A contract of guarantee involves how many parties?

Three: the creditor, the principal debtor and the surety

Four, including the guarantor's surety

Two: the indemnifier and the indemnity holder

Three: the creditor, the principal debtor and the surety

Under the Sale of Goods Act 1930, unless otherwise agreed, the risk in goods passes:

Only on full payment of the price

When the contract is signed, in all cases

Assertion (A): An unregistered partnership firm cannot sue a third party to enforce a right arising from a contract. Reason (R): Registration of a firm is compulsory under the Indian Partnership Act 1932. Choose the correct option.

Both A and R are true, and R is the correct explanation of A

Both A and R are true, but R is not the correct explanation of A

After receiving information that his cheque has been dishonoured, a payee must send a demand notice to the drawer within:

One month from the date of the cheque

Which of the following discharge a surety under the Indian Contract Act 1872? Select all that apply.

Release of the principal debtor by the creditor

A variance in the terms of the contract between creditor and debtor made without the surety's consent

An act of the creditor impairing the surety's eventual remedy against the debtor

Release of the principal debtor by the creditor

A variance in the terms of the contract between creditor and debtor made without the surety's consent

The creditor's decision to sue the surety before the debtor

An act of the creditor impairing the surety's eventual remedy against the debtor

Which statement correctly distinguishes a limited liability partnership from a partnership firm?

An LLP is a body corporate, and a partner is not liable for another partner's wrongful act

An LLP's partners are each agents of the other partners

An LLP has no legal personality separate from its partners

An LLP is a body corporate, and a partner is not liable for another partner's wrongful act

An LLP needs only one designated partner

Assertion (A): Every pledge is a bailment. Reason (R): Every bailment is made as security for the payment of a debt. Choose the correct option.

Both A and R are true, and R is the correct explanation of A

Both A and R are true, but R is not the correct explanation of A

Which of the following are implied conditions under the Sale of Goods Act 1930? Select all that apply.

That the seller has a right to sell the goods

That goods sold by description correspond with the description

That the seller has a right to sell the goods

That the buyer shall pay within seven days

That goods sold by description correspond with the description

That the price shall be fixed by a valuer

Interim compensation during a trial under section 138 of the Negotiable Instruments Act may be ordered under:

Section 143A, up to 20 per cent of the cheque amount

Section 9, only for a holder in due course

Section 147, at the court's discretion

Section 139, up to the full cheque amount

Section 143A, up to 20 per cent of the cheque amount

Commercial Law II: Bailment, Pledge, Indemnity, Guarantee and Agency; the Sale of Goods Act 1930; Partnership and the LLP; and the Negotiable Instruments Act 1881

This chapter takes Unit VI's items 4 to 7: the specific contracts in the Indian Contract Act 1872 (bailment, pledge, indemnity, guarantee and agency), the Sale of Goods Act 1930, partnership under the Indian Partnership Act 1932 and the limited liability partnership under the LLP Act 2008, and the Negotiable Instruments Act 1881, with the dishonour of cheques under section 138. These statutes are also surveyed in NET Commerce. The treatment here is by section and case, with the distinctions examiners test: indemnity versus guarantee, bailment versus pledge, condition versus warranty, and the timeline of a cheque-dishonour prosecution.

1. Indemnity, guarantee, bailment, pledge and agency

The specific contracts in the Indian Contract Act 1872
Contract	Definition and key rules
Indemnity (ss.124–125)	A promise to save the other from loss caused by the conduct of the promisor or of any other person; two parties; the Indian definition is narrower than English law, but courts apply equitable principles so that the indemnity holder need not wait until he has actually paid (Gajanan Moreshwar v Moreshwar Madan, 1942)
Guarantee (ss.126–147)	A contract to perform the promise or discharge the liability of a third person in case of his default; three parties (creditor, principal debtor, surety); the surety's liability is co-extensive with the principal debtor's (s.128); the surety is discharged by variance in terms without consent (s.133), by release of the debtor (s.134), and by the creditor's act or omission impairing his remedy (s.139); on payment he is subrogated to the creditor's rights (s.140)
Bailment (ss.148–171)	Delivery of goods for a purpose on a contract that they be returned or disposed of as directed when the purpose is accomplished; the bailee must take the care a person of ordinary prudence would take of his own goods (s.151) and is not liable for loss despite such care (s.152); the bailee has a particular lien for his charges (s.170)
Pledge (ss.172–181)	Bailment of goods as security for payment of a debt or performance of a promise; the pawnee may retain the goods for the debt, interest and expenses (s.173) and, on default, sue or sell after reasonable notice (s.176); a pledge by a mercantile agent in possession with the owner's consent is valid (s.178)
Agency (ss.182–238)	An agent is employed to do any act for another or to represent him in dealings with third persons (s.182); authority may be express or implied, and arises in emergency (s.189), by ratification (ss.196–200) or by estoppel; an agent cannot delegate except as allowed (s.190); agency coupled with an interest cannot be terminated to the agent's prejudice (s.202)

🧠 Two parties or three

Indemnity has two parties and the indemnifier's liability is primary. Guarantee has three and the surety's liability is secondary, arising only on the principal debtor's default, though once it arises the creditor may proceed against the surety without first suing the debtor. Bailment is delivery for a purpose; pledge is bailment for security, so every pledge is a bailment but not every bailment is a pledge.

2. The Sale of Goods Act 1930

A contract of sale (section 4) is one by which the seller transfers or agrees to transfer the property in goods to the buyer for a price. Where property passes at once it is a sale; where it is to pass in future or on a condition it is an agreement to sell, which becomes a sale when the time elapses or the condition is fulfilled. The distinction matters because risk prima facie passes with property (section 26), whatever the position of delivery. Property in specific goods in a deliverable state passes when the contract is made (section 20); in unascertained goods, not until they are ascertained (section 18) and unconditionally appropriated to the contract (section 23).

Key rules of the Sale of Goods Act 1930
Rule	Section	Content
Condition and warranty	s.12	A condition is essential to the main purpose, and its breach gives a right to reject; a warranty is collateral, and its breach gives only damages. A buyer may treat a breach of condition as a breach of warranty (s.13)
Implied conditions	ss.14–17	Title (s.14); sale by description (s.15); fitness for purpose and merchantable quality (s.16); sale by sample (s.17)
Caveat emptor	s.16	Let the buyer beware: no implied condition as to quality or fitness, subject to exceptions where the buyer relies on the seller's skill and makes the purpose known, or buys by description from a dealer
Nemo dat quod non habet	s.27	A seller who is not the owner cannot pass a better title than he has, with exceptions for a mercantile agent, a joint owner, a seller or buyer in possession, and a voidable title not yet avoided (s.29)
Unpaid seller	ss.45–54	Rights against the goods: lien while in possession (s.47), stoppage in transit on the buyer's insolvency (s.50), and resale (s.54); and a suit for the price

🎯 Why passing of property matters

If specific goods are destroyed after the contract but before delivery, the question is who bears the loss. Because risk follows property under section 26, a buyer to whom property in specific goods has passed bears the loss even though the goods were still in the seller's warehouse, unless the parties agreed otherwise or delivery was delayed by the fault of one of them.

3. Partnership and the limited liability partnership

Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all (section 4, Indian Partnership Act 1932). The last element, mutual agency, is the true test: sharing profits is evidence of partnership but not conclusive (section 6; Cox v Hickman, 1860). A firm is not a legal person distinct from its partners, and every partner is liable jointly with all the others and severally for all acts of the firm done while he is a partner (section 25), without limit. Registration is optional, but an unregistered firm and its partners cannot sue third parties or each other to enforce a right arising from a contract (section 69).

Firm and LLP compared
Feature	Partnership firm (1932 Act)	LLP (2008 Act)
Legal status	Not a separate legal person	A body corporate with perpetual succession, separate from its partners
Liability	Unlimited, joint and several	Limited to the agreed contribution; a partner is not liable for another partner's wrongful act
Formation	By agreement; registration optional	By incorporation with the Registrar; at least two partners and at least two designated partners, one of whom must be resident in India
Agency	Each partner is agent of the firm and of the other partners	Each partner is agent of the LLP but not of the other partners

ℹ️ The 2021 amendment to the LLP Act

The LLP (Amendment) Act 2021 decriminalised a number of compoundable offences, converting them into civil penalties, introduced the category of the "small limited liability partnership", and provided for special courts. The Indian Partnership Act 1932 applies to an LLP only where the LLP Act so provides.

4. The Negotiable Instruments Act 1881

The Act recognises three instruments: the promissory note (section 4, an unconditional written undertaking signed by the maker to pay a certain sum), the bill of exchange (section 5, an unconditional written order directing a person to pay a certain sum), and the cheque (section 6, a bill drawn on a specified banker and payable on demand, including the electronic image of a truncated cheque and a cheque in electronic form). A holder in due course (section 9) takes the instrument for consideration, before maturity, in good faith and without notice of any defect in title, and takes it free of defects in the title of prior parties.

Dishonour of a cheque under section 138
Step in a section 138 prosecution	Requirement
Presentation	The cheque is presented within its period of validity (three months from its date, under Reserve Bank directions) and returned unpaid for insufficiency of funds or because it exceeds the arrangement
Notice	The payee gives written notice demanding payment within 30 days of receiving information of dishonour
Failure to pay	The drawer fails to pay within 15 days of receiving the notice; the offence is then complete
Complaint	Filed within one month of the cause of action (section 142), before the court within whose jurisdiction the payee's bank branch lies, after the 2015 amendment that followed Dashrath Rupsingh Rathod v State of Maharashtra (2014)
Punishment and presumption	Imprisonment up to two years, or fine up to twice the amount, or both; a presumption under section 139 that the cheque was issued for a debt or liability; the offence is compoundable (section 147); interim compensation up to 20 per cent may be ordered (section 143A, added in 2018)

⚠️ Section 138 needs a legally enforceable debt

The offence applies only to a cheque issued in discharge of a legally enforceable debt or other liability. A cheque given as a gift, or for a time-barred debt not revived in writing, does not attract section 138. The section 139 presumption is rebuttable on a preponderance of probabilities, and the accused may rely on the complainant's own evidence to rebut it.

Key takeaways

Indemnity (s.124) has two parties; guarantee (s.126) three, with the surety's liability co-extensive (s.128) and discharged by variance (s.133) or impairment of remedy (s.139).
Bailment is delivery for a purpose (s.148), with the care of a person of ordinary prudence (s.151); pledge is bailment as security (s.172); agency runs from s.182, with agency coupled with interest irrevocable (s.202).
Sale of Goods Act 1930: risk follows property (s.26); a condition's breach allows rejection, a warranty's only damages (s.12); caveat emptor (s.16) and nemo dat (s.27) with exceptions.
A firm is not a legal person and partners are jointly and severally liable (s.25); an unregistered firm cannot sue (s.69); an LLP (2008) is a body corporate with limited liability and at least two designated partners, one resident in India.
Section 138 of the NI Act: notice within 30 days of dishonour, 15 days to pay, complaint within one month; up to two years or twice the amount; presumption under s.139; interim compensation under s.143A.

Practice questions (10)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

A contract of guarantee involves how many parties?
1. Four, including the guarantor's surety
2. Two: the indemnifier and the indemnity holder
3. Three: the creditor, the principal debtor and the surety
4. Two: the bailor and the bailee
Show answer
Answer: C — Three: the creditor, the principal debtor and the surety
Section 126 describes a guarantee as a contract among the surety, the principal debtor and the creditor. Indemnity and bailment are two-party contracts.
Under the Sale of Goods Act 1930, unless otherwise agreed, the risk in goods passes:
1. Only on full payment of the price
2. With the property in the goods
3. Only on physical delivery
4. When the contract is signed, in all cases
Show answer
Answer: B — With the property in the goods
Section 26 provides that risk prima facie passes with property, whether delivery has been made or not. Property itself passes according to sections 18 to 25, which is why delivery and payment are not the decisive events.
Assertion (A): An unregistered partnership firm cannot sue a third party to enforce a right arising from a contract. Reason (R): Registration of a firm is compulsory under the Indian Partnership Act 1932. Choose the correct option.
1. Both A and R are true, and R is the correct explanation of A
2. Both A and R are true, but R is not the correct explanation of A
3. A is true, but R is false
4. A is false, but R is true
Show answer
Answer: C — A is true, but R is false
A is true under section 69. R is false: registration is optional; the Act does not compel it but attaches the disability of section 69 to non-registration, which in practice pushes firms to register.
After receiving information that his cheque has been dishonoured, a payee must send a demand notice to the drawer within:
1. One month from the date of the cheque
2. 15 days
3. Three months
4. 30 days
Show answer
Answer: D — 30 days
Section 138 requires the notice within 30 days of receiving information of dishonour. The drawer then has 15 days to pay, and the complaint must be filed within one month after that period expires. Three months is the cheque's validity for presentation.
Which of the following discharge a surety under the Indian Contract Act 1872? Select all that apply.
1. Release of the principal debtor by the creditor
2. A variance in the terms of the contract between creditor and debtor made without the surety's consent
3. The creditor's decision to sue the surety before the debtor
4. An act of the creditor impairing the surety's eventual remedy against the debtor
Show answer
Answer: A — Release of the principal debtor by the creditor; B — A variance in the terms of the contract between creditor and debtor made without the surety's consent; D — An act of the creditor impairing the surety's eventual remedy against the debtor
Sections 133, 134 and 139 discharge the surety in these three situations. Suing the surety first does not discharge him: his liability is co-extensive and the creditor need not first exhaust remedies against the debtor.
Which statement correctly distinguishes a limited liability partnership from a partnership firm?
1. An LLP's partners are each agents of the other partners
2. An LLP has no legal personality separate from its partners
3. An LLP is a body corporate, and a partner is not liable for another partner's wrongful act
4. An LLP needs only one designated partner
Show answer
Answer: C — An LLP is a body corporate, and a partner is not liable for another partner's wrongful act
An LLP under the 2008 Act is a body corporate with perpetual succession, and a partner is not personally liable for another partner's wrongful act. It needs at least two designated partners, and each partner is the agent of the LLP, not of the other partners.
Assertion (A): Every pledge is a bailment. Reason (R): Every bailment is made as security for the payment of a debt. Choose the correct option.
1. Both A and R are true, and R is the correct explanation of A
2. Both A and R are true, but R is not the correct explanation of A
3. A is true, but R is false
4. A is false, but R is true
Show answer
Answer: C — A is true, but R is false
A is true: section 172 defines pledge as the bailment of goods as security. R is false: bailment is delivery for any purpose, such as repair, carriage or safe custody; only a pledge is made as security.
Which of the following are implied conditions under the Sale of Goods Act 1930? Select all that apply.
1. That the seller has a right to sell the goods
2. That the buyer shall pay within seven days
3. That goods sold by description correspond with the description
4. That the price shall be fixed by a valuer
Show answer
Answer: A — That the seller has a right to sell the goods; C — That goods sold by description correspond with the description
Title (s.14) and correspondence with description (s.15) are implied conditions, as are fitness and merchantable quality in the cases of s.16 and correspondence with sample under s.17. Time of payment and a valuer's price are matters for the contract, not implied conditions.
Interim compensation during a trial under section 138 of the Negotiable Instruments Act may be ordered under:
1. Section 9, only for a holder in due course
2. Section 147, at the court's discretion
3. Section 139, up to the full cheque amount
4. Section 143A, up to 20 per cent of the cheque amount
Show answer
Answer: D — Section 143A, up to 20 per cent of the cheque amount
Section 143A, inserted in 2018, lets the court order the drawer to pay interim compensation not exceeding 20 per cent of the cheque amount. Section 139 is the presumption of liability, section 147 makes the offence compoundable, and section 9 defines holder in due course.
Which section of the Indian Contract Act 1872 defines a contract of indemnity? Type the section number.
Numerical answer — type the value.
Show answer
Answer: 124
Section 124 defines indemnity as a contract by which one party promises to save the other from loss caused by the conduct of the promisor or of any other person; section 126 then defines guarantee.