paid, or thing delivered by mistake or under coercion, must repay or return them
Example: A and B jointly owe Rs 1,000 to C. A pays the amount to C. Also, B, not knowing this fact, pay Rs 1,000 to C. Is C bound to repay the amount to B.
Contingent Contracts
A contingent contract is to do or not to do something, if some event collateral to such contract does or does not happen.
A contingent contract may be contingent upon The happening or not happening of some event within a specified time
Example: A contract to pay B Rs 10,000 if B’s house is burnt
Performance of Contract
Performance of contract means carrying out of obligation under it
Who must perform the promise under the contract-a) By promisor himselfb) By his agentc) By his legal representative
Performance of joint promisesa) When two or more person has made a joint
promise, all such persons must jointly fulfill the promise
b) When two or more person make a joint promise, the promisee may compel any one or more of such joint promisors to perform whole of the promise.
Contd…c) Where, a joint promisor has been compelled to
perform the whole promise, he may compel other joint promisor to contribute equally. If any one of the joint promisor makes default in such contribution, the remaining joint promisor must bear the loss in equal shares.
Examples A, B and C are under joint promise to pay D Rs 3,000.
a is compelled to pay the whole amount. Can A recover the amount from B and C. if yes, how much.
A, B and C are under joint promise to pay D Rs 3,000. C is compelled to pay the whole amount. A is insolvent, but his assets are sufficient to pay half of his debt. Can C recover the amount from B and A. If yes, how much.
A, B and C are under joint promise to pay D Rs 3,000. C is unable to pay anything. And A is compelled to pay the whole amount. B is insolvent, but his assets are sufficient to pay half of his debt. Can A recover the amount from B and C. If yes, how much.
CONTD…d) When a person has made a promise to two
or more persons jointly, the right to claim performance rests with all the joint promisees and after death, with the representative of such a deceased promisee jointly with survivor’s and after death of survivors with representatives of all jointly
Example: A, in consideration of Rs 5,000 lent to him by
B and C, promises B and C jointly to repay them that sum with interest on a day specified. B dies. Later on C also dies. Who will claim the right to performance?
Contracts which need not be performedThe parties may mutually agree to substitute the
original contract by a new one or rescind it or alter it
The promisee may dispense with or remit wholly or in part the performance of the promise made to him or extend the time for such performance or accept any satisfaction for it
The person at whose option the contract is voidable because of undue influence, fraud, coercion or misrepresentation can rescind it
The promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise
Rules regarding the time, place and manner of performance of contractWhen the time for the performance has been
specified, the promisor must perform on the day fixed during usual business hours and at the place at which promise ought to be performed
Where a time of performance is not specified, the performance must be made within a reasonable time
Where a promise is to be performed on a certain day, the promisee must apply for performance at a proper place during usual business hours
When promise is to be performed and no place is fixed, the promisor must apply to the promisee to appoint a reasonable place for performance
The performance of any promise may be made in any manner or at any time which the promisee prescribes or sanctions
Remedies for Breach of contract: Remedies are available under Indian Contract Act,
1872 and under Specific Relief Act 1963.Remedies under specific relief act are1. A decree for specific performance: the court
direct the party in breach to carry out his promise according to the term of the contract
2. An injunction: an order of the court prohibiting a person to do something where a party is in breach of negative term of contract
3. A suit on quantum meruit: means as much as merited (earned). A right to sue on a “quantum meruit” arises where a contract partly performed by one party has become discharged by breach of other party.
Remedies under Indian Contract Act, 18721. Recession of contract (s. 39)2. Damages for the loss sustained or suffered
Remedies for Breach of contract: • Rescission of the contract:When breach of contract is committed by
one party, the other party may treat the contract as rescinded
Aggrieved party is freed from all the obligation
ExampleA promises to supply one bag of rice on a
certain day and B promises to pay the price on receipt of the bag. A does not delivers the bag of rice on the appointed day.
DamagesDamages are awarded as per rules laid down in
Ss. 73-74. As per S.73 - 1. compensations as general damages will be
awarded only those losses that directly or naturally results from breach of contract
2. compensation for losses indirectly caused by breach may be paid as special damages
3. aggrieved party should try to take steps to keep the losses to the minimum
S. 74 provides that if the parties agree in their contract that whosoever commits the breach shall pay the agreed amount as compensation, the court has power to award a reasonable amount only, subject to such agreed amount.
Different kinds of damages:Ordinary damages: damages which naturally arise in
the usual course of thing from such breachThe measure of ordinary damage is difference
between the contract price and market price at the date of breach
Example: A contracts to deliver 10 bags of rice at Rs 500 a bag on future date. On the due date he refuses to deliver. The price on that day is Rs 520 a bag. What is the measure of damage?
Special damages: are claimed in case of loss of profit etc.
When there are certain special circumstances present and their existence is communicated to the promisor, the non-performance of promise entitles the promisor to not only pay ordinary damages but also other damages that may result therefrom.
The communication of special circumstances are prerequisite for the claim of damages
CASES A, a builder, contracts to erect and finishes the house by
the 1st Jan, in order that B give possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between B and C. A builds the house so badly that before 1st Jan it falls down and had to be rebuilt by B, who in consequence losses the rent, which he has to receive from C and is obliged to make compensation to C for the breach of contract. Can B claim for compensation? How much?
X’s mill was stopped due to breakdown of shaft. He delivered the shaft to Y, a common carier, to be taken to manufacturer to copy it and make a new one. X did not make known to Y that delay would result in loss of profit. By some neglect on the part of Y the delivery of the shaft was delayed in transit beyond a reasonable time. As a result, the mill remain idle for a longer time than otherwise would have been, had the shaft been delivered in time. Is Y liable for loss of profit?
Contd.. Liquidated damages & Penalty:The parties to the contract pre-estimate of the loss
which might happen to them in case contract was broken by any of them (Liquidated damages)
The parties made no attempt to estimate the loss that might happen to them in case of breach but still stipulate a sum to be payable in case of breach with the object of coercing the party to perform the contract (penalty)
Example: A contracts with B to pay B Rs 1000 if he fails to
pay B 500 on a particular day. A fails to pay Rs 500 on that day. Is B entitled for compensation?
A contracts with B that if A practices as surgeon in Calcutta, he will pay B Rs 5000. A practices as surgeon in Calcutta. Is B entitled for compensation?
Contd… Exemplary, punitive or vindictive
damages: awarded to punish the defendant and not solely of awarding compensation to the plaintiff. These have been awarded
a) For breach of a promise to marryb) For wrongful dishonor of the cheque
of the customer by a banker possessing adequate funds of the customer.
Nominal damages: awarded where there is only technical violation of legal rights but no substantial loss is caused thereby.
Contracts of Indemnity. A contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a " contract of indemnity".
Eg - A contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 20000/- rupees. This is a contract of indemnity.
Essentials of Contract of Indemnity.
It must contain all the essentials of a valid contract.
The promisee or the Indemnity holder must have suffered loss.
Rights of indemnity holder 1. All damages which he may be compelled to pay
in any suit in respect of any matter to which the promise to indemnify applies.
2. All costs which he may be compelled to pay in any such suit if, in bringing or defending it, providing he acted prudently or with the authority of promisor
3. All sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, or was prudent or authorized by the promisor
Contracts of Guarantee A "contract of guarantee" is a contract to perform
the promise, or discharge the liability, of a third person in case of his default.
Eg – A lends money to B and C promises A that if B fails to repay he will pay the money.
The person who gives the guarantee is called the "surety“.
The person in respect of whose default the guarantee is given is called the "principal debtor “.
The person to whom the guarantee is given is called the "creditor“.
A guarantee may be either oral or written.
Essentials of a Guarantee
1. There must be a debt existing, which should be recoverable.
2. Existence of 3 parties ie. Principal debtor, creditor & surety.
3. There should be some consideration4. The liability must be legally enforceable.5. The principal debtor must be primarily liable.
Surety’s liability is secondary. 6. There must be a distinct promise, oral or written
by the surety to pay the debt in case of default by principal debtor.
7. All essentials of a contract.
Rights of Surety
Rights of Subrogation (Right of surety against principal debtor).-
When the surety pays gauranted sum to creditor on behalf of principal debtor, he owns all the rights of the Creditor.
Rights to indemnity - Surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but, no sums which he has paid wrongfully
Rights to benefit of Creditors Securities A surety is entitled to the benefit of every security which the creditor has against the principal debtor
To be contributed equally in case where two or more persons are co-sureties.
Contract of Bailment
A bailment is the transfer of possession of personal property without the transfer of ownership, usually on the understanding that the property will be returned.
The party who transfers the property is called the bailor, and the party to whom the property is transferred is the bailee.
Types of Bailment
There are two main types of bailment: contractual and non-contractual.
Contractual bailment exists where the elements of a bailment are found in a contract.
Non-contractual bailment exists where the elements of a bailment are present without a contract.
Rights and Duties of a BaileeAll bailees are under a duty to ensure to
take care of the property bailed to them. The standard of care varies according to
the type of bailment. The standard of care is least exacting upon
a bailee when the bailment is both gratuitous and for the benefit of the bailor. The standard of care is most exacting on a bailee when the bailment is gratuitous and for the benefit of the bailee.
Pledge The bailment of goods as a security for payment
for debt or performance of promise is called pledge
Example: A borrows Rs 100 from B and keeps his watch as security for payment of debt. The bailment of watch is called pledge
Distinction between bailment and pledge1. As to purpose: pledge is bailment of goods for a
specific purpose while no such purpose in case of bailment
2. As to right of sail: pledgee has a right of sale in case of default after giving notice to pledger while there is no such right to sale to bailee
3. As to right of using the goods: pledgee has no rights of using the goods pledged while no such restriction exists for bailee
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Law of AgencyWhen people do business, they often deal with
each other directlyBuyer Seller
However, sometimes they deal with each other using a “middleman” (or representative or intermediary)
Buyer Middleman SellerThe legal relationship between the middleman
and the businessperson is governed by the law of agency
The legal term for a middleman or representative is an agent
The person who is represented by the agent is called the principal
Therefore, in our exampleBuyer Middleman SellerIf the middleman represents the buyerPrincipal Agent Seller
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Definition of Agency (cont)Definition:
An agent is a person who is authorised to represent another person, who is called the principal.
The agent creates a legal relationship between the principal and a third party.
Therefore, any contract entered into is between the principal and the third party, even though it is arranged by the agent
The agent does not usually get any rights or responsibilities under the contract
Therefore, it is the principal who must have the capacity to contract and not the agent
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Forms of AgencyThere are several different forms of agencyA general agent has the power to act for the
principal in all business mattersA special agent only has the authority of the
principal for one transactionA del credere agent guarantees to the principal
that if the third party does not pay then the agent will pay. The agent usually takes a higher commission for this
A marketing agent has limited authority to introduce potential clients to the principal. He does not have the authority to negotiate or enter into contracts on behalf of the principal
A distribution agent is appointed by a supplier to arrange for distribution of the supplier’s goods in a particular place.
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Creation of AgencyThe principal/agent relationship can be
created in several waysExpress AppointmentRatificationImplicationNecessityEstoppel
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Express AppointmentThis is the most common way of creating
an agencyThe agent is specifically appointed by the
principal for a particular task or a general function
It can be done by contract, but this is not necessary
What matters is authority
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Ratification In this case, a person who does not have the
authority of the principal enters into a contract with a third party on behalf of the principal
Ratification occurs when the principal expressly accepts the contract later
The effect of this is to make the earlier actions of the agent valid
The following conditions apply to ratification1. The principal must have been in existence at the
time the agent made the contract with the third party
This is not a problem where the principal is a real person, but it could apply to companies or partnerships which have not been formed
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Ratification (cont.)2. The principal must have had the legal capacity to
contract at the time the contract was made3. An undisclosed principal cannot ratify a contract In other words, when the agent made the
contract with the third party, he must have stated to the third party that he was acting as an agent for a particular person
Even though the principal had not actually authorised him
If the agent appeared to be acting for himself, then the principal cannot ratify the contract later.
4. The principal must adopt the whole of the contract
5. Ratification must take place within a reasonable time
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ImplicationAgency by implication is where it is assumed
that the principal has authorised the person to act as his agent
It is assumed that because the agent holds a particular position, then he has the authority of the principal to enter into contracts
Eg: in Panorama Developments v Fidelis Furnishing Fabrics Ltd, it was held that a company secretary had the implied authority to make contracts in the company’s name for the day to day running of the company
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Necessity A principal/agent relationship can be created where
there has been no agreement between the parties when there is an emergency and one person acts to protect the interests of another person.
There are 3 conditions for necessity to apply1. There must be a genuine emergency Eg in Great Northern Railway Co v Swaffield, the
railway company transported the defendant’s horse When no one arrived at the destination to collect it,
the railway company paid to put the horse in some stables
The court allowed the company to recover the costs as necessity had forced them to pay for the stables
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Necessity (cont.)2. There must also be no practical way of getting
further instructions from the principal In Springer v Great Western Railway Co, some
tomatoes arrived late at a port because of a storm
The railway company could not transport them to London immediately because of a strike. The company decided to sell the tomatoes locally before they became rotten
The court held that the railway company should pay the owner of the tomatoes the difference in the price between the price obtained locally and the (higher) price which would have been obtained in London
The reason for this is that it was possible for the company to have contacted the owner for instructions before selling the tomatoes locally
3. The person who acted as ‘agent’ must have acted in the genuine interests of the ‘principal’
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EstoppelThis form is also known as agency by holding outIt occurs where there is no actual principal/agent
relationship, but the principal makes a third party think that there is
In this case the agent has apparent authority and the principal is bound by any contract entered into by the ‘agent’ and a third party who thought there was a proper principal/agent relationship
There are 2 conditions for estoppel to apply1.The ‘principal’ must have made a representation
that the ‘agent’ had his authority2.The party who claims there has been estoppel must
have relied on the principal’s representation
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Authority of the Agent In order for the agent to create rights and
responsibilities for the principal in a contract, the agent must act within the authority given to him by the principal
An agent has two types of authority1. Actual: Actual authority occurs in 2 ways Expressly By implication
2. Apparent
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Actual AuthorityExpress Actual Authority: This is the authority given by
the principal expressly to the agentThe principal tells the agent what he wants the agent
to do and what powers (or authority) the agent has to do those things
Implied Actual Authority: A third party can assume that someone has the powers which a person in the agent’s position usually has, whether or not the agent has been given those powers expressly
For example, in Watteau v Fenwick, the new owners of a hotel employed the previous owner as the manager. They expressly told him that he could not buy certain things, including cigars. However, the manager bought cigars from a third party. The third party sued the owners for payment as the manager was their agent. The court held that buying cigars was within the usual authority of the manager of a hotel. If the owners wanted to limit the manager’s authority in buying things then they would have to tell third parties of the limits of his authority
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Apparent Authority Apparent authority relates to agency created by
estoppel Apparent authority occurs in 2 ways1. A person makes a representation to a third party
that another person has their authority to act as their agent even though that person has not been appointed as their agent
In this situation, the person who makes the representation is bound by the actions of their apparent agent
A person will also be liable if he knows that someone is claiming to be his agent, but he does nothing to stop that person
2. When a principal told a third party in the past that someone was his agent
If the principal ends the agency but does not tell the third party, then he may still be liable for the actions of his former agent
Sale of Goods Act, 1930 Section 4 (1) of the Sale of Goods Act defines
contract of sale of goods as “a contract by which seller transfers or agrees to transfer the property in goods to the buyer for a price”
Essential characteristics of Contract of Sale of Goodsa) Two partiesb) Transfer or agreement to transfer ownership of
goodsc) The subject matter of contract must necessarily
be Goodsd) Price is the consideration of contract of salee) A contract of sale may be absolute or conditionalf) All other essentials of valid contract
“Sale” and “Agreement to sell”Sale: Where ownership in the goods transferred
from seller to buyerExample: A sells his car to B for Rs 1 Lakh. If all
essential elements of contracts are present, it is a sale. This is so even where the payment of the price or delivery of car or both have been postponed
Agreement to sell: contract of sale under which transfer of property in goods is to take place at a future date or subject to some conditions thereafter to be fulfilled
Example: A agrees to sell certain goods to B. The goods are on their way from London to Mumbai in a ship. The ownership in the goods will pass to the buyer when the goods come and the agreement is subject to the condition that ship arrives at port with the goods.
Difference between “sale” and “agreement to sell”Transfer of property (ownership): In “sale”, property in goods transfers immediately to the buyer at the time of contract while in “an agreement to sell” there is no transfer of property to the buyer at the time of contract
Risk of loss: in “sale”, if goods are destroyed the risk passes to buyer even though the goods may not have come into his possession while in “agreement to sell” such loss has to be borne by the seller
Consequences of breach: in “sale”, if buyer wrongfully neglects or refuses to pay the price of the goods, the seller can sue him even though the goods are still in his possession while in “agreement to sell”, if buyer breaks his promise, the seller can only sue for damages and not for price
Contd… Right of resale: in “sale”, the property is with the buyer
and as such the seller can not resell the goods. In “agreement to sell”, the property in goods remain with the seller and as such he can dispose of the goods as he like and the original buyer can sue him for the breach of contract only
Insolvency of buyer before he pays for the goods: in “sale”, if buyer is adjudged insolvent before payment of goods, the seller in absence of “right of lien”, must deliver the goods to the official receiver or assignee. In an “agreement to sell”, the seller may refuse to deliver the goods
Insolvency of seller if buyer has already paid the price: in sale, if seller is adjudged insolvent, the buyer is entitled to recover the goods from official receiver or assignee. In an “agreement to sell”, if buyer has already paid the price and seller is adjudged insolvent, the buyer can only claim a rateable dividend (as a creditor) and not goods
Sale of goods and hire purchase agreementIn sale, property in the goods transferred
immediately at the time of contract, whereas in hire-purchase property in the goods transferred only after the payment of last installment
In sale, position of buyer is that of owner while in hire purchase position of buyer is similar to bailee till the payment of last installment
In sale, buyer can not terminate the contract and he is bound to pay the price of goods. In hire purchase, the hirer may terminate by returning the goods to owner without any liability to pay remaining installments
In sale, seller takes the responsibility of any loss resulting from the insolvency of buyer. In hire-purchase, owner takes no such risk, if hirer fails to pay installments the owner has a right to take back the goods
In sale, sales tax is levied at the time of contract whereas in hire-purchase sales tax is not leviable until it eventually ripens into sales.
Subject matter of contract of sale of goods Goods form the subject matter of
contract of sale Goods may be classified into three types1. Existing goodsa. Specific goodsb. Unascertained goods2. Future goods3. Contingent goods
Contd…1. Existing goodsGoods which are physically in existence and which
are in seller’s ownership or possession, at the time of entering the contract
Existing goods may be either ‘specific’ or unascertained’
Specific: goods identified and agreed upon at the time of the making of contract
Example: A agrees to sell B a particular radio bearing a distinctive number
Unascertained goods: the goods which are not separately identified or ascertained at the time of making of contract
Example: A agrees to sell B one bag of sugar out of the lot of one hundred bags lying in the godown
Contd…
2. Future goods: goods to be manufactured, produced or acquired by the seller after the making of contract of sale
Example: A agrees to sell B all the milk that his cow may yield during the coming year
3. Contingent goods: Goods, the acquisition of which by seller depends upon an uncertain contingency
Example: A agrees to sell B specific rare painting provided he is able to purchase it from its present owner
Effect of perishing of goods Under sec. 7 & 8, perishing not only
covers physical destruction but also1. Damage to goods so that the goods have
cease to exist in the commercial sense2. Loss of goods by theft3. Where the goods have been lawfully
requisitioned by the government
Contd…Effect of perishing of goods 1. Perishing of specific goods at or before making of
contractIncase of perishing of whole of goods: where ‘specific
goods’ form the subject matter of sale, and they without the knowledge of seller perish at or before the time of contract, the agreement is void
Example: A agrees to sell B a certain horse. It turns out that the horse was dead at the time of bargain
In case of perishing of only part of the goods: where in ‘specific goods’ only part of the goods perished , the effect of the perishing will depend upon whether the contract is entire (void) or divisible (not void).
Case: There was a contract for the sale of a parcel containing 700 bags of chinese groundnuts of different qualities. Unknown to the seller, 109 bags had been stolen at the time of contract. The seller delivered the remaining 591 bags and on the buyers refusal to take them, brought an action for the price.
Contd…2. Pershing of specific goods before sale but after
agreement to sell: where there is an agreement to sell specific goods , and subsequently the goods, without any fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is thereby avoided i.e., contract of sale becomes void
Example: a buyer took a horse on trial for 8 days on condition that if found suitable for his purpose the bargain would become absolute. The horse died on 3rd day without the fault of any of the party. Is contract valid.
If only part of the goods perish, the contract becomes void if it is indivisible but if it is divisible the parties are absolved from their obligations only to the extent of perishing of goods
Contd…
3. Effect of perishing of future goods: future goods, if sufficiently identified, are to be treated as specific goods, the destruction of which makes contract void.
Example: C agreed to sell H 200 tons of potatoes to be grown on C’s land. C sowed sufficient land to grow the required quantity of potatoes, but without the fault on his part, a disease attacked the crop and he could deliver only about 10 tons. Is contract valid.
Conditions and warrantiesSec. 12(2) defines conditions as a stipulation
essential to the main purpose of contract, the breach of which give rise to a right to treat the contract as repudiated
Sec. 12(3) defines warranty as stipulation collateral to main purpose of contract, the breach of which gives rise to claim for damages but not to a right to reject a goods and treat the contract as repudiated
Example:Kaushal asks a dealer to supply him a shirt which
would not shrink after use and wash. The dealer supplies a shirt which shrinks after use and wash. Kaushal can reject the shirt or keep the shirt and claim for damages. here stipulation to supply a shirt which would not shrink after use and wash is condition.
Kaushal buys a particular shirt which is warranted by a dealer to be one which would not shrink after use and wash and the shirt does shrink after use and wash, kaushal’s only remedy is to claim damages
Express and implied conditions and warranties: Express condition or warranty: these may be of
any kind that the parties may choose to agree upon
Implied conditions and warranty: implied conditions and warranties are deemed to be incorporated by law in every contract of sale of goods unless the terms of contract shows a contrary intention. It includes
1. Condition as to title2. Sale by description3. Condition as to quality or fitness for buyers
purpose4. Condition as to merchantable quality5. Condition as to wholesomeness6. Implied condition in case of sale by sample7. Implied condition in case of sale by sample and
description
Condition as to title: in contract of sale, it is implied condition on the part of seller in case of ‘sale’ that he has a right to sell the goods and in ‘agreement to sell’, he will have a right to sell the goods at the time when the ownership is to pass unless circumstances of contract shows a contrary intention
Sale by description: in contract for the sale of goods by description it is implied condition that the goods shall corresponds with the description
Condition as to quality or fitness: as a general rule, buyer has to satisfy himself about the quality and fitness of goods before purchase and seller is not responsible for it. However, there is an exceptions
When buyer make known to the seller particular purpose for which goods are required, there is an implied condition that goods shall be reasonably fit for such purpose. For this, 3 condition must be fulfilled
1)The purpose must have been disclosed2)The buyer must have relied on the skills of seller3)The seller’s business must be to sell such type of
goodsExample: a person who is a carpenter, and has no
special knowledge about the hot water bottle, purchases it from chemist. The bottle bursts and injures his wife. Is chemist liable for refund of price or damages?
The above exception does not apply if the specific goods are sold under their patent or trademark
Example: A buyer orders a patent smoke consuming furnace by its patent name for his brewery. The furnace supplied is found to be unsuitable for the purpose. Can buyer take action against seller?
Condition as to merchantable quality: another implied condition is that goods should be merchantable
Example: Ameer buys a black yarn from Daleep and finds it to be damaged by white ants.
There is a contract of sale of manila hemp. The hemp, that is supplied, though manila hemp, is so damaged by sea water that no one in the market would accept it as manila hemp.
However, if buyers examines the goods prior to sale, there is no implied condition as to merchantability
However, inspite of examination, if goods have certain latent defects which would not reveal by examination, the implied condition as to merchantability subsists.
Implied condition as to wholesome: condition of merchantability includes another condition, namely that of wholesome or soundness in the case of sale of provisions or foodstuff.
Example: C bought a bun at M’s factory and broke one of the teeth by biting on a stone in a bun. Is M liable of damages?
Implied condition in case of sale by sample: implied conditions are:
The bulk shall correspond to the sample in quality The buyer shall have reasonable opportunity of
comparing the bulk with sample The goods shall be free from any defects rendering them
unmerchantable Implied condition in case of sale by sample as well as
description: the goods must correspond with the description as well as sample
Example: there was a sale of ‘foreign refined rape-oil’ warranted only equal to sample. The oil supplied was same as the sample but was not ‘foreign refined rape-oil’, being a mixture of it and other oil.
Implied warranties
There are two implied warranties:1. Warranty of quiet possession: in contract
of sale, unless contrary intention appears, there is an implied warranty the buyer shall have and shall enjoy quiet possession of goods
2. Warranty of freedom from encumbrance: goods are free from any charge or encumbrance in favour of third person, not declared to or known to buyer
Doctrine of Caveat EmptorMeans “caution buyer”, i.e., ‘let the buyer beware’Exceptions to doctrine of caveat emptor1.Where the seller makes a false representation and
buyer relies on that representation, the buyer is entitled to the goods according to that representation
2.Where the consent of buyer, in a contract of sale, is obtained by the seller by fraud or seller actively conceals the defects, so that on reasonable examination the same could not be discovered
3.Where buyer makes known to the seller the purpose for which he is buying the goods, then there is an implied condition
4.In case of sale by description, there is an implied condition as to goods being of merchantable quality
5.Proof of reasonable usage or custom of trade may also establish an implied condition as to quality or fitness of goods for a particular purpose
Meaning of transfer of ownership: “When the buyer becomes the owner of the
goods only there the transfer of the ownership of goods considered to have been established”
Significance: Transfer of riskRight to file suitAccruing of goods by the liquidation
Transfer of title by non-ownersSale by mercantile agents:Example: A mercantile agent obtained some diamonds
from the true owner falsely pretending that he had a customer who wanted to purchase them and he afterwards fraudulently pledges the goods to secure advance for himself. Will true owner be bound by pledge?
Sale by a joint owner:Example: Radha & Shyam are co-owners of radiogram.
While the radiogram was in possession of Radha, Shyam secretly sells it to pawan. Can Pawan get the title of the good?
Sale by a person in possession under a voidable contracts
Example: Kawal, by exercising undue influence, buys a car from Bimal at a very low price and sell it toKanta. Can Kanta get the tile of the car?
Contd…Sale by a seller in possession of goods after saleEaxmple: Shyam sells 100 bags of sugar to Bali. Bali
delays in taking the bags away. In the meantime, Shyam sells those bags to another purchaser Kamal who takes it without notice of prior sale and for value. Can Kamal get the title of goods?
Sale by a buyer in possession of goods:Example: Amrik sells Bhatia some copper and
transfers him Bill of lading along with Bill of Exchange. Bhatia endorses the Bill of Lading to Sultan. Bhatia subsequently becomes insolvent without making payment. Can Amrik stop the goods in transit?
Sale by an unpaid sellerExceptional cases under other acts
Meaning of unpaid seller: “When the whole of the price has not been paid or
tendered, When a bill of exchange or any other negotiable instrument has been received as a conditional payment and the condition on which it was received has not been fulfilled by reason of dishonor of the instrument or otherwise”
Rights of an unpaid seller: Right of lienStoppage of goods in transitRight of re saleUnpaid seller’s right against the buyer-Suit for the priceSuit for damagesSuit for interest
Law of Negotiable Instruments
Definition Law relating to negotiable instruments is primarily
contained in Negotiable Instruments Act, 1881.The term ‘instruments’ means any written document
by which a right is created in favour of some personThe word ‘negotiable’ has a technical meaning
whereby rights in the instruments can be transferred from one person to another.
An ‘instrument’ is called ‘negotiable’ if it possesses the following features:
1.Freely transferable2.Holders title free from defects3.The holder can sue in his own name4.A negotiable instrument can be transferred infinitum
Characteristics of Negotiable instrumentsMust be in writingMust be signed by a person who is a maker or
drawerThere must be an unconditional promise or orderMust involve payment of certain sum of money and
nothing elseMust be payable at a time which is certain to arriveIn bill or cheque, the drawee must be named or
described with reasonable certaintyThe instrument must be such or in such a state that
it can be transferred
Nature and kinds of Negotiable InstrumentsNegotiable instruments originated as a
form of bill of exchange.A bill of exchange was a document made
by a person instructing another person to make payment to a third person or the bearer of the document.
The Bills of Exchange Act governs three kinds of negotiable instruments: bills of exchange, promissory notes and cheques.
Bills of Exchange (Drafts)Section 5 of the Negotiable Instruments Act, 1881 defines a bill
of exchange as ‘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’.
Suppose Rajiv has given a loan of Rupees Ten Thousand to Sameer, which Sameer has to return. Now, Rajiv also has to give some money to Tarun. In this case, Rajiv can make a document directing Sameer to make payment up to Rupees Ten Thousand to Tarun on demand or after expiry of a specified period. This document is called a Bill of Exchange, which can be transferred to some other person’s name by Tarun.
Types of bills of exchange: Demand bills: A bill of exchange or promisory note is payable
on demand, thus, no time of payment is mentioned therein Sight or Time Bills: Bills payable at a fixed period after date
or sight of bills
Promissory Note
Suppose you take a loan of Rupees 5,000 from your friend Ramesh. You can make a document stating that you will pay the money to Ramesh or the bearer on demand. Or you can mention in the document that you would like to pay the amount after three months. This document, once signed by you, duly stamped and handed over to Ramesh, becomes a negotiable instrument. Now Ramesh can personally present it before you for payment or give this document to some other person to collect money on his behalf. He can endorse it in somebody else’s name who in turn can endorse it further till the final payment is made by you to whosoever presents it before you. This type of a document is called a Promissory Note.
Section 4 of the Negotiable Instruments Act, 1881 defines a promissory note as ‘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’.
ChequeThe Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn
on a specified banker and not expressed to be payable otherwise than on demand. A cheque is an order by the account holder of the bank directing his banker to pay
on demand, the specified amount, to or to the order of the person named therein or to the bearer.
From the point of view of the holder, a cheque contains the implied promise of its drawer that the drawer has funds on deposit at the bank to meet the amount.
TYPES OF CHEQUESOpen cheque: A cheque is called ‘Open’ when it is possible to get
cash over the counter at the bank. The holder can do the following:
i. Receive its payment over the counter at the bank,
ii. Deposit the cheque in his own account
iii. Pass it to some one else by signing on the back of a cheque.
b) Crossed cheque: Since open cheque is subject to risk of theft, it is dangerous to issue such cheques. This risk can be avoided by issuing another types of cheque called ‘Crossed cheque’. The payment of such cheque is not made over the counter at the bank. It is only credited to the bank account of the payee.
c) Bearer cheque: A cheque which is payable to any person who presents it for payment at the bank counter is called ‘Bearer cheque’. A bearer cheque can be transferred by mere delivery and requires no endorsement.
d) Order cheque: An order cheque is one which is payable to a particular person. In such a cheque the word ‘bearer’ may be cut out or cancelled and the word ‘order’ may be written. The payee can transfer an order cheque to someone else by signing his or her name on the back of it.
Crossing of ChequesCrossing of cheque is direction to the paying banker
by the drawer that payment should not be made across the counter
Sec 123 defines crossing as ‘where a cheque bears across its face an addition of words ‘and company’ or any abbreviation thereof, between two parallel transverse lines, or of two parallel lines simply, either with or without the words, ‘not negotiable’, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally’
Significance of crossing: crossing of cheque serves as a measure of safety against theft or loss of cheque in transit.
Modes of crossing: (1) General crossing: implies the addition of two transverse lines.(2) Special crossing: implies the specification of name of banker on the face of cheque.
Not negotiable crossing: ‘general’ or ‘special’ crossing may also be accompanies by the word ‘not negotiable’ which means the cheque is deprives of its special feature of negotiability
Account payee crossing: signifies that drawer intends that payment to be credited only to the payee’s account and in none else.
Not negotiable, A/c payee crossing: safest form of crossing
The Holder and Holder in Due CourseA holder is a person entitled in his own name to the
possession thereof and to receive or recover the amount due thereon from the parties thereto.
E.g.E.g.: when an employer pays employee with : when an employer pays employee with paycheck, the employee is a holder.paycheck, the employee is a holder.
A holder in due course is one who acquires more rights in an instrument than the transferor had.
To obtain the rights to which the holder in due course is entitled, he or she must satisfy a number of conditions.
Holder Versus Holder In Due CourseHolderA person who is in
possession of a negotiable instrument that is drawn, issued, or indorsed to him or his order, or to bearer, or in blank.
Holder in Due Course (HDC)
A person who takes a negotiable instrument for value, in good faith, and without notice that it is defective or is overdue.
Holder in Due Course: The ConditionsThe holder in due course must satisfy the following
conditions:The holder must have taken the instrument
complete and regular on its face;The instrument must have been acquired before it
was overdue, and without notice of any dishonour;
Consideration must have been given; andThe holder must have taken the instrument in
good faith and without notice of any defect.
RIGHTS OR PRIVILIDGES OF HDC1) HDC can file a suit in his own name against the parties liable to pay.
2) The HDC gets a good title even though the instruments were originally stamped but was an inchoate instrument OR even though the title of the transferor or any price party to the instrument is defective
3) Every prior party to the instruments is liable to a HDC until the instrument is duly satisfied (Sec 36).
4) Acceptor cannot plead against HDC that the bill is drawn in fictitious name
5) The other parties liable to pay cannot plead that the delivery of the instrument was conditional or for a specific purposes only
6) if negotiable instrument is made without consideration, & get into hands of the HDC, he can recover the amount on it from any of the prior parties
7) The person liable cannot plead against the HDC that the instrument had been lost/obtained by means of fraud/for an unlawful consideration.
8) The validity of instrument as originally made or dawn cannot be denied by maker of drawer of negotiable instrument or by acceptor of bill of exchange.
9) Endorser is not permitted as against the HDC to deny the signature or capacity to contract of any prior party to the instrument
Negotiation The transfer of an instrument by one party to another so
as to constitute the transferee a holder thereof.Distinction between negotiability and
assignability:Negotiation can be affected by mere delivery if the
instrument is bearer one and by ‘endorsement and delivery’ in case it is an order instrument. Assignment requires a written document signed by the transferor.
In assignment, the title of the transferee is always subject to the title of its transferor. In case of of negotiation, holder in due course gets better title than its transferor
Consideration is always presumed in case of negotiable instruments; in case of assignment the transferee must prove consideration for the transfer.
Dishonour of instruments A bill of exchange may be dishonoured either by non-
acceptance or non-payment. Sec. 91 enumerates circumstances when the bill will be considered dishonoured
1. When the drawee does not accept it within 48 hrs. from the time of presentment of acceptance
2. When presentment for acceptance is excused and it remains unaccepted
3. When the drawee is the person incompetent to contract
4. When the drawee could not be found after reasonable search
5. Where the acceptance is qualified6. Where one or more of the several drawees refuse to
accept the bill
Contd…Dishonour of instrument by non-payment: when
maker, acceptor or drawee makes default in payment upon being duly required to pay the same or when presentment for payment is excused and instruments remain unpaid after maturity
Effect of dishonour: render the drawer and all the endorsers liable to holder
Discharge of instrument A negotiable instrument is said to be discharged when it
becomes completely useless I.e., no action on that will lie and it can not be negotiated further. In the following cases, the instrument deemed to be discharged-
1. When the party primarily liable on the instrument makes the payment in due course to the holder at or after maturity
2. When the bill of exchange which has been negotiated is, at or after maturity, held by an acceptor in his own right
3. When the party primarily liable becomes insolvent, the instrument is discharged and the holder can not make any other prior party liable thereon.
4. When the holder cancels the instrument with an intention to release the party primarily liable thereon from the liability
Discharge of one or more partyBy cancellationBy releaseBy paymentBy allowing drawee more than 48 hour to
acceptBy taking qualified acceptanceBy not giving notice of dishonorBy non-presentment for acceptance of billBy delay in presenting the chequeBy material alterationBy negotiation back
Indian Partnership Act, 1932One of the forms in which business can be
carried on is ‘partnership’, where two or more persons join together to form the partnership and run the business. In order to govern and guide partnership, the Indian Partnership Act, 1932 was enacted.
Since public at large would be dealing with the partnership as customers, suppliers, creditors, lendors, employees or any other capacity, it is also very important for them to know the legal consequences of their transactions and other actions in relation with the partnership.
Features of Partnership Act, 1932Indian Partnership Act, 1932 is a Central Act.
(made by Parliament This Act deals with special type of contract.
( contract of partnership)Provisions regarding contract of partnership
were earlier contained in the Indian Contract Act, 1872.
This Act extends to the whole of India except the state of Jammu and Kashmir.
This Act came in to force on 1.10.1932, except section 69 which came into force on the 1st Day of October, 1933.
Meaning &Definition of ‘Partnership’ Section 4 of the Partnership Act, 1932 defines
the term ‘Partnership’ as under: ‘’PARTNERSHIP IS THE RELATION BETWEEN
TWO OR MORE PERSONS WHO HAVE AGREED TO SHARE THE PROFITS OF A BUSINESS CARRIED ON BY ALL OR ANY OF THEM ACTING FOR ALL’’.
Thus, Partnership is the name of legal relationship between/among persons who have entered in to the contract.
Meaning of ‘Partner’ ‘Firm’ and ‘Firm Name’ Section 4 of Indian Partnership Act, 1932 provides
that:
Persons who have agreed into partnership with one another are called individually ‘PARTNERS’ and collectively ‘FIRM’ and the name under which their business is carried on is called the ‘FIRM NAME’
“Partnership is thus Invisibility which binds the partners together and firm is the visible form of those partners who are thus bound together”.
Maximum Limit on Number of Partners
Section 11 Companies Act provides that the maximum no. of persons, a firm can have:
In case of partnership firm carrying on a banking business 10
In case of partnership firm carrying on any other business 20
If the number of partners exceeds the aforesaid limit, the partnership firm becomes an illegal association.
If an association of persons or firm having members or partners exceeding the Above limit will not be an illegal association if that firm’s objective is not to earn profit.
Two or more persons
An agreement
Sharing of profit
Business
Mutual agency
Essential elements of Partnership
For explanation go through the next slides:
For forming a partnership the above elements should be present. Though each element is important, ‘Mutual Agency is the conclusive proof
Nature of Partnership
A partnership firm is not a person in the eyes of Law (except for the purpose of taxation [sec.2 (31)] ). It has no separate legal entity (like company) apart from the partners constituting it.
Further Section 5 of the Act provides that partnership arises from contract and not from status
Real test of partnership [Sec. 6]The true test of partnership is the existence of
‘Mutual Agency’ relationship, i.e. the capacity of a partner to bind other partners by his acts done in firm’s name and be bound by the acts of other partners.
Sharing of profit is an essential element of partnership but it is not a conclusive proof of partnership.
Sharing of profit is Prima facie evidence.Thus partnership can be presumed whena.There is an agreement to share the profits of business andb.The business is carried on by all or by any of them acting for all.
Contd.
Contd.The relation among partners can be
ascertained as under:
a.If there is an express contract.
The real relation is ascertained from the partnership contract.
b.If there is no express contract
The real relation is ascertained from all the relevant factors such as contract of parties, books of account, statement of employees etc.
Characteristics of Partnership
A partnership firm has the following characteristics:
1. Two or more members2. Unlimited liability3. Voluntary registration 4. No separate legal existence 5. Restriction on transfer of interest: 6. Based on agreement7. Partners are competent to contract8. Partnership may be only for lawful business.
Types of Partnership
Partnership at Will(Sec.7)
Particular Partnership(Sec.8)
On the Basis of Duration
Partnership at Will [Sec.7 read with Sec.43)]When there is no provision in partnership
agreement (known as partnership Deed, if in writing) for:The duration of their partnership, orThe determination of their partnership,
then the partnership is called ‘Partnership at Will’.
Special feature of ‘Partnership at will’ is that such firm may be dissolved by any partner by giving a notice in writing to all other partners of his intention to dissolve the firm
The firm will be dissolved from that date which is mentioned in the notice as the date of dissolution and if no date is mentioned then from the date of communication of notice.
Particular Partnership [sec. 8]When a partnership is formed for a
Specific venture or undertaking, orParticular period (fixed term)
then such partnership is called a ‘particular partnership’.
Such partnership comes to an end on the completion of the venture or the expiry of time period.
If such partnership is continued after the expiry of term or completion of venture, it is deemed to be a partnership at will.
A particular partnership may be dissolved before the expiry of the term or completion of the venture only by the mutual consent of all the partners.
Contd.
Sec. 17 (b) of the Act provides that if a firm ,constituted for a fixed term, continues to carry on business after the expiry of that term, then the partnership will become partnership at will AND mutual rights and duties of partners will remain same as they were before the expiry.
Advantages of Partnership FirmEasy to form: Like sole proprietorships, partnership
businesses can be formed easily without any compulsory legal formalities. It is not necessary to get the firm registered. A simple agreement or partnership deed, either oral or in writing, is sufficient to create a partnership.
Availability of large resources: Since two or more partners join hands to start a partnership business, it may be possible to pool together more resources as compared to a sole proprietorship. The partners can contribute more capital, more effort and more time for the business
Contd.
Partnership deedA partnership is formed by an agreement. This
agreement may be in writing or oral.though the law does not expressly require that the partnership agreement should be in writing, it is desirable t o have it in writing in order to avoid any dispute with regard to the terms of the partnership. The document which contains the term of a partnership as agreed among the partners is called “partnership deed”.
The partnership Deed is to be duly stamped as per the Indian Stamp Act, and duly signed by all the partners.
Contd.
Contents of partnership Deed A partnership deed may contain any matter relating to the regulation of partnership but all provisions in the deed should be within the limits of Indian Partnership Act, 1932. However, A Partnership Deed should contain the following clause:
Nature of business Duration of partnership Name of the firm Capital Share of partners in profits and losses Bank Account firm Books of account Powers of partners Retirement and expulsion of partners Death of partner Dissolution of firm Settlement of disputes
Minor Partner
Sec. 30(1): ‘A person who is a minor according to the law to which he is subject may not be a partner in a firm, but with the consent of all partners for the time being, may be admitted to the benefits of partnership’
Types of partnership
Partnership at will : M O H Uduman v Ashurn AIR 1991 SC 1020: Karumuthu Thiagarajan Chettiar v Muthappa
Chettiar AIR 1961 SC 1225Partnership for a fixed termParticular partnership : Limited Partnership : Partnership by Holding out
Sleeping partnerNominal partnerWorking partners
Rights of a partner1. Joint ownership of partnership property2. Right to take part in the management [sec. 12]3. Access accounts and act during emergency4. Right to profit5. No claim for interest of capital6. Right to indemnity sec. 13(e)6. Right not to be expelled7. No new partner to be introduced: right to
prevent8. No liability before joining unless with consent
and expressly stated in the deed9. Right to retire
Nature of Liability of partnersJoint and several: sec. 25: every partner is
liable jointly with all the other partners and also severally for all acts of the firm done while he is a partner’
TestBenefit of the partnershipWithin the scope of authority
Malyn v John Houston 1903 1 KB 81Moreton v Harden 1825Citizens Life Assurance v Brown 1905R W Pathirana v Pathirana 1967 1 AC 233
Nature of Implied Authority1. Authority to purchase and sell
Bond v Gibson [1808] 2. power to recover money due to firm/
borrow money on credit: Higgins v Beauchamp 1914 2 KR 1992:
3. Authority to engage lawyers4. Authority to insure firm goods
Conditions for application of Implied authority
1. Act must be done in the capacity of a partner: Gouthwaite v Duckworth [1810 104 ER 174]:
2. Act must be done on behalf of the firm and not on personal behalf
3. Act must relate to activities within the scope of business
4. Act must be done in the firms nameOffer: CommunicationExceptions
Company law
A company formed and registered i.e. incorporated under the Companies Act,
1956 or an existing co. [Sec.3]
Incorporated AssociationArtificial personSeparate Legal Entity Perpetual Succession i.e. continued existenceLimited LiabilityCommon SealTransferability of SharesSeparation of ownership from its managementCapacity to Sue and be sued in its own name
Incorporated AssociationA company must be incorporated or
registered under Companies ActMinimum number required is 7 in case of
public company and 2 in case of private company.
Separate legal entity
A company is a separate legal entity means it is different from its members. It works as a individual body.
It can make contracts, open a bank account, can sue and be sued by others.
The law has recognised that even if a person holds virtually all the shares, the right and obligations of the company shall be different from its members.
Artificial personA company is a purely a creation of law. It
is invisible, intangible and exists only in the eyes of law.
It has no soul, no body, but has a position to enter or exit into a contract, to appoint a people as its employees
In short it can do every thing just like a natural person.
Perpetual existence [sec 34(2)]Section 34(2) of the act states that an
incorporated company has perpetual life. The life of the company is not related to
the life of the members . Law create the company and law alone can dissolve it.
The existence of the company is not affected b y death, insolvency, retirement or transfer of share of members.
Limited liability
It means that the liability of a member shall be limited to the
value of the share held by him, he cannot be called upon
to bear the loss from his personal property.
Common seal
A company being an artificial person can not work as a natural being.
Therefore, it has to work through its directors, officers and other employees. Common seal used as a official signature of a company.
Transferability of share sec(82)The share of a company are freely transferable. The shareholder can transfer his share to any person without the consent of other members.
A company cannot impose absolute restrictions on the rights of member to transfer their shares
Separate propertyShareholders are not, in the eyes of law,
part owners of undertaking.Shareholders are only given certain rights
by law, e.g., to vote or attend meetings, to receive dividends.
Capacity to sue and be sued
When a company incorporated it acquire a separate and
independent legal personality. As a legal person it can be sue and be sued in its own name.
Solomon carried on business as leather merchant. He sold his business for a sum of $30,000 to a company formed by him along with his wife, a daughter and four sons. The purchase consideration was satisfied by allotment of 20,000 shares of $1 each and issue of debentures worth $10,000 secured by floating charge on the company’s assets in favour of Mr Solomon. All the other shareholders subscribed for one share of $1 each. Mr. Solomon was also the MD of company. The company almost immediately ran into difficulties and immediately became insolvent and winding up commenced. At the time of winding up the total asset of company amounted to $6,050; its liabilities were $10,000 secured by debentures issued by Solomon and $8,000 owing to unsecured trade creditors. The unsecured sundry creditors claimed the whole of the company assets, viz., $6,050 on the ground that the company was mere alias or agent for Solomon.
Types of companies (Registered under company act 1956)
Member and Shareholder Limited Company: Generally, member and shareholders are used
interchangeably Unlimited Company or Company limited by guarantee: member
may not be a shareholder Distinction between member and shareholder in case of limited
company
1. X is a member of company limited by shares. His name is placed on the register of members. Here, “member” or “shareholder” can be used interchangeably. However,
a. On sale: X sells shares to Y. He hands over share transfer form and share certificate to Y.
b. On death: X dies and his property including shares is inherited by Y.
c. On becoming insolvent: X becomes insolvent and his property including shares vests in the official receiver or officially assignee.
2. A person who is holding a share warrant is a shareholder but not member
3. A member who subscribes to the MoA becomes member but not shareholder
MoA - Charter of the company and contains the powers of the company.
Contents• Name Clause• Domicile Clause• Objects Clause• Liability Clause• Capital Clause
AoA – (i) Rules & Regulation of internal Management. (ii) Contract between the company and its
members.Contents
Business of the companyAmt. of capital issued & the classes of sharesRights of each class of share holder & procedure for
variationAllotment ,Calls, Forfeiture of sharesTransfer of sharesCompanies lien on shares
Exercise of borrowing powers including issue of debentures.
General Meeting, Notices, Quorum, Proxy, Voting, resolution, Minutes etc.
Appointment, No., & Powers of Directors.Dividends- Interim & Final- General
Reserve.Accounts & Audits.Keeping of books.
Modes of winding up
(i)Compulsory winding up by Court [Sec.433]
(ii)Voluntary winding up Members voluntary winding up Creditors voluntary winding up
Special Resolution.Default in holding statutory meeting.Failure to commence business.Reduction in membership.Inability to pay debts.Just & equitable.
Ordinary resolution passed where the period fixed by the Articles for the duration.
If the company resolves by special resolution that it shall be wound-up voluntarily [sec.484]
Members• Solvent companies• No need of creditors
meeting• Liquidator appointed
by the member• No committee of
inspection can be formed.
Creditors• Insolvent Companies• Creditors meeting
necessary• Liquidator appointed
by the creditor• If wish can formed a
Committee of inspection.
Difference b/w public and private co.Private company Public company
Minimum no. of member is 2 & maximum is 50
Right to transfer shares is restricted
Can Commence business immediately after receiving certificate of incorporation
Need not to hold statutory meeting
Directors are not required to file with registrar written consent to act as director or sign MoU or enter into contract for their qualification shares
Directors are not required to retire by rotation
Minimum no. is 7 & no restriction on maximum no.
Shares are freely transferable
Can commence only after receiving certificate to commence from registrar
Must hold statutory meetingDirectors are required to file
with registrar written consent to act as director or sign MoU or enter into contract for their qualification shares
At least 2/3rd of directors must retire by rotation
Difference b/w public and private co.Private company Public company
No. of directors may be increased to any extent without the permission of central govt.
Two members have to be personally present to form a quorum
If the no. of directors is more than 12 approval of central govt is necessary
The number is five
Procedure for incorporation of companyDivided into three parts1.Promotion 2.Registration3.FloatationPromotionPreliminary steps taken for the purpose of
registration and floatation of co.The person who assumes the task of promotion is
called promoterThe promoter may be an individual, syndicate,
association, partnership or company
Duties and liabilities of promotersPromoters are in fiduciary relationship with the companyPromoters are not forbidden to make profit but to make secret profitExample: In Gluckstein vs. Barnes, a syndicate of person was formed to buy a
property called ‘Olympia’ and resell this Olympia to the co. to be formed for the purpose. The syndicate first bought the debenture of old olympia co. at discount. Then they bought the co. itself for $1,40,000. out of this money, provided by themselves the debentures were repaid in full and profit of $ 20,000 made thereon. They promoted a new co. and sold olympia to it for $ 1,80,000. the profit of 80,000 was revealed in the prospectus but not the profit of $ 20,000.
Liabilities of promotersFor non-disclosure – the co. may (1) rescind the contract and recover
the purchase price (2) recover the profit made, if rescission is not claimed or impossible (3) claim damages for breach of fiduciary duty
Under companies act – for mis-statement contained in prospectus – imprisoned upto 2 yrs. Or fine upto Rs 50,000. in course of winding up – court may make promoter liable for breach of trust
Registration Promoters will have to get together atleast 7 person in case of
public co. and 2 persons in case of private co. to subscribe to MoU3 documents are required to be presented to Registrar of
Companies where office is to be situated (1) Memorandum of the Co. (2) the article (3) agreement, if any.
Availability of name: co. cannot be registered by name which in opinion of central govt. is undesirable
Two documents are to be submitted within 30 days of the registration of the company: (1) address of the registered office of the co. (2) particulars regarding directors, managers and secretary, if any.
Certificate of incorporation/ consequence of incorporation: when the documents have been filed and fees paid, Registrar, if satisfied, enter the name of co. and issue a certificate of incorporation
FloatationWhen company has been registered and received certificate
of incorporation, it is ready for floatation
Prospectus Steps necessary before issue of prospectus: public co. limited
by shares, generally issues shares to the public for which it has to issue the prospectus.
After certificate of incorporation, first appointed director takes over and elect one of the members as Chairman of the BOD. The Board attends following matters
1.Appointment of expert agencies
2.Entering into underwriting/brokerage contracts
3.Listing of shares on stock exchanges
4.Drafting prospectus to be issued to publicProspectusA document is called prospectus, if it satisfies 2 things
1. It invites subscription to shares or debentures or invites deposits
2.Aforesaid invitation is made to public
Contents of prospectus
General informationCapital structure of the companyTerms of present issueParticulars of the issueCompany management and projectCertain prescribed particularsOutstanding litigationsManagement perception of risk factors
Shares Sec 2(46) defines share “as a share in the share
capital of a company and includes stock except where a distinction between share and stock is expressed or implied”
A share signifies the following
1.The interest of shareholder in a company; the right to receive dividends, attend meetings, vote at the meeting
2.The liability of shareholder in a company
3.The right of shareholder to transfer shares subject to article of association
4.Binding covenants on the part of the company as well as the shareholder, as given in the article of company
Classes of sharesPreference shares: carries 2 rights over holders of equity
shares – (1)preferential right in respect of dividends at a fixed amount or at a fixed rate (2) a preferential right in regard to repayment of capital on winding up
Priority of preference shareholder in relation to rights of equity shareholder
1.Participating or non-participating: participating means to (1) to participate further in the profit either along with or after payment of certain rate of dividends on equity share (2) to participate in surplus asset at the time of winding up
2.Cumulative or non cumulative: dividends not paid in any year/years accumulate and are paid out whenever profits are available – cumulative.
3.Redeemable or irredeemable: a preference share which can be redeemed upon the resolution of BOD, if article so provide - redeemable
Contd…Equity share: share which is not preference
share. The rate of dividend is not fixed.Deferred or founders share: a)Normally held by promoters or directorb)Usually of small denomination, say 1Rs eachc)Generally given equal voting rights as that of
equity shared)Carry a dividend fixed in relation to profit
available after dividends have been declared
Right of minority shareholder
Equitable Treatment.The right to seek informationThe right to voice opinionDisclosure and Transparency The right to seek redress
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