Indian Contract Act

We enter into contracts so many times in a day that ‘contract’ has become an indispensable part of our life. When you purchase milk or newspaper in the morning or go to movie in the evening, you are entering into a contract. Indian Contract Act really codifies the way we enter into a contract, execute a contract, implement provisions of a contract and effects of breach of a contract. Basically, a person is free to contract on any terms he chooses. The Contract Act consists of limiting factors subject to which contract may be entered into, executed and breach enforced. It only provides a framework of rules and regulations which govern formation and performance of contract. The rights and duties of parties and terms of agreement are decided by the contracting parties themselves. The court of law acts to enforce agreement, in case of non-performance.

Section 1 of Contract Act provides that any usage or custom or trade or any incident of contract is not affected as long as it is not inconsistent with provisions of the Act. In other words, provision of Contract Act will prevail over any usage or custom or trade. However, any usage, custom or trade will be valid as long as it is not inconsistent with provisions of Contract Act. The Act extends to the whole of India except the State of Jammu and Kashmir; and came into effect on 1-9-1872.

It must be noted that contract need not be in writing, unless there is specific provision in law that the contract should be in writing. [e.g. * contract for sale of immovable property must be in writing, stamped and registered. * Contracts which need registration should be in writing * Bill of Exchange or Promissory Note must be in writing. * Trust should be created in writing * Promise to pay a time barred loan should be in writing, as per Limitation Act * Contract made without consideration on account of natural love and affection should be in writing  ]. A verbal contract is equally enforceable, if it can be proved.. A contract can be enforced or compensation/damages for breach of contract can be obtained through Civil Court

Essential Ingredients of a contractAs per Contract Act, an agreement enforceable by law is a contract. [section 2(h)]. Hence, we have to understand first what is ‘agreement’.

Every promise and every set of promises, forming the consideration for each other, is an agreement. [section 2(e)]. – – A person makes a proposal (offer). When it is accepted by other, it becomes a promise. However, promise cannot be one sided. Only a mutual promise forming consideration for each other is ‘agreement’. – – For example, A agrees to pay Rs 100 to B and B agrees to give him a book which is priced at Rs 100. This is set of promises which form consideration for each other. However, if A agrees to pay Rs 100 to B, but B does not promise anything, it is not ‘set of promises forming consideration for each other’ and hence not an agreement.

It should be noted that the term ‘agreement’ as defined in Contract Act requires mutual consideration. – – Thus, if A invites B to dinner and B agrees to come, it is not an ‘agreement’ as defined in Contract Act.

Meaning of ‘Proposal’ – 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. [section 2(a)].- – Thus, a ‘proposal’ can be to do a positive act or abstinence from act (i.e. negative act). [English Act uses the word ‘offer’, while Indian Contract Act uses the word ‘proposal’. Generally, both words are used inter-changeably. This is not technically correct, as the word ‘offer’ is not used in Contract Act].

Meaning of ‘Promise’ – When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A pro­posal, when accepted, becomes a promise. [section 2(b)].  – – Thus, when a proposal (offer) is accepted, it becomes a ‘promise’. As is clear from the definition, only person to whom proposal is made can signify his assent. Other person cannot accept a proposal.

Promisor and promisee – The person making the proposal is called the “promisor”, and the person accepting the proposal is called the “promisee”. [section 2(c)].

Reciprocal promises – Promises which form the consideration or part of the consideration for each other are called reciprocal promises. [section 2(f)].

Consideration for promise – The definition of ‘agreement’ itself states that the mutual promises should form consideration of each other. Thus, ‘consideration’ is essential for an agreement. A promise without consideration is not ‘agreement’ and hence naturally, it is not a ‘contract’.

Definition of ‘consideration’ – When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consid­eration for the promise. [section 2(d)].

Steps involved in contract – The steps involved in the contract are – * proposal and its communication * acceptance of proposal and its communication * Agreement by mutual promises * Contract * Performance of Contract.  – – All agreements are not contract. Only those agreements which are enforceable by law are ‘contracts’. Following are essential requirements of a valid contract.


Offer and its acceptance


Free consent of both parties


Mutual and lawful consideration for agreement


It should be enforceable by law. Hence, intention should be to create legal relationship. Agreements of social or domestic nature are not contracts


Parties should be competent to contract


Object should be lawful


Certainty and possibility of performance


 Contract should not have been declared as void under Contract Act or any other law

Communication, acceptance and revocation of proposals Communication of proposal/ revocation/acceptance are vital to decide validity of a contract. A ‘communication’ is complete only when other party receives it.

Acceptance must be absoluteIn order to convert a proposal into a promise, the acceptance must – (1) be absolute and unqualified; (2) be expressed in some usual and reasonable manner, unless the proposal prescribed the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such a manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance. [section 7].

Acceptance of offer is complete only when it is absolute and unconditional.  Conditional acceptance or qualified acceptance is no acceptance.

Promises, express or impliedInsofar as the proposal or acceptance of any promise is made in words, the promise is said to be express. Insofar as such proposal or acceptance is made otherwise than in words, the prom­ise is said to be implied. [section 9]. – – For example, if a person enters a bus, there is implied promise that he will pay the bus fair.

Voidable Contract – An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. [section 2(i)]. – – (a) When consent is obtained by coercion, undue influence, misrepresentation or fraud is voidable at the option of aggrieved party i.e. party whose consent was obtained by coercion/fraud etc. However, other party cannot avoid the contract. (b) When a contract contains reciprocal promises and one party to contract prevents the other from performing his promise, the contract becomes voidable at the option of the party to prevented. (section 53). Obvious principle is that a person cannot take advantage of his own wrong (c) When time is essence of contract and party fails to perform in time, it is voidable at the option of other party (section 55). A person who himself delayed the contract cannot avoid the contract on account of (his own) delay.

Void contract – A contract which ceases to be enforceable by law be­comes void when it ceases to be enforceable. [section 2(j)]. – – Thus, initially a contract cannot be void, i.e. a contract cannot be void ab initio. The simple reason is that in such a case, it is not a contract at all to begin with. Hence, only a valid contract can become void contract due to some subsequent events. e.g. the person dies or property is destroyed or Government imposes a ban etc. – – A void agreement is void ab initio. It never becomes a contract. It is nullity and cannot create any legal rights.

What agreements are contractsAll agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful considera­tion and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall effect any law in force in India and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents. [section 10].

Who are competent to contractEvery person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. [section 11].

Free consent – Consent of both parties must be free. Consent obtained through coercion, undue influence, fraud, misrepresentation or mistake is not a ‘free consent’. –Two or more persons are said to consent when they agree upon the same thing in the same sense. [section 13].  – – Consent is said to be free when it is not caused by – (1) coercion, as defined in section 15, or (2) undue influence, as defined in section 16, or (3) fraud, as defined in section 17, or (4) misrepresentation, as defined in section 18, or (5) mistake, subject to the provisions of sections 20, 21 and 22. – – Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake. [section 14].

Void agreements – An agreement not enforceable by law is said to be void. [section 2(g)]. – – Note that it is not ‘void contract’, as an agreement which is not enforceable by law does not become ‘contract’ at all. Following are void agreements – * Both parties under mistake of fact (section 20) * Unlawful object or consideration (section 24) * Agreement without consideration (section 25) * Agreement in restraint of marriage (section 26) * Agreement in restraint of trade (section 27) * Agreement in restraint of legal proceedings (section 28) * Uncertain agreement (section 29) * Wagering agreement (section 29) * Agreement to do an impossible Act (section 56). – – These are discussed below.

Obligation of person who has received advantage under void agree­ment or contract that becomes voidWhen an agreement is discovered to be void, or when a con­tract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.

Contingent contract – A “contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Illustration – A contracts to pay B Rs. 10,000 if B’s house is burnt. This is a contingent contract. [section 31].

Contracts which must be performed The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract. – – Illustrations – (a) A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before that day. A’s representatives are bound to deliver the goods to B, and B is bound to pay Rs. 1,000 to A’s representatives. (b) A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract cannot be enforced either by A’s representative or by B [section 37]. The performance can be ‘actual performance’ or ‘attempted performance’, i.e. ‘offer to perform’.

Performance of reciprocal promises – Promises which form the consideration or part of the consideration for each other are called reciprocal promises. [section 2(f)].  A mutual promise can be of following types – (a) Mutual and independent – Where each party must perform his promise independently and irrespective of whether the other party has performed or willing to perform e.g. Seller agrees to deliver on 5th and Buyer agrees to pay on 15th. (b) Conditional and dependent – Performance of promise by one party depends on prior performance of promise by other party. e.g. Buyer agrees to pay for goods 15 days after delivery. Hence, unless seller delivers goods, buyer’s liability does not arise. (c) Mutual and concurrent – Where the promises of both parties must be performed simultaneously. e.g. buyer agrees to pay immediately on delivery of goods i.e. cash payment.

Contracts which need not be performed  – Normally, a contract is expected to be performed. The performance my be actual or by way of tender, i.e. attempted performance. However, in certain situations as stated below, the contract need not be performed. * Novation, rescission and alteration of contract * Promisee may dispense with or remit performance of promise * Effect of neglect of promisee to afford promisor reasonable facilities for performance * Merger of superior rights with inferior right under contract. This is usually termed as ‘discharge of contract’.

Quasi Contracts – ‘Quasi’ means ‘almost’ or ‘apparently but not really’ or ‘as if it were’. This term is used when one subject resembles another in certain characteristics but there are intrinsic differences between the two. ‘Quasi contract’ is not a ‘contract’. It is an obligation which law created in absence of any agreement. It is based on equity. There are certain relations resembling those created by contract. These are termed as ‘quasi contracts’.  These are – (a) Supply of necessaries (section 68) (b) Payment of lawful dues by interested person (section 69) (c) Person enjoying benefit of a gratuitous act (section 70) (d) Finder of goods (section 71) (d) Goods or anything delivered by mistake or coercion (section 72).

Consequences of Breach of Contract – Compensation is payable for breach of contract. Penalty is also payable if provided in contract. Breach of contract may be actual or anticipatory.

Summary of principles of compensation and damages – Following points are important – * Compensation for loss or damage is payable. Since the word used is ‘compensation’, punitive damages cannot be awarded. * These should be in usual course or known to parties i.e. both parties must be aware * No compensation for remote and indirect loss or damage * Same principle applies to quasi contract also.

General damages – General damages are those which result from ‘direct and proximate’ consequences from breach of contract. Normally, what can be awarded is compensation for loss or damage which can be directly or proximately attributed to the breach of contract. One way of assessing damages is the difference between the contract price and the market price on date of breach of contract, plus reasonable expenses incurred by him on account of the breach plus cost of suit in court of law.

Consequential loss or special damage – Special damages or consequential damages arise due to existence of special circumstances. Such damages can be awarded only in cases where the special circumstances were foreseeable by the party committing the breach or were specifically known to the party. Consequential losses like loss of profit due to breach, which may occur  indirectly due to breach cannot be normally awarded unless there are special circumstances which parties were aware. Loss of profit can be awarded only in cases where seller could have foreseen those losses and arose directly as result of breach.

Promisee should take steps to mitigate the loss or damage – Explanation to section 73 specifically provides that in estimating loss or damage, the means available for remedying the inconvenience caused by breach of contract shall be taken into account. Thus, promisee should take all reasonable steps to mitigate the losses e.g. if promisor does not supply goods, he should make efforts to procure from alternate sources may be even at higher price, to reduce his losses arising out of breach of contract.

Vindictive or exemplary damages – Vindictive or exemplary damages cannot be awarded under Contract Act. However, these may be awarded by Court under tort under special circumstances e.g. * Dishonour of cheque by Bank when there was balance in account, as it causes loss of reputation of credit worthiness of person issuing cheque * Breach of contract to marry, as it hurts both feelings and reputation.

Quantum Meruit – ‘Quantum meruit’ means ‘as much as earned’. A contract may come to end by * breach of contract * contract becoming void or * Voidable contract avoided by party. In such case, if a party has executed part of contract, he is entitled to get a proportionate amount i.e. ‘as much as earned by him’. This is not by way of ‘damages’ or ‘compensation for loss’. – – The principle is that even when contract comes to a premature end, the party should get amount proportional to the work done/services provided/goods supplied by one party.  One party should not get enriched at the cost of other.

Contract of indemnityA 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’.  – – Illustration – A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity. [section 124].

Contract 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. 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”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written. [section 126]. – – [Person giving guarantee is also called as ‘guarantor’. However, Contract Act uses the word ‘surety’ which is same as ‘guarantor’]. – – Three parties are involved in contract of guarantee. Contract between any two of them is not a ‘contract of guarantee’. It may be contract of indemnity. Primary liability is of the principal debtor. Liability of surety is secondary and arises when Principal Debtor fails to fulfill his commitments. However, this is so when surety gives guarantee at the request of principal debtor. If the surety gives guarantee on his own, then it will be contract of indemnity. In such case, surety has all primary liabilities.

Consideration for guarantee Anything done, or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the surety for giving the guarantee. – – Illustrations – (a) B requests A to sell and deliver to him goods on cred­it. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise. (b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient considera­tion for C’s promise. (c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agree­ment is void. [section 127].

Bailment – Bailment is another type of special contract. Since it is a ‘contract’, naturally all basic requirements of contract are applicable. – – Bailment means act of delivering goods for a specified purpose on trust. The goods are to be returned after the purpose is over. In bailment, possession of goods is transferred, but property i.e. ownership is not transferred.  A “bailment” is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the “bailor”. The person to whom they are delivered is called the “bailee”. – – Explanation : If a person already in possession of the goods of another, contracts to hold them as a bailee, he thereby becomes the bailee, and owner becomes the bailor, of such goods, although they may not have been delivered by way of bailment. [section 148]. [Thus, initial possession of goods may be for other purpose, and subsequently, it may be converted into a contract of bailment, e.g. seller of goods will become bailee if goods continue in his possession after sale is complete].

Bailment can be only of ‘goods’.  As per section 2(7) of Sale of Goods Act, ‘goods’ means every kind of movable property other than money and actionable claim. – – Thus, keeping money in bank account is not ‘bailment’. Asking a person to look after your house or farm during your absence is not ‘bailment’, as house or farm is not a movable property.

Bailment of pledges – Pledge is special kind of bailment, where delivery of goods is for purpose of security for payment of a debt or performance of a promise. Pledge is bailment for security. Common example is keeping gold with bank/money lender to obtain loan. Since pledge is bailment, all provisions applicable to bailment apply to pledge also. In addition, some specific provisions apply to pledge. The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. [section 172].

Contract of Agency – Agency is a special type of contract. The concept of agency was developed as one man cannot possibly do every transaction himself. Hence, he should have opportunity or facility to transact business through others like an agent. The principles of contract of agency are – (a) Excepting matters of a personal nature, what a person can do himself, he can also do it through agent (e.g. a person cannot marry through an agent, as it is a matter of personal nature) (b) A person acting through an agent is acting himself, i.e. act of agent is act of Principal. – – Since agency is a contract, all usual requirements of a valid contract are applicable to agency contract also, except to the extent excluded in the Act. One important distinction is that as per section 185, no consideration is necessary to create an agency.

Agent and principal definedAn “agent” is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal” [section 182].

Who may employ agentAny person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. [section 183]. – – Thus, any person competent to contract can appoint an agent.

Who may be an agentAs between the principal and third persons any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained. [section 184]. – – The significance is that a Principal can appoint a minor or person of unsound mind as agent. In such case, the Principal will be responsible to third parties. However, the agent, who is a minor or of unsound mind, cannot be responsible to Principal. Thus, Principal will be liable to third parties for acts done by Agent, but agent will not be responsible to Principal for his (i.e. Agent’s) acts.

Consideration not necessaryNo consideration is necessary to create an agency. [section 185]. Thus, payment of agency commission is not essential to hold appointment of Agent as valid.

Authority of agent – An agent can act on behalf of Principal and can bind the Principal.

Agent’s duty to Principal – An agent has following duties towards principal. * Conducting principal’s business as per his directions * Carry out work with normal skill and diligence * Render proper accounts  [section 213]. * Agent’s duty to communicate with principal  [section 214] * Not to deal on his own account, in business of agency [section 215].  * Agent’s duty to pay sums received for principal  [section 218] *  Agent’s duty on termination of agency by principal’s death or insanity – [section 209].

Remuneration to Agent – Consideration is not necessary for creation of agency. However, if there is an agreement, an agent is entitled to get remuneration as per contract.

Rights of Principal – * Recover damages from agent if he disregards directions of Principal * Obtain accounts from Agent * Recover moneys collected by Agent on behalf of Principal * Obtain details of secret profit made by agent and recover it from him * Forfeit remuneration of Agent if he misconducts the business.

Duties of Principal – * Pay remuneration to agent as agreed * Indemnify agent for lawful acts done by him as agent * Indemnify Agent for all acts done by him in good faith * Indemnify agent if he suffers loss due to neglect or lack of skill of Principal.

Termination of Agency – An agency is terminated by the principal revoking his au­thority; or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insol­vent debtors. [section 201]. – – In following cases, an agency cannot be revoked – * Agency coupled with interest (section 202) * Agent has already exercised his authority (section 203) * Agent has incurred personal liability.

The Indian Partnership Act was passed in 1932 to define and amend the law relating to partnership. Indian Partnership Act is one of very old mercantile law. Partnership is one of the special types of Contract. Initially, this was part of Indian Contract Act itself (Chapter IX – sections 239 to 266), but later converted into separate Act in 1932.

The Indian Partnership Act is complimentary to Contract Act. Basic provisions of Contract Act apply to contract of partnership also. Basic requirements of contract i.e. legally enforceable agreement, mutual consent, parties competent to contract, free consent, lawful object, consideration etc. apply to partnership contract also.

Partnership Contract is a ‘concurrent subject’ – ‘Contract, including partnership contract’ is a ‘concurrent subject, covered in Entry 7 of List III (Seventh Schedule to Constitution). Indian Partnership Act is a Central Act, but State Government can also pass legislation on this issue. Though Partnership Act is a Central Act, it is administered by State Governments, i.e. work of registration of firms and related matters is looked after by each State Government. The Act is not applicable to Jammu and Kashmir.

Unlimited liability is major disadvantage – The major disadvantage of partnership is the unlimited liability of partners for the debts and liabilities of the firm. Any partner can bind the firm and the firm is liable for all liabilities incurred by any firm on behalf of the firm. If property of partnership firm is insufficient to meet liabilities, personal property of any partner can be attached to pay the debts of the firm.

Partnership Firm is not a legal entity It may be surprising but true that a Partnership Firm is not a legal entity. It has limited identity for purpose of tax law. As per section 4 of Indian Partnership Act, 1932, ‘partnership’ is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. – – Under partnership law, a partnership firm is not a legal entity, but only consists of individual partners for the time being. It is not a distinct legal entity apart from the partners constituting it – Malabar Fisheries Co. v. CIT (1979) 120 ITR 49 = 2 Taxman 409 (SC).

Firm legal entity for purpose of taxation – For tax law, income-tax as well as sales tax, partnership firm is a legal entity – State of Punjab v. Jullender Vegetables Syndicate – 1966 (17) STC 326 (SC) * CIT v. A W Figgies – AIR 1953 SC 455 * CIT v. G Parthasarthy Naidu (1999) 236 ITR 350 = 104 Taxman 197 (SC). Though a partnership firm is not a juristic person, Civil Procedure Code enables the partners of a partnership firm to sue or to be sued in the name of the firm. – Ashok Transport Agency v. Awadhesh Kumar 1998(5) SCALE 730 (SC). [A partnership firm can sue only if it is registered].

Partnership, partner, firm and firm name “Partnership” is the relation between persons who have agreed to share the profits of business carried on by all or any to them acting for all. – – Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”. [section 4].

“Business” includes every trade, occupation and profes­sion. [section 2(b)]. Thus, a ‘partnership’ can be formed only with intention to share profits of business. People coming together for some social or philanthropic or religious purposes do not constitute ‘partnership’.

Partners are Mutual agents – The business of firm can be carried on by all or any of them for all. Any partner has authority to bind the firm. Act of any one partner is binding on all the partners. Thus, each partner is ‘agent’ of all the remaining partners. Hence, partners are ‘mutual agents’.

Oral or written agreement – As per normal provision of contract, a ‘partnership’ agreement can be either oral or written. – – Agreement in writing is necessary to get the firm registered. Similarly, written agreement is required, if the firm wants to be assessed as ‘partnership firm’ under Income Tax Act.  A written agreement is advisable to establish existence of partnership and to prove rights and liabilities of each partner, as it is difficult to prove an oral agreement. – – However, written agreement is not essential under Indian Partnership Act.

Sharing of profit necessary – The partners must come together to share profits. Thus, if one member gets only fixed remuneration (irrespective of profits) or one who gets only interest and no profit share at all, is not a ‘partner’. – – Similarly, sharing of receipts or collections (without any relation to profits earned) is not ‘sharing of profit’ and the association is not ‘partnership’. For example, agreement to share rents collected or percentage of tickets sold is not ‘partnership’, as sharing of profits is not involved. – – The share need not be in proportion to funds contributed by each partner. – – Interestingly, though sharing of profit is essential, sharing of losses is not an essential condition for partnership . – – Similarly, contribution of capital is not essential to become partner of a firm.

Number of partners – Since partnership is ‘agreement’ there must be minimum two partners. The Partnership Act does not put any restrictions on maximum number of partners. However, section 11 of Companies Act prohibits partnership consisting of more than 20 members, unless it is registered as a company or formed in pursuance of some other law.

Mode of determining existence of partnershipIn determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together. [section 6].

Mutual agency is the real test – The real test of ‘partnership firm’ is ‘mutual agency’, i.e. whether a partner can bind the firm by his act, i.e. whether he can act as agent of all other partners.

Partnership at willWhere no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is “partnership at will”. [section 7]. – – Partnership ‘at will’ means any partner can dissolve a firm by giving notice to other partners (or he may express his intention to retire from partnership) – – Partnership deed may provide about duration of partnership (say 10 years) or how partnership will be brought to end. In absence of any such term, the partnership is ‘at will’. – – In case of ‘particular partnership’, the partnership comes to end when the venture for which it was formed comes to end.

Determination of rights and duties of partners by contract be­tween the partnersSubject to the provisions of this Act, the mutual rights and duties of the partners of a firm may be determined by con­tract between the partners, and such contract may be express or may be implied by a course of dealing. – – Such contract may be varied by consent of all the partners, and such consent may be express or may be implied by a course of dealing. [section 11(1)]. – – Thus, partners are free to determine the mutual rights and duties by contract. Such contract may be in writing or it may be implied by their actions.

Dutiesand mutual rights  of partnersSubject to contract to contrary, partners have duties and mutual rights as specified in Partnership Act-

Every partner has right to take part in business – Subject to contract between partners (to the contrary), every partner has right to take part in the conduct of the business. [section 12(a)]. – – Thus, every partner has equal right to take active part in business, unless there is specific contract to the contrary. Even if authority of a partner is restricted by contract, outside party is not likely to be aware of such restriction. In such case, if such partner acts within the apparent authority, the firm will be liable for his acts.

The property of the firmSubject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. – – Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm [section 14].

Partner to be agent of the firmSubject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the firm. [section 18].

Implied authority of partner as agent of the firm Subject to the provisions of section 22, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. The authority of a partner to bind the firm conferred by this section is called his “implied authority”. [section 19(1)]. –

Partners jointly and severally liable acts of the firm 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. [section 25]. ‘An act of a firm’ means any act or omission by all the partners, or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm [section 2(a)]. ‘Joint and several’ means each partner is liable for all acts. Thus, if amount due cannot be recovered from other partners, any one partner will be liable for payment of entire dues of the firm.

Partner by Holding out‘Holding out’ means giving impression that a person is partner though he is not. This is principle of ‘estoppel’. If a person gives an impression to outsiders that he is partner of firm though he is not partner, he will he held liable as partner, if third party deals with the firm on the impression that he is a partner. Similarly, if a person retires from the firm but does not give notice of retirement, he will be liable as a partner, if some third party deals with the firm on the assumption that he is still partner.

Minors admitted to the benefits of partnershipA 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 the partners for the time being, he may be admitted to the benefits of partnership. [section 30(1)].

Rights of minor – Minor (who is admitted to benefit of partnership) has a right to such share of the property and of the profits of the firm as may be agreed upon and he may have access to and inspect and copy any of the accounts of the firm. [section 30(2)]. [Since the word used is ‘may’, it seems that right of minor to inspect accounts can be restricted by agreement among partners].

Minor’s share liable but not minor himself – Such minor’s share is liable for the acts of the firm, but the minor is not personally liable for any such act. [section 30(3)].

Reconstitution of a Partnership Firm A partnership firm is not a legal entity. It has no perpetual existence as in case of a company incorporated under Companies Act. However, the Act gives the partnership limited rights of continuity of business despite change of partners. In absence of specific provision in partnership deed, death or insolvency of a partner means dissolution of the firm. However, partnership can provide that the firm will not dissolve in such case.

Change in partners may occur due to various reasons like death, retirement, admission of new member, expulsion, insolvency, transfer of interest by partner etc. After such change, the rights and liabilities of each partner are determined afresh. This is termed as reconstitution of a firm.

Dissolution of a Firm A partnership firm is an ‘organisation’ and like every ‘organ’ it has to either grow or perish. Thus, dissolution of a firm is inevitable part in the life of partnership firm some time or the other.

Dissolution of a firm without intervention of Court can be (a) By agreement (section 40) (b) Compulsory dissolution in case of insolvency (section 41) (c) Dissolution on happening of certain contingency (section 42) (d) By notice if partnership is at will (section 43).

A firm can also be dissolved by Court u/s 44.

Dissolution of partnership and dissolution of firm – The dissolution of partnership between all the partners of a firm is called the dissolution of the firm. [section 39]. – – . As per section 4, Partnership is the relation between persons who have agreed to share profits of business carried on by all or any of them acting for all. – – Thus, if some partner is changed/added/ goes out, the ‘relation’ between them changes and hence ‘partnership’ is dissolved, but the ‘firm’ continues. Hence, the change is termed as ‘reconstitution of firm’. However, complete breakage between relations of all partners is termed as ‘dissolution of firm’. After such dissolution, the firm no more exists. Thus, ‘Dissolution of partnership’ is different from ‘dissolution of firm’. ‘Dissolution of partnership’ is only reconstruction of firm, while ‘dissolution of firm’ means the firm no more exists after dissolution.

Mode of dissolution of firm – Following are various modes of dissolution of firm. * Dissolution by agreement – [section 40]. * Compulsory dissolution in case of insolvency – [section 41] * Dissolution on the happening on certain contingencies [section 42] * Dissolution by notice of partnership at will  [section 43(2)] * Dissolution by the court

Consequences of dissolution of firm – After firm is dissolved, business is wound up and proceeds are distributed among partners. The Act specifies what are the consequences of dissolution of a firm.

Sale of goodwill of firm after dissolution – Business is attracted due to reputation of a firm. It creates a ‘brand image’ which is valuable though not tangible. ‘Goodwill’ is the value of reputation of the business of the firm. Goodwill of a firm is sold after dissolution either separately or along with property of firm. – – As per section 14, property of partnership firm includes goodwill of the firm. – – Goodwill is the reputation and connections which the firm establishes over time, together with circumstances which make the connections durable. This reputation enable to earn profits more than normal profits which a similar business would have earned. Goodwill is an intangible asset of the firm.  – –

In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm. [section 55(1)].

Settlement of accounts after dissolution – Accounts are settled after a firm is dissolved as provided in the Act. A firm is said to be ‘wound up’ only after accounts are fully settled.

Registration of Firms – Registration of firm is not compulsory,  though usually done as registration brings many advantages to the firm. Since ‘partnership contract’  is a ‘Concurrent Subject’ as per Constitution of India, registration of firms and related work is handled by State Government in each State. Section 71 authorises State Government to make rules for * prescribing fees for filing documents with registrar * prescribing forms of various statements and intimations are to be made to registrar and * regulating procedures in the office of Registrar.

Partner cannot sue if firm is unregistered – No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm. [section 69(1)]. – – Thus, a partner cannot sue the firm or any other partner if firm is unregistered. – – If third party files suit against a partner, he cannot claim of set off or institute other proceeding to enforce a right arising from a contract. – – Suit or claim or set off upto Rs 100 can be made as per section 69(4)(b), but it is negligible in today’s standards. – – Criminal proceedings can be filed, but civil suit is not permissible.

Unregistered Firm cannot sue third party – No suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm. [section 69(2)].  – – If third party files suit against the unregistered firm, the firm cannot claim set off or institute other proceeding to enforce a right arising from a contract. – – Suit or claim or set off upto Rs 100 can be made as per section 69(4)(b), but it is negligible in today’s standards. – – Criminal proceedings can be filed, but civil suit is not permissible.

The basic purpose of Indian Stamp Act, 1899 is to raise revenue to Government. However, over a period of time, the stamped document has obtained so much value that a ‘stamped document’ is considered much more authentic and reliable than an un-stamped document.

Power of Parliament in respect of stamp duty – Parliament can make law in respect of Stamp Duty. It can prescribe rates of stamp duty. The stamp duty rates prescribed by Parliament in respect of bill of exchange, cheques, transfer of shares etc. will prevail all over India. However, other stamp duty rates prescribed by Parliament in Indian Stamp Act, 1899 (e.g. stamp duty on agreements, affidavit, articles of association of a company, partnership deed, lease deed, mortgage, power of attorney, security bond etc.) are valid only for Union territories. In case of States, the rates prescribed by individual States will prevail in those States.

Powers of State Government of Stamp Duty – State Government has powers to fix stamp duties on all documents except bill of exchange, cheques etc. Rates prescribed by State Government will prevail in that State. State Government can make law for other aspects of stamp duty also (i.e. matters other than quantum of duty). However, if there is conflict between State law and Union law, the Union law prevails [Article 254 of Constitution].

Instruments chargeable to stamp duty – Instrument includes every document by which any right or liability, is, or purported to be created, transferred, limited, extended, extinguished or recorded [section 2(17) of Indian Stamp Act]. Any instrument mentioned in Schedule I to Indian Stamp Act is chargeable to duty as prescribed in the schedule [section 3]. The list includes all usual instruments like affidavit, lease, memorandum and articles of company, bill of exchange, bond, mortgage, conveyance, receipt, debenture, share, insurance policy, partnership deed, proxy, shares etc. Thus, if an instrument is not listed in the schedule, no stamp duty is payable. ‘Instrument’ does not include ordinary letters. Similarly, an unsigned draft of an agreement is not an ‘instrument’.

Duty payable when several instruments – In case of sale, mortgage or settlement, if there are several instruments for one transaction, stamp duty is payable only on one instrument. On other instruments, nominal stamp duty of Re. 1 is payable [section 4(1)]. If one instrument relates to several distinct matters, stamp duty payable is aggregate amount of stamp duties payable on separate instruments [section 5]. However, it may happen that one instrument covering only one matter can come under more than one descriptions given in Schedule to Stamp Act. In such case, highest rate specified among the different heads will prevail [section 6].

Powers to reduce stamp duty – Government can reduce or remit whole or part of duties payable. Such reduction or remission can be in respect of whole or part of territories and also can be for particular class of persons. Government can also compound or consolidate duties in case of issue of shares or debentures by companies [section 9(1)]. ‘Government’ means Central Government in respect of stamp duties on bills of exchange, cheque, receipts etc. and ‘State Government’ in case of stamp duties on other documents [section 9(2)].

Mode of payment of stamp duty – The payment of stamp duty can be made by adhesive stamps or impressed stamps. Instrument executed in India must be stamped before or at the time of execution (section 17). Instrument executed out of India can be stamped within three months after it is first received in India [section 18(1)]. However, in case of bill of exchange or promissory note made out of India, it should be stamped by first holder in India before he presents for payment or endorses or negotiates in India [section 19].

Valuation for stamp duty – In some cases, stamp duty is payable on ad valorem basis i.e. on basis of value of property etc. In such cases, value is decided on prescribed basis.

Adjudication as to stamp duty payable – Adjudication means determining the duty payable. Normally, the person paying the duty himself may decide the stamp duty payable and pay accordingly. However, in cases of complex documents, the person paying the duty may not be sure of the stamp duty payable. In such case, he can apply for opinion of Collector. He has to apply with draft document and prescribed fees. Collector will determine the stamp duty payable as per his judgment [section 31(1)].

What is meant by ‘duly stamped’ – ‘Duly stamped’ means that the instrument bears an adhesive or impressed stamp not less than proper amount and that such stamp has been affixed or used in accordance with law in force in India [section 2(11)]. In case of adhesive stamps, the stamps have to be effectively cancelled so that they cannot be used again. Similarly, impressed stamps have to be written in such a way that it cannot be used for other instrument and stamp appears on face of instrument. If stamp is not so used, the instrument is treated as ‘un-stamped’. Similarly, when stamp duty paid is not adequate, the document is treated as ‘not duly stamped’.

Instrument cannot be accepted as evidence if not duly stampedAn instrument not ‘duly stamped’ cannot be accepted as evidence by civil court, an arbitrator or any other authority authorised to receive evidence. However, the document can be accepted as evidence in criminal court.

Case when short payment is by mistake – If non-payment or short payment of stamp duty is by accident, mistake or urgent necessity, the person can himself produce the document to Collector within one year. In such case, Collector may receive the amount and endorse the document that proper duty has been paid [section 41].

Stamp duty on Receipt – Stamp Duty on receipt is Re. 1 for receipt above Rs. 5,000. Receipt includes any note, memorandum or writing [whether signed by any person or not] (a) where any money, or any bill of exchange or promissory note is acknowledged to have been received or (b) where any other movable property is acknowledged to have been received in satisfaction of a debt or (c) whereby any debt or demand is acknowledged to have been satisfied or discharged or (d) which signifies or indicates any such acknowledgment [section 2(23)].

Stamp duty on transfer of shares in a company or body corporate – It is 50 Paise for every hundred rupees or part thereof of the value of share. [It is 75 Ps as per Article 62 of Schedule I to Stamp Act, reduced to 50 Ps per Rs 100 vide notification No. SO 198(E) dated 16.3.1976]. As per section 21, the duty has to be calculated on the basis of market price prevalent on date of instrument and not on the face value of shares.

Stamp Duty on transfer in Depository Scheme – If the company issues securities to one or more depositories, it will have to pay stamp duty on total amount of security issued by it and such securities need not be stamped. [section 8A(a) of Stamp Act]. If an investor opts out of depository scheme, the securities surrendered to Depository will be issued to him in form of a certificate. Such share certificate should be stamped as if a ‘duplicate certificate’ has been issued. [section 8A(1)(b) of Indian Stamp Act]. If securities are purchased or sold under depository scheme, no stamp duty is payable.



3 Responses

  1. Eva_Boyd

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  2. please give example of fictitious and live cases

  3. @ sumit duggal
    which example do you exactly want

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