condition is orally made for delivery. Conditional indorsement does not imply conditional delivery. PARTIAL INDORSEMENT Partial indorsement is when the amount with respect to the instrument is partial paid and the indorsement is made after such payment. 4.12 PRESENTMENT Resentment For Acceptance A Bill of Exchange has to be presented for payment in the following three conditions: The bill is payable at a given time after acceptance or after sight. The expression ‘after sight’ means that the bill is payable at a given time after it has presented to his drawee for his knowledge. The bill expressly contains a clause with respect to acceptance before it is presented for payment. The bill is made payable at a place other than the place of residence or business as a drawee. If a bill or promissory note is payable after sight, it must be presented for the maker’s acceptance within the specified time or within a reasonable time. The bill must be presented at a place specified for presented and if not specified, at the place of the drawee’s residence or place of business. The Drawee can be given 48 hours for expressing his acceptance or rejection. If these conditions are not fulfilled, the bill is deemed to dishonored for non- acceptance. Presentment For Payment The holder of a negotiable instrument is duty bound to present the instrument for payment as per section 64 of the Negotiable Instruments Act, 1881. If the payee fails to do so, the other parties of the instruments will be discharged from their liability from in the instrument. The exception to this rule is a promissory note which is payable on demand and not at a particular place, which need not be presented for payment. An instrument must be presented for payment on maturity. If it is a payment in instalments, the instrument must be presented for payment within three days from when each instalment becomes due. Even if one instalment is not paid, it amounts to dishonor of the instrument. An instrument payable on demand must be presented for payment within a reasonable time. The presentment must be made within the working hours of the maker or in case of a bank, within the banking hours. 101 CU IDOL SELF LEARNING MATERIAL (SLM)
The instrument must be presented at the place specified in the instrument. The place so specified must be clear and definite and not vague or ambiguous. Mere mentioning of the name of the city in which the instrument is to be presented does not amount to a ‘specified place’. If the payee does not present the instrument for payment at the specified place, the instrument will be considered dishonored. If the payee presents the instrument for payment at the specified place, the drawer will become liable, irrespective of whether the drawer is present there or if the place is shut. In case no place is specified in the instrument, it must present at the place of business of the drawer or maker. If the place or business or place of residence is not known, presentment can be made wherever the drawer is found. MATURITY The maturity of an instrument is when the payment under that instrument falls due. It applies to a promissory note, bill of exchange, cheque or any other negotiable instrument. If the instrument is payable at sight or on presentment, it is payable on demand. That is matured on the date of issue itself. However, if there is a specified period after sight for payment, the instrument matures on the expiry of the said period. However, Section 22 also provides for 3 days grace period from the date of maturity if there is a specified time for payment in the instrument. When the period is in the interval of months, then the date of maturity will be on the corresponding day on the relevant month. For instance, if the time for maturity is for three months and the instrument was executed on 15th of January, it will mature on 15th of March. If the period is in the interval of days, the day of presentment shall be excluded. If it is payable on the happening of a particular event, the date of occurrence of the event shall be excluded. In case the date of maturity falls on a public holiday, the date of maturity will be considered the next business date. In case the drawee, maker or acceptor is dead, the instrument may be presented for payment to his legal representatives. In case he is insolvent, it can be presented to his agent. In case there is any delay in presentment and there is a justifiable cause for the same which is beyond the control of the holder, it can be excused. In case the instrument could not be presented for payment owing to the existence of a riot the presentment shall not be necessary and the instrument shall deem to be dishonored. Section 76 talks about the circumstances in which presentment is not necessary and reads as follows: - Section 76 - When presentment unnecessary No presentment for payment is necessary, and the instrument is dishonored at the due date for presentment, in any of the following cases: -- if the maker, drawee or acceptor intentionally prevents the presentment of the instrument, orif the instrument being payable at his place of business, he closes such place on a business day 102 CU IDOL SELF LEARNING MATERIAL (SLM)
during the usual business hours, or if the instrument being payable at some other specified place, neither he nor any person authorized to pay it attends at such place during the usual business hours, orif the instrument not being payable at any specified place, he cannot after due search be found. as against any party sought to be charged therewith, if he has engaged to pay notwithstanding non-presentment. as against any party if, after maturity, with knowledge that the instrument has not been presented—he makes a part payment on account of the amount due on the instrument, or promises to pay the amount due thereon in whole or in part, or otherwise waives his right to take advantage of any default in presentment for payment. as against the drawer, if the drawer could not suffer damage from the want of such presentment. In case the bank shows negligence in payment of a bill duly presented, the bank will be liable to pay damages to the holder of the instrument. 4.13 DISHONOUR Dishonour By Non-Acceptance Disclosure by non-acceptance is dealt with under section 91 of the Negotiable Instruments Act, 1881. An instrument is construed as dishonored by non-acceptance when the instrument is properly presented for acceptance and the drawee has defaulted in accepting it. When there are more than one drawee who are partners, then a default by any of them would result in the dishonor of the instrument. When presentment is excused and the bill remains unaccepted, it is dishonored by non-acceptance. Dishonour By Non-Payment Section 92 deals with dishonor of a negotiable instrument by non-payment. When an instrument is duly presented for payment to the maker, acceptor or banker and when he makes a default in payment, the instrument shall be dishonored by non-payment. Notice Of Dishonour In case the holder wants to hold previous or prior parties to the instrument jointly and severally liable to the amount payable, such previous parties must be given notice of the dishonor of the instrument by the holder. Unless a notice is given, the holder does not get the right to sue such a party for the dishonor of the instrument. However, the present party to the instrument need not be given a notice of dishonor. Notice can be served on the person or his agent or his legal representatives if he is dead. In case the recipient is dead, and the notice dispatched without such knowledge, the service of notice is deemed to be sufficient. Notice may send by post or given orally or in writing form. 103 CU IDOL SELF LEARNING MATERIAL (SLM)
There is no restriction with respect to the mode of service of notice, but the notice must clearly indicate that the specific instrument has been dishonored. Section 98 provides for the circumstances under which notice of dishonor can be dispensed with. Section 98 reads as follows: Section 98: When Notice of Dishonor is not necessary No Notice of dishonor is not necessary- when it is dispensed with by the party entitled thereto. in order to charge the drawer, when he has countermanded payment. when the party charged could not suffer damage for want of notice. when the party entitled to notice cannot after due search be found; or the party bound to give notice is, for any other reason, unable without any fault of his own to give it. To charge the drawers, when the acceptor is also a drawer. in the case of a promissory note which is not negotiable. when the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on the instrument. 4.14 NOTING Noting is nothing but an authentication or verification of the dishonour of an instrument by a notary public. Noting must be done after giving notice of dishonour but before initiating legal proceedings for the same. The Notary Public will then make a formal demand to the drawee or maker to honor the instrument. Noting is done on the instrument or in a paper annexed to the instrument and contains the fact of dishonour, date of dishonour, reason for dishonour, establishment of dishonour in case the dishonour is not seen on the face of the facts and the notary charges. However, the rights of the holder do not get affected even if the dishonour is not noted. 4.15 PROTEST If an instrument has been dishonored by non-acceptance or non-payment, the Notary Public, after noting the dishonour as stated above shall issue a certificate to that effect and such a certificate is called a Protest. It contains the instrument or its literal transcript, name of the maker or drawee, fact and reason for dishonour, place and time of dishonour, signature of the Notary Public and in case there is acceptance or payment of honor, the fact of acceptance and payment and the parties thereto. 4.16 RULES AS TO COMPENSATION 104 CU IDOL SELF LEARNING MATERIAL (SLM)
The Holder is entitled to receive the amount due from the instrument along with the expenses incurred in presenting, noting and protesting the instrument. If the maker or drawee resides in a different country, the compensation shall be calculated at the rate of exchange prevailing on the date of dishonour. An endorser who clears the instrument on behalf of the maker is entitled to claim the amount along with 6 to 18% interest and expenses incurred due to the dishonour, if he was liable on the instrument at the time of payment. The Holder can draw a bill for the compensation amount and annex the dishonored instrument with it. Such a bill is called the re draft. The same procedure and same compensation applies if the redraft is dishonoured. 4.17 SUMMARY A negotiable instrument is an acknowledgement of a debt or liability of any nature. Therefore, it amounts to a movable asset, being a proof or acknowledgment of a debt or liability, which is transferable. A promissory note is a promise made by a person to pay a certain amount to a specified person or to his order. A \"bill of exchange\" is 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. A \"cheque\" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. A Bill of Exchange has to be presented for payment in the following three conditions: The bill is payable at a given time after acceptance or after sight. The expression ‘after sight’ means that the bill is payable at a given time after it has presented to his drawee for his knowledge. The bill expressly contains a clause with respect to acceptance before it is presented for payment. The bill is made payable at a place other than the place of residence or business as a drawee. If a bill or promissory note is payable after sight, it must be presented for the maker’s acceptance within the specified time or within a reasonable time. The bill must be 105 CU IDOL SELF LEARNING MATERIAL (SLM)
presented at a place specified for presented and if not specified, at the place of the drawee’s residence or place of business. The Drawee can be given 48 hours for expressing his acceptance or rejection. If these conditions are not fulfilled, the bill is deemed to dishonoured for non-acceptance. The essential elements of making out an offence under section 138 are as follows: - The cheque must be drawn on the account he holds and for the payment of a certain amount of money from the said account. The cheque must be presented with three months from the date of the cheque or within its validity period, whichever is earlier. The cheque must have been returned by the bank unpaid owing to insufficiency of funds in the bank account on which the cheque was drawn. The payee or holder must have sent a notice calling upon the drawer to pay the amount in the cheque within thirty days from the date of knowledge of dishonour of cheque. The drawer of the cheque must have failed to pay the said amount within fifteen days from the date of receipt of the notice issued by the payee. 4.18 KEYWORDS Negotiable Instruments: A negotiable instrument is an acknowledgement of a debt or liability of any nature. Therefore, it amounts to a movable asset, being a proof or acknowledgment of a debt or liability, which is transferable. Promissory Note: A promissory note is a promise made by a person to pay a certain amount to a specified person or to his order. Bill of Exchange: A \"bill of exchange\" is 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. Cheque: A \"cheque\" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. 4.19 LEARNING ACTIVITY 106 CU IDOL SELF LEARNING MATERIAL (SLM)
1. A Draws on K bank a cheque payable to R and forwards it to his agent, S, with instructions to hand it over to R. S forges R’s indorsement and collects payment on the cheque. Decide on the position of K bank. ___________________________________________________________________________ ___________________________________________________________________________ 2. A draws a cheque on his banker for Rs. 50/- but carelessly leaving a blank space before the amount. The holder fills it up and makes the amount as Rs. 550/-. Decide on the claim of the banker. ___________________________________________________________________________ ___________________________________________________________________________ 4.20 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What are the types of negotiable instruments? 2. Who are the parties to a bill of exchange, a promissory note and a cheque? 3. Examine to what extent a minor can be a party to a negotiable instrument? 4. Explain the meaning and effect of a) indorsement in bank b) special indorsement c) restrictive indorsement 5. Define negotiation. Distinguish between assignability and negotiability of an instrument. What is the importance of delivery in the matter of negotiation? Long Questions 1. Distinguish between a) a bill and a note: b) a bill and a cheque. 2. What are the liabilities of a) the drawer: b) the endorsers (assuming that there are more than one) in case of a bill of exchange? 3. Explain clearly what is meant by negotiation. How is it effected and in what way is it different from an ordinary assignment? 4. In what different ways can a negotiable instrument be dishonoured? What steps should be taken by the holder of a dishonoured bill? 5. When is a negotiable instrument considered as dishonoured? what are the duties of a holder upon such dishonour? 107 CU IDOL SELF LEARNING MATERIAL (SLM)
B. Multiple Choice Questions 1. Which of the following section in the Negotiable Instruments Act deals with the Bill of Exchange? a. Section 5 b. Section 6 c. Section 4 d. Section 13 2. Which of the followings are not the Negotiable Instruments as defined by the Statute… a. Banker’s Note b. Promissory Note c. Bill of Exchange d. All the Instruments are Negotiable Instruments 3. Which of the following is/are true about the Negotiable Instruments Act, the Promissory Note is … I. Definition of Promissory Note is given in section 8 of the Negotiable Instrument ActContaining an unconditional undertaking II. To pay a certain sum of money only to a specific person or the bearer III. The seller is bound to accept the promissory note IV. A document was written and signed by the payer/maker a. (I), (II) and (III) b. (II), (III) and (V) c. (II), (III), and (IV) d. (I), (III) and (IV) 4. Dishonour of Negotiable Instrument by Non-Payment is covered under section in Negotiable Instrument Act 1882… 108 CU IDOL SELF LEARNING MATERIAL (SLM)
a. Section 90 b. Section 91 c. Section 92 d. Section 93 5. Which of the following is/are true about bill of exchange? I. A bill of exchange requires in its inception two parties. II. A bill of exchange or “draft” is a written order by the drawer to the drawee to pay money to the payee. III. Bills of exchange are used primarily in international trade and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. IV. Definition of ‘Bill of Exchange’ is mentioned in Section 6 of the Negotiable Instrument Act. a. (I) and (IV) b. (I), (II) and (IV) c. (II) and (III) d. (III) and (IV) Answers 109 1-a, 2-d, 3-b,4-c, 5-c 4.21 REFFERENCES Textbooks: Elements of Mercantile Law by N.D. Kapoor Mercantile Law by Garg Chawla Reference Books: Legal Aspects of business by Pathak Akhileshwar Legal Aspects of Business by P.K. Pandhi CU IDOL SELF LEARNING MATERIAL (SLM)
Websites: Manupatra.com 110 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 5 LAW OF INSURANCE STRUCTURE 5.0 Learning objectives 5.1 Introduction 5.2 Contract of insurance 5.3 Nature of contract 5. 4 Classification of contract of insurance 5.5 Summary 5.6 Keywords 5.7 Learning Activity 5.8 Unit end questions 5.9 References 5.0 LEARNING OBJECTIVES After studying this unit, you should be able to: Explain the concept of insurance State the various kinds of insurance Describe the legal position of an insurer Describe the legal position of an insured Explain the elements of a contract of insurance 5.1 INTRODUCTION Insurance services are also widely and commonly used in today’s world. Insurance is a service that aims at protecting the insured person from a future calamity. In other words, it tries to reduce the effect of the calamity. Insurances are of various types and are made for various purposes. The nature of an insurance contract also depends on its purpose, the calamity, the insurer and the insured. Insurance is governed by various legislations like the Insurance Act, 1938 and Insurance Regulatory and Development Authority Act, 1999. 111 CU IDOL SELF LEARNING MATERIAL (SLM)
5.2 CONTRACT OF INSURANCE A Contract of Insurance is a contract either to indemnify a person against a loss which may arise on the happening of an event or to pay a sum of money on the happening of some or any event for an agreed consideration. Insurer The person who undertakes to indemnify the loss owing to the specified event or events is the insurer or assurer. Insured The person getting indemnified for loss owing to the specified event or events is the insured or assured Premium The consideration paid for the indemnity as periodical payment is premium. Insurance Policy The Document containing the terms and conditions of the insurance is the Insurance Policy. Elements of Insurance The Contract must be between an insurer and insured The Contract must be for the purpose of indemnifying from a loss due to a specific event or series of events. There must be a consideration, which is, premium. An insurance contract must be in writing. Medical Defence Union Ltd. vs. Department of Trade Some medical and dental practitioners formed the ‘Medical Defence Union’ which was to conduct legal proceedings on behalf of its members, indemnifying members against claims for damages and costs and giving advice to members on various matters and provide educational guidance. The members had the right to request for help from the Union. On payment of an appropriate annual subscription. It was held that this contract was not one of insurance as there was no element of indemnity. Department of Trade vs. Chrispheres The Defendant company formed an association and announced that if any of its members suffer from any accident they will be provided with a chauffeur or if necessary, a car and a driver. It was held that this amounts to insurance, as the benefit provided need not necessarily be with money. 112 CU IDOL SELF LEARNING MATERIAL (SLM)
5.3 NATURE OF CONTRACT Contract Is ‘Aleatory’ An aleatory contract is one in which the obligation of the parties arise on the happening of a specific event or events, which is uncertain. An insurance contract is one of speculation. The liability of an insurance company arises only on the occurring of a loss or injury owing to the specified event or events. For instance, in case of a fire insurance, the insurance company is liable to pay the insured only in case of loss and injury due to fire. Therefore, insurance is only a gamble and the return for the consideration (premium) paid is not guaranteed. Contract Is Of Utmost Good Faith A contract of insurance is a contract of utmost good faith. This is because in a contract of insurance, one of the parties is in a privileged position and possesses better knowledge with respect to insurance. Therefore, in a contract of insurance, the insurer is bound to disclose all the material facts and make the insured aware of the same. Marine Insurance Act lays down the rules with respect to disclosure, which apply to all classes of insurance in general. Section 19 clearly says that a contract of marine insurance is a contract of ubberimaefidie Section 20 of the Marine Insurance Act talks about disclosure by the assured and reads as follows: - Section 20 - Disclosure by assured Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which, is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known to him. If the assured fails to make such disclosure, the insurer may avoid the contract. Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk. In the absence of inquiry, the following circumstances need not be disclosed, namely: -- Any circumstance which diminishes the risk. Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge and matters which an insurer in the ordinary course of his business as such ought to know. Any circumstance as to which information is waived by the insurer. Any circumstance which it is superfluous to disclose by reason of any express or implied warranty. 113 CU IDOL SELF LEARNING MATERIAL (SLM)
Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact. The term \"circumstance\" includes any communication made to, or information received by, the assured. Section 21 talks about the disclosure by the agent effecting insurance, which reads as follows: Section 21 - Disclosure by agent effecting insurance Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer— every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and every material circumstance which the assured is bound to disclose, unless it comes to his knowledge too late to communicate it to the agent. With respect to disclosure, the following points to be noted: - The duty to disclose extends only to material facts. Whether a fact is material or not is a question of fact. The test to see if a fact is material fact or not is to see if an insurer of prudent judgment would be influenced by the fact. LIC vs. Shakuntala Indigestion complaint of the assured does not amount to a material fact. The test is whether the fact in question would increase the risk to such an extent that the insurer could have even rejected the policy application. Rohini Nandan vs. Ocean Accident and Guarantee Corporation With respect to a fire and burglary insurance, an earlier burglary on the ground floor of the same building as the insured does not form a material fact as it has no bearing risk on the insurer. P.C. Chaco vs. LIC of India Non-disclosure of surgery undergone for adenoma thyroid amounts to non-disclosure of material facts. The duty extends only to those material facts known to him or ought to be known to him. Though ignorance of fact is an excuse, ignorance of materiality of fact is not an excuse. GouriSethi vs. the Divisional Manager of LIC Suppression of an illness not expected to reduce expectation of life does not amount to suppression of material fact. 114 CU IDOL SELF LEARNING MATERIAL (SLM)
The duty to disclose extends to the authorized agents, to the extent of the facts within the knowledge of the principal, which should have been communicated in the normal course of business between the Principal and agent. Doctrine of utmost good faith applies to insurer also. Hanil Era Textiles Ltd. vs. Oriental Insurance Co. Ltd The insurance company which insured a spinning mill, and the blow room did not disclose some important technical requirements for the optimum strength and life of the machines. However, the insurance company asked for increased premium on the ground that such technical requirements were not fulfilled. The assured is not entitled to any damages in this respect but is entitled to rescind the contract alone. The rules as to disclosure apply only during the stage of negotiations. If a material fact comes to the knowledge of either of the parties after the execution of the contract of insurance, the parties are not bound to disclose the facts. Ratanlal vs. Metropolitan Insurance Co. After the execution of a contract of insurance, the insured went to the doctor with a complaint of general exhaustion. However, unexpectedly, the insured died in a few weeks. It was held that there was no non-disclosure. The duty of disclosure is deemed to be cast when the insured is asked a question by the insurer. All the questions mentioned in the policy application shall be considered material fact irrespective of their relevancy. Duty of disclosure does not extend to certain set of facts, listed out under section 23 of the Marine Insurance Act, which are as follows: Facts he is not aware of. Any circumstance which diminishes the risk. Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge and matters which an insurer in the ordinary course of his business as such ought to know. Any circumstance as to which information is waived by the insurer. Any circumstance which it is superfluous to disclose by reason of any express or implied warranty. Effect of Non-disclosure: In case of non-disclosure of a material fact, the aggrieved party is entitled to rescind the contract. However, he is not entitled to any damages as this does not amount to fraud. 115 CU IDOL SELF LEARNING MATERIAL (SLM)
Lambert vs. Cooperative Insurance Society A lady fails to disclose the conviction of her husband while insuring the jewels partly owned by herself and her husband. Held, as both the husband and wife are owners, conviction of husband is material, though he is not the insured. March Cabarets Club vs. London Assoc Suppression of conviction of directors of an insurance company for handling stole property amounts to non-disclosure of material facts. CONTRACT OF INDEMNITY ‘Indemnity’ refers to a promise to save another person from harm or from the loss caused as a result of a transaction entered into at the instance of the promisor. Indemnity is an important element in all non-life insurance contracts. The element of indemnity is made out by the contingency as it that is the risk insured against. However, not all insurance contracts are contracts of indemnity. Life insurance, personal accident insurance and medical insurance do not form contracts of indemnity. With respect to fire and marine insurance contracts, the principles of contribution and subrogation apply. Principle of subrogation is that when a person who has claimed damages from a third party for the loss suffered due to negligence and also makes a claim against the insurance company, the insurance company becomes entitled to the claim against the third party, after paying its claim. Principle of contribution is when the insured has taken a number of policies, all such insurance companies, one of the companies can call upon all the other companies to contribute to the claim according to their assurances. However, a contract of insurance cannot be strictly considered a contract of indemnity for the following reasons: - There may be policies where the assured becomes entitled to claim more than the loss suffered. Even if the amount recovered is slightly more than the loss suffered, the insurance contract is enforceable, as long as there is no gross over valuation. In case a policy promises a ‘sum insured’, no matter what the loss is, the insured is entitled to only that sum, irrespective of whether it indemnifies his loss. Therefore, though a contract of insurance is not strictly a contract of indemnity, it consists of many elements of a contract of indemnity. CONTRACT OF WAGER A contract of insurance is not a contract of wager for the following reasons: - 116 CU IDOL SELF LEARNING MATERIAL (SLM)
The contract of insurance is based on the risk of loss or damage and not on the loss or damage itself. Since the risk exists irrespective of the insurance, insurance cannot be considered a wager. In contracts of insurance there is insurable interest, while in wager, there is no interest. In a contract of wager, one party must win, and the other party must lose. However, in an insurance contract, there is no chance of winning for the insurer. That is, the insurer does not get any reward or benefit when the contingent even does not happen. Tyrie vs. Fletcher Although risk is the essence of a contract of insurance, it cannot be considered a wagering contract, as the risk of loss is not created by the contract itself. In a pure wager, the risk, by itself is created by the wagering contract, while in a contract of insurance, it exists, irrespective of the contract of insurance. 5.4 CLASSIFICATION OF CONTRACT OF INSURANCE Classification Based On Nature of Interest Affected Personal Insurance Personal insurance is when a person’s life or health is being insured. The subject matter of the insurance would be the health, life and body of an individual. Therefore, they fall under the category of personal insurances. There is no pecuniary value to the subject matter of the insurance contracts under this category. Property Insurance When the subject matter of the contract is pecuniary in nature and aims at indemnifying the loss or damage to property, it is property insurance. Liability Insurance Liability insurance is when the insured would become liable to a third party or parties on the happening of a contingent event and the insurance company would protect the insured from the said liability. Classification Based On the Nature of Event Life Insurance The sum insured becomes payable on the death of the insured or on the attainment of a particular age. Life insurance falls under the category of personal insurance. Fire Insurance In this class of contracts, the sum is payable on the accident of fire by which the insured property is destroyed or damaged. Here the loss is the loss caused by fire. Fire insurance can 117 CU IDOL SELF LEARNING MATERIAL (SLM)
fall under the category of property insurance as only properties form the subject matter of insurance. Marine Insurance Here the sum becomes payable on the happening of a perilous at sea. Marine insurance also fall under the category of property insurance. Sometimes, they might also form a personal insurance is the peril insured affects the life or health of the insured. Miscellaneous Insurance This includes a variety of new insurances, which are Social insurances, Liability Insurances, Aviation and transport insurances, medical insurance, etc. Motor Vehicle insurance, transport and aviation insurance fall under the category of liability insurance. Medical insurances fall under the category of personal insurance. 5.5 SUMMARY A Contract of Insurance is a contract either to indemnify a person against a loss which may arise on the happening of an event or to pay a sum of money on the happening of some or any event for an agreed consideration. The person who undertakes to indemnify the loss owing to the specified event or events is the insurer or assurer. The person getting indemnified for loss owing to the specified event or events is the insured or assured. The consideration paid for the indemnity as periodical payment is premium. The Document containing the terms and conditions of the insurance is the Insurance Policy. Elements Of Insurance The Contract must be between an insurer and insured The Contract must be for the purpose of indemnifying from a loss due to a specific event or series of events. There must be a consideration, which is, premium. An insurance contract must be in writing. Classification Based On Nature Of Interest Affected Personal Insurance Property Insurance Liability Insurance Classification Based On The Nature Of Event 118 CU IDOL SELF LEARNING MATERIAL (SLM)
Life Insurance Fire Insurance Marine Insurance Miscellaneous Insurance 5.6 KEYWORDS Contract of Insurance: A Contract of Insurance is a contract either to indemnify a person against a loss which may arise on the happening of an event or to pay a sum of money on the happening of some or any event for an agreed consideration. Insurer: The person who undertakes to indemnify the loss owing to the specified event or events is the insurer or assurer. Insured: The person getting indemnified for loss owing to the specified event or events is the insured or assured. Premium: The consideration paid for the indemnity as periodical payment is premium. Insurance Policy: The Document containing the terms and conditions of the insurance is the Insurance Policy. 5.7 LEARNING ACTIVITY 1. Examine a contract of insurance and go through its contents and prepare notes on the contents of a contract of insurance ___________________________________________________________________________ ___________________________________________________________________________ 2. observe a case on any insurance claim and prepare a case study ___________________________________________________________________________ ___________________________________________________________________________ 5.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Insurance. 2. What is fire insurance? 119 CU IDOL SELF LEARNING MATERIAL (SLM)
3. Define Life Insurance. 4. What is risk? 5. What is fire insurance Long Questions 1. What is the nature of insurance? 2. What are the three principles of insurance? 3. List the types of life insurance 4. What is meant by general insurance? 5. What is the nature of credit insurance? 18. What is meant by marine insurance? B. Multiple Choice Questions 1. Choose the correct option. a. In an insurance contract, an insurer makes an offer, and the prospect accepts it. b. In an insurance contract, a prospect makes an offer, and an insurer accepts it. c. In an insurance contract, an offer and acceptance is not a requirement. d. In an insurance contract, no principles of contact are applicable 2. Choose the correct options Statement - A: The minor can enter into an insurance contract. Statement - B: The person with an unsound mind cannot enter into an insurance contract. a. Both statements are correct. b. Both statements are wrong c. Statement A is correct d. Statement B is correct 3. Choose the correct options Statement A: Insurance is a lawful business. Statement B: Insurance is not gambling. a. Both statements are correct b. Both statements are wrong c. Statement A is correct d. Statement B is correct 120 CU IDOL SELF LEARNING MATERIAL (SLM)
4. Medicalaim Insurance was primarily introduced to cover charges. a. Insurance b. Hospitalization c. Nursing d. Accident 5. In policy, a fixed amount is paid as compensation irrespective of the loss. a. Valued b. Fixed c. Mandatory d. Legal Answers 1-b, 2-d, 3-a, 4-b, 5-b 5.9 REFERENCES Textbooks: Elements of Mercantile Law by N.D. Kapoor Mercantile Law by Garg Chawla Modern Law of Insurance by K.V.S. Sharma Reference Books: Legal Aspects of business by Pathak Akhileshwar Legal Aspects of Business by P.K. Pandhi Websites: Manupatra.Com 121 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 6 SALE OF GOODS ACT STRUCTURE 6.0 Learning objectives 6.1 Introduction 6.2 Definiton of a contract of sale of goods 6.3 Formation of A Contract 6.4 Unpaid seller 6.5 Rights of an unpaid seller 6.6 Summary 6.7 Keywords 6.8 Learning activity 6.9 Unit end questions 6.10 References 6.0 LEARNING OBJECTIVES After studying this unit, you should be able to: Explain the concept of contract for sale of goods Explain the rights of an unpaid seller against the property Explain the rights of an unpaid seller against buyer Describe the legal position of an unpaid seller. State the elements to be satisfied to be recognised as an unpaid seller. 6.1 INTRODUCTION Sale of goods is governed by Sale of Goods Act, 1930, which lays down the principles which apply to contracts with respect to sale of goods and decides on the rights and liabilities of the parties to a contract of sale. 6.2 DEFINITON OF A CONTRACT OF SALE OF GOODS Section 4(2): Contract of Sale 122 CU IDOL SELF LEARNING MATERIAL (SLM)
A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part- owner and another. This includes both a contract for sale and an agreement to sell. When the goods for sale are transferred from the seller to the buyer, it is a contract of sale. When the goods are to be transferred on a future date, it is an agreement to sell. A contract of sale can be made in any form or manner as agreed between the parties, like any other contract. There is no prescribed form or manner to form a contract for sale of goods. 6.3 FORMATION OF A CONTRACT OF SALE OF GOODS A Contract of Sale with respect of goods can be formed if the following elements are present: Two Parties The two parties herein are buyer and seller, being complimentary to each other. Seller is the person who sells the goods, and the buyer is the one who buys the goods. State of Gujarat vs. Raman Lal & Co. A partnership firm was dissolved and the surplus assets, including the stock in trade, were divided among partners. Held it was not a contract of sale. Goods The subject matter of the contract must be goods, viz. Movable property. Contract with respect to the sale of goods can be only for movable properties. Transfer of immovable property is not governed by the Sale of Goods Act. Associated Hotels of India vs. Excise & Taxation Officer A hotel gave boarding and lodging services. No rebate was allowed if food was not taken by customers. It was held that supply of food was a service and not sale of goods as the whole service is indivisible. Price Consideration must either be wholly in money or partly by money and partly by goods. However, if the whole consideration is in the form of goods, it would be a barter and would not come under sale of goods. Transfer of General Property The goods must be in the absolute ownership of the seller. He must hold the goods on pledge. He must transfer the absolute ownership of the goods. Specific property refers to the rights obtained by pledge. General property refers to the absolute ownership of the property. Therefore, sale of goods refers to transfer of general property and not specific property. Essential elements of a valid contract 123 CU IDOL SELF LEARNING MATERIAL (SLM)
A contract for sale of goods should satisfy all the essential elements of a valid contract. 6.4 UNPAID SELLER An unpaid seller is one who has not received the whole price of the goods sold or has received a negotiable instrument as a conditional payment, which has not been fulfilled owing to the dishonour of the instrument. The essential elements to qualify as an unpaid seller are: a) The seller must not have received the full price of the products b) The seller must have an immediate right of action c) The negotiable instrument received was dishonored. 6.5 RIGHTS OF AN UNPAID SELLER Rights with respect to the property: Right of lien A lien is a right to retain the possession until payment of price. A right of lien is available if the goods have been sold without any stipulation of credit or if there was a stipulation of credit, it expired, or the buyer becomes insolvent. Lien is with respect to actual possession only and not title. Right of Lien gets terminated when the goods are delivered to another Bailee or Carrier for the purpose of transmission to the buyer, without reserving his right to disposal of the goods or when the buyer or his agent lawfully obtained the possession of the goods or when the right to lien has been waived. Right of stoppage in transit The seller has the right to stop the transit of goods and hold the goods in transit if the buyer becomes insolvent and when the goods are in transit. Rights with respect to the buyer Suit for price The seller has the right to sue the buyer for the price of the goods irrespective of whether the goods have passed or not. Suit for damages for non-acceptance The seller may sue for damages against the buyer for non-acceptance and non-payment of the price of the goods. Repudiation of Contract before due date 124 CU IDOL SELF LEARNING MATERIAL (SLM)
If the buyer repudiates the contract before the due date, the seller may either treat the contract as subsisting and wait till the due date or sue for damages for breach, by treating the contract as rescinded. Suit for interest Where there is a provision for interest on the default in payment of price, the seller may sue the buyer for interest at the agreed rate. In case there is no such provision, the seller may notify the buyer about the interest on the due date and interest would be at the rate awarded by the Court. 6.6 SUMMARY A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another. This includes both a contract for sale and an agreement to sell. When the goods for sale are transferred from the seller to the buyer, it is a contract of sale. When the goods are to be transferred on a future date, it is an agreement to sell. A contract of sale can be made in any form or manner as agreed between the parties, like any other contract. There is no prescribed form or manner to form a contract for sale of goods. An unpaid seller is one who has not received the whole price of the goods sold or has received a negotiable instrument as a conditional payment, which has not been fulfilled owing to the dishonour of the instrument. The rights of an unpaid seller include: Rights with respect to the property: Right of lien Right of stoppage in transit Rights with respect to the buyer Suit for price Suit for damages for non-acceptance Repudiation of Contract before due date Suit for interest 6.7 KEYWORDS 125 CU IDOL SELF LEARNING MATERIAL (SLM)
Contract for sale of goods: A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. Unpaid seller: An unpaid seller is one who has not received the whole price of the goods sold or has received a negotiable instrument as a conditional payment, which has not been fulfilled owing to the dishonour of the instrument. Condition: A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. Warranty: A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated 6.8 LEARNING ACTIVITY 1. A bought from B a shipment of certain goods. B sent the bill of lading to A, A handed over the bill of lading to C in return of a loan. C took the bill of lading in good faith. A became insolvent. B attempted to stop the goods in transit, but C claims them. Decide who has right over the goods. ___________________________________________________________________________ _____________________________________________________________________ 2. B cells and consigns certain goods to A. A becomes insolvent and then assigns the Bill of lading for cash to C, who receives it knowing full well that A is insolvent. Decide on its validity and the claim of B and C. ___________________________________________________________________________ _____________________________________________________________________ 6.9 UNIT END QUESTIONS 126 A. Descriptive Questions: Short Questions 1. Write short notes on goods. 2. Write short notes on document of title of goods 3. Write short notes on earnest 4. Write short notes on stipulations as to time. 5. Discuss the rights of an unpaid seller against the buyer personally. Long Questions CU IDOL SELF LEARNING MATERIAL (SLM)
1. Write a short note on a) Stoppage in transit b) Right to lien 2. Discuss the rights of an unpaid seller 3. Explain the nature of a contract of sale of goods and bring out clearly the distinction between a sale and an agreement to sell. 4. How is a contract of sale made? State briefly the necessary formalities of such a contract with illustrations. 5. Is an unpaid seller of goods who is in possession of them entitled to retain possession? If so, under what circumstances? When does he lose his lien over the goods? B. Multiple Choice Questions 1. In a sale, the property in goods, a. Is transferred to the buyer b. May be transferred at a future time c. Is transferred when goods are delivered to the buyer d. Is transferred when the buyer pays the price. 2. In a sale, if the goods are destroyed, the loss falls on a. The buyer b. The seller c. Partly on the buyer and partly on the seller d. The seller, if the price has not been paid. 3. The term property as used in the Sale of Goods Act, 1930 means a. Possession b. Ownership c. Ownership and possession both d. The subject matter of Contract of sale. 4. If a price is not determined by the parties in a contract of sale, the buyer is bound to pay a. The price demanded by the seller b. A reasonable price 127 CU IDOL SELF LEARNING MATERIAL (SLM)
c. The price which the buyer thinks is reasonable d. The price to be determined by a third independent person. 5. The lien of an unpaid seller depends on a. Possession b. Title c. Ownership d. Whether the buyer has paid the price or not. Answers 1-a, 2-a, 3-d, 4-b, 5-a 6.10 REFERENCES Textbooks: Elements of Mercantile Law by N.D. Kapoor Mercantile Law by Garg Chawla Reference Books: Legal Aspects of business by Pathak Akhileshwar Legal Aspects of Business by P.K. Pandhi Websites: Manupatra.com 128 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 7 LAW OF PARTNERSHIP STRUCTURE 7.0 Learning Objectives 7.1 Nature of partnership 7.2 Partnership deed 7.3 Powers of partners 7.4 Types of partners 7.5 Relation of partners to one another 7.6 Relation of partners to third parties 7.7 Summary 7.8 Keywords 7.9 Learning Activity 7.10 Unit End Questions 7.11 References 7.0 LEARNING OBJECTIVES After studying this unit, students should be able to Explain the concept of partnerships, types of partners and be clear about its essentials Describe the essentials about Partnership deed Discuss the relation of partners to one another as per Indian partnership Act 1932 Explain the Relation of partners to third parties as per Indian partnership Act 1932 7.1 NATURE OF PARTNERSHIP Business can be organised into different forms like sole proprietorship, partnership firm or a company. Every form of business has its own share of limitations. As a business expands, there is a requirement of capital, and more risk is involved. Partnership is based on mutual agreement and in a partnership, they agree to share capital, profits and loss of the business. The individuals who have entered into the partnership are known as partners. Partnership is defined as per the Indian Partnership Act, 1932 as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. 129 CU IDOL SELF LEARNING MATERIAL (SLM)
Features of a partnership The following features of a partnership can be discussed: It is an association of two or more persons A partnership is established by an agreement Partners must share the profit and loss of the business Business must be conducted lawfully in order to make profit Partnership business must be carried by all or any one on behalf of all. Mutual and implied agency forms the basis of partnership Generally, a partnership deed deals with all the matters related to the relationship between partners and how the profit and loss should be shared. In absence of a partnership deed the following Accounting rules are applicable as per Indian Partnership Act, 1932: The partners are not entitled to receive interest on capital. There will be no interest charged on drawings made by the partners The partners are not entitled to receive salary or commission, unless otherwise stated in partnership deed. The profit-sharing ratio will be the same irrespective of their capital contribution in the partnership. A partner will be able to earn interest on any extra amount provided as loan to firm apart from his share of capital. Nature of Partnership – Meaning When two or more people join hands to set up an enterprise and share its gains and losses, they are said to be in a partnership. Section 4 of the Indian Partnership Act 1932 states partnership as the association between people who have consented to share the profits of an enterprise carried by all or any of them acting for all. People who have entered into a partnership with one another are independently termed as ‘partners’ and comprehensively termed as ‘firm’. The name under which the trade is carried is called the ‘name of the firm’. A partnership enterprise has no distinct legal entity apart from the partners comprising it. Hence, the vital features of the partnership are as follows: Two or more persons: In order to manifest a partnership, there should be at least two persons possessing a common goal. To put it in other words, the minimal number of partners in an enterprise can be two. However, there is a constraint on their maximum number of people. 130 CU IDOL SELF LEARNING MATERIAL (SLM)
By the uprightness of Section 464 of the Companies Act 2013, the Central Government is authorised to stipulate a maximum number of partners in an enterprise; however, the number of partners cannot exceed 100. Under Rule 10 of the Companies (miscellaneous) Rules 2014, the central government has stipulated the maximum number of partners in an enterprise to be 50. Hence, a partnership enterprise cannot have more than 50 people (partners). Agreement: It is the outcome of an accord between two or more people to regulate a business and share its gains and losses. The agreement (accord) becomes the basis of the association between the partners. Such an agreement is in the written form. An oral agreement is even- handedly legitimate. In order to avoid controversies, it is always good if the partners have a copy of the written agreement. Sharing of profit: Another significant component of the partnership is the accord between partners to share the gains and losses of a trading concern. However, the definition held in the Partnership Act elucidates partnership as an association between the people who have consented to share the gains of a business. The sharing of loss is implicit. Hence, the sharing of gains and losses is vital. Business Motive: It is important for a firm to carry some kind of business and should have a profit gaining motive. Mutual Business: The partners are the owners as well as the agent of their firm. Any act performed by one partner can affect other partners and the firm. It can be concluded that this point acts as a test of partnership for all the partners. Unlimited Liability: Every partner in a partnership has unlimited liability. Types of Partnerships A partnership is divided into different types depending on the state and where the business operates. Here are some general aspects of the three most common types of partnerships. General Partnership A general partnership comprises two or more owners to run a business. In this partnership, each partner represents the firm with equal right. All partners can participate in management activities, decision making, and have the right to control the business. Similarly, profits, debts, and liabilities are equally shared and divided equally. In other words, the general partnership definition can be stated as those partnerships where rights and responsibilities are shared equally in terms of management and decision making. Each partner should take full responsibility for the debts and liability incurred by the other partner. If one partner is sued, all the other partners are considered accountable. The creditor or court will hold the partner’s personal assets. Therefore, most of the partners do not opt for this partnership. 131 CU IDOL SELF LEARNING MATERIAL (SLM)
Limited Partnership In this partnership, includes both the general and limited partners. The general partner has unlimited liability, manages the business and the other limited partners. Limited partners have limited control over the business (limited to his investment). They are not associated with the everyday operations of the firm. In most of the cases, the limited partners only invest and take a profit share. They do not have any interest in participating in management or decision making. This non-involvement means they do not have the right to compensate the partnership losses from their income tax return. Limited Liability Partnership In Limited Liability Partnership (LLP), all the partners have limited liability. Each partner is guarded against other partners legal and financial mistakes. A limited liability partnership is almost similar to a Limited Liability Company (LLC) but different from a limited partnership or a general partnership. Partnership at Will Partnership at Will can be defined as when there is no clause mentioned about the expiration of a partnership firm. Under section 7 of the Indian Partnership Act 1932, the two conditions that have to be fulfilled by a firm to become a Partnership at Will are: The partnership agreement should have not any fixed expiration date. No particular determination of the partnership should be mentioned. Therefore, if the duration and determination are mentioned in the agreement, then it is not a partnership at will. Also, initially, if the firm had a fixed expiration date, but the operation of the firm continues beyond the mentioned date that it will be considered as a partnership at will. The agreement can be either in written or oral form. The Partnership Act does not demand that the agreement has to be in writing. Wherever it is in the form of writing, the document, which comprises terms of the agreement is called ‘Partnership Deed.’ It usually comprises the attributes about all the characteristics influencing the association between the partners counting the aim of trade, the contribution of capital by each partner, the ratio in which the gains and losses will be divided by the partners and privilege and entitlement of partners to interest on loan, interest on capital, etc. 7.2 PARTNERSHIP DEED What is a Partnership Deed? 132 CU IDOL SELF LEARNING MATERIAL (SLM)
Partnership deed is a partnership agreement between the partners of the firm which outlines the terms and conditions of the partnership between the partners. The purpose of a partnership deed is to provide clear understanding of the roles of each partner, which ensures smooth running of the operations of the firm. The Partnership comes into the limelight when: There is an outcome of agreement among the partners. All the rights and responsibilities of each member are recorded in a document known as a Partnership Deed. This deed can be oral or written; however, an oral agreement is of no use when the firm has to deal with tax. A few essential characteristics of a partnership deed are: The name of the firm. Name and addresses of the partners. Nature of the business. The term or duration of the partnership. The amount of capital to be contributed by each partner. The drawings that can be made by each partner. The interest to be allowed on capital and charged on drawings. Rights of partners. Duties of partners. Remuneration to partners. The method used for calculating goodwill. Profit and loss sharing ratio Partnership Deed Contents While making a partnership deed, all the provisions and the legal points of the partnership deed are included. This deed also includes basic guidelines for future projects and can be used as evidence at times of conflict or legal procedures. For a general partnership deed, the below mentioned information should be included. • Name of the firm as determined by all partners. • Name and details of all the partners of the firm. • The date on which business commenced. • Firm’s existence duration. • Amount of capital contributed by each partner. • Profit sharing ratio between the partners. 133 CU IDOL SELF LEARNING MATERIAL (SLM)
• Duties, obligations and power of each partner of the firm. • The salary and commission if applicable that is payable to partners. • The process of admission or retirement of a partner. • The method used for calculating goodwill. • The procedure that must be followed in cases of dispute arising between partners. • Procedure for cases where a partner becomes insolvent. • Procedure for settlement of accounts in the event of dissolution of a firm. Importance of partnership deed A few important advantages of a well-drafted deed are listed: It controls and monitors the rights, responsibilities and liabilities of all the partners Avoids dispute between the partners. Avoids confusion on profit and loss distribution ratio among the partners. Individual partner’s responsibilities are mentioned clearly. Partnership deed also defines a remuneration or salary of the partners and working partners. However, interest is paid to each partner who has invested capital in the business. A partnership form of business organisation is quite similar to a sole proprietorship form of business, but there are certain exceptions to this form of business organization that needs to be taken into consideration while preparing accounts for the partnership firms. These exceptions are referred to as special aspects of partnership accounts and are as follows: Maintenance of Partners Capital Accounts Distribution of Profit and Loss among the partners. Adjustment for Wrong Appropriation of Profit Reconstitution of the Partnership Firm Dissolution of the Partnership Firm Maintenance of Partners Capital Accounts In a partnership business, the capital accounts are maintained by two different methods which are (a) Fixed Capital Method and (b) Fluctuating Capital Method. In fixed capital method, two accounts are maintained which is capital account and current account, while in the fluctuating capital method only capital account is maintained. Distribution of Profit and Loss Among Partners 134 CU IDOL SELF LEARNING MATERIAL (SLM)
The distribution of profit and loss needs to be done carefully as there are more than one individual involved in the partnership business. For this purpose, a Profit and Loss Appropriation Account is prepared. Adjustment for Wrong Appropriation of Profit\\ One of the special aspects of partnership is the adjustment of partnership accounts whenever there is any adjustment or correction that needs to be made for any events in the past. It may happen that profit was shared in the wrong ratio between partners in the past, in such case the firm makes adjustments to perform rectification of the error. Reconstitution of the Partnership Firm Reconstitution is referred to as the changes that occur in terms of partnership or in the partnership deed which leads to creation of new terms of agreement between the partners. Following situations lead to the reconstitution of partnership firm: Admission of a new partner Retirement of a partner/ Death of a partner Insolvency of a partner Rules in the absence of Partnership Deed In the absence of any agreement to the contrary. 1. No partner has the right to a salary, 2. No interest is to be allowed on capital, 3. No interest is to be charged on the drawings, 4. Interest at the rate of 6%.p.a is to be allowed on a partner’s loan to the rm, and 5. Prots and losses are to be shared equally 7.3 POWERS OF PARTNERS The Partners are supposed to have the power to act in certain matters and not to have such powers in others. In other words, unless a public notice has been given to the contrary, certain contracts entered into by a partner on behalf of the partnership, even without consulting other partners are binding on the rm and the provisions of the Act relating to the question will apply. In case of a trading rm, the implied powers of partners are the following: 135 CU IDOL SELF LEARNING MATERIAL (SLM)
(a) Buying and selling of goods. (b) Receiving payments on behalf of the rm and giving valid receipt. (c) Drawing cheques and drawing, accepting and endorsing bills of exchange and promissory notes in the name of the firm. (d) Borrowing money on behalf of the rm with or without pledging the inventories-in-trade. (e) Engaging servants for the business of the rm. In certain cases, an individual partner has no power to bind the rm. This is to say that third parties cannot bind the rm unless all the partners have agreed. These cases are: (a) Submitting a dispute relating to the firm arbitration. (b) Opening a bank account on behalf of the firm in the name of a partner. (c) Compromise or relinquishment of any claim or portion of claim by the firm (d) Withdrawal of a suit or proceeding led on behalf of the firm; (e) Admission of any liability in a suit or proceedings against the firm; (f) Acquisition of immovable property belonging to the firm. (g) Entering into partnership on behalf of the firm. The rights, duties and powers of partners can be changed by mutual consent. 7.4 TYPES OF PARTNERS Based on the extent of liability, the different classes of partners are: Active or Actual or Ostensible partner: He acts as an agent of other partners for all acts done in the ordinary course of business. In the event of his retirement, he must give a public notice in order to absolve himself of liabilities for acts of other partners done after his retirement. Sleeping or Dormant Partner: 136 CU IDOL SELF LEARNING MATERIAL (SLM)
They are called as ‘sleeping’ or ‘dormant’ partners. They share profits and losses and are liable to the third parties for all acts of the firm. They are, however not required to give public notice of their retirement from the firm. Nominal Partner: A person who lends his name to the firm, without having any real interest in it, is called a nominal partner. He is not entitled to share the profits of the firm. Neither he invest in the firm nor takes part in the conduct of the business. He is, however, liable to third parties for all acts of the firm. Partner in profits only: A partner who is entitled to share the profits only without being liable for the losses is known as the partner for profits only and also liable to the third parties for all acts of the profits only. Incoming partners: A person who is admitted as a partner into an already existing firm with the consent of all the existing partners is called as “incoming partner”. Such a partner is not liable for any act of the firm done before his admission as a partner. Outgoing partner: A partner who leaves a firm in which the rest of the partners continue to carry on business is called a retiring or outgoing partner. Such a partner remains liable to third parties for all acts of the firm until public notice is given of his retirement. Partner by holding out (Section 28): Partnership by holding out is also known as partnership by estoppel. Where a man holds himself out as a partner, or allows others to do it, he is then stopped from denying the character he has assumed and upon the faith of which creditors may be presumed to have acted. 7.5 RELATION OF PARTNERS TO ONE ANOTHER The Partnership Act contains various provisions regulating the relationship between partners. 1. GENERAL DUTIES OF PARTNERS (SECTION 9): Partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representative. Analysis of section 9: The partners should carry business of the firm to the greatest common advantages and later, they should render to any partner or his legal representatives full information of all things affecting the firm. A partner must observe the utmost good faith in his dealings with the other partners. All the partners are bound to render accounts to each other but where some of the accounts are kept by one of them, prima facie he would be the proper person to explain and give full information about them. Example 1: In a transaction between partners for the sale and purchase of a share in the business, ifone of them is better acquainted with the accounts than the other, it is his duty to disclose all material facts. 137 CU IDOL SELF LEARNING MATERIAL (SLM)
2. DUTY TO INDEMNIFY FOR LOSS CAUSED BY FRAUD (SECTION 10): Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. Analysis of section 10: The partner, committing fraud in the conduct of the business of the firm, mustmake good the loss sustained by the firm by his misconduct and the amount so brought in the partnershipshould be divided between the partners. An act of a partner imputable to the firm or the principles of agency, which is a fraud on his co-partners,entitles the co-partners as between themselves, to throw the whole of the consequences upon him. 3. DETERMINATION OF RIGHTS AND DUTIES OF PARTNERS BY CONTRACT BETWEEN THE PARTNERS (SECTION 11): (1) Subject 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. (2) Agreements in restraint of trade- Notwithstanding anything contained in section 27 of the Indian Contract Act, 1872, such contracts may provide that a partner shall not carry on any business other than that of the firm while he is a partner. Analysis of section 11: Section 11(1) provides that, subject of the provisions of the 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. It further provides that such contract may be varied by consent of all the partners. Section 11(2) clearly provides that, notwithstanding anything contained in section 27 of the Indian Contract Act, the contract between the partners may provide that a partner shall not carry on any business other than that of the firm while he is a partner. Partnership is a relation eminently depending on the consent of the parties, not only for its existence, but for the terms of the agreement in all things consistent with its essential nature and purpose; and an agreement to become partners in the first instance, or to vary the terms at any time, need not be manifested in any particular form. 4. THE CONDUCT OF THE BUSINESS (SECTION 12): Subject to contract between the partners- (a) every partner has a right to take part in the conduct of the business; 138 CU IDOL SELF LEARNING MATERIAL (SLM)
(b) every partner is bound to attend diligently to his duties in the conduct of the business; (c) any difference arising as to ordinary matters connected with the business may be decided by majority of the partners, and every partner shall have the right to express his opinion before the matter is decided, but no change may be made in the nature of the business without the consent of all partners; and (d) every partner has a right to have access to and to inspect and copy any of the books of the firm. (e) in the event of the death of a partner, his heirs or legal representatives or their duly authorised agents shall have a right of access to and to inspect and copy any of the books of the firm. Analysis of section 12 (i) Right to take part in the conduct of the Business [Section 12(a)]: Every partner has the right to take part in the business of the firm. This is because partnership business is a business of the partners, and their management powers are generally co-extensive. Example 2: Now suppose this management power of the particular partner is interfered with and he has been wrongfully precluded from participating therein. Can the Court interfere in these circumstances? The answer is in the affirmative. The Court can, and will, by injunction, restrain other partners from doing so. It may be noted in this connection that a partner who has been wrongfully deprived of the right of participation in the management has also other remedies, e.g., a suit for dissolution, a suit for accounts without seeking dissolution, etc. The above mentioned provisions of law will be applicable only if there is no contract to the contrary between the partners. It is quite common to find a term in partnership agreements, which gives only limited power of management to a partner or a term that the management of the partnership will remain with one or more of the partners to the exclusion of others. In such a case, the Court will normally be unwilling to interpose with the management with such partner or partners, unless it is clearly made out that something was done illegally or in breach of the trust reposed in such partners. (ii) Right to be consulted [section 12(c)]: Where any difference arises between the partners with regard to the business of the firm, it shall be determined by the views of the majority of them, and every partner shall have the right to express his opinion before the matter is decided. But no change in the nature of the business of the firm can be made without the consent of all the partners. This means that in routine matters, the opinion of the majority of the partners will prevail. Of course, the majority must act in good faith and every partner must be consulted as far as practicable. It may be mentioned that the aforesaid majority rule will not apply where there is a change in the nature of the firm itself. In such a case, the unanimous consent of the partners is needed. 139 CU IDOL SELF LEARNING MATERIAL (SLM)
(iii) Right of access to books [Section 12 (d)]: Every partner whether active or sleeping is entitled to have access to any of the books of the firm and to inspect and take out of copy thereof. The right must, however, be exercised bona fide. (iv) Right of legal heirs/ representatives/ their duly authorised agents [Section 12(e)]: In the event of the death of a partner, his heirs or legal representatives or their duly authorised agents shall have a right of access to and to inspect and copy any of the books of the firm. MUTUAL RIGHTS AND LIABILITIES (SECTION 13): Subject to contract between the partners- (a) a partner is not entitled to receive remuneration for taking part in the conduct of the business; (b) the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm; (c) where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of profits; (d) a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six percent per annum; (e) the firm shall indemnify a partner in respect of payments made and liabilities incurred by him- (i) in the ordinary and proper conduct of the business, and (ii) in doing such act, in an emergency, for the purposes of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances; (f) a partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of business of the firm. Analysis of section 13 (i) Right to remuneration [Section 13(a)]: No partner is entitled to receive any remuneration in addition to his share in the profits of the firm for taking part in the business of the firm. But this rule can always be varied by an express agreement, or by a course of dealings, in which event the partner will be entitled to remuneration. Thus, a partner can claim remuneration even in the absence of a contract, when such remuneration is payable under the continued usage of the firm. In other words, where it is customary to pay remuneration to a partner for conducting the business of the firm, he can claim it even in the absence of a contract for the payment of the same. (ii) Right to share Profits [Section 13 (b)]: Partners are entitled to share equally in the profits earned and so contribute equally to the losses sustained by the firm. The amount of a 140 CU IDOL SELF LEARNING MATERIAL (SLM)
partner’s share must be ascertained by enquiring whether there is any agreement in that behalf between the partners. If there is no agreement then you should make a presumption of equality and the burden of proving that the shares are unequal, will lie on the party alleging the same. There is no connection between the proportion in which the partners shall share the profits and the proportion in which they have contributed towards the capital of the firm. (iii) Interest on Capital [Section 13 (c)]: The following elements must be there before a partner can be entitled to interest on moneys brought by him in the partnership business: (i) an express agreement to that effect, or practice of the particular partnership or (ii) any trade custom to that effect; or (iii) a statutory provision which entitles him to such interest. (iv) Interest on advances [Section 13 (d)]: Suppose a partner makes an advance to the firm in addition to the amount of capital to be contributed by him, in such a case, the partner is entitled to claim interest thereon @ 6% per annum. While interest on capital account ceases to run on dissolution, the interest on advances keep running even after dissolution and up to the date of payment. (v) Right to be indemnified [Section 13 (e)]: Every partner has the right to be indemnified by the firm in respect of payments made and liabilities incurred by him in the ordinary and proper conduct of the business of the firm as well as in the performance of an act in an emergency for protecting the firm from any loss, if the payments, liability and act are such as a prudent man would make, incur or perform in his own case, under similar circumstances. (vi) Right to indemnify the firm [Section 13 (f)]: A partner must indemnify the firm for any loss caused to it by willful neglect in the conduct of the business of the firm. PARTNERSHIP PROPERTY (SECTION 14) 1. THE PROPERTY OF THE FIRM (SECTION 14): Subject to contract between the partners, the property of the firm includes all property and rights and interest 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. Analysis of section 14: The expression ‘property of the firm’, also referred to as ‘partnership property’, ‘partnership assets’, ‘joint stock’, ‘common stock’ or ‘joint estate’, denotes all property, rights and interests to which the firm, that is, all partners collectively, may be entitled. The property, which is deemed as belonging to the firm, in the absence of any agreement between the partners showing contrary intention, is comprised of thefollowing items: 141 CU IDOL SELF LEARNING MATERIAL (SLM)
(i) all property, rights and interests which partners may have brought into the common stock as their contribution to the common business; (ii) all the property, rights and interest acquired or purchased by or for the firm, or for the purposes and in the course of the business of the firm; and (iii) Goodwill of the business. The determination of the question whether a particular property is or is not ‘property’ of the firm ultimately depends on the real intention or agreement of the partners. Thus, the mere fact that the property of a partner is being used for the purposes of the firm shall not by itself make it partnership property, unless it is intended to be treated as such. Partners may, by an agreement at any time, convert the property of any partner or partners (and such conversion, if made in good faith, would be effectual between the partners and against the creditors of the firm) or the separate property of any partner into a partnership property. Goodwill: Section 14 specifically lays down that the goodwill of a business is subject to a contract between the partners, to be regarded as ‘property’ of the ‘firm’. But this Section does not define the term Goodwill. ‘Goodwill’ is a concept which is very easy to understand but difficult to define. Goodwill may be defined as the value of the reputation of a business house in respect of profits expected in future over and above the normal level of profits earned by undertaking belonging to the same class of business. When a partnership firm is dissolved every partner has a right, in the absence of any agreement to the contrary, to have the goodwill of business sold for the benefit of all the partners. Goodwill is a part of the property of the firm. It can be sold separately or along with the other properties of the firm. Any partner may upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits and notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872. Such agreement shall be valid if the restrictions imposed are reasonable. Property of a partner: Where the property is exclusively belonging to a person, it does not become a property of the partnership merely because it is used for the business of the partnership, such property will become property of the partnership if there is an agreement. 2. APPLICATION OF THE PROPERTY OF THE FIRM (SECTION 15): Subject to contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business. Analysis of section 15: Section 15 provides that the property of the firm shall be held and used exclusively for the purpose of the firm. In partnership, there is a community of interest which all the partners take in the property of the firm. But that does not mean than during the 142 CU IDOL SELF LEARNING MATERIAL (SLM)
subsistence of the partnership, a particular partner has any proprietary interest in the assets of the firm. Every partner of the firm has a right to get his share of profits till the firm subsists and he has also a right to see that all the assets of the partnership are applied to and used for the purpose of partnership business. According to section 16, subject to contract between the partners,- (a) If a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm; Analysis of section 16 Where a partner derives any profit for himself from any transaction of the firm or from the use of the property or business connection of the firm or firm name, he must account for that profit and pay it to the firm. Example 3: A, B, C & D established partnership business for refining sugar. A, who was himself a wholesale grocer, was entrusted with the work of selection and purchase of sugar. As a wholesale grocer, A was well aware of the variations in the sugar market and had the suitable sense of propriety as regards purchases of sugar. He had already in stock sugar purchased at a low price which he sold to the firm when it was in need of some, without informing the partners that the sugar sold had belonged to him. It was held that A was bound to account to the firm for the profit so made by him. This rule, however, is subject to a contract between partners. Where a partner carries on a competing business, he must account for and pay to the firm all profits made by him in that business. Example 4: A, B, C and D started a business in partnership for importing salt from foreign ports and selling it at Chittagong. A struck certain transactions in salt on his own account, which were found to be of the same nature as the business carried on by the partnership. It was held that A was liable to account to the firm for profits of the business so made by him. This rule is also subject to a contract between the partners. RIGHTS AND DUTIES OF PARTNERS AFTER A CHANGE IN THE FIRM (SECTION 17) Before going into rights and duties, we should first know how a change may take place in the constitution of the firm. It may occur in one of the four ways, namely, 143 CU IDOL SELF LEARNING MATERIAL (SLM)
1.When a new partner or partners come in 2.when some partner goes out by retirement or death 3.when partnership carries on a business other than business for which it was originally formed 4.when the partnership business is carried on after the expiry of the term According to section 17, subject to contract between the partners- (a) after a change in the firm: Where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be. (b) after the expiry of the term of the firm: Where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership at will; and (c) where additional undertakings are carried out: where a firm constituted to carry out one or more adventures or undertakings carries out other adventures or undertakings are the same as those in respect of the original adventures or undertakings. 7.6 RELATION OF PARTNERS TO THIRD PARTIES 1. PARTNER TO BE AGENT OF THE FIRM (SECTION 18): Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the firm. Analysis of section 18: You may recall that a partnership is the relationship between the partners who have agreed to share the profits of the business carried on by all or any of them acting for all (Section 4). This definition suggests that any of the partners can be the agent of the others. Section 18 clarifies this position by providing that, subject to the provisions of the Act, a partner is the agent of the firm for the purpose of the business of the firm. The partner indeed virtually embraces the character of both a principal and an agent. So far as he acts for himself and in his own interest in the common concern of the partnership, he may properly be deemed a principal and so far as he acts for his partners, he may properly be deemed as an agent. The principal distinction between him and a mere agent is that he has a community of interest with other partners in the whole property and business and liabilities of partnership, whereas an agent as such has no interest in either. The rule that a partner is the agent of the firm for the purpose of the business of the firm cannot be 144 CU IDOL SELF LEARNING MATERIAL (SLM)
applied to all transactions and dealings between the partners themselves. It is applicable only to the act done by partners for the purpose of the business of the firm. 2. IMPLIED AUTHORITY OF PARTNER AS AGENT OF THE FIRM (SECTION 19): 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”. (2) In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to- (a) Submit a dispute relating to the business of the firm to arbitration; (b) open a banking account on behalf of the firm in his own name; (c) compromise or relinquish any claim or portion of a claim by the firm; (d) withdraw a suit or proceedings filed on behalf of the firm; (e) admit any liability in a suit or proceedings against the firm; (f) acquire immovable property on behalf of the firm; g) transfer immovable property belonging to the firm; and (h) enter into partnership on behalf of the firm. MODE OF DOING ACT TO BIND FIRM (SECTION 22): In order to bind a firm, an act or instrument done or executed by a partner or other person on behalf of the firm shall be done or executed in the firm name, or in any other manner expressing or implying an intention to bind the firm. Analysis of section 19 and 22: At the very outset, you should understand what is meant by “implied authority”. You have just read that every partner is an agent of the firm for the purpose of the business thereof. Consequently, as between the partners and the outside world (whatever may be their private arrangements between themselves), each partner is agent of every other in every matter connected with the partnership business; his acts bind the firm. Sections 19(1) and 22 deal with the implied authority of a partner. The impact of these Sections is that 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, provided that the act is done in the firm name, or any manner expressing or implying an intention to bind the firm. Such an authority of a partner to bind the firm is called his implied authority. It is however subject to the following restrictions: 145 CU IDOL SELF LEARNING MATERIAL (SLM)
1. The act done must relate to the usual business of the firm, that is, the act done by the partner must be within the scope of his authority and related to the normal business of the firm. 2. The act is such as is done for normal conduct of business of the firm. The usual way of carrying on the business will depend on the nature and circumstances of each particular case [Section 19(1)]. 3. The act to be done in the name of the firm or in any other manner expressing or implying an intention to bind the firm (Section 22). Thus, a partner has implied authority to bind the firm by all acts done by him in all matters connected with the partnership business and which are done in the usual way and are not in their nature beyond the scope of partnership. You must remember that an implied authority of a partner may differ in different kinds of business. Example 5: X, a partner in a firm of solicitors, borrows money and executes a promissory note in the name of firm without authority. The other partners are not liable on the note, as it is not part of the ordinary business of a solicitor to draw, accept, or endorse negotiable instruments; however, it may be usual for one partner of firm of bankers to draw, accept or endorse a bill of exchange on behalf of the firm. If partnership be of a general commercial nature, (i) he may pledge or sell the partnership property. (ii) he may buy goods on account of the partnership. (iii) he may borrow money, contract debts and pay debts on account of the partnership. (iv) he may draw, make, sign, endorse, transfer, negotiate and procure to be discounted, Promissory notes, bills of exchange, cheques and other negotiable papers in the name and on account of the partnership. Section 19(2) contains the acts which are beyond the implied authority of the partners. 3. EXTENSION AND RESTRICTION OF PARTNERS’ IMPLIED AUTHORITY (SECTION 20): According to Section 20, the partners in a firm may, by contract between the partners, extend or restrict the implied authority of any partners. Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls within his implied authority binds the firm, unless the person with whom he is dealing knows of the restriction or does not know or believe that partner to be a partner. Analysis of section 20: The implied authority of a partner may be extended or restricted by contract between the partners. Under the following conditions, the restrictions imposed on the implied authority of a partner by agreement shall be effective against a third party: 1. The third party knows about the restrictions, and 2. The third party does not know that he is dealing with a partner in a firm. 146 CU IDOL SELF LEARNING MATERIAL (SLM)
Example 6: A, a partner, borrows from B ` 1,000 in the name of the firm but in excess of his authority, and utilizes the same in paying off the debts of the firm. Here, the fact that the firm has contracted debts suggests that it is a trading firm, and as such it is within the implied authority of A to borrow money for the business of the firm. This implied authority, as you have noticed, may be restricted by an agreement between him and other partners. Now if B, the lender, is unaware of this restriction imposed on A, the firm will be liable to repay the money to B. On the contrary, B’s awareness as to this restriction will absolve the firm of its liability to repay the amount to B. It may be noted that the above-mentioned extension or restriction is only possible with the consent of all the partners. Any one partner, or even a majority of the partners, cannot restrict or extend the implied authority. 4. PARTNER’S AUTHORITY IN AN EMERGENCY (SECTION 21) According to section 21, a partner has authority, in an emergency, to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence, in his own case, acting under similar circumstances, and such acts bind the firm. EFFECT OF ADMISSIONS BY A PARTNER (SECTION 23) According to Section 23, an admission or representation made by a partner concerning the affairs of the firm is evidence against the firm, if it is made in the ordinary course of business. Analysis of Section 23: Partners, as agents of each other can make binding admissions but only in relation to partnership transaction and in the ordinary course of business. An admission or representation by a partner will not however, bind the firm if his authority on the point is limited and the other party knows of the restriction. The section speaks of admissions and representations being evidenced against the firm. That is to say, they will affect the firm when tendered by third parties; they may not have the same effect in case of disputes between the partners themselves. Example 7: X and Y are partners in a firm dealing in spare parts of different brands of motorcycle bikes. Z purchases a spare part for his Yamaha motorcycle after being told by X that the spare part is suitable for his motorcycle. Y is ignorant about this transaction. The spare part proves to be unsuitable for the motorcycle and it is damaged. X and Y both are responsible to Z for his loss EFFECT OF NOTICE TO ACTING PARTNER (SECTION 24) According to section 24, notice to a partner who habitually acts in the business of the firm of any matter relating to the affairs of the firm operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner. Analysis of section 24: The notice to a partner, who habitually acts in business of the firm, on matters relating to the affairs of the firm, operates as a notice to the firm except in the case of a fraud on the firm committed by or with the consent of that partner. Thus, the notice to one is equivalent to the notice to the rest of the partners of the firm, just as a notice to an agent is notice to his principal. This notice must be actual and not constructive. It must be 147 CU IDOL SELF LEARNING MATERIAL (SLM)
received by a working partner and not by a sleeping partner. It must further relate to the firm’s business. Only then it would constitute a notice to the firm. Example 8: P, Q, and R are partners in a business for purchase and sale of second-hand goods. R purchases a second-hand car on behalf of the firm from S. In the course of dealings with S, he comes to know that the car is a stolen one and it actually belongs to X. P and Q are ignorant about it. All the partners are liable to X, the real owner. The only exception would lie in the case of fraud, whether active or tacit. Example 9: A, a partner who actively participates in the management of the business of the firm, bought for his firm, certain goods, while he knew of a particular defect in the goods. His knowledge as regards the defect, ordinarily, would be construed as the knowledge of the firm, though the other partners in fact were not aware of the defect. But because A had, in league with his seller, conspired to conceal the defect from the other partners, the rule would be inoperative and the other partners would be entitled to reject the goods, upon detection by them of the defect. LIABILITY TO THIRD PARTIES (SECTION 25 TO 27) The question of liability of partners to third parties may be considered under different heads. These are as follows: 1. LIABILITY OF A PARTNER FOR ACTS OF THE FIRM (SECTION 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. Analysis of section 25: The partners are jointly and severally responsible to third parties for all acts which come under the scope of their express or implied authority. This is because that all the acts done within the scope of authority are the acts done towards the business of the firm. The expression ‘act of firm’ connotes 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. Again in order to bring a case under Section 25, it is necessary that the act of the firm, in respect of which liability is brought to be enforced against a party, must have been done while he was a partner. Example 10: Certain persons were found to have been partners in a firm when the acts constituting an infringement of a trademark by the firm took place, it was held that they were liable for damages arising out of the alleged infringement, it being immaterial that the damages arose after the dissolution of the firm. 2. LIABILITY OF THE FIRM FOR WRONGFUL ACTS OF A PARTNER (SECTION 26): Where, by the wrongful act or omission of a partner in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefor to the same extent as the partner. Analysis of section 26: 148 CU IDOL SELF LEARNING MATERIAL (SLM)
The firm is liable to the same extent as the partner for any loss or injury caused to a third party by the wrongful acts of a partner, if they are done by the partner while acting: (a) in the ordinary course of the business of the firm (b) with the authority of the partners. If the act in question can be regarded as authorized and as falling within either of the categories mentioned in Section 26, the fact that the method employed by the partner in doing it was unauthorized or wrongful would not affect the question. Furthermore, all the partners in a firm are liable to a third party for loss or injury caused to him by the negligent act of a partner acting in the ordinary course of the business. Example 11: One of the two partners in coal mine acted as a manager was guilty of personal negligence in omitting to have the shaft of the mine properly fenced. As a result thereof, an injury was caused to a workman. The other partner was also held responsible for the same. 3. LIABILITY OF FIRM FOR MISAPPLICATION BY PARTNERS (SECTION 27): Where- (a) a partner acting within his apparent authority receives money or property from a third party and misapplies it, or (b) a firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good the loss. Analysis of section 27: It may be observed that the workings of the two clauses of Section 27 is designed to bring out clearly an important point of distinction between the two categories of cases of misapplication of money by partners. Clause (a) covers the case where a partner acts within his authority and due to his authority as partner, he receives money or property belonging to a third party and misapplies that money or property. For this provision to the attracted, it is not necessary that the money should have actually come into the custody of the firm. On the other hand, the provision of clause (b) would be attracted when such money or property has come into the custody of the firm, and it is misapplied by any of the partners. The firm would be liable in both the cases. If receipt of money by one partner is not within the scope of his apparent authority, his receipt cannot be regarded as a receipt by the firm and the other partners will not be liable, unless the money received comes into their possession or under their control. Example 12: A, B, and C are partners of a place for car parking. P stands his car in the parking place, but A sold out the car to a stranger. For this liability, the firm is liable for the acts of A. RIGHTS OF TRANSFEREE OF A PARTNER’S INTEREST (SECTION 29) 149 CU IDOL SELF LEARNING MATERIAL (SLM)
(1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the creation by him of a charge on such interest, does not entitle the transferee, during the continuance of the firm, to interfere in the conduct of business, or to require accounts, or to inspect the books of the firm, but entitles the transferee only to receive the share of profits of the transferring partner, and the transferee shall accept the account of profits agreed to by the partners. (2) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is entitled as against the remaining partners to receive the share of the assets of the firm to which the transferring partner is entitled, and, for the purpose of ascertain that share, to an account as from the date of the dissolution. Analysis of section 29: A share in a partnership is transferable like any other property, but as the partnership relationship is based on mutual confidence, the assignee of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights and privileges as the original partner. The rights of such a transferee are as follows: (I) During the continuance of partnership, such transferee is not entitled: (a) to interfere with the conduct of the business, (b) to require accounts, or (c) to inspect books of the firm. He is only entitled to receive the share of the profits of the transferring partner, and he is bound to accept the profits as agreed to by the partners, i.e., he cannot challenge the accounts. (II) On the dissolution of the firm or on the retirement of the transferring partner, the transferee will be entitled, against the remaining partners: (a) to receive the share of the assets of the firm to which the transferring partner was entitled, and (b) for the purpose of ascertaining the share, he is entitled to an account as from the date of the dissolution. By virtue of Section 31, which we will discuss hereinafter, no person can be introduced as a partner in a firm without the consent of all the partners. A partner cannot by transferring his own interest, make anybody else a partner in his place, unless the other partners agree to accept that person as a partner. At the same time, a partner is not debarred from transferring his interest. A partner’s interest in the partnership can be regarded as an existing interest and tangible property which can be assigned. MINORS ADMITTED TO THE BENEFITS OF PARTNERSHIP (SECTION 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 the partners for the time being, he may be admitted to the benefits of partnership. 150 CU IDOL SELF LEARNING MATERIAL (SLM)
Search
Read the Text Version
- 1
- 2
- 3
- 4
- 5
- 6
- 7
- 8
- 9
- 10
- 11
- 12
- 13
- 14
- 15
- 16
- 17
- 18
- 19
- 20
- 21
- 22
- 23
- 24
- 25
- 26
- 27
- 28
- 29
- 30
- 31
- 32
- 33
- 34
- 35
- 36
- 37
- 38
- 39
- 40
- 41
- 42
- 43
- 44
- 45
- 46
- 47
- 48
- 49
- 50
- 51
- 52
- 53
- 54
- 55
- 56
- 57
- 58
- 59
- 60
- 61
- 62
- 63
- 64
- 65
- 66
- 67
- 68
- 69
- 70
- 71
- 72
- 73
- 74
- 75
- 76
- 77
- 78
- 79
- 80
- 81
- 82
- 83
- 84
- 85
- 86
- 87
- 88
- 89
- 90
- 91
- 92
- 93
- 94
- 95
- 96
- 97
- 98
- 99
- 100
- 101
- 102
- 103
- 104
- 105
- 106
- 107
- 108
- 109
- 110
- 111
- 112
- 113
- 114
- 115
- 116
- 117
- 118
- 119
- 120
- 121
- 122
- 123
- 124
- 125
- 126
- 127
- 128
- 129
- 130
- 131
- 132
- 133
- 134
- 135
- 136
- 137
- 138
- 139
- 140
- 141
- 142
- 143
- 144
- 145
- 146
- 147
- 148
- 149
- 150
- 151
- 152
- 153
- 154
- 155
- 156
- 157
- 158
- 159
- 160
- 161
- 162
- 163
- 164
- 165
- 166
- 167
- 168
- 169
- 170
- 171
- 172
- 173
- 174
- 175
- 176
- 177
- 178
- 179
- 180
- 181
- 182
- 183
- 184
- 185
- 186
- 187
- 188
- 189
- 190
- 191
- 192
- 193
- 194
- 195
- 196
- 197
- 198
- 199
- 200
- 201
- 202
- 203
- 204
- 205
- 206
- 207
- 208
- 209
- 210
- 211
- 212
- 213
- 214
- 215
- 216
- 217
- 218
- 219
- 220
- 221
- 222
- 223
- 224
- 225
- 226
- 227
- 228
- 229
- 230
- 231
- 232
- 233
- 234
- 235
- 236
- 237
- 238
- 239
- 240
- 241
- 242
- 243
- 244
- 245
- 246
- 247
- 248
- 249
- 250
- 251
- 252
- 253
- 254
- 255
- 256
- 257
- 258
- 259
- 260
- 261
- 262
- 263
- 264
- 265
- 266
- 267
- 268
- 269
- 270
- 271
- 272
- 273
- 274
- 275
- 276
- 277
- 278
- 279
- 280
- 281
- 282
- 283
- 284
