Business Economic Laws

BUSINESS &
ECONOMIC
LAWS

Directorate of
Distance & Online
Education
The importance of Business & Economic Laws, as a field
of study and practice, is being increasingly realized in
schools, colleges, universities, commercial and industrial
organizations both in India and abroad.

AMITY
UNIVERSITY
Preface

The importance of Business & Economic Laws, as a field of study and practice, is
being increasingly realized in schools, colleges, universities, commercial and industrial
organizations both in India and abroad.

This Study Material is intended to serve as a Study Material for the students of
B.Com.(H.) course of Amity University. This Material of Business & Economic Laws,
is student oriented and written in teach yourself style.

The primary objective of this study material is to facilitate clear understanding of
the subject of Business & Economic Laws. In this Material an effort has been made to
lay bare the complexities of the above mentioned laws and making them easily
intelligible to the students who are being initiated to the study of this subject.

The complicated provisions of Business & Economic Laws have been
explained in as lucid, systematic and logical manner as possible in a compact form.
English and Indian cases have been cited with a view to ensure necessary authenticity and
clarity on the subject. For the benefit of the students test questions and practical problems
with hints to their solution have also been given at the end of each Chapter. Most of the
illustrations and exercise problems have been taken from the various university
examinations.

This material contains a sufficiently large number of examples and cases to
illustrate and understand the subject. For the convenience of the students I have also
included descriptive questions and multiple questions whenever and wherever it was
needed.

I hope that this Material will prove useful to both students and teachers. The
contents of this Study Material are divided into Forty Lectures in total covering various
aspects of the syllabus of Business & Economic Laws and other related courses.

I have taken considerable amount of help from various literatures, journals and
media. I express my gratitude to all those personalities who have devoted their life to
knowledge specially to Commerce & Law, from whom I could learn and on the basis of
those learning now, I am trying to deliver my knowledge to others through this material.
It is by Gods loving grace that he brought me in to this world and blessed me
with loving and caring parents, my respected father Mr. Manohar Lal Arora and my
loving mother Mrs. Kamla Arora, who have supported me in this Study Material.

Words may not be enough for me to express my deep sense of gratitude and
indebtedness to Dr. Shipra Maitra, Director (Amity College of Commerce & Finance,
Amity University, Uttar Pradesh) for the benevolent guidance, constructive criticism and
constant encouragement throughout the period I have been involved in this Study
Material.

I am thankful to my beloved wife Mrs. Deepti Arora, without whose constant
encouragement, advice and material sacrifice, this achievement would have been a far of
dream.

Syllabus

Course Contents:-

Module I:- Introduction
Meaning and scope of business law Sources of Indian Business Law.

Module II:- Indian Contract Act
Definition types of contract essentials offer, acceptance, consideration, capacity of
parties free consent, legality of object and consideration various modes of discharge
of a contract remedies of breach of contract, contract of indemnity and guarantee,
bailment and pledge, law of agency.

Module III:- Indian Sale of Goods Act
Formation of a contract, Condition and warranties, Transfer of ownership, Performance
of the contract, Right of unpaid seller.

Module IV:- Negotiable Instruments Act
Definition of a negotiable instruments; instruments negotiable by law and by custom;
types of negotiable instruments; parties to a negotiable instrument duties, rights,
liabilities and discharge; material alteration; crossing of cheques; payments and collection
of cheques and demand drafts; presumption of law as to negotiable instruments.

Module V:- Indian Partnership Act
Definition and nature of partnership rights and duties of partner types of partners
incoming and outgoing and minor as a partner dissolution of partnership registration
of a firm.

Module VI:- Consumer Protection Act. [COPRA] 1986
Back ground definitions of 1) Consumer, 2) Consumer dispute, 3) Complaint, 4)
Deficiency 5) Service Consumer Protection Council Consumer Redressal Agencies
District Forum, State Commission and National Commission.

Module VII:- Foreign Exchange Management Act 1999
Objectives, scope and silent features features offences under the Act.

Table of Contents
Preface ..................................................................................................................... 2
Syllabus ................................................................................................................... 4
Module 1 : Introduction to Business Law ....................................................... 11
Unit 1 : Environment ........................................................................................... 12
What is environment? ........................................................................................... 12
Relationship between a business and an environment .......................................... 13
Characteristics of Environment............................................................................. 14
Summary:-............................................................................................................. 15
Questions:- ............................................................................................................ 15
Unit 2 : Types of Environment ............................................................................ 16
Environmental Scanning ....................................................................................... 16
Type of Environment ............................................................................................ 17
Summary:-............................................................................................................. 24
Questions:- ............................................................................................................ 24
Unit 3 : Michael Portes Five Forces Model ...................................................... 25
Micro Environment ............................................................................................... 25
Summary:-............................................................................................................. 28
Questions:- ............................................................................................................ 28
Unit 4 : Introduction to Law ............................................................................. 29
Introduction to Law............................................................................................... 29
Nature & Definition of Law .................................................................................. 30
Summary:-............................................................................................................. 32
Questions:- ............................................................................................................ 32
Unit 5 : Kinds of Laws ............................................................................................. 33
Kinds of Laws ....................................................................................................... 33
Sources of Law ..................................................................................................... 35
Summary:-............................................................................................................. 36
Questions:- ............................................................................................................ 36
Summary of the module:- ..................................................................................... 37
Module 2: Indian Contract Act, 1872 ............................................................ 38
Unit 6 : Definition and Elements of Contract .................................................... 39
Introduction to The Indian Contract Act ............................................................... 39
Essential Elements of a Valid Contract ................................................................ 41
Summary:-............................................................................................................. 43
Questions:- ............................................................................................................ 43
Unit 7 : Acceptance .............................................................................................. 44
Acceptance ............................................................................................................ 44
Summary:-............................................................................................................. 49
Questions:- ............................................................................................................ 50
Unit 8 : Lawful Consideration ............................................................................ 51
Lawful Consideration............................................................................................ 51
Restitution ............................................................................................................. 52
Contingent Contracts ............................................................................................ 53
Summary:-............................................................................................................. 53
Questions:- ............................................................................................................ 53
Unit - 9 : Discharge of Contract ............................................................................. 54
Persons Who are Required to Perform Contracts ................................................. 54
Discharge Of Contract .......................................................................................... 55
Remedies for Breach of Contract .......................................................................... 57
Summary:-............................................................................................................. 59
Questions:- ............................................................................................................ 59
Unit 10 : Quasi-Contracts .................................................................................... 60
Quasi-contracts ..................................................................................................... 60
Contracts of Indemnity ......................................................................................... 61
Contracts of Guarantee ......................................................................................... 63
Summary:-............................................................................................................. 63
Questions:- ............................................................................................................ 63
Unit - 11 : Kinds of Guarantee .............................................................................. 64
Kinds of Guarantee ............................................................................................... 64
Consideration of Guarantee .................................................................................. 65
Suretys Liability .................................................................................................. 66
Limitation of Suretys Liability ............................................................................ 67
Summary:-............................................................................................................. 68
Questions:- ............................................................................................................ 68
Unit 12 : Rights of The Surety ............................................................................... 69
Rights of the Surety .............................................................................................. 69
Discharge of Surety Liabilities ............................................................................. 71
Bailment & Pledge ................................................................................................ 72
Summary:-............................................................................................................. 73
Questions:- ............................................................................................................ 73
Unit 13 : Duties of a Bailor.................................................................................. 74
Duties and Rights of Bailor and Bailee................................................................. 74
Rights of Finder of Goods..................................................................................... 77
Summary:-............................................................................................................. 78
Questions:- ............................................................................................................ 78
Unit - 14 : Pledge ..................................................................................................... 79
Pledge .................................................................................................................... 79
Rights And Duties Of Pawnee .............................................................................. 80
Rights and Duties of Pawnor ................................................................................ 80
Contract of Agency ............................................................................................... 81
Summary:-............................................................................................................. 85
Questions:- ............................................................................................................ 85
Unit 15 : Rights of Agent ......................................................................................... 86
Rights of Agent ..................................................................................................... 86
Duties of Principal to Agent ................................................................................. 87
Rights of Principal ................................................................................................ 88
Termination of Agency ......................................................................................... 88
Irrevocable Agency ............................................................................................... 88
Summary:-............................................................................................................. 89
Questions:- ............................................................................................................ 89
Summary of the Module:- ..................................................................................... 89
Module 3: Indian Sale of Goods Act, 1930 .................................................... 91
Unit - 16 : Introduction to Sale of Goods Act ....................................................... 93
Sale of Goods Act ................................................................................................. 93
Contract of Sale..................................................................................................... 95
Sale and Agreement to Sell ................................................................................... 95
Essentials of a Contract of Sale ............................................................................ 96
Summary:-............................................................................................................. 97
Questions:- ............................................................................................................ 98
Unit - 17 : Sale and Hire Purchase Agreement ..................................................... 99
Sale and Hire Purchase Agreement ....................................................................... 99
Sale and Barter or Exchange ............................................................................... 100
Sale and Bailment ............................................................................................... 100
Sale and Contract For Work and Materials ......................................................... 100
Contract Of Sale How Made ............................................................................... 101
Summary:-........................................................................................................... 102
Questions:- .......................................................................................................... 102
Unit 18 : Subject Matter of a Contract of Sale ............................................... 103
Present sale of future goods ................................................................................ 104
Contingent Goods ............................................................................................... 106
Effect of Destruction of Goods ........................................................................... 106
Conditions and Warranties .................................................................................. 106
Summary:-........................................................................................................... 109
Questions:- .......................................................................................................... 109
Unit 19 : Implied Conditions ............................................................................. 110
Implied Conditions.............................................................................................. 110
Implied Warranties.............................................................................................. 113
Summary:-........................................................................................................... 114
Questions:- .......................................................................................................... 114
Unit - 20 : Caveat Emptor ..................................................................................... 115
Caveat Emptor .................................................................................................... 115
Transfer of Property ............................................................................................ 116
Summary:-........................................................................................................... 125
Questions:- .......................................................................................................... 125
Unit - 21 : Performance of Contract of Sale ........................................................ 126
Performance of Contract of Sale ......................................................................... 126
Delivery of Goods ............................................................................................... 127
Summary:-........................................................................................................... 132
Questions:- .......................................................................................................... 132
Unit 22 : Re-Sale of Rejected Goods ................................................................ 133
Re-Sale of Rejected Goods ................................................................................. 133
Summary:-........................................................................................................... 136
Questions:- .......................................................................................................... 136
Unit - 23 : Rights Of An Unpaid Seller Against The Goods .............................. 137
Rights of an Unpaid Seller Against the Goods ................................................... 138
Summary:-........................................................................................................... 142
Questions:- .......................................................................................................... 142
Summary of the Module:- ................................................................................... 142
Module 4 : Negotiable Instruments Act ....................................................... 144
Introduction ......................................................................................................... 144
Unit - 24 : Introduction to Negotiable Instruments ............................................ 146
Negotiable Instruments ....................................................................................... 146
Summary:-........................................................................................................... 150
Questions:- .......................................................................................................... 150
Unit - 25 : Promissory Notes ................................................................................ 151
Promissory Notes ................................................................................................ 151
Summary:-........................................................................................................... 156
Questions:- .......................................................................................................... 156
Unit - 26 : Bills of Exchange................................................................................. 157
Bills of Exchange ................................................................................................ 157
Bills in Sets ......................................................................................................... 159
Summary:-........................................................................................................... 161
Questions:- .......................................................................................................... 161
Unit - 27 : Cheques ............................................................................................... 162
Cheques ............................................................................................................... 162
Electronic Cheque ............................................................................................... 163
Illustrations ......................................................................................................... 166
Capacity of Parties .............................................................................................. 168
Parties to Negotiable Instruments ....................................................................... 170
Liabilities of Parties ............................................................................................ 172
Summary:-........................................................................................................... 176
Questions:- .......................................................................................................... 176
Unit - 28 : Negotiation ........................................................................................... 177
Negotiation .......................................................................................................... 177
Effects of Endorsement ....................................................................................... 179
Summary:-........................................................................................................... 182
Questions:- .......................................................................................................... 182
Unit - 29 : Ndorsement ......................................................................................... 183
Endorsement ....................................................................................................... 183
Dishonor of a Negotiable Instrument .................................................................. 184
Summary:-........................................................................................................... 187
Questions:- .......................................................................................................... 188
Module 5 : Indian Partnership Act .............................................................. 190
Unit 30 : Partnership ............................................................................................. 191
Partnership .......................................................................................................... 191
Definition in civil law ......................................................................................... 192
Characteristics Of Partnership Firm: .................................................................. 192
Summary:-........................................................................................................... 193
Questions:- .......................................................................................................... 194
Unit 31 : Advantages of Partnership ................................................................... 195
Advantages Of Partnership ................................................................................. 195
Disadvantages Of Partnership ............................................................................. 196
Effects of Non-Registration of a Firm ................................................................ 197
The Conduct of the Business .............................................................................. 198
Summary:-........................................................................................................... 198
Questions:- .......................................................................................................... 199
Unit 32 : Mutual Rights And Liabilities Of Partners .................................... 200
Mutual Rights and Liabilities of Partners .......................................................... 200
Rights and Duties of Partners After a Change in the Firm ................................. 201
Implied Authority of Partner as Agent of the Firm ............................................. 202
PARTNER BY HOLDING OUT ....................................................................... 202
Introduction of a New Partner............................................................................. 204
Dissolution of a Partnership Firm ....................................................................... 206
Summary:-........................................................................................................... 208
Questions:- .......................................................................................................... 208
Unit - 33 : Registration Of A Partnership Firm .................................................. 209
Registration of a Partnership Firm ...................................................................... 209
Summary:-........................................................................................................... 212
Questions:- .......................................................................................................... 212
Summary of the module:- ................................................................................... 212
Module 6 : Consumer Protection Act, [Copra] 1986 ................................... 213
Unit 34 : Introduction To Consumer Protection Act, [Copra] 1986 ................ 214
Consumer Protection Act, [Copra] 1986 ............................................................ 214
Object of the Consumer Protection Act, 1986 .................................................... 215
Extend and Coverage of the Act:- ....................................................................... 216
Summary:-........................................................................................................... 217
Questions:- .......................................................................................................... 217
Unit - 35 : Definitions of Important Terms ....................................................... 218
Definitions of Important Terms .......................................................................... 219
Summary:-........................................................................................................... 225
Questions:- .......................................................................................................... 225
Unit - 36 : State Commission ............................................................................... 226
State Commission ............................................................................................... 226
National Commission.......................................................................................... 227
Summary:-........................................................................................................... 229
Questions:- .......................................................................................................... 229
Unit 37 : Filing of Complaint ................................................................................ 230
How to File a Complaint ..................................................................................... 230
Relief Available to the Consumers ..................................................................... 231
Procedure for Filing the Appeal:- ....................................................................... 231
Speedy Disposal .................................................................................................. 232
Summary:-........................................................................................................... 234
Questions:- .......................................................................................................... 234
Module 7 : Foreign Exchange Management Act 1999 ................................. 235
Unit 38 : Foreign Exchange Management Act ................................................... 236
Foreign Exchange Management Act ................................................................... 236
Objectives and Extent of FEMA ......................................................................... 237
Summary:-........................................................................................................... 240
Questions:- .......................................................................................................... 240
Unit 39 : Broad Scheme of the Foreign Exchange Management Act, 1999 ...... 241
Broad Scheme Of The Foreign Exchange Management Act, 1999 .................... 241
Enforcement Directorate ..................................................................................... 243
Summary:-........................................................................................................... 243
Questions:- .......................................................................................................... 243
Unit - 40 : Organisation Set-UP OF {Fema} ...................................................... 244
Organisational Set-Up ......................................................................................... 244
Staff ..................................................................................................................... 244
Functions ............................................................................................................. 245
Procedural Provisions ......................................................................................... 246
Summary:-........................................................................................................... 247
Questions:- .......................................................................................................... 247
Bibliography ....................................................................................................... 249

Module 1 : Introduction to Business Law

Introduction
In this module we will discuss what is environment, features of environment, types of
environment, meaning & features of business law, functions, advantages and
disadvantages of law, kinds and different sources of law. This module will help the
students to study and understand the basic concepts of business law.

Objectives
The foremost objective of this module is to make the students familiarize with the
concept of business and its environment, how and upto what extent it affects the business.
To study the concept of business law, why it is important for every business organization
whether small or large. Different kinds and sources of law will also be discussed in this
module.

Unit 1 : Environment
Objective:-
The main objective of this lecture is to study the concept of environment, its relationship
with business. With this lecture the students will learn the meaning of environment
specially in the context of business.

Introduction:-
Environment literarily means the surroundings, external objects, influences or
circumstances under which someone or something exists. Environment refers to all
external forces that have a bearing on the functioning of a business. Environment is
Complex as it consists of a number of factors, events, conditions and influences arising
from different sources. All these interact with each other to create new sets of influences.

What is environment?

Environment literarily means the surroundings, external objects, influences or
circumstances under which someone or something exists. The environment of any
organization isthe aggregate of all conditions, events and influences that surround and
affect it-Davis, K, The Challenge of Business, (New York: Mcgraw Hill, 1975), P43

Environment refers to all external forces that have a bearing on the functioning of a
business. Jauch and Gluecke define environment thus: The environment includes factors
outside the which can lead to opportunities or a threat to the firm. Although there are
many factors, the most important of these sectors are socio-economic, technological,
supplier, competitor and the government

Business is all about reaping profits from the opportunities available in the environment
Opportunity can manifest themselves in the form of short supply, excess demand, latent
need or new better and economical sources of supply or manufacturing.

Every business operates in a particular environment and each business unit has its own
environment. A change in environment presents opportunity to some and threat to others.
Sometimes, in the same industry, a relevant change in environment can a favorable of the
opposite impact on different units of the same industry.

For instance, the General Agreement on Trade and Services (GATS) implemented in
India on January 1,2005, is an opportunity for research-based pharmaceutical companies
like Ranbaxy but a threat for smaller companies. In the long run, only those organizations
will survive that are able to forecast the environment early and can react in time to the
change in environment.

The recent changes in tariff rates have changed the toy industry of India with the market
now being dominated by Chinese products. A slight change in the Reserve Bank of
Indias monetary policy can increase of decrease interest rates in the market. A slight
shift in the governments fiscal policy can shift the whole demand curve towards the right
or the left.

Hindustan Lever Limited (HLL) took advantage of the new takeover and merger codes
and acquired brands like Kissan from the UB group. TOMCO (Tata Oil Mills Company)
and Lakme from Tata and Modern Foods from the government, besides many other small
takeovers and mergers.

The new moguls of the Indian business are those who predicted the changes in the
environment and reacted accordingly. Azim Premji of Wipro, Narayana Murthy of
Infosys, Subhash Goyal of ZEE, the Ambanis of reliance, L.N.Mittal of Mittal Steel, of
Bharti Telecom are some of them.

Even a small businessman who plans to open a small shop as a general merchant in his
town needs to study the environment before deciding where he wants to open his shop,
the products he intend to sell and what brands he wants to stock.

Relationship between a business and an environment

The relation between a business and an environment is not a one way affair. The business
also equally influences the external environment and can bring about changes in It.
Powerful business lobbies for instance, actively work towards changing government
policies.

The business environment is not all about the economic environment but also about the
social and political environment. Politically, after the Congress government came to
power at the center with the support of the CPI in May 2004, the whole process of
disinvestments took a U-turn Similarly, a new sociological order in India today has
created a market for fast foods, packaged foods, multiplexes, designer names, valentine
day gifts and presents, and gymnasiums and clubs etc.

So it is quite obvious that success in a business depends upon better understanding of the
environment. A successful organization doesnt look at the environments on and ad hoc
basis but develops a system to study the environment on a continuous basis to try and
protect the organization from every possible threat and to take the advantage of every
opportunity. Some times better and timely understanding of the environment can even
turn threat into an opportunity.

Characteristics of Environment

1. Environment is Complex: The environment consists of a number of factors, events,
conditions and influences arising from different sources. All these interact with each
other to create new sets of influences.

2. It is Dynamic: The environment by its very nature, is a constantly changing one. The
varied influences operating upon it impart a dynamism to it and cause it ot continually
change its shape and character.

3. Environment is multi-faceted: The same environmental trend can have different
effects on different industries. For instance GATS that is an opportunity for some
companies but a threat for others.

4. It has a far-reaching impact: The environment has a far reaching impact on
organizations inn that the growth and profitability of organization depends critically
on the environment in which it exists.

5. Its impact on different firms with in the same industry differs: A change in
environment may have different bearings on various firms operating in the same
industry. In the pharmaceutical industry in India, for instance, the impact of the new
IPR (Intellectual Property Rights ) law will different for research-based pharmacy
companies such as Ranbaxy and Dr. Reddys Lab and will be different for smaller
pharmacy companies.

6. It may be and opportunity as well as a threat to expansion: Developments in the
general environment often provide opportunities for expansion in terms of both
products and markets. For example, liberalization in 1991 opened lot of opportunities
for companies and HLL took the advantage to acquire companies like Lakme,
TOMCO, KISSAN etc. Changes in environment often also pose a serious threat to the
entire industry. Like Liberalization does pose a threat of new entrants to Indian firms
in the form of Multi National Corporation (MNCs).

7. Changes in the environment can change the competitive scenario: General
environmental changes may alter the boundaries to an industry and change the nature
of its competition. This has been the case with deregulation in the telecom sector in
India. Since deregulation, every second year new competitors emerge, old foes
become friends and M&As follow every new regulation.

8. Sometimes developments are difficult to predict with any degree of accuracy:
Macroeconomic developments such as interest rate fluctuations, the rate of inflation,
and exchange rate variations are extremely difficult of predict on a medium of a long
term basis. On the hand, some trends such as demographic and income levels can be
easy to forecast.

Summary:-

A change in environment may have different bearings on various firms operating in the
same industry. In the pharmaceutical industry in India, for instance, the impact of the new
pharmacy companies.

The relation between a business and an environment is not a one way affair. The business
also equally influences the external environment and can bring about changes in It.
Powerful business lobbies for instance, actively work towards changing government
policies. Environment literarily means the surroundings, external objects, influences or
circumstances under which someone or something exists.

Questions:-

1. What do you mean by environment? Explain its features.

Unit 2 : Types of Environment
Objective:-
The objective of this lecture is to study the types of environment in detail to understand
their role and importance for the business. The environment can be classified as internal,
external, micro, macro etc. so what these environments are and their role will be studied
in this lecture.

Introduction:-
Internal environment refers to that of the organization and is controllable. The
Macro/General environment consists of factors external to the industry that may have a
significant impact on the firms strategies. Here we will look at six broad dimensions:
demographic, socio-cultural, political/legal, technological, economic and global. Political
Environment is the political environment of the country that decides the fortune of
businesses in a country. On the other hand Global Environment is the international
environment consists of all factors operate at the transnational, cross-cultural level and
across the border. The world is a global village today and it is getting closer and closer as
far as business is concerned.

Environmental Scanning

The process by which organizations monitors their environment to identify opportunities
and threats affecting their business, is known environmental scanning.

The following factors to be considered for environmental scanning.

1. Events: Important and specific occurrences that taking place in a certain sector.
2. Trends: The general tendencies or course of action along which these events take
Place.
3. Issues: the current concerns that arise in response to events and trends.
4. Expectations: The demands made by interested groups in the light of their concern
for issues.(Azhar Kazmi, TATA McGraw Hill,p118)

Type of Environment

The environment can be divided into three broad categories:

Internal Environment
Macro Environment (General Environment)
Micro Environment(Relevant Environment of Competitive Environment)

Internal Environment

Internal environment refers to that of the organization and is controllable. Some internal
factors are:

1. Culture and Value Systems: Organizational culture can be viewed as the system of
shared values and beliefs that shape a companys behavioral norms. A value is an
enduring preference as a mode of conduct or an end state. The value system of the
founders of the organization have a lasting impact on it. The value systems not only
influence the working of the company and the attitude of its people but also the
choice of its business.Values and cultures are inherited from seniors by juniors in a
organization. If a young man gets a job in a bureaucraic culture he gets accustomed to
a work routine of 10 to 6. On the other hand, if he gets a job in a private concern he
works till the work finishes. Similarly, for organizations accustomed to and
aggressive consumer goods sales culture, a foray into the industrial goods segment
proves difficult.

2. Mission and Objectives: The mission and objectives of the company guide the
priorities, direction of development, business philosophy, and business policy.

3. Management Structure and Nature: Structure is the manner in which the tasks and
sub-tasks of the organization are related. Structure is concerned with the hierarchical
relationship and the relationship between the management or different functional
areas like the structure of the top management and the pattern of share holding.

4. Human Resource: It concerns with factors like manpower planning, recruitment and
selection, compensation, communication and appraisal.

Besides this, internal environment also includes corporate resources,
production/operation of goods and services, finance and accounting systems and
methods, marketing and distribution.

Macro Environment

The Macro/General environment consists of factors external to the industry that may have
a significant impact on the firms strategies. Here we will look at six broad dimensions:
demographic, socio-cultural, political/legal, technological, economic and global.

Dimensions in General Environment

All these dimensions of general environment are interrelated. These dimensions not only
influence businesses, but also influence each other. After a political change in 1991,
when congress government came to power, major economic change took place in the
form of LPG, i.e., Liberalization, Privatization, and Globalizations. This led to and
enhancement in the technological environment of the country. This technological and
economical change has transformed the socio-culture environment of the country.

Demographic
Political/Leg
al
Economic
Business
Socio Culture
Technologica
l
Global
Globalization has also enabled India to become the software superpower of the world. All
global organizations now have a new and vast market, as well as cheap manufacturing
hub, which has compelled them to change their global marketing and manufacturing
strategies.

With this, over the last ten years there has been a drastic change in the Indias
demography per capita incomes have risen. The number of young achievers and high
earners has increased drastically, which changed the entire demand schedule of products.
This shows that a single political in 1991 has changed all the components of the macro
environment. So while studying macro environment, one should not only concentrate on
how this factor will influence business but also on how this will influence other
components of the environment and what will be the impact of these changes in the
business. Only then can one design long term strategies.

1. Political Environment: It is the political environment of the country that decides
the fortune of businesses in a country. After the 1917 revolution in sudden
political change transformed the equation of doing business. After the change of
tegime in the USSR in late 1980s and early 1990s business equations changed
once again in Ressin.

In India in 1977, the janata government came to power because of which Coca
Cola and IBM had to leave the country. All liquor companies had to close their
operations. When P.V Narsimha Rao can to power and a new economic policy
was putin, that presented of new opportunities for Businesses, but at the same
time brought a threat for inefficient organizations.

Not only political philosophy but political stability too has a significance for
businesses. The more stable the political environment of a country, the more
conducive will be the environment for business. The consensus among various
political parties on key issues are also relevant in this case.

2. Regulatory and Legal Environment: The political environment governs the
legal and regulatory environment of country. The regulatory environment plays a
vital role by dictating the dos and donts of a business. Every county has a
different legal environment.

In India we have the Companies Act that governs Companies, the MRTP Act
which restricts monopoly,various laws regarding shares, the Consumer protection
Act, environmental laws, and the implementation of GATS.GATS has resulted in
the implementation of international laws regarding patents,.There are laws for
import and export, licensing etc. that have a drastic impact on business and the
future of organizations.

When an NRI Lord Swaraj Paul, a British Citizen, tried take over Escorts, its
owners, the Nandas approached the government to save their company. A law
restricting any NRI from purchasing shares of an Indian company came into
force, and Escorts was saved.

3. Demographic: It is the demographic environment which decides the marketing
mix for an organization. It decides the type of product the organization comes out
with. In India a lot of research and efforts are undertaken to reduce the cost of
products and to launch products at the cheapest possible rates. A one rupee sachet
of shampoo or a five rupee ice-cream cone are some examples. It is the
demography that decides the pricing, promotion and distribution strategies. 70%
of Indias population is lives in villages and of this, 70% are youth which is why
every business house is launching new products, specifically for rural market. ITC
launched its unique and ambitious programme called e-chaupal,targeted at the
rural market.

4. Socio Culture: Socio culture variables like the beliefs, value system, attitudes of
people and their demographic composition have a major impact on their
personality and behavior style. The consumers preferences have undergone a
drastic change through the 1990s This has led to the production of more cars,
refrigerators, air conditioners and other articles that were at one time considered
ostentatious and luxurious.

Not only this, this socio-cultute paradigms also dictates the preference of
consumer in different regions. For instance companies launch different products
in the south and north because of differing preferences. Companies have to
change their product portfolio because of cultural preferences as Mc Donalds and
KFC did when they launched their restaurant chain in India.

5. Technological: Technological forces present a wide range of opportunities and
threats that have to be accounted for in the process of business strategy
formulation. Technological advancement may dramatically affect an
Organizations products, services, markets, suppliers, distributors, competitors,
customers, manufacturing process, marketing practices, financial composition,
and competitive position. Some of the important factors that influence operating
in the technological environment are:

Sources of technology like company sources, external sources and foreign
sources, cost of technology acquisition, collaboration and transfer of
technology.

Rate of change in technology, of obsolesce

Impact of technology on human being, the man machine system, and the
environmental effect of technology.
Communication and infrastructural technology in management.

In fact, technology is today a decisive factor. From FMCGs to the microprocessor
industry is investing heavily technology. The technological knowledge of consumer the
decisions. Organizations have to modify products according to the level of technological
knowledge of the target costumer, because in developing nations complex household
machines that need programming will not work. So they have to be technologically more
and more focused.

6. Global Environment: The international environment consists of all factors
operate at the transnational, cross-cultural level and across the border. The world
is a global village today and it is getting closer and closer as far as business is
concerned.

For the sake of business, countries are burying their grievances and forging
economic relationships. Erstwhile adversaries like America and Russia are today
goods friends and China ad India are coming closer.

India has signed a bilateral treaty with sri Lanka, it is developing close economic
relationship with South Africa and Brazil, and is Planning to develop a road
network in South East Asia. India is also a close ally of ASEAN, nd is also
signatory of WTO which has a multilateral trade agreement among more than
100 nations.

India is in a process of laying down a gas pipeline from Iran via Pakistan. All this
is just glimpse of the present international environment. Every new bilateral and
multilateral agreement new vistas for business and also brings a new threat in the
form of global competition.

7. Economic Environment: The economic environment consists of macro level
factors related to the means of production and distribution of wealth, which have
and impact on the business of an organization.

The economic structure of a country, whether it is socialist, mixed or capitalist,
has drastic impact on the economy. Economic policies such as foreign trade
policy, industrial policy, fiscal policy, GDP growth tare, policy of licensing,
monetary policy, development of financial institutions, development of money
and stock market, and the extent of globalization are some of the aspects of an
economy that reflect on business in an economy. A slight change in monetary
policy can release crores of rupees into the economy that may result in a decrease
in interest rate, which further increases investment as well as inflation.

Also, banks lending rates decide the level of investment in any country. The
higher the interest rate, the lower the level of investment. In most industrialized
nations like the US, this interest tare is between 4% to 6%. In India in 1991, the
PLR (prime lending rate) was 17% to 18% which was reduced to 8% to 10% by
2000 because of a change in the countrys economic policy.

8. National Competitive Advantage: Despite globalization, industrialization is
clustered in a small and specific number of countries. Most successful computer
and biotechnology firms are based in the US, the successful chemical and
engineering industry is based in Germany, and the cream of the electronics
industry is based in Japan.

Similarly the successful call centers are clustered in India as are many of the
customized software companies. This suggests that nation and its environment in
which a company is based may have an important bearing of the competitive
position of that company in the global marketplace.

Michael Porters International Competitiveness Model

In a study national competitive advantage, Michael Porter identified four attributes of a
national of country-specific environment that have an important impact on the global
competitiveness of companies located within that nation.

a. Factor Endowments: A nations position in the factors of production such as
skilled labor, capital, technology or infrastructure necessary to compete in a given
industry.
b. Demand Condition: The nature of home demand for services.
c. Relating and Supporting Industry: The presence and absence in a nation of
supplier industries and related industries that are internationally competitive .
d. Firm strategy, structure and rivalry: The conditions in the nation that govern
how companies are created, organized and managed and the nature of domestic
rivalry.

Firm Strategy, Structure
& Rivalry
Factor Endowment Local Demand
Condition
Relating and Supporting
Industries
Summary:-

The process by which organizations monitors their environment to identify opportunities
and threats affecting their business, is known environmental scanning.

Culture and Value Systems:- Organizational culture can be viewed as the system of
shared values and beliefs that shape a companys behavioral norms. A value is an
enduring preference as a mode of conduct or an end state. The value system of the
founders of the organization have a lasting impact on it.

demographic, socio-cultural, political/legal, technological, economic and global. Socio
culture variables like the beliefs, value system, attitudes of people and their demographic
composition have a major impact on their personality and behavior style.

Questions:-

1. Discuss about different types of environment.

Unit 3 : Michael Portes Five Forces Model
Objective:-
The main objective of this particular chapter is to study Michael Portes Five Forces
Model of competition, benefits and analysis of environment analysis.

Introduction:-
Micro environment of the competitive environment refers to the environment which and
organization faces in its specific arena. This arena may be an industry, of it may be what
is referred to as a strategic group. Professor Michael Porter of the Harvard Business
School has demonstrated the state of competition in an industry as a composite of five
composite of competitive forces. One of the limitation of environment is that today it is
turbulent and dynamic and it is difficult to forecast of predict the environment.

Micro Environment

is referred to as a strategic group.

Besides looking at primary demand and supply factors, firms examine the state of
competition they face because that determines whether that determines whether they will
remain in the same industry or start a new one. All the business decisions-what business,
pricing, distribution channel, promotion portfolio, etc. depends on competitive position of
the firm.
For instance, a new entrant in the glucose biscuit segment will have to study and consider
the marketing mix as well as strategy of existing players like Britannia, Parle, Priyagold,
etc., before deciding its marketing mix following are the key Micro Environment factors:

The Five Forces of Competition

Professor Michael Porter of the Harvard Business School has demonstrated the state of
competition in an industry as a composite of five composite of competitive forces.
According to Michael Porter the five forces of competition are:

a. Threat of Competitors: The rivalry among sellers in the industry.
b. Threat of New Entrants: The potential entry of new competitors.

c. Threat of Substitutes: Market attempts of companies in other industries to win
customers over to their own substitute products.

d. Bargaining Power of Supplier: The competitive pressure stemming from the
supplier-seller collaboration and resultant bargaining.

e. Bargaining Power of Buyers: The competitive pressure stemming from seller-
buyer collaboration and bargaining.

Michael Portes Five Forces Model

Benefits of Environmental Analysis

1. Environmental analysis gives an idea of organizations environment.
2. Environmental analysis gives a brief about competitors.
3. Environmental analysis tells us about opportunities to reap profits.
4. Environmental analysis gives details about threats in the environment.
5. Environmental analysis keeps the manager informed and alert.
6. Business is all about making the right decision at the right time. Without proper
environmental analysis the right decision cant be made.
7. Environmental analysis helps in predicting the future.
Threat of Substitutes
Bargain Power
of supplier
Bargain Power
of Buyer
Threat of New
Entrants
Threat of Competitor
8. Environmental analysis helps in suitable modification of strategies, as and when
required.

Limitations of Environmental Analysis

1. Today the environment is turbulent and dynamic and it is difficult to forecast of
predict the environment.

2. Business environment is global and any development in any part of the world can
influence the business. Even a small political move can have a drastic impact,
which in very difficult to scan and assess. A sudden disintegration of USSR had
very adverse impact on many exporters in India. A sudden attack of Al Qaeda on
the Twin Towers in the US resulted in the hike of global petroleum prices. After
Signing the WTO, all of a sudden the toy market of India was captured by
Chinese products. Today it is extremely difficult to predict the external
environment.

3. The Effectiveness of environmental analysis depends upon how it is practiced,
i.e., whether it is a systematic approach, ad hoc or processed. Under a systematic
approach, information for environmental scanning is collected, scanned and
monitored on a continuous basis and forecast and is assessed for the relevant
factor. In an ad hoc approach, an organization condusts special surveys and
studies to deal with specific environmental issues from time to time. In a
processed form approach, an organization uses information in a processed form,
available from different sources, both inside and outside the organization. For
effectiveness, an organization should use the combination of these approaches
instead of just following the tried formulas, because all have their importance
according to requirement.

Too much reliance is often placed on the information collected through
environmental scanning.

When there is overloading of information, one is likely to get lost and become
inactive-typical of paralysis through analysis syndrome.

Summary:-

is referred to as a strategic group. Today the environment is turbulent and dynamic and it
is difficult to forecast of predict the environment.

Questions:-
1. Discuss Michael Portes Five Forces Model.

Unit 4 : Introduction to Law

Objective:-
The objective of this module is to understand what is law, its definition, nature, merits
and demerits. We will discuss it in the context of business also.
Introduction:-
Business laws are essential for the students of management to understand the legal rules
and aspects of business. Just like any other study even business management is
incomplete without a proper study of its laws. For the proper working of the society,
there must exists a code of conduct. To enforce the law and to resolve the conflicts
arising there from, courts of law were setup by the state. Laws were made to govern
almost every walk of life. According to Woodrow Wilson, Law is that portion of the
established habit and thought of mankind which has gained distinct and formal
recognition in the shape of uniform rules backed by the authority and power of the
government.

Introduction to Law
Business laws are essential for the students of management to understand the legal rules
and aspects of business. Just like any other study even business management is
incomplete without a proper study of its laws. Any form of business needs legal
sanction. Therefore, it is imperative that a manager understands the various ways in
which businesses can be organized. This subject introduces some of the common forms
of business organizations, including some forms unique to India like the Joint Hindu
Undivided Family firm. Different types of organizations like Sole Ownership,
Partnership, Private Limited Company, Public Limited Company, Joint Stock Company
along with the rationale for adopting these forms are explored.
What form of business organization is the best under a particular set of conditions?
What advantage or disadvantage does it have over other forms of business? Formalities
to be gone through and some the quasi-legal processes required for starting a business
will be discussed in detail in this subject.
For the proper working of the society, there must exist a code of conduct. As you all
know, in the ancient times the society was not organized. The rights of the individuals
were not recognized. Gradually, the society evolved and the state came into being. As
we all know, to regulate the state, there should be a specific code of conduct, which
should be followed by everyone. As a result of which law evolved as a system of rights
and obligations including all the rules and principles, which regulate our relations with
other persons and with the state. These rules and regulations took the form of statutes.
To enforce the law and to resolve the conflicts arising there from, courts of law were
setup by the state. Laws were made to govern almost every walk of life. You all must
know that criminal laws were made to control criminal activities in the society like
Indian Penal Code, which enumerates which activities are considered criminal and what
will be the punishment for committing a crime. Likewise, mercantile law was evolved
to govern and regulate trade and commerce. Hence, the term mercantile law can be
defined as that branch of law, which comprises laws concerning trade, industry and
commerce. It is an ever-growing branch of law with the changing circumstances of
trade and commerce.

Nature & Definition of Law
Law is a social science that grows and develops with the growth and development of
society. The law is required to deal with the new developments, which create new
problems in the society. Thus, the definition of law given at a particular time cannot
remain valid for all times to come. The definition of law today may become very
narrow in future. Prof. Keeton rightly points out that, to attempt or to establish a single
satisfactory definition of law is to seek to confine jurisprudence within a straitjacket
from which it is continually striving to escape.
According to Austin, Law is the aggregate of rules set by men as politically superior,
or sovereign, to men as politically subject. In other words, law is the command of the
sovereign. It imposes a duty and is backed by a sanction. Command, duty and sanction
are the three elements of law.
According to Holmes, Law is a statement of the circumstances in which the public
force will be brought to bear upon men through courts. Again the prophecies of what
the court will do in fact and nothing more pretentious, are what I mean by law.
According to Woodrow Wilson, Law is that portion of the established habit and
thought of mankind which has gained distinct and formal recognition in the shape of
uniform rules backed by the authority and power of the government.
Functions and Purpose of Law

The main functions of law are as follows:-

1. To maintain law and order within a given society;

2. To maintain status quo in society ensuring stability and security of social order;

3. To enable individuals, maximum of freedom to assert themselves;

4. Determine the sphere within which the existence and activity of each individual
will be secure and free play;

5. The main goal of law is to secure justice; and

6. An important function of law is to ensure rule of law.

Advantages of Law

The main advantages of law are as follows:
1. The principles of law provide uniformity and certainty to the administration of
justice.
2. The existence of fixed principles of law avoids the dangers of arbitrary, biased and
dishonest decisions.
3. The fixed principles of law protect the administration of justice from the errors of
individual judgment.
4. These fixed principles are reliable than individual judgment.

Disadvantages of Law

Some of the disadvantages of law are:

1. The lack of flexibility in law results in hardship and injustice to people, which
needs to change according to the changing needs of the people.

2. Law is conservative in nature as the lawyers and judges favor continuation of
the existing law making it static.

3. Another disadvantage of law is formalism, which emphasis more on the form of
law than its substance.

4. Lastly, law is unduly and needlessly complex.

Summary:-
Law is the aggregate of rules set by men as politically superior, or sovereign, to men as
politically subject. In other words, law is the command of the sovereign. It imposes a
duty and is backed by a sanction. Command, duty and sanction are the three elements of
law. Functions and Purpose of Law are:- To maintain law and order within a given
society, to maintain status quo in society ensuring stability and security of social order,
to enable individuals, maximum of freedom to assert themselves;

Questions:-

1. What do you mean by Law? Explain the features and functions of law.

Unit 5 : Kinds of Laws
Objective:-

The objective of this lecture is to study different types of law. These laws are applicable
in different situations. With this lecture the students will learn the utility of these laws.

Introduction:-
Physical laws or the laws of science are expression of the uniformities of nature-general
principles expressing the regularity and harmony observable in the activities and
operations of the universe. According to Holland, the expression sources of law is
employed to denote the quarter from where we obtain our knowledge of law, for
example, whether from statute book, the reports or esteemed treatises. Sometimes it is
used to denote the ultimate authority, which gives them the force of law, i.e., the State.

Kinds of Laws

The following are different kinds of law:

1. Imperative Law: It is a rule which prescribes a general course of action imposed by
some authority which enforces it by superior power either by physical force or any
other form of compulsion. Austin who is a chief advocate of imperative law defines,
Law as a command, which obliges a person or persons to a course of conduct.

2. Physical or Scientific Laws: Physical laws or the laws of science are expression of
the uniformities of nature-general principles expressing the regularity and harmony
observable in the activities and operations of the universe.

3. Natural Law or Moral Law: Natural law or moral law is ought to have the
principles of natural right and wrong, i.e., to include the principles of natural justice,
if it is used in a wider sense, then the term justice is to include all forms of rightful
action.

4. Conventional Law: According to Salmond, conventional law means, any rule or
system of rules agreed upon by persons for the regulation of their conduct towards
each other.

5. Customary Law: According to Salmond, customary law means, any rule of action
which is actually observed by men any rule, which is expression of some actual
uniformity of some voluntary action. A custom may be voluntary and still becomes
or retains the features of law. Therefore, when a custom is firmly established, it is
enforceable by the authority of the state

6. Practical or Technical Law: Practical or technical law consists of rules, which are
made for the attainment of certain ends, for example, the law of health, the laws of
architecture, etc.

7. International Law: According to Starke, international law may be defined, for its
great part, as the principles and rules of conduct which the states feel themselves
bound to observe and therefore do commonly observe in their relations with each
other and includes: (i) the rules of law relating to functioning of international
institutions and organizations, their relations with each other and their relations with
states and individuals, and (ii) certain rules of law relating to individuals so far it
relates to their rights and duties are the concern of the international community.

8. Civil Law: According to Salmond, civil law is, the law of the state or of the land,
the law of lawyers and the law courts.
Advantages of Legal Justice
The key advantages of legal justice are:
i.Legal justice ensures uniformity and certainty in the administration of justice;
ii.Impartiality in the administration of justice is another important advantage;
iii.Legal justice represents the collective wisdom of the community and it is always
to be preferred to the wisdom of any one individual.

Disadvantages of Legal Justice
Some of the disadvantages are:
i. It is rigid, as it follows what has been laid down by precedents;
ii. It is not always possible to adjust to the changing needs of the society;
iii. Another defect of legal justice is its formalism or technicalities; and
iv. Lastly, it is complex.

Sources of Law
According to Holland, the expression sources of law is employed to denote the
quarter from where we obtain our knowledge of law, for example, whether from statute
book, the reports or esteemed treatises. Sometimes it is used to denote the ultimate
authority, which gives them the force of law, i.e., the State.
John Austin refers to three meanings for the term sources of law: (a) the first term
refers to the immediate or direct author of the law which means the sovereign in the
country, (b) the second term refers to the historical document from which the body of
law can be known, and (c) the third term refers to the causes which have brought into
existence the rules which later on acquire the force of law.
According to Salmond, the two main sources of law were formal and material. The
legal sources consist of legislations, precedent (previous judgments of the court),
custom, agreement and professional opinion.

1. Formal Sources

The law derives its force validity from the formal sources.

The material sources of law is derived from the matter, which is composed of

(a)Legal sources and (b) Historical sources.

a. LEGAL SOURCES

These are the sources which are recognized by the law itself as authoritative, for
example, Statute Law, having its source in legislation; Case Law, having its source in
precedents; Customary Law, having its source in customs. All these are inherent sources
of law and have a binding force.

b. HISTORICAL SOURCES

The sources which have no binding force and which are not recognized by the law are
referred to as historical sources, for example, juristic writings, literary works, foreign
decisions. These are of a great persuasive force, but they are not binding law by
themselves.

Legislation

Etymologically, legislation means the making or the setting of law. In a wide sense, it
includes all methods of law-making and, therefore, would include laws made by judges
also. In the strict sense, it may be defined as the promulgation of legal rules by an
authority which has the power to do so. In modern times, legislation is the most
important source of law.
According to Salmond, legislation is that source of law which consists in the
declaration of legal rules by a competent authority.
According to Austin, there can be no law without a Legislative Act.
Summary:-

Imperative Law: It is a rule which prescribes a general course of action imposed by
some authority which enforces it by superior power either by physical force or any other
form of compulsion. Austin who is a chief advocate of imperative law defines, Law as a
command, which obliges a person or persons to a course of conduct.

Practical or Technical Law: Practical or technical law consists of rules, which are made
for the attainment of certain ends, for example, the law of health, the laws of
architecture, etc. Civil Law: According to Salmond, civil law is, the law of the state or
of the land, the law of lawyers and the law courts.
Questions:-
1. What are the different sources of Law? Discuss.

Summary of the module:-

A change in environment may have different bearings on various firms operating in the
same industry. In the pharmaceutical industry in India, for instance, the impact of the new
pharmacy companies.

demographic, socio-cultural, political/legal, technological, economic and global. Socio
culture variables like the beliefs, value system, attitudes of people and their demographic
composition have a major impact on their personality and behavior style.
Today the environment is turbulent and dynamic and it is difficult to forecast of predict
the environment.

Law is the aggregate of rules set by men as politically superior, or sovereign, to men as
politically subject. In other words, law is the command of the sovereign. It imposes a
duty and is backed by a sanction. Command, duty and sanction are the three elements of
law.

Imperative Law is a rule which prescribes a general course of action imposed by some
authority which enforces it by superior power either by physical force or any other form
of compulsion. Austin who is a chief advocate of imperative law defines, Law as a
command, which obliges a person or persons to a course of conduct.

Module 2: Indian Contract Act, 1872

Introduction:-

The Indian Contract Act, 1872 provides the general principles and rules governing
contracts. All transactions that relate to the agreements and obligations of the
contracting parties, come under the purview of the Act. The Indian Contract Act, 1872
is one of the oldest Acts. It is one of the best drafted enactments which have stood the
test of time. A contract basically evolves from an offer by one party and acceptance of
the same, by the other party. The acceptance should be definite and without any
qualification. There should be a consensus ad idem between the two parties on the terms
and conditions of contract. Consideration is an important element of a contract. In day
to day life, quite often promises are made without giving them a thought. In order to
make an agreement enforceable, law requires such agreements barring a few exceptions,
to be backed by consideration. Quasi Contracts are such type of contract where there is
no element of contract but still it is considered as contract is referred as quasi-contract.
Quasi-contracts rest on the equitable principle that a person shall not be allowed to
enrich himself unjustly at the expense of another.

Objectives:-
The objective of this module is to teach the students about the Indian Contract Act:- its
meaning, definition, types and some other very important terms such as breach of
contract, bailment, and pledge, consideration, offer, acceptance, free consent etc. The
Indian Contract Act is very wide and complex so a thorough knowledge of it is
mandatory for the student.

Unit 6 : Definition and Elements of Contract
Objective:-
The objective of this lecture is to study the meaning and concept of The Indian Contract
Act, 1872. In this module we will study some important elements which are required for
a valid contract.
Introduction:-
The Indian Contract Act, 1872 is one of the oldest Acts. It is one of the best drafted
enactments which have stood the test of time. The provisions of the Indian Contract Act
has laid down certain settled principles of law, which creates some rights and duties
between the parties. All agreements are not necessarily enforceable by law. An
agreement to sell a house may be a contract enforceable by law. However, an agreement
to attend a party being of a social nature is not enforceable. It is not necessary that a
contract need not be only in writing, unless there is specific provision in law that it
should be in writing.

Introduction to The Indian Contract Act
contracts. All transactions that relate to the agreements and obligations of the
contracting parties, come under the purview of the Act. Special categories of contracts,
are governed by separate Acts. They are Partnership Act, Sale of Goods Act, Negotiable
Instruments Act, Insurance Act, etc. The Indian Contract Act (referred as Act hereafter),
which the law will uphold.
between the parties. They are very well known and well accepted in the commercial
transactions. Initially, the Act contained provisions in respect of Sale of Goods and
Partnership also. Later, certain Sections (76-123) were repealed and a separate law was
passed on Sale of Goods as, Sale of Goods Act, 1930 and the Indian Partnership Act,
1932 was passed by repealing Sections (239-266).

Definition of Contract
Section 2(h) of the Act, defines a contract as an agreement enforceable by law. A
contract is defined as an agreement enforceable at law, made between two or more
persons, by which rights are acquired by one or more, to act on the part of the other. It
creates and defines obligations between the parties.
All agreements are not necessarily enforceable by law. An agreement to sell a house
may be a contract enforceable by law. However, an agreement to attend a party being of
a social nature is not enforceable.
It is not necessary that a contract need not be only in writing, unless there is specific
provision in law that it should be in writing. Certain contracts must be in writing as
otherwise they are not enforceable in law. Following are the examples of such contracts.
Contract for sale of immovable property must be in writing, stamped and registered.
Certain other contracts though are required to be in writing do not compulsorily be
require registration, for example, Bills of Exchange, Promissory Notes, Cheques, A
Trust created under the Indian Trust Act, A promise to pay a time-barred debt,
Contracts made without consideration with natural love and affection.
Elements of Contract
It may be noted that a contract essentially contains two elements: agreement and
enforceability by law. For a better understanding, let us elaborate on these two
elements. Section 2(e) of the Act defines agreement as, every promise and every set of
promises, forming consideration for each other. This essentially means that there
should be an offer and acceptance to form an agreement. It is important that before an
agreement is finalized there should be a consensus ad idem (consent to the matter)
between the two parties. Both the contracting parties should say and mean the same
without, which there cannot be a contract.
The other element of contract, enforceability by law, emphasizes the importance of
intention to create a legal obligation or duty to perform or abstain from performing
certain act(s). These acts could relate to social or legal matters.
The classic case of Balfour vs. Balfour (1919) elaborates this point. A husband working
in Ceylon, had agreed in writing to pay a housekeeping allowance to his spouse living
in England. On receiving information that she was unfaithful to him, he stopped the
allowance. It was held that the agreement was without any intention of creating a legal
obligation. Hence, there was no contract. It may be summed up that all contracts are
agreements, but all agreements are not contracts.

Essential Elements of a Valid Contract

1. Offer and acceptance.
2. Intention to create legal relationship.
3. Capacity to contract.
4. Free consent.
5. Lawful consideration.
6. Legal object.
7. Certainty and possibility of performance.

Each of the essential elements are discussed in detail below.

1. Offer and Acceptance

A contract basically evolves from an offer by one party and acceptance of the same, by
the other party. The acceptance should be definite and without any qualification. There
should be a consensus ad idem between the two parties on the terms and conditions of
contract.

Conditions of Making an Offer

The following conditions that govern making an offer are:
1. The offer must be definite and not vague.
2. An offer should be differentiated from an invitation to make an offer. There are
occasions where a person may make some statements or give information with
an intention of inviting others to make an offer. For example, a catalogue with
prices indicated on it is not an offer to sell. On the contrary it is only an
invitation to make an offer. A person interested in buying the product specified
in the catalogue, may make an offer to buy and it is left to the discretion of the
seller to either accept or reject the same.
Lapse of Offer

Section 6 specifies the instances which results in the lapse of an offer:

I. An offer comes to an end if it is revoked by the offeror at any time before its
acceptance is complete as against him and not after its acceptance;

II. If either the offeror or the offeree dies or becomes insane and the offeree comes to
know about it, before acceptance. If the offeree accepts an offer in ignorance of
the death and insanity of the offeror, the acceptance is valid;

III. If the offer is not accepted within the specified time or within a reasonable time,
or if none of it is clearly specified then the law of limitation applies after that, if
none is specified (Law of limitation applies). In Ramsgate Victoria Hotel Co vs.
Montefiore, Montefiore agreed to take up shares in Ramsgate Victoria Hotel Co in
June. However, when he received the letter of acceptance in November, he
declined to take up shares. The offer had come to an end by lapse of time and
therefore he could not be compelled to take up the shares. When an offer is made
by an agent and it is accepted within a reasonable time, the contract will be
binding on the principal even though the agent may have been guilty of delay in
making the offer;

IV. On failure to fulfill a condition precedent to acceptance. In State of Madhya
Pradesh vs. Gobardhan Dass where the tender required acceptance of a tender to
be accompanied by payment of 25% of the amount and was fulfilled by the
successful tenderer to make the requisite payment the court held that the omission
did not give rise to a binding contract between the parties;

V. If it is not accepted in the mode prescribed or if no mode is prescribed, in some
usual and reasonable manner or if the offer is rejected by the distinct refusal of the
offeree;

VI. If the offeree makes a counter offer, it amounts to rejection of the original offer and
such an offer by the offeree may be accepted or rejected by the offeree;

VII. If law is changed making the offer illegal or incapable of performance. According
to the Indian Contract Act, an offer may be revoked at any time provided it is
communicated to the offeree before the acceptance. Also an offer to keep an offer
open for a specified time (option) is not binding unless it is supported by
consideration.

Summary:-

contracts. All transactions that relate to the agreements and obligations of the contracting
parties, come under the purview of the Act. Special categories of contracts, are governed
by separate Acts.
All agreements are not necessarily enforceable by law. An agreement to sell a house
may be a contract enforceable by law. However, an agreement to attend a party being of
a social nature is not enforceable. The other element of contract, enforceability by law,
emphasizes the importance of intention to create a legal obligation or duty to perform or
abstain from performing certain act(s). These acts could relate to social or legal matters.
Questions:-

1. What is a contract? Discuss essential elements for a valid contract?

Unit 7 : Acceptance
Objective:-
The objective of this lecture is to study the concept of acceptance with its conditions,
parties competent to contract, free consent, undue influence etc.

Introduction:-
An acceptance is said to be express when it is communicated by words spoken or
written or by doing some required Act. It is implied when it is to be gathered from the
surrounding circumstances or the conduct of the parties. In an auction sale, the highest
bidder is assumed to be the buyer of the goods once the deal is struck. Section 10
specifies that an agreement to be a contract, is to entered between the two parties who
are competent to contract. Section 12 lays down a test of soundness of mind. It states
that a person is said to be of sound mind for the purpose of making a contract if, at the
time of making the contract, he is capable of understanding it and of forming a rational
judgment as to its effect upon his interests.

Acceptance

Under Section 2(b) of the Act, when a person to whom the proposal is made signifies
his assent thereto, the proposal is said to be accepted. Just as in case of offer,
acceptance may also be express or implied. An acceptance is said to be express when it
is communicated by words spoken or written or by doing some required Act. It is
implied when it is to be gathered from the surrounding circumstances or the conduct of
the parties. In an auction sale, the highest bidder is assumed to be the buyer of the goods
once the deal is struck.
In order to convert an offer into a promise, acceptance should be absolute and
unqualified. It is also essential that the acceptance is given in some usual and reasonable
manner. If the offer prescribes the manner in which the acceptance is to be given, then
the acceptor should adhere to the prescribed mode. On failure to do so, the offeror can
insist that his offer will be accepted only if it is given in the prescribed manner.

1. Conditions of Acceptance

i. An offer should be accepted only by the person to whom it is put forth. It is clear by
the rule of law that if A proposes to make a contract with B, C cannot substitute
himself with B without the consent of A. An acceptance may be withdrawn before it
reaches the offeror.
ii. Acceptance of an offer should be absolute and unqualified and should conform totally
with the offer made. A conditional or qualified acceptance does not result in a valid
contract. By giving a conditional acceptance or counter offer, the original offer is
deemed to have been rejected. Once the original offer has been rejected by making a
counter offer, it cannot be accepted again, unless renewed. In Hyde vs. Wrench an
offer made for the sale of a farm for 1,000 pounds was not accepted in the first
instance. A counter offer was made wherein the plaintiff expressed his willingness
to buy the same for 950 pounds. When the counter offer was rejected, the plaintiff
consented to buy the farm for 1,000 pounds which was again rejected by the
defendant. A suit filed for breach of contract was not maintainable as the counter
offer implied that the original offer had been rejected. Hence, there was no valid
contract between the parties.
iii. The acceptance must be communicated to the offeror. The acceptance must be in the
form specified or in some perceptible form if not specified. A mere intent of acceptance
will not suffice. In this regard, reference may be made to an American case, Eliason
vs. Henshaw the mode of acceptance as prescribed by the offeror was not adhered
to. The offeree sent the letter of acceptance by post when it was required to be sent
by wagon as indicated by the offeror.
A deviation in the mode of acceptance clearly entitled the offeror to treat the
acceptance as invalid.

2. Intention to Create Legal Relationship

The validity of a contract is dependent on the intention of the contracting parties. A
contract will be valid only when the parties to the contract intend to create a legal
relationship between themselves. Non-existence of such an intention will not give rise
to a valid contract. Agreements of social nature do not contemplate legal relationship
and hence they are not contracts.
The parties to a contract may either specifically lay down that the agreement entered is
not a formal or legal agreement or in certain cases the non-existence of an intention to
enter into a legal relationship can be implied from the agreement itself.

3. Capacity to Contract
Section 10 specifies that an agreement to be a contract, is to entered between the two
parties who are competent to contract. The persons declared to be incompetent to
contract are:
a. Minors: A minor is a person under the age of eighteen years, except when a guardian
of a minors person or property has been appointed by the court, in which case it is
twenty-one. The purpose of declaring minors as incompetent to enter into a contract is to
protect minors against their own inexperience. However, law tries not to cause
unnecessary hardships to persons who deal with minors..
b. Persons of Unsound Mind: Section 12 lays down a test of soundness of mind. It
states that a person is said to be of sound mind for the purpose of making a contract if, at
the time of making the contract, he is capable of understanding it and of forming a
rational judgment as to its effect upon his interests. A person who is a lunatic (who is at
times of sound mind) may enter into contract in these times. Persons who have
completely lost their mental powers or those who are drunken or intoxicated are
incapable of entering into a contract. The question of unsoundness has to be determined
based on unmistakable facts and not merely on speculation. The burden of proving
insanity will be on the person who alleges it. The question whether a contract is
invalidated because of unsoundness of mind will not depend upon the belief or disbelief
of the witness but largely based upon the inference to be drawn from evidence.
c. Persons Disqualified by any Law to which they are Subject: The following persons
are disqualified by law to enter into a contract:-
1. Alien Enemies: They are those persons who are not subjects of Republic of India
and the country in which they reside, is not at peace with Republic of India. An
Indian who resides voluntarily in a country hostile to India is also considered as
an alien enemy. Contracts made before war may be either suspended or dissolved
depending whether their performance would benefit the enemy or not.
2. A special privilege is granted to the foreign sovereigns, their diplomatic staff and
accredited representatives of foreign states. Such persons can enter into contracts
and enforce their performance in Indian courts. However, they cannot be sued
unless these persons voluntarily submit to the Indian Law. An Indian citizen
needs to obtain the permission of the Central Government to sue such a person.
3. A contract entered into by a company beyond its authority, as prescribed in its
Memorandum of Association and the relevant provisions in the Companies Act,
is declared as void. A company formed under the Companies Act, 1956 has a
limited contractual capacity and any Act in excess of its powers whether
expressly conferred on it or derived by reasonable implication from its objects
clause in the Memorandum, is ultra vires the company and is void.
4. Any contract with a person adjudged insolvent is not valid. It is the official
receiver or official assignee of the insolvent who can enter into contracts relating
to his property and sue and be sued on his behalf.
5. A convict is incapable of entering into a contract while undergoing
imprisonment. The incapacity to contract, or to sue on a contract, comes to an
end when the sentence expires. Also, the convict does not suffer from the rigors
of the Law of Limitation as the period of the sentence is not included in the
lapsed time frame.

4. Free Consent
The fourth essential element of a valid contract is free consent. Consent is said to be free
when it is not caused by any of the following:
a. Coercion (Section 15)
Coercion is the committing or threatening to commit any act forbidden by the Indian
Penal Code, or unlawful detaining or threatening to detain, any property to the prejudice
of any person whatever with the intention of causing any person to enter into an
agreement. Unlawful detaining or threatening to detain any property is also an instance
of coercion. Threatening at gun-point, threatening to commit suicide and refusing to
hand over the account books of a business to an agent are some of the instances which
amount to coercion. The party whose consent is obtained by coercion has the right to
avoid performance of the contract. In Ranganayakamma vs. Alwar Setti the question
before the court was regarding the validity of the adoption of a boy by a widow aged 13
years. In the given case, the husbands dead body was not allowed to be removed for
cremation until the widow adopted the boy. It was held that the adoption was brought
about by coercion and was not binding.
b. Undue Influence (Section 16)
Undue influence is defined as follows: A contract is said to be induced by undue
influence where the relations subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other and uses that position to obtain
an unfair advantage over the other. It is to be noted that the emphasis is on the ability to
dominate the will of another. Such ability is said to be existing in cases, where a person:
1. Holds a real or apparent authority over the other. For example, income tax
authority and assessee, police and accused;
2. Stands in a fiduciary relation (relation of trust and confidence). Fiduciary
relationship implies a relationship of confidence and trust. Examples of fiduciary
relationship are solicitor and client, spiritual adviser and devotee, husband and
wife.
3. Makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness or mental or bodily distress. The
unconscientious use by one person of power possessed by him over another in
order to induce the other party to enter into a contract is referred as moral
coercion and is considered as a form of undue influence. In Lakshmi Amma vs.
Telengala, the executant who was aged and suffering from diabetes made a deed
of settlement of the entire property in favor of one of his grandsons to the
exclusion of his wife, his children and other grand children. The person in
whose favor the deed was made was unable to prove that the executant had
executed the deed without any external pressure while he was not of infirm mind
and was fully aware of the dispositions. The court held the settlement deed to be
invalid.

The following relationships raise the assumptions of undue influence:
Parent and child,
Guardian and ward,
Trustee and beneficiary,
Religious advisers and disciple,
Doctor and patient,
Solicitor and client, and
Fiance and fiancee.

c. Misrepresentation (Section 18)
Misrepresentation is the innocent or unconscious presentation of wrong facts by one
party which are taken into account by other party before entering into a contract. The
person making such a misrepresentation honestly believes that such statement is true.
Section 18 defines misrepresentation to be existing.
1. When a person positively asserts that a fact is true when his information does not
warrant it to be so, though he believes it to be so.
2. When there is any breach of duty by a person which brings an advantage to the
person committing it by misleading another to his prejudice.
3. When a party causes, however innocently, the other party to the agreement to
make a mistake as to the substance of the thing which is the subject of the
agreement.

d. Fraud (Section 17)
Fraud means and includes any of the following acts committed by a party to a contract,
or with his connivance (intentional active or passive acquiescence) or by his agent with
intent to deceive or to induce a person to enter into a contract.
The essential ingredients of fraud as contemplated by subsection (1) are as under:
1. There must be a False Representation of a Material Fact.
2. The Representation should be made with Knowledge of its Falsity.
3. The Other Party should have been induced to Enter into the Contract based on
the False Representation.
4. The Other Party should have relied upon the False Representation and should
have been deceived.

Summary:-

In order to convert an offer into a promise, acceptance should be absolute and
unqualified. It is also essential that the acceptance is given in some usual and reasonable
manner. If the offer prescribes the manner in which the acceptance is to be given, then the
acceptor should adhere to the prescribed mode.

A minor is a person under the age of eighteen years, except when a guardian of a minors
person or property has been appointed by the court, in which case it is twenty-one. The
purpose of declaring minors as incompetent to enter into a contract is to protect minors
against their own inexperience. However, law tries not to cause unnecessary hardships to
persons who deal with minors..

Questions:-

1. How will you describe acceptance? Discuss the conditions for acceptance.

Unit 8 : Lawful Consideration
Objective:-
In this lecture the students will learn what is lawful consideration, contingent contract
with associated sections.

Introduction:-
Consideration is an important element of a contract. In day to day life, quite often
promises are made without giving them a thought. In order to make an agreement
enforceable, law requires such agreements barring a few exceptions, to be backed by
consideration. Section 31 of the Act provides for such contracts and defines it as a
contract to do or not to do something, if some event, collateral to such contract, does or
does not happen. In Muthu vs. Secretary of State, a person was the highest bidder for a
house which was put up for sale.

Lawful Consideration

Consideration is an important element of a contract. In day to day life, quite often
promises are made without giving them a thought. In order to make an agreement
enforceable, law requires such agreements barring a few exceptions, to be backed by
consideration.

Consideration may be of following kinds:
i.Executory or future consideration, in return of a promise which is to be fulfilled
in future.
ii.Executed or present in which it is an act or forbearance made or suffered for a
promise. For example, in a cash sale, consideration is present or executed.
iii.Past consideration is the one which pays for a past act or forbearance. An act
constituting consideration which took place and is complete before the promise
is made.

As per Section 23, there has to be a lawful consideration for a legal object in every
contract. Hence, the following aspects should not exist in case of consideration and object
for the contract to be declared as legal and binding.
1. It should not be Forbidden by Law:
2. Performance should not Defeat the Provisions of any Law
3. It should not be Fraudulent
4. It should not be Considered Immoral

6. LEGAL OBJECT. The sixth essential element of a valid contract is legal object. By
object it is to mean the purpose of the contract. Contracts with unlawful objects are
void.

7. CERTAINTY AND POSSIBILITY OF PERFORMANCE: The agreements in
which the meaning is not certain, or is not capable of being made certain, are void. The
uncertainty may exist because of quality, quantity, price or title of the subject matter.
The terms of contract should be certain. In Keshavlal Lallubhai Patel vs. Lalbhai
Trikumlal Mills Limited, the workers of the respondent Mill went on a strike expressing
their support to the Quit India Movement. As a result, the respondent mill was closed
and could not supply the textile goods to the appellants as agreed. In a letter seeking
extension of time the respondent mill cited the reason for the failure to supply goods
and stated that the delivery time of the goods stands extended until the normal state of
affairs is restored.
In Guthing vs. Lynn, the buyer of a horse agreed to pay 5 pounds extra, if the horse
proved to be lucky. The agreement was held to be void for uncertainty. The definition
of void agreements includes the wager agreements. Section 30 defines wager as an
agreement between the parties by which one promises to pay money or moneys worth
on the happening of some uncertain event in consideration of the other parties promise
to pay if the event does not happen.

Restitution

When a contract becomes void, any benefit derived out of the contract by one party is
required to be restored to the other. It is significant to note that the law of restitution
covers only benefits received and not losses incurred. The principle of restitution is that
the defendant who has been unjustly enriched at the expense of the plaintiff is required
to make restitution to the plaintiff. There cannot be restitution where the parties are
wholly incompetent to contract (where one of the parties is minor). Section 65 which
deals with restitution applies to contracts discovered to be void and contracts which
become void. A person who has received a benefit under any such contract will have to
restore the benefit to the person from whom it was received. In Dharamsey vs.
Ahmedbhai, a person hired a godown for a period of 12 months by paying an advance
for the entire period. When a fire broke out in the godown he was entitled to claim a
proportionate amount of rent paid in advance.

Contingent Contracts

Section 31 of the Act provides for such contracts and defines it as a contract to do or not
to do something, if some event, collateral to such contract, does or does not happen. In
Muthu vs. Secretary of State, a person was the highest bidder for a house which was put
up for sale. However, one of the conditions was that the sale could be confirmed only if
the Collector authorizes it. The Collector declined to confirm the sale. It was held that
there was no contract.

The event on which the happening of the contract is dependent should be uncertain.
Further, the event should be collateral to the contract. The event should not form part of
the consideration of the contract though the contract is made to depend upon it. Contracts
of indemnity and insurance are examples of contingent contracts.

Summary:-

As per Section 23, there has to be a lawful consideration for a legal object in every
contract. Hence, the following aspects should not exist in case of consideration and object
for the contract to be declared as legal and binding.
covers only benefits received and not losses incurred.

Questions:-

1. Write a short note on legal consideration.

Unit - 9 : Discharge of Contract
Objective:-
The objective of this lecture is to study who are the persons required to perform
contracts and discharge of contracts.

Introduction:-
Where personal considerations do not form the basis of a contract, then the contract
may be performed by the promisor or his agent or legal representatives of the promisor
in the event of his death. A contract, which does not specify the time for performance
should be performed within a reasonable time. Any contract cannot be extended
indefinitely. The Limitation Act, 1963 provides for a certain time frame within which
the contract has to be performed (called period of limitation). If no action is taken by
the contracting parties within the period of limitation, no remedy at law will be
available. It provides for a definite time frame within which, the deprived party may
seek remedy at law.

Persons Who are Required to Perform Contracts
Where personal considerations form the basis of a contract, the promisor alone should
perform the contract. Where personal considerations do not form the basis of a contract,
then the contract may be performed by the promisor or his agent or legal representatives
of the promisor in the event of his death.

Time and Place of Performance
A contract, which does not specify the time for performance should be performed
within a reasonable time.

When a promise is to be performed on a certain day, and the promisor has undertaken to
perform it, without application by the promisee, the promisor may perform it at any
time during the usual hours of business on such day and at the place at which the
promise ought to be performed.

When a promise is to be performed on a certain day, and the promisor has not
undertaken to perform it, without application by the promisee, it is the duty of the
promisee to apply for performance at a proper place and within the usual hours of
business.

A contract should be performed in the manner and at the time prescribed in the contract.

Devolution of Joint Rights and Liabilities

Where a joint promise is made, the promisee may compel any one of the joint promisors
to perform the whole of the promise. The joint promisor, who performs the contract
may claim contribution from the other joint promisors. Where any of the joint
promisors defaults in making his contribution, then the other joint promisors will have
to bear even the defaulted amount equally.

Appropriation of Payments
Where several debts are owed and where payment made is insufficient to discharge the
debt, the debtor may intimate the creditor as to the nature of appropriation. In such a case,
the creditor should follow the directions issued by the debtor.
Assignment of Contracts
Assignment of a contract means the transfer of rights and liabilities arising out of the
contract in favor of a third person either with or without the concurrence of other party
to a contract.
An assignment may take place either by the act of the parties or by operation of law.

Discharge Of Contract
We now come to the last stage of contracts. A contract is said to be discharged when the
rights and liabilities created by such contract come to an end. Contracts may be
discharged or terminated by:
1. Performance of the contract, or
2. By mutual consent, or
3. By lapse of time (by limitation), or
4. By operation of law, or
5. Impossibility of performance, or
6. By breach of contract.
Each of the various modes of discharge of contract are explained below:
1. Performance of Contract: The most obvious and meaningful way to discharge a
contract is to fulfill the terms and conditions agreed by each of the parties in the
contract. Section 38 provides for tender of performance. As per this section if the
promisor offers to perform his side of the contract, but the promisee does not accept his
performance the promisor is discharged from his liability. This is known as attempted
performance. The promisor may sue the promisee for the breach of contract, if he so
desires.

2. Discharge by Mutual Agreement or Consent: The contract may be terminated
by mutual consent of both the contracting parties. Various cases of discharge by mutual
agreement are specified in Section 62 and Section 63. Section 62 provides about the
effect of novation as to where a new contract is substituted for an existing contract by
mutual agreement of both the parties, the new contract is basically agreed upon to
adjust the remedial rights arising out of the breach of the old contract.

3. Discharge by Lapse of Time: Any contract cannot be extended indefinitely.
The Limitation Act, 1963 provides for a certain time frame within which the contract
has to be performed (called period of limitation). If no action is taken by the
contracting parties within the period of limitation, no remedy at law will be available. It
provides for a definite time frame within which, the deprived party may seek remedy at
law.

4. Discharge by Operation of Law: A contract may be discharged by the
operation of law in any of the following ways:
i. By Merger: When the parties agree to include the previous inferior contract in
a superior contract.
ii. Law does not permit any unauthorized alteration of the terms of a written
agreement. Any such act by any one of the parties will automatically make the
contract as discharged by operation of law.
iii. By Insolvency: When a person is adjudged insolvent, he is discharged from all
liabilities incurred prior to his adjudication.
iv. Death: Where a contract is entered into, based on personal consideration and
where it is required that performance of the contract should be made by the
promisor in person, the contract will be discharged on the death of the
promisor.

5. Discharge by Impossibility of Performance: A contract which is clearly
impossible to perform is discharged. A contract which has its subject as an act, which is
impracticable to perform by either of the parties is assumed to be impossible to perform
and hence the contract is discharged. Section 56 states that a contract which is made
impossible to perform due to subsequent changes is taken as void and hence discharged.
This is known as, supervening impossibility or supervening illegality.

6. Discharge by Breach of Contract: Breach of contract is often referred as the
easiest way of discharging a contract. When either of the parties does not fulfill the
duties and liabilities prescribed by the contract, the contract is said to be breached.
There are two types of breach of contract:

i. Actual breach of contract. Actual Breach of contract may take place in two
instances:

a. When the performance is actually due
b. During the actual performance of the contract.

ii. Anticipatory breach of contract. Anticipatory breach of contract is stated to
have occurred if a breach has been committed before the time for performance.
When a party explicitly denies or abstains from performing the contract or does
some definite act, which makes the performance impossible, then such a breach is
an anticipatory breach of contract.

Remedies for Breach of Contract
The following alternatives are available for the injured party in case of a breach of
contract.
a) Rescission: The injured party can rescind the contract and refuse the performance of
contract.
b) Restitution: As per Section 65, when a party treats the contract as rescinded, he
makes himself liable to restore any benefits that he has received, under the contract to
the party from whom such benefits were received. The court may refuse to rescind the
contract where the plaintiff has expressly or impliedly ratified the contract or where
only a part of the contract is sought and such part is not severable from the rest of the
contract. Section 75 provides relief to the person who sustains damages through non-
fulfillment of the contract by entitling him to claim compensation for the same.
c) Claim Damages: Section 73 deals with the compensation for loss or damage caused
by breach of contract. The foundation of the claim for damages rests in the celebrated
case of Hadley vs. Baxendale (1854). The facts of the case are: A delivered a defective
shaft in his mill to B, a manufacturer, for making a new shaft-identical to the one that
is sent. A did not make known to B that delay would result in loss of profits. B by
his neglect delayed the delivery of the shaft beyond a reasonable time. As a result the
mill was idle for a longer period than it would otherwise have been, had there been no
such delay. It was held, B was not liable for the loss of profits during the period of
delay as the circumstances communicated to A did not show that the delay in the
delivery of the shaft would entail loss of profits to the mill. Damages cannot be awarded
if the injured party did not take any reasonable steps for the loss to be avoided. Section
74 allows for agreement of a sum to be paid as damages in case of breach of such
contract. If the contract contains any stipulation by way of a penalty for failure to
perform the obligations, the aggrieved party is entitled to receive from the party who
has broken the contract. The damages are classified into four categories:
i. General or Ordinary Damages: These are damages which naturally arise in the usual
course of things from such breach.
General Damages are usually assessed based on the actual loss suffered. The main aim
of providing general damages is to compensate the aggrieved party and not to punish the
party which is at fault.
ii Special Damages: These are awarded from a breach of contract under some peculiar
circumstances. At the time of entering into the contract the party has notice of special
circumstances, which makes special loss, the likely result of the breach in the ordinary
course of things. These are the damages which are claimed in addition to the damages
arising from the breach of contract.
In Simpson vs. London and N W Rail Co, Simpson entrusted a few specimens of his
goods to an agent of a railway company in order that the same be delivered at New
Castle where an agricultural show was to be held. The consignment note clearly
specified that the delivery was to be made in time. Because of default by the railway
company, the samples arrived late for the show. It was held that Simpson could claim
damages for loss of profits.
iii Vindictive or Exemplary Damages: These are discouraged by court of law.
However, in case of breach of a promise to marry and dishonor of cheque by banker
wrongfully when he possesses sufficient funds to the credit of the customer, exemplary
damages are awarded.
iv Nominal Damages: These are awarded merely to acknowledge that the plaintiff has
proved his case. Nominal damages are not awarded to compensate for the damages.
Summary:-

Where a joint promise is made, the promisee may compel any one of the joint promisors
to perform the whole of the promise. The joint promisor, who performs the contract
may claim contribution from the other joint promisors. Where any of the joint
promisors defaults in making his contribution, then the other joint promisors will have
to bear even the defaulted amount equally.
Assignment of a contract means the transfer of rights and liabilities arising out of the
contract in favor of a third person either with or without the concurrence of other party
to a contract. In Rescission the injured party can rescind the contract and refuse the
performance of contract.
Questions:-

1. What do you understand by discharge of contract? What are the various modes of
discharge of contract?

Unit 10 : Quasi-Contracts
Objectives:-
The objective of this lecture is to through the light on the concept of Quasi Contract, and
different types of it as per The Indian Contract Act. In this lecture we will also discuss
contract of indemnity.
Introduction:-
Such type of contract where there is no element of contract but still it is considered as
contract is referred as quasi-contract. Its types are, Payment by an interested person on
behalf of the actual party in pursuance of his own interests is required to be reimbursed
by the other party. According to Section 124, a contract by which, one party promises to
save the other from loss caused to him by the conduct of the promisor himself or by the
conduct of any other person, is called a contract of indemnity.

Quasi-contracts
Such type of contract where there is no element of contract but still it is considered as
contract is referred as quasi-contract. Quasi-contracts rest on the equitable principle that
a person shall not be allowed to enrich himself unjustly at the expense of another.
The Indian Contract Act provides for the following types of quasi-contracts:
a. Necessaries supplied to a person incapable of contracting or to anyone who is legally
bound to support. The persons who are incapable to contract may be minors and
persons of unsound mind.
b. Payment by an interested person on behalf of the actual party in pursuance of his
own interests is required to be reimbursed by the other party.
c. If any person lawfully does anything for another person without any intention to do it
gratuitously, such other person, has to reimburse the amount as per Section 70,
though there is no formal contract for such an act. This section does not apply to
persons who have no a capacity to contract.

Case: In Damodar Mudaliar vs. Secretary of State for India, the Government undertook
the repairs of an irrigation tank which was owned jointly by the Government and a
Zamindar. Later, the Government sued the zamindar for his share of the repairs. It was
held that the Government had carried out repairs not intending to do so gratuitously and
hence the zamindar was liable to pay compensation.

Contracts of Indemnity

According to Section 124, a contract by which, one party promises to save the other
from loss caused to him by the conduct of the promisor himself or by the conduct of any
other person, is called a contract of indemnity. The person who promises or makes
good the loss is called the indemnifier (promisor) and the person whose loss is to be
made good is called the indemnified or indemnity holder (promisee).

A contract of insurance is an example of a contract of indemnity according to English
Law. In consideration of a premium the insurer promises to make good the loss suffered
by the assured on account of the destruction by fire of his property insured against fire.
However, a contract of life insurance does not come under the category of a contract of
indemnity. This is because, in the case of life insurance, the insurer agrees to pay a
certain sum of money either on the death of a person or on the expiry of a stipulated
period of time. The question of having suffered a loss does not arise. Moreover, as the
life of a person cannot be valued, the whole of the sum assured becomes payable and
for that reason also it is not a contract of indemnity.
The contract of indemnity in a real sense is a contingent contract. It must have all
essentials of valid contract. It can be expressed or implied. It is relevant to discuss
following cases in this regard:

The case of Goulston Discount Co. Ltd. vs Clark (1967), is an explicit example
of express contract of indemnity.
A and B go into a shop. B says to the shopkeeper let him (A) have the
goods, I will see you paid. The contract is one of indemnity.

The case of Adamson vs Jarvis (1927) explains an implied contract of
indemnity.

A on the instruction of T, sold certain cattle belonging to O. O held A
liable for it and recovered damages from him for selling it. It was held that A
could recover the loss from T, as a promise by T to A from any such loss
would be implied from his conduct in asking A to sell the cattle.

The definition given in Sections 124 and is 125 of the Contract Act are not
exhaustive of the law of indemnity as it does not include implied promises to
indemnify and cases where loss arises from accidents and events that are not
depending on the conduct of the promisor or any other person.
Certain rights have been granted to the indemnity holder under Section 125.

Rights of Indemnity Holder When Sued

The promisee in a contract of indemnity, acting within the scope of his authority, is
entitled to recover from the promisor:
a) all damages within the scope of the terms of the indemnity;
b) all costs which he may be compelled to pay in any such suit if, in bringing or
defending it, he did not contravene the orders of the promisor, and acted as it
would have been prudent for him to act in the absence of any contract of
indemnity, or if the indemnifier authorized him to bring or defend the suit; and
c) all sums to be paid under the terms of any compromise of any such suit,
provided the compromise is not contrary to the orders of the indemnifier, and
should be authorized by him.

Though the Indian Contract Act does not grant specific rights to the indemnifier, we can
however, as in English Law, draw the rights of the indemnifier to be the same as those of
the surety which are detailed in the foregoing parts.

The Indian Contract Act does not specify the time of commencement of the indemnifiers
liability. Different courts have been following different rules with regard to this. Some
courts contend that the indemnifiers liability will begin only when the indemnity holder
actually suffers a loss. On the other hand, some have held that an indemnity holder may
compel an indemnifier to fulfill his promise even before actually incurring the loss. Buckley
L J in Richardson, ex parte etc. made the following observation Indemnity is not given by
repayment after payment. Indemnity requires that the party to be indemnified shall never
be called upon to pay.

Contracts of Guarantee

Section 126 deals with contract of guarantee. According to this Section contract of
guarantee is a contract to perform the promise, or discharge the liability of a third
person in case of his default. The person who gives the guarantee is called the surety,
the person in respect of whose default the guarantee is given is called the principal
debtor, and the person to whom the guarantee is given is called the creditor. A
guarantee may be either oral or written.
The purpose of a contract of guarantee is to provide additional security to the creditor in
the event of default by the principal debtor. In a contract of guarantee, there are three
parties, i.e., the creditor, the debtor and the surety. Also, there are three contracts in a
contract of guarantee (i.e., between the creditor and the debtor, between the creditor and
the surety and between the debtor and the surety).
It should also be noted that a contract of guarantee presupposes the existence of a debt.
If there is no existing liability, there cannot be a guarantee. Therefore, if the debt to be
guaranteed is already time barred, guarantee given will not be valid and the surety will
be discharged from his liability.

Summary:-

The Indian Contract Act provides for the following types of quasi-contracts:
a. Necessaries supplied to a person incapable of contracting or to anyone who is legally
bound to support. The persons who are incapable to contract may be minors and persons
of unsound mind.
b. Payment by an interested person on behalf of the actual party in pursuance of his own
interests is required to be reimbursed by the other party.

Questions:-
1. Write short note on Contract of Guarantee and Quasi contracts.

Unit - 11 : Kinds of Guarantee
Objectives:-
The objective of this lecture is to study the kinds of guarantee, consideration of
guarantee, suretys liability & limitation of suretys liability..

Introduction:-
A guarantee may be given retrospectively for an existing debt, or for future debt, or for
the good conduct or honesty of an employee, in which case the guarantee is called a
fidelity guarantee. Anything done, or any promise made, for the benefit of the principal
debtor, may be a sufficient consideration to the surety for giving the guarantee.
According to Section 128, the liability of the surety is co-extensive with that of the
principle debtor, unless otherwise provided by the contract.

The liability of the surety is normally to the same extent as that of the principal debtor.
The surety cannot however, be made liable beyond what he had earlier contracted to. The
surety may however, limit his liability to a part of the entire debt. The extent of liability
of a surety assumes importance when the principal debtor is declared insolvent.

Kinds of Guarantee

fidelity guarantee.
A guarantee may also be specific or continuing guarantee. A specific guarantee is one
which is given for a specific debt, and comes to an end when the debt is paid. A
continuing guarantee relates to a series of transactions where the surety remains liable
for a fixed sum till the continuance of guarantee. However, a continuing guarantee can
be revoked by the surety by giving due notice to the creditor. This can be explained by
referring to the case Wingfield vs de St Croix. In this case, the creditor (C) let out his
cottage to the principal debtor (P) on the condition that rent would be paid initially for
three months and thereafter from week to week. S, who was the surety guaranteed the
payment of rentals by P to C. After four months, the surety revoked his guarantee by
giving notice to the creditor. It was held that the surety was not liable for the rentals
which became due after revocation of the guarantee. The death of a surety also results in
revocation of continuing guarantee as far as future transactions are concerned.
A continuing guarantee may also be revoked by any of the modes:
a. novation;
b. variance in the terms of the contract;
c. discharge of the principal debtor;
d. compounding with the principal debtor;
e. creditors act or omission impairing suretys eventual remedy; and
f. loss of security.

The following illustration discusses the case of continuing guarantee: A, in
consideration that B will employ C in collecting the rents of Bs zamindari,
promises B to be responsible, to the amount of Rs.5,000 for the due collection and
payment by C of those rents. This is a continuing guarantee.

Just like other contracts, a contract of guarantee should also be supported by
consideration. Inadequacy of consideration is not a criterion to judge the validity of a
contract of guarantee. The only requirement is that there should be some consideration.
Further, it is not necessary that consideration should have passed between the creditor
and the surety. It is sufficient that the creditor has done something for the benefit of the
debtor. Past consideration will not be treated as good consideration for a contract of
guarantee.

Consideration of Guarantee

Anything done, or any promise made, for the benefit of the principal debtor, may be a
sufficient consideration to the surety for giving the guarantee.
It is relevant to discuss following illustrations in this regard: B requests A to sell and
deliver to him goods on credit. A agrees to do so, provided C will guarantee the
payment of the price of the goods. C promises to guarantee the payment in consideration
of As promise to deliver the goods. This is a sufficient consideration of Cs promise.
A sells and delivers goods to B. C afterwards, without consideration agrees to pay
for them in default of B. The agreement is void.
In a contract of guarantee it is not necessary that all the material facts be disclosed
unless it is in nature of an insurance. In other words a contract of guarantee is not a
contract of Uberrimae Fidei.
The following case aptly describes this. London General Omnibus Co. vs. Holloway
(1912) C engaged P as a clerk to collect money for him. P misappropriated some of Cs
receipts and failed to account for them. This sum was made good by Ps relations and C
agreed to retain P in his service on having a fidelity guarantee. S gave his guarantee for
Ps duly accounting. C did not acquaint S with Ps previous dishonesty. Held, the
guarantee could not be enforced against S owing to the non-disclosure of Ps previous
dishonesty.

Suretys Liability

According to Section 128, the liability of the surety is co-extensive with that of the
principle debtor, unless otherwise provided by the contract.

The liability of the surety is normally to the same extent as that of the principal debtor.
The surety cannot however, be made liable beyond what he had earlier contracted to. The
surety may however, limit his liability to a part of the entire debt. The extent of liability
of a surety assumes importance when the principal debtor is declared insolvent.
A reduction in the liability of the principal debtor (for example, after the creditor has
recovered a part of the sum due from him out of his property) will result in a
proportionate scaling down of the suretys liability. In Narayan Singh vs Chattarsingh,
it was held that if the principal debtors liability is either reduced or extinguished in
part/whole, the suretys liability will also be proportionately reduced or extinguished in
part/whole. In the given case, the debt owed by an agriculturist was reduced by virtue
of a statute. The suretys liability was also reduced proportionately as it was held that if
the surety is made liable to pay the entire amount, he would recover the same from the
principal debtor which would in turn negate the benefit conferred upon the agriculturist.
It should, however, be noted that any illegality attached to the principal debtors
liability will in turn affect the liability of the surety. Hence, where the principal debtors
liability becomes unenforceable because of illegality, the surety cannot be made liable
on the said debt.
If the principal debtor defaults in making payment it is up to the creditor to proceed
against either the principal debtor or the surety or both of them. Unless otherwise
provided by the contract, the creditor can sue the surety without exhausting all his
remedies against the principal debtor. In Bank of Bihar vs Damodar Prasad, the
plaintiff bank advanced a loan to Damodar Prasad which was guaranteed by Paras Nath
Sinha. In spite of repeated demands, both the principal debtor and the surety failed to
make repayment. The plaintiff then, filed a suit against both the debtor and the surety. A
decree was passed in favor of the bank with the condition that the bank could proceed
against the surety only after exhausting all its remedies against the principal debtor. On
an appeal made by the bank, the Supreme Court, set aside the decree and allowed the
bank to enforce its claim against the surety immediately, without first exhausting its
remedies against the principal debtor.
It may be stated here that, the liability of a surety is an independent contract by itself.
Therefore, in case the contract between the creditor and principal becomes void or
voidable, the surety is however not discharged of his liability. Unless it has been
specifically provided in the contract that the suretys liability arises only when the
principal debtor is made liable, the surety continues to be liable in the given instances:
death of the principal debtor;
discharge of the principal debtors liability by operation of law;
creditors failure to sue the principal debtor within the period of limitation, and
release of one of the co-sureties by the creditor.

Limitation of Suretys Liability

Sometimes a surety may limit his liability by providing guarantee only for a part of the
entire debt or may provide guarantee for the entire debt subject to a limit. The
difference between the two may be explained with the help of an example. Arun owes
Prem Rs.8,000 on a continuing guarantee given by Srinath. Srinath may have given this
guarantee in either of the following ways:
a. I guarantee the payment of the debt of Rs.5,000 by Arun to Prem; and
b. I guarantee the payment of any amount lent by Prem to Arun subject to a limit
of Rs.5,000.
In the first instance, the guarantee given is restricted to a part of the debt whereas in the
second instance the guarantee given is for the entire debt subject to a limit. As earlier
discussed the distinction becomes important in case the debtor is declared insolvent. In
the given example assume that Arun is declared insolvent and his estate pays a dividend
of 25 paise in a rupee.
This will result in the following consequences:-
a. where guarantee is given for a part of the debt. Here, Prem will be able to
recover Rs.5,000 from Srinath (surety) and Rs.750 (1/4th of the balance of
Rs.3,000) from Aruns estate. After making the payment, Srinath (surety) steps
in the shoes of the creditor and can recover Rs.1,250 (i.e., 1/4th of Rs.5,000)
from Aruns estate.
b. where guarantee is given for the entire debt subject to a limit, Prem will succeed
in recovering Rs.5,000 from Srinath (i.e., the guaranteed amount) and Rs.2,000
(1/4th of the entire debt of Rs.8,000) from Aruns estate. Srinath will not get any
dividend from Aruns estate till the full amount of Rs.8,000 is paid to Prem.

Summary:-

fidelity guarantee.

The following illustration discusses the case of continuing guarantee: A, in
consideration that B will employ C in collecting the rents of Bs zamindari,
promises B to be responsible, to the amount of Rs.5,000 for the due collection and
payment by C of those rents. This is a continuing guarantee. The liability of the surety
is normally to the same extent as that of the principal debtor. The surety cannot
however, be made liable beyond what he had earlier contracted to. The surety may
however, limit his liability to a part of the entire debt. The extent of liability of a surety
assumes importance when the principal debtor is declared insolvent.

Questions:-

1. Discuss the kinds of guarantee?

Unit 12 : Rights of The Surety
Objective:-
In this lecture we will discuss rights of the surety, discharge of suretys liabilities,
Bailment & Pledge to understand these concepts well.
Introduction:-
Section 141 provides that a surety is entitled to all the securities of the principal debtor
in the possession of the creditor at the time when the contract of surety is entered into.
This right can be exercised by the surety irrespective of whether he is aware of the
existence of the security or not. Discharge of suretys liability by Revocation in which
continuing guarantee can be revoked by the surety any time by giving notice to the
creditor. A notice given, discharges the liability of the surety with respect to all future
transactions. However, the surety will remain liable for those transactions prior to the
revocation.

Rights of the Surety

a. Right against the Creditor:
The surety can exercise the following two rights against the creditor:
a. Section 141 provides that a surety is entitled to all the securities of the principal
debtor in the possession of the creditor at the time when the contract of surety is
entered into. This right can be exercised by the surety irrespective of whether he
is aware of the existence of the security or not.
b. Secondly, in case the creditor loses or parts with the security without the consent
of the surety, then the surety is discharged to the extent of the value of the
security.
b. Rights against the Principal Debtor
According to Section 140 of the Contract Act, soon after discharging the liability of the
principal debtor, the surety steps into the shoes of the creditor and can exercise all the
rights which the creditor himself would have exercised against the principal debtor.
This right of the surety is called the right of subrogation.
c. Right to Indemnity
According to Section 145, in every contract of guarantee there is an implied promise by
the principal debtor to indemnify the surety, and the surety is entitled to recover from
the principal debtor whatever sum he has rightfully paid under the guarantee, but no
sums which he has paid wrongfully. Thus a surety is entitled to full indemnification
(i.e., he can recover not only the amount paid to the creditor but also any interest
thereon).

However, Section 145 lays down certain restrictions as to what the surety can claim.
a. A surety can claim only that amount which he has actually paid to the creditor.
b. He cannot claim amounts paid by him negligently or wrongfully.

d. Suretys Right to Sue
i. A suit can be filed to declare that the debtor shall be the person liable to pay
debt before the payment of principal debt and on the payment of the principal debt
the surety will be placed in the position of the creditor.

ii. Rights of surety on payment or performance: Where a guaranteed debt has
become due, or default of the principal debtor to perform a guaranteed duty has
taken place, the surety, upon payment or performance of all that he is liable for, is
invested with all the rights which the creditor had against the principal debtor
(Section 140). He is also entitled to recover from the principal debtor whatever sum
he has rightfully paid under the guarantee, but no sums which he has paid
wrongfully (Section 145).

The following illustration aptly discusses this: F is indebted to E and N is
surety for the debt. E demands payment from N and, on his refusal, sues him for
the amount. N defends the suit, having reasonable grounds for doing so, but is
compelled to pay the amount of the debt with costs. He can recover from F the
amount paid by him for costs, as well as the principal debt.

iii. Suretys rights against the co-sureties: When a surety has paid more than
his share of debt to the creditor, he has a right of contribution from the co-
sureties who are equally bound with him in absence of any agreement to the
contrary. If they are bound in different sums, they are liable to pay equally as far
as the limits of their respective obligations permit (Section 147). As between co-
sureties, there is equality of burden and benefit.

A, B and C are sureties for a debt due by D to E. A restricts his liability
to Rs.10,000, B to Rs.20,000 and C to Rs.40,000. D makes default to the
extent of Rs.30,000. In such an event, A, B and C will be liable to the extent
of Rs.10,000 each. The position varies in case D makes default to the extent of
Rs.40,000. A shall then be liable to pay Rs.10,000 and B and C Rs.15,000
each.

Discharge of Surety Liabilities

Surety is Discharged from Liability:

i. By Revocation:
A continuing guarantee can be revoked by the surety any time by giving notice to the
creditor. A notice given, discharges the liability of the surety with respect to all future
transactions. However, the surety will remain liable for those transactions prior to the
revocation.
ii. by Conduct of the Creditor:
Any variance made without the suretys consent, in the terms of the contract between
the principal debtor and the creditor, the surety is automatically discharged from
liability as the subsequent transaction is at variance.
The following illustration aptly discusses this: S guaranteed C against the
misconduct of P in an office to which P is appointed by C and of which the duties
are defined by an Act of the legislature. By a subsequent Act, the nature of the office is
materially altered. Afterwards, P misconducts himself in respect of a duty not
affected by the latter Act. S is discharged by the change from future liability under his
guarantee.
iii By Invalidation of Contract:
A guarantee obtained by means of either misrepresentation or concealment of material
fact which the creditor was aware of, at the time of entering into the contract,
invalidates the guarantee and discharges the surety.
Where there is no consideration between the creditor and the principal debtor, the
surety is discharged.
Where a person gives guarantee on the condition that the creditor shall not act upon it
until another person joins in as co-surety, the guarantee is not valid if that other person
does not join.

Bailment & Pledge

Bailment and Pledge are special types of contracts which are regulated by Sections 148
to 181 of the Indian Contract Act, 1872. The word bailment takes its roots from the
French word bailor which means to deliver.
According to Section 148, bailment is the delivery of goods by one person to another
for some purpose, upon a contract that they shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions of the person delivering
them. The person delivering the goods is called the bailor and the person to whom
they are delivered is called the bailee.
The following case and illustrations explain the concept of bailment clearly.
N R Srinivasa Iyer vs New India Assurance Co. Ltd. (1983)
An insurance company places a damaged insured car of A in possession of R, a
repairer. A is the bailor, the insurance company is the bailee, and R is the
sub-bailee. It is not necessary that a contract be entered for a bailor and bailee
relationship to be formed.
Essentials of a bailment can be summarized as under:
a. Firstly, there should be delivery of goods for some purpose. The delivery of
goods should not be accompanied by transfer of ownership.
b. Secondly, the goods should either be returned to the bailor after the purpose has
been accomplished or it should be disposed of according to the bailors
directions.
Classification of Bailment
Bailments may be for,
i. exclusive benefit of the bailor;
ii. exclusive benefit of the bailee;
iii. mutual benefit of the bailor and the bailee;
iv. gratuitous bailment; where there is no consideration between the parties; and
v. non-gratuitous bailment or bailment for reward.

Summary:-
According to Section 140 of the Contract Act, soon after discharging the liability of the
principal debtor, the surety steps into the shoes of the creditor and can exercise all the
rights which the creditor himself would have exercised against the principal debtor. This
right of the surety is called the right of subrogation.
French word bailor which means to deliver.
Questions:-
1. What are the rights of the Suretys?

Unit 13 : Duties of a Bailor
Objective:-
More emphasis in this chapter will be towards studying the duties and rights of a bailor
and bailee, rights of finder of goods.

Introduction:-
The bailor is bound to disclose, all the faults in the goods bailed to the bailee, of which
the bailor is aware, and that which materially interferes with the use of the goods, or
exposes the bailee to extraordinary risks. The bailor is entitled to file a suit for
enforcing all the liabilities or duties of the bailee.
The bailor can terminate the bailment if the bailee does, with regard to the goods bailed,
any act which is inconsistent with the terms of the bailment (Section 153). It is a duty of
a bailee not to make any unauthorized use of goods.

Duties and Rights of Bailor and Bailee
DUTIES OF A BAILOR
I. The bailor is bound to disclose, all the faults in the goods bailed to the bailee, of
which the bailor is aware, and that which materially interferes with the use of the
goods, or exposes the bailee to extraordinary risks. If he does not make such
disclosure, he is responsible for damage arising to the bailee directly from such
faults.
II. In a contract of bailment, the bailee will have to bear all the ordinary expenses
incurred, while the bailor will be responsible for any extraordinary expenses
incurred by virtue of the bailment. In case of a gratuitous bailment, it is the duty
of the bailor to bear the ordinary and reasonable expenses incurred by the
bailee.
III. The bailor is responsible to the bailee for any loss sustained by him in the
following instances:
Where the bailor is not entitled to make the bailment, or to receive back
the goods, or to give directions, regarding them.
Premature termination of a gratuitous bailment.
IV. It is the duty of bailor to receive back the goods after the purpose is achieved.

Rights of Bailor
i.The bailor is entitled to file a suit for enforcing all the liabilities or duties of the
bailee.
ii.The bailor can terminate the bailment if the bailee does, with regard to the goods
bailed, any act which is inconsistent with the terms of the bailment (Section
153).
iii.emand return of goods lent gratuitously.
iv.The bailor can sue a third party who by his act causes any injury or deprives the
bailee the possession and use of goods bailed.

DUTIES OF BAILEE

I. The bailee is duty bound to take reasonable care of the goods bailed, as he
would in similar circumstances take care of his own goods. According to
Section 151, the bailee should take such care of the goods as a man of ordinary
prudence would take of his own goods. If the bailee has not acted in a prudent
manner, he cannot be excused by pleading that he had taken similar care of his
own goods also, and his goods, have also been lost or damaged along with those
of the bailor, or that the bailor had the knowledge that his goods were being kept
in a negligent manner.
II. The bailee should not make any unauthorized use of goods.
III. The bailee should not mix the goods of the bailor with his own goods, but keep
them separate from his own goods.
Where the bailee mixes the bailors goods with those of his own with the bailors
consent, then the bailor and the bailee shall have an interest in the mixed goods in
proportion to their respective shares.

Where he mixes the goods without the consent of the bailor, two possibilities may
arise:
The goods can be separated.
The goods cannot be separated
Where the goods can be separated: Where the goods of the bailor and the bailee
can be separated, then they will remain the owners in accordance with their
respective shares. However, the costs of separation as well as any damage arising
from the mixture will have to be borne by the bailee.

When the goods cannot be separated: The bailor can recover damages from the
bailee for the loss of the goods.

If, by mistake on the part of the bailee or by accident or by an act of God or by the
act of an unauthorized third party, goods of the bailor get mixed up with like
goods of the bailee, then the mixture belongs to the bailor and bailee in proportion
to their shares but the cost of separation will have to be borne by the bailee.

IV. The bailee should not set up an adverse title of the goods bailed claiming them
to be his.
V. The bailee not only has to return the goods bailed but also any accretion to the
goods.

Rights of Bailee

The duties of the bailor are the rights of the bailee:
i. Delivery of goods to one of several joint bailors of goods.
ii. According to Section 165, in case of several joint owners of goods, the bailee
may deliver them back to or according to the directions of, one joint owner
without the consent of all, in the absence of any agreement to the contrary.
iii. Delivery of goods to bailor without title.
iv. According to Section 166, if the bailor has no title to the goods, and the bailee, in
good faith, delivers them back to, or according to the directions of, the bailor, the
bailee is not responsible to the owner in respect of such delivery.
v. Right to apply to court to stop delivery, where it is claimed by a person other
than the bailor.
vi. According to Section 167, if a person other than the bailor, claims the goods
bailed, the bailee may apply to the court to stop the delivery of the goods to the
bailor, and to decide the title to the goods.
vii. Right of action against trespassers.
viii. According to Section 180, if a third person wrongfully deprives the bailee of the
use or possession of the goods bailed to him, he has the right to bring an action
against that party. The bailor can also bring a suit in respect of the goods bailed.
In Purushottam Das Banarsi Das vs Union of India delivery of certain goods
were obtained by a person on a forged railway receipt. The said person later
pledged the goods with a third party. It was held that the railway authorities
could recover the same from the third party.
ix. The bailee is also entitled to recover necessary expenses incurred on bailment.
He can also recover compensation from the bailor in case he incurs a loss owing
to the defective title of the bailor.
x. Retain the goods (lien) till his dues are paid, in other words the bailee can
exercise a general lien. The bailee may also exercise a particular lien when the
contract requires him to use his skills.

Rights of Finder of Goods

When a person finds an article and takes it into his custody, he assumes the role of a
bailee. He then has the same responsibilities like any other bailee.

We shall now discuss the rights available to him:
i.According to Section 168, the finder of goods can exercise lien over the goods
till the owner reimburses the expenses incurred for the safe custody of the
goods.
ii.Where the owner has announced a reward for recovery of the lost article, the
finder has the right to retain the goods till he receives the award.
iii.The finder has a right to sell the article:
if the owner cannot be found provided the bailee has made reasonable
efforts;
if the owner refuses, upon demand, to pay the lawful charges of the
finder;
the article is of perishable nature or that, which loses most of its value
with passage of time; or
if the lawful charges of the finder in respect of the goods found, amount
to two thirds of their value.

Termination of Bailment

A contract of bailment is terminated:
on the expiry of the bailment period;
when the purpose of bailment is achieved;
when the subject matter gets destroyed;
inconsistent use of the goods; and

Summary:-

Rights of Bailor are that the bailor is entitled to file a suit for enforcing all the liabilities
or duties of the bailee, the bailor can terminate the bailment if the bailee does, with
regard to the goods bailed, any act which is inconsistent with the terms of the bailment
(Section 153). On the other hand Rights of Bailee are that the Delivery of goods to one
of several joint bailors of goods.
According to Section 165, in case of several joint owners of goods, the bailee may
deliver them back to or according to the directions of, one joint owner without the
consent of all, in the absence of any agreement to the contrary.

Questions:-

1. What do you mean by Bailer and Bailee? Discuss the rights and duties of bailer and
bailee.

Unit - 14 : Pledge
Objectives:-
Few important topics from this module would be studied in this lecture, these topics are
pledge, Rights and duties of pawnee, Rights and duties of pawnor, Contract of agency,
Agent, classification of agents, & duties of an agent.

Introduction:-
In a pledge, the pawnor deposits any type of movable property with the pawnee. In
other words, actual transfer of possession should take place. The pawnee has a right to
retain the goods not only for payment of the principal debt or for performance of a
promise but also for any expenses incurred or interest accrued thereon. The pawnor can
get back the goods pledged on his performance of promise or repayment of loan and
interest.
In a contract of agency, it is the agent who brings about a legal relationship between
two persons. It should be noted that an agent is not merely a connecting link between
the principal and a third person. The agent is also capable of binding the principal by
acts done within the scope of his authority.
An agent is employed to bring the principal into legal relations with third persons or to
represent him in dealings with third persons.

Pledge

According to Section 172, bailment of goods as security for payment of a debt or
performance of a promise is called pledge. The bailor is, in this case, called the
pledger or pawnor and the bailee is called the pledgee or pawnee.
In a pledge, the pawnor deposits any type of movable property with the pawnee. In
other words, actual transfer of possession should take place.
Essentials of a pledge may be summarized as under:
a. There should be a delivery of goods.
b. The purpose of delivery should be to make the goods bailed, serve as security
for the payment of a debt, or performance of a promise.

Rights And Duties Of Pawnee

i. The pawnee has a right to retain the goods not only for payment of the principal
debt or for performance of a promise but also for any expenses incurred or
interest accrued thereon.
ii. The pawnee can sue the pawnor to recover from him any extraordinary
expenses incurred by him for the preservation of the goods pledged.
iii. When the goods pledged have been obtained by the pawnor under a voidable
contract and where such contract has not been rescinded at the time of pledge,
the pawnee acquires a good title to the goods, provided he has acted in good
faith and has no knowledge of the defective title.
iv. When the pawnor defaults in payment of debt or fails to perform his part of the
promise, the pawnee can: (a) initiate a suit against the pawnor; (b) retain the
goods as a collateral security; (c) sell the goods pledged after giving the pawnor
a reasonable notice of sale, and (d) recover from the pawnor any deficit between
the debt due and sale price.

Rights and Duties of Pawnor
I. The pawnor can get back the goods pledged on his performance of promise or
repayment of loan and interest.
II. In case the pawnor makes default in payment, he can still pay the pledged
amount and redeem the goods pledged at any subsequent time. However, he can
exercise his right to redeem only before the pawnee has made an actual sale of
the goods. The right to redeem the pledged goods will be invalidated when the
pawnee sells the goods in exercise of his right under Section 176.
The right of redemption of goods also includes a right to any accretion to the
goods pledged. For e.g: if shares are pledged and during that period the company
issues bonus and right shares, then the pawnor will be entitled to the same on
redemption.
III. The pawnor can oversee whether the pawnee preserves and maintains the goods
properly.
IV. The pawnor has rights of an ordinary debtor which he has acquired by various
statutes for the protection of debtors.

Contract of Agency

According to Section 182 of the Contract Act, an agent is defined as a person employed
to do any act for another or to represent another in dealings with third persons. The
persons for whom such act is done, or who is so represented, is called the principal.
In a contract of agency, it is the agent who brings about a legal relationship between
two persons. It should be noted that an agent is not merely a connecting link between
the principal and a third person. The agent is also capable of binding the principal by
acts done within the scope of his authority.
An agent does not act on his own behalf but acts on behalf of his principal. He either
represents his principal in transactions with third parties or performs an act for the
principal. The question as to whether a particular person is an agent can be verified by
finding out if his acts bind the principal or not.

Essentials of Relationship of Agency

I. According to Section 183, any person who is of the age of majority and is of
sound mind may employ an agent.
II. According to Section 184 of the Act, between the principal and the third
persons, any person may become an agent. But no person who is a minor and of
unsound mind can become an agent.
III. According to Section 185 of the Act, no consideration is necessary to create an
agency.
IV. It is not essential that a contract of agency be entered into. It is sufficient if a
person acts on behalf of another and is accepted by the latter.

Rules of Agency
Agency revolves around two important rules:
I. Whatever a person can do personally, he can do through an agent with exception
to very few personal acts like marriage etc.
II. Qui Facit Per Alium, Facit Per se, in other words what is done with the help of
another is the act of the person himself.
AGENT
An agent is employed to bring the principal into legal relations with third
persons or to represent him in dealings with third persons.
An agent is bound to follow all the lawful instructions of the principal but he is
not subject to the direct control and supervision of the principal.
An agent may work for several principals at the same time.
A principal is liable for the acts of his agent done within the scope of his
authority.

Creation of Agency
i.Express agreement, i.e., an agreement is said to be express when it is given by
words spoken or written.
ii.Implied agreement, i.e., by inference from the circumstances of the case and
things spoken or written, or the ordinary course of dealing.

CLASSIFICATION OF AGENTS

1. Special Agent: A special agent is one who is appointed to perform a special act or to
represent his principal in some particular transaction.

The authority of such an agent is limited and comes to an end as soon as the act is
performed. He cannot bind the principal in any matter other than that for which he is
employed.

2. General Agent: A general agent is one who has authority to do all acts connected with
a particular trade, business or employment. The principal may limit the authority of such
an agent. Unless the principal puts an end to the authority, it shall be assumed to be
continuous.

3. Universal Agent: A universal agent is one whose authority to act for the principal is
unlimited. He has authority to bind his principal by any act which he does, provided the
act (i) is legal, (ii) is agreeable to the law of the land.

4. Mercantile Agents: Section 2(9) of the Sale of Goods Act, 1930, defines a mercantile
agent as a mercantile agent having in the customary course of business as such agent,
authority either to sell goods, or to consign goods for the purpose of sale or to buy goods,
or to raise money on the security of goods. This definition covers factors, brokers,
auctioneers, commission agents, Del credere agents and bankers.
Factor: A factor is a mercantile agent entrusted with the possession of goods
for the purpose of selling them. He has a ostensible authority to do such things
as are usual in the conduct of business. He has a general lien on the goods of his
principal for the general balance of account between him and the principal.
Auctioneer: An auctioneer is an agent appointed by a seller to sell his goods by
public auction for a reward generally in the form of a commission. He is
primarily the agent of the seller, but after the sale has taken place, he becomes
the agent of the purchaser also. He has the authority to receive the price of the
goods sold. He can also sue for the price in his own name.
Broker: A broker is an agent who is employed to buy or sell goods on behalf of
another. He is employed to bring about a contractual relation between the
principal and the third parties. He is not entrusted with the possession of the
goods in which he deals. He cannot act or sue in his own name. He has no right
of lien.
5. Commission Agent: A commission agent is employed to buy and sell goods, or
transact business generally for other persons receiving for his labor and trouble a
money payment, called commission.
6. Del credere Agent: A del credere agent is one who, in consideration of an extra
commission, guarantees his principal that the persons with whom he enters into
contract on behalf of the principal, shall perform their obligations.
7. Banker: The banker is the agent of his customer. The relationship between a banker
and his customer is really that of debtor and creditor.
8. Non-mercantile agents like insurance agents, advocates etc.

DUTIES OF AGENT

i. An agent is bound to conduct the business of his principal according to the
directions given by the principal, or in the absence of directions, according to
the custom which prevails in doing business of the same kind at the place where
the agent conducts such business. When the agent acts otherwise, if any loss is
sustained, he must make it good to his principal, and if any profit accrues, he
must account for it.
ii. An agent is bound to conduct the business of the agency with as much skill as is
generally possessed by persons engaged in similar business unless the principal
has notice of his want of skill. The agent is always bound to act with reasonable
diligence, and to use such skill as he possesses; and to make compensation to his
principal, in respect of the direct consequences of his own neglect, want of skill
or misconduct, but not in respect of loss or damage which are indirectly or
remotely caused by such neglect, want of skill or misconduct.
iii. An agent is bound to render proper accounts to his principal on demand.
iv. It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in
communicating with his principal and seeking to obtain his instructions (Section
214). If an agent deals on his own account in the business of the agency,
without first obtaining the consent of his principal and acquainting him with all
material circumstances which have come to his own knowledge on the subject,
the principal may repudiate the transaction, if the case shows, either that any
material fact has been dishonestly concealed from him by the agent, or that the
dealings of the agent have been disadvantageous to him. (Section 215).
v. If an agent, without the knowledge of his principal, deals in the business of the
agency on his own account instead of on account of his principal, the principal is
entitled to claim from the agent any benefit which may have resulted to him
from the transaction. (Section 216)
vi. An agent should not set up an adverse title to the goods which he receives from
the principal as an agent.
vii. An agent is duty bound to pay sums received to the principal on his account.
viii. An agent should protect and preserve the interests of the principal in case of
his death or insolvency.
ix. An agent must not use confidential information entrusted to him by his
principal for his own benefit or against the principal.
x. The agent must not make secret profit from the extract agency. He must disclose
any extra profit that he may make.
xi. The following case aptly discusses this: In Kimber vs. Barber (1875), An agent
sold his own stock to his principal without disclosing this fact, at the prevailing
market price. Held, he was bound to account for any profit he made in the
transaction.
xii. An agent must not allow his interest to conflict with his duty e.g. he must not
compete with his principal.
xiii. An agent must not delegate his authority to a sub-agent. This rule is based on the
principle Delegatus non protest delegare A delegate cannot further delegate
Section 190. The exceptions to this rule, is, when delegation is allowed by the
principal or the trade custom or usage sanctions delegation or when delegation is
essential for proper performance or where emergency renders it imperative or
where nature of the work is purely ministerial and where the principal knows
that the agent intends to delegate.

Summary:-

According to Section 172, bailment of goods as security for payment of a debt or
performance of a promise is called pledge. The bailor is, in this case, called the
pledger or pawnor and the bailee is called the pledgee or pawnee.
According to Section 182 of the Contract Act, an agent is defined as a person employed
to do any act for another or to represent another in dealings with third persons. The
persons for whom such act is done, or who is so represented, is called the principal.

Questions:-

1. What is Pledge? Discuss the rights and duties of Pawnee.

Unit 15 : Rights of Agent
Objectives:-
In this lecture we will discuss the rights of agent, Duties of principal to agent, Rights of
principal, Termination of agency, & Irrevocable agency.

Introduction:-
The agent has a right to retain any sums received on account of the principal in the
business of the agency, all moneys due to himself in respect of his remuneration and
advances made or expenses properly incurred by him in conducting such business.

Rights of Agent

i. The agent has a right to retain any sums received on account of the principal in
the business of the agency, all moneys due to himself in respect of his
remuneration and advances made or expenses properly incurred by him in
conducting such business.
ii. The agent has a right to receive remuneration.
iii. Right of Lien: In the absence of any contract to the contrary, an agent is entitled
to retain goods, papers and other property of the principal if it has been received
by the agent, whether movable or immovable, until the amounts due to himself
from commission, disbursements, and services in respect of the same has been
paid or accounted for.
a. In order to exercise the right of lien, the agent should have obtained
possession of goods not merely as bailee or consignee but as an agent.
iv. The employer of an agent is bound to indemnify him against the consequences
of all lawful acts done by such agent in exercise of the authority conferred upon
him.
v. The agent has a right to receive compensation for injuries sustained due to
neglect or want of skill on part of the principal. Section 225 provides that an
agent can claim compensation under this section only if he proves:
(a) that some injury was caused to him; and (b) the injury was caused because of
the negligence of the principal.
vi. In case the principal establishes the fact that the agent could have avoided the
consequences of the principals negligence by reasonable means and he failed to
do so, then the agent cannot recover compensation from the principal.
vii. The agent cannot recover compensation from the principal if the injury has been
caused because of the nature of his employment.
viii. Right of stoppage of goods in transit: This right is available to the agent in the
following two cases:
ix. where he has bought goods for his principal by incurring a personal liability, he
has a right of stoppage in transit against the principal, in respect of the money
which he has paid or is liable to pay; and
x. where he is personally liable to the principal for the price of the goods sold, he
stands in the position of an unpaid seller towards the buyer and can stop the
goods in transit on the insolvency of the buyer.

Duties of Principal to Agent

i. The principal is bound to indemnify the agent against the consequences of all
lawful acts done by such agent in exercise of the authority conferred upon him.
(Section 222)
ii. The principal is required to indemnify the agent against the consequences of acts
done in good faith. According to Section 223 of the Contract Act, where one
person employs another to do an act and the agent does the act in good faith, the
employer is liable to indemnify the agent against the consequences of that act
though it causes an injury to the rights of third persons.
iii. Thus, Section 223 entitles the agent to claim compensation in respect of acts
done in good faith though they cause injury to the rights of third persons.
iv. Where a person employs another to do an act which is criminal, the employer is
not liable to the agent, either upon an express or an implied promise to
indemnify him against the consequences of that act.
v. The principal must make compensation to his agent in respect of injury caused
to such agent by the principals neglect or want of skill.
vi. To pay the agent the commission or other remuneration agreed.

Rights of Principal
i.If the principal suffers any loss due to disregard by the agent of the directions by
the principal, or by not following the custom of trade in the absence of
directions by the principal, or where the principal suffers due to lack of requisite
skill, care, or diligence on the part of the agent, he can recover damages
accruing as a result from the agent.
ii.To obtain an account of secret profits and recover them and resist a claim for
remuneration.
iii.To resist agents claim for indemnity against liability incurred.

Termination of Agency
According to Section 201, an agency is terminated,
a. by an agreement between the parties; or
b. by the principal revoking his authority; or
c. by the agent renouncing the business of agency; or
d. by the business of agency being completed; or
e. by either the principal or the agent dying or becoming of unsound mind; or
f. by the principal being adjudicated an insolvent under the provisions of any Act
for the time being in force for relief of insolvent debtors.

Irrevocable Agency
When an agency cannot be put an end to, it is said to be irrevocable agency. An
agency is irrevocable where the agent has himself an interest in the property which
forms the subject-matter of the agency. Such an agency cannot, in the absence of an
express contract, be terminated to the prejudice of such interest.
The following example is relevant in this case: A gives authority to B, to sell As
land, and to pay himself, out of the proceeds, the debts due to him from A. A cannot
revoke this authority, nor can it be terminated by his insanity or death.
When agent has incurred a personal liability the agency becomes irrevocable.
The principal cannot revoke the authority given to his agent after the authority
has been partly exercised, so far as regards such acts and obligations as arise
from acts already done in the agency. (Section 204)
The following example clearly explains this: A authorizes B to buy 1,000 bales of
cotton on account of A, and to pay for it out of As money remaining in Bs hands.
B buys 1,000 bales of cotton in his own name, so as to make himself personally liable
for the price. A cannot revoke Bs authority so far as regards payment for the cotton.

Summary:-
Right of Lien is that in the absence of any contract to the contrary, an agent is entitled to
retain goods, papers and other property of the principal if it has been received by the
agent, whether movable or immovable, until the amounts due to himself from
commission, disbursements, and services in respect of the same has been paid or
accounted for.
The principal is bound to indemnify the agent against the consequences of all lawful
acts done by such agent in exercise of the authority conferred upon him. (Section 222)

Questions:-
1. Who can become an agent? What are the rights of an agent?

Summary of the Module:-

between the parties. All agreements are not necessarily enforceable by law.

A minor is a person under the age of eighteen years, except when a guardian of a minors
person or property has been appointed by the court, in which case it is twenty-one. The
purpose of declaring minors as incompetent to enter into a contract is to protect minors
against their own inexperience. However, law tries not to cause unnecessary hardships to
persons who deal with minors..

covers only benefits received and not losses incurred. Assignment of a contract means
the transfer of rights and liabilities arising out of the contract in favor of a third person
either with or without the concurrence of other party to a contract. In Rescission the
injured party can rescind the contract and refuse the performance of contract.


French word bailor which means to deliver. According to Section 165, in case of
several joint owners of goods, the bailee may deliver them back to or according to the
directions of, one joint owner without the consent of all, in the absence of any
agreement to the contrary. The principal is bound to indemnify the agent against the
consequences of all lawful acts done by such agent in exercise of the authority
conferred upon him. (Section 222)

Module 3: Indian Sale of Goods Act, 1930
Introduction

The law relating to sale of goods can be found in the Sale of Goods Act, 1930. The sale
of goods is the most common of all commercial contracts and hence the law relating to
this, is bound to be of importance to all classes of the community. Buyer means a
person who buys or agrees to buy goods;
Delivery means voluntary transfer of possession from one person to another. Goods
are said to be in a deliverable state when they are in such state that the buyer would
under the contract be bound to take delivery of them.
Contract means an agreement that is enforceable by law. It excludes from its purview
all void agreements. It also presumes the existence of those elements necessary to
constitute a valid contract.
When goods are delivered by one person to another for some purpose, and where it is
agreed that on the accomplishment of the purpose, the goods will be returned or
disposed of according to the directions of the person delivering it, the goods are said to
have been bailed.Goods form the subject matter of a contract of sale. As per Section
2(7) of the Sale of Goods Act, goods means every kind of movable property other
than actionable claims and money; and includes stock and shares, etc.
Subsection 2 of Section 6 lays down that a seller may also undertake to sell goods, the
acquisition of which is dependent upon a contingency. According to Section 14(a), in a
contract of sale subject to a contrary intention, there is an implied condition on the part
of the seller that, in case of a sale, he has a right to sell the goods and that, in the case of
an agreement to sell, he will have a right to sell the goods at the time when the property
is to pass. According to Section 14(b), in a contract of sale unless the circumstances of
the contract are such as to show a different intention there is an implied warranty that the
buyer shall have and enjoy quiet possession of the goods.
The term caveat emptor means let the buyer beware. Caveat emptor is the general
rule applicable to sales so far as quality is concerned. A buyer purchases at his own risk
and it is his responsibility to examine the goods properly before purchasing the same. If
the goods are subsequently found to be defective, the seller cannot be held liable for it.
Performance of a contract with reference to the seller means the delivery of the goods
by him and with reference to the buyer it means the acceptance and payment of the
same, as per the terms of the contract. [Section 31]

Objectives

In this whole module we will study the Indian Sale Of Goods Act, 1930, where we will
study the contract of sale, sale and agreement to sell, essentials of a contract of sale, sale
and hire purchase agreement, sale and bailment, contract of sale how made, subject
matter of a contract of sale. We will in this module study in detail why these terms are
important at the time of sales both for the buyer and seller.

Unit - 16 : Introduction to Sale of Goods Act

Objectives:-
In lecture sixteen we will study what is Sale of Goods Act, Contract of Sale, Sale And
Agreement to sell, essential features of a Contract of Sale.

Introduction:-
The general provisions of the Indian Contract Act, continue to apply to contracts for the
sale of goods in so far as they are not inconsistent with the express provisions of the Sale
of Goods Act. The Act has not defined the term sale but contemplates two parties to
the contract a buyer and a seller and that the buyer accepts the goods for a price.
Mercantile agent means a mercantile agent having in the customary course of
business as such agent authority either to sell goods, or to consign goods for the
purposes of sale, or to buy goods, or to raise money on the security of goods. Price
means the money consideration for a sale of goods. A contract which contemplates
transfer of title to goods to the buyer immediately is a sale while a contract which does
not contemplate a transfer of title to goods immediately is an agreement to sell.

Sale of Goods Act

this, is bound to be of importance to all classes of the community.
The general rules applicable to contracts are applicable to contracts of sale of goods as
well. The general provisions of the Indian Contract Act, continue to apply to contracts
for the sale of goods in so far as they are not inconsistent with the express provisions of
the Sale of Goods Act. The Act has not defined the term sale but contemplates two
parties to the contract a buyer and a seller and that the buyer accepts the goods for a
price.

DEFINITIONS [Important Terms]
1. Buyer means a person who buys or agrees to buy goods;
2. Delivery means voluntary transfer of possession from one person to another;
3. Goods are said to be in a deliverable state when they are in such state that the
buyer would under the contract be bound to take delivery of them;
4. Document of title to goods includes bill of lading, dock-warrant, warehouse
keepers certificate, wharfingers certificate, railway receipt, [multimodal transport
document,] warrant or order for the delivery of goods and any other document used
in the ordinary course of business as proof of the possession or control of goods or
authorizing or purporting to authorize, either by endorsement or by delivery, the
possessor of the document to transfer or receive goods thereby represented;
5. Fault means wrongful act or default;
6. Future goods means goods to be manufactured or produced or acquired by the
seller after making of the contract of sale;
7. Goods means every kind of moveable property other than actionable claims and
money; and includes stock and shares, growing crops, grass, and things attached to
or forming part of the land which are agreed to be severed before sale or under the
contract of sale;
8. A person is said to be insolvent who has ceased to pay his debts in the ordinary
course of business, or cannot pay his debts as they become due, whether he has
committed an act of insolvency or not;
9. Mercantile agent means a mercantile agent having in the customary course of
business as such agent authority either to sell goods, or to consign goods for the
purposes of sale, or to buy goods, or to raise money on the security of goods;
10. Price means the money consideration for a sale of goods;
11. Property means the general property in goods, and not merely a special property;
12. quality of goods includes their state or condition;
13. Seller means a person who sells or agrees to sell goods;
14. Specific goods means goods identified and agreed upon at the time a contract of
sale is made; and
15. Expressions used but not defined in this Act and defined in the Indian Contract Act,
1872, have the meaning assigned to them in that act.

Contract of Sale
As per Section 4(1) of the Sale of Goods Act, 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. As per subsection (2), such contract of sale may either be absolute or conditional.
Subsection (3) deals with the concept of an agreement to sell and stipulates that where the
transfer of property in the goods is to take place at a future time, or subject to some
condition thereafter to be fulfilled, such a contract is an agreement to sell.

Sale and Agreement to Sell

1. The distinction between a sale and an agreement to sell may thus be summarized as
follows:
2. A contract which contemplates transfer of title to goods to the buyer immediately is
a sale while a contract which does not contemplate a transfer of title to goods
immediately is an agreement to sell.
3. A contract of sale is an executed contract. It involves a contract plus a conveyance
of the property. When the property is transferred, the rights and liabilities attached
to the goods are also transferred. An agreement to sell, on the other hand, is an
executory contract. The property in the goods does not pass until a certain time has
lapsed or until a certain condition is fulfilled.
4. In an agreement to sell, the seller remains the owner of the property until it is
actually transferred to the buyer at a future point of time. However, in a contract of
sale, the buyer becomes the owner immediately and all the risks attached to the
goods are passed on to him irrespective of the fact whether the goods are delivered
to him or not and whether the price is paid or not.
5. In an agreement to sell, the seller agrees to sell the goods for a price and the buyer
agrees to buy the goods for a price. In a contract of sale, the seller sells the goods to
the buyer for a price.
6. The consequences of a breach of an agreement to sell is as follows:
7. n case the buyer defaults, the seller may sue for damages; in case the seller defaults,
the buyer has a personal remedy against the seller.
8. Where there is a breach by any of the parties to a contract of sale, the following will
be the consequence.
9. If the buyer fails to pay the price, the seller may sue him; if the seller fails to deliver
the goods, the buyer may sue for delivery of the same or for conversion or for
damages.
10. Violation of any of the conditions of an agreement to sell entitles the buyer to
rescind the contract.
11. However, in a sale, the breach of any condition will not be a ground for rejecting the
goods or treating the contract as rescinded. The breach can only be treated as a
breach of warranty.
12. The property in the goods remains with the seller in the case of an agreement to sell.
He may sell the goods to a third party, although he will be committing a breach.
13. In a sale, the goods cannot be resold by the seller. If he does so, the buyer can
recover the goods, sometimes from third parties.
14. The goods in an agreement of sale may not be specified or ascertained. In a sale, the
goods are specified and ascertained.
15. A sale results in creation of a jus in rem (i.e., right to the buyer to enjoy the goods as
against the world at large including the seller) while an agreement to sell results in
jus in personam (i.e., right to the buyer against the seller to sue for damages).
16. In a contract of sale, in case the buyer becomes insolvent before making payment,
the seller is required to handover the goods to the official receiver or the assignee.
In such a situation, he can claim a rateable dividend for the price of the goods.
17. The situation differs when it comes to an agreement to sell. Here, if the buyer
becomes insolvent and has not made payment, the seller is under no obligation to
part with the goods.
18. In a contract of sale, if the seller becomes insolvent, the buyer can claim the goods
from the official receiver or assignee. In an agreement to sell, if the seller is
declared insolvent, the buyer can only claim a rateable dividend in case he has
already made payment

Essentials of a Contract of Sale

The following are the essential ingredients of a valid contract of sale. There should be:
a. a contract
b. two parties (i.e., the buyer and the seller)
c. transfer or agreement to transfer the property
d. goods
e. from the seller to the buyer
f. for a price (i.e., money consideration).

a. Contract: The term contract means an agreement that is enforceable by law. It
excludes from its purview all void agreements. It also presumes the existence of
those elements necessary to constitute a valid contract.
b. Two Parties: The presence of two parties (the seller and the buyer) is essential
to constitute a contract of sale. Also, the two parties should be two different
people and should be competent to enter into a contract.
c. Transfer the Property: A contract of sale of goods contemplates a transfer of
general property and not special property. Where a person owns the goods he is
said to have general property in the goods. Where he has special property, he is
a mere pawnee of the goods.
d. Goods: Any kind of goods may be transferred unless provided otherwise by law.
Even the interest of a pawner and a pawnee comes within the definition of
goods. The transfer of goods should contemplate a transfer of the whole
interest of the seller in the goods.
e. From the Seller to the Buyer: The transfer of property should be from the
seller to the buyer. If the seller has no right to sell the goods, then the buyer is
not entitled to receive the same and consequently there will be no contract.
f. For a Price: The consideration in a contract of sale should be money alone. The
price should be money, paid or promised. However, if the consideration is
something other than money, then the contract will not be one of sale.

Summary:-

this, is bound to be of importance to all classes of the community.

Subsection (3) deals with the concept of an agreement to sell and stipulates that where the
transfer of property in the goods is to take place at a future time, or subject to some
condition thereafter to be fulfilled, such a contract is an agreement to sell. Contract
means an agreement that is enforceable by law. It excludes from its purview all void
agreements. It also presumes the existence of those elements necessary to constitute a
valid contract.

Questions:-

1. What is Sale of Goods Act? Discuss essentials of a contract of sale.

Unit - 17 : Sale and Hire Purchase Agreement
Objectives:-
In this lecture we will discuss the sale and sale and hire purchase agreement, Sale
and barter or exchange, Sale and bailment, Sale and contract for work and materials,
Contract of sale how made, Presence of Mutual Assent between the Parties.

Introduction:-
A hire purchase agreement basically involves two stages:
a. Firstly, goods are hired out according to the terms and conditions of the hire
purchase agreement.
b. Secondly, the hirer can become the owner of the goods by exercising his option
to purchase the goods, provided he has paid all the installments.
have been bailed. Mutual assent or consensus ad idem is an essential ingredient of every
contract. The parties to the contract should be of the same mind regarding the subject
matter of the contract. Mutual assent of the parties may be:- Express, or Implied.

Sale and Hire Purchase Agreement

A hire purchase agreement basically involves two stages:

a. Firstly, goods are hired out according to the terms and conditions of the hire
purchase agreement.
b. Secondly, the hirer can become the owner of the goods by exercising his option
to purchase the goods, provided he has paid all the installments.

Thus, in a hire purchase transaction, the hirer is under no obligation to buy the goods.
He may either return the goods or become the owner by paying all the hire purchase
installments and exercising his option to purchase. The property in the goods
continues to remain with the seller until the hirer has exercised his option.
In case of a sale, the buyer cannot repudiate the contract by return of the goods.
However, in the case of a hire purchase agreement, the hirer has an option to repudiate
the contract by returning the goods.

In Finance Center vs. Sri Ram Prakash, it was held that a hire purchase agreement is
virtually a contract of bailment.

Sale and Barter or Exchange
In a barter or exchange, the element of price in money is lacking. Similarly, the
exchange of one form of money for another cannot be considered as a sale. Even where
foreign currency is bought and sold in Indian currency or vice versa, it does not
constitute a sale.

Sale and Bailment
have been bailed.
However, in case of a sale, the ownership of the goods is transferred from the seller to
the buyer.
Sale and Contract For Work and Materials
The question as to whether a particular contract is one of sale or a work contract will
depend upon the facts of each case. Even though it is difficult to lay down any
specific rule to distinguish between the two, it should be remembered that if the
contract is for supply of materials at an agreed price and the work and the service is
incidental to the execution of the contract, the contract is for sale of materials.

In Dr Baretto vs. T R Pruce, it was held that the supply of artificial teeth by a dentist
was a contract of sale.

A works contract for supply of window frames and fixing them to the building was held
to be an indivisible works contract. It was held that the material supplied for execution
of the works contract was not sale but formed a part of the works contract Nanuram vs.
State of Rajasthan
Contract Of Sale How Made
Section 5 lays down that:
a. A contract of sale is made by an offer to buy or sell goods for a price and the
acceptance of such offer. The contract may provide for the immediate delivery of
the goods or immediate payment of the price or both, or for the delivery or payment
by installments or that the delivery or payment or both shall be postponed.
b. Subject to the provisions of any law for the time being in force, a contract of sale
may be made in writing or by word of mouth, or partly in writing and partly by
word of mouth or may be implied from the conduct of the parties.
The presence of a buyer and seller is essential for a contract of sale.
Who may sell: Any person who is competent to contract and who is the owner of the
goods may execute the sale. Also, the owner may authorize any person to do so on his
behalf. Where the goods have been attached, any sale of the same is void. Such goods
are liable to be confiscated and sold in execution of the decree.
A sale may also be made under the authority and with the consent of the owner. For
example, a sale by an agent acting within the scope of his authority. Similarly, it was
held in National Bank vs. Hampson, that sales made by persons with limited interest in
the ordinary course of business may also be valid, as sales of mortgaged goods by a
mortgagor who has been allowed by his mortgagee to carry on business to which such
sales are incident.
A sale may also be effected by a pawnee of goods. In this case, even though the pawnee
is not the owner of the goods, he can sell the goods by virtue of a special covenant.
Presence of Mutual Assent between the Parties
Mutual assent or consensus ad idem is an essential ingredient of every contract. The
parties to the contract should be of the same mind regarding the subject matter of the
contract. Mutual assent of the parties may be:
a. Express, or
b. Implied.
If express it may be oral or in writing. However, if it is implied it can be inferred from
the conduct, gestures or sometimes by the mere silence of the parties.
According to Section 5, contract of sale of goods may provide for,
a. immediate delivery of the goods, or
b. delivery of goods at some future time, or
c. delivery of goods by installments.
Also, there may be,
a. immediate payment of price, or
b. payment of price in future, or
c. payment of price by installments.
It also lays down another situation where,
a. both delivery and payment may be simultaneous
b. both delivery and payment will be postponed
c. both delivery and payment will be made by installments.

Summary:-

In a hire purchase transaction, the hirer is under no obligation to buy the goods. He
may either return the goods or become the owner by paying all the hire purchase
installments and exercising his option to purchase. The property in the goods
continues to remain with the seller until the hirer has exercised his option.
have been bailed.

Questions:-

1. Write a note on Sale and Hire purchase agreement.

Unit 18 : Subject Matter of a Contract of Sale
Objectives:-

In this lecture we will discuss subject matter of a contract of sale, Present sale of future
goods, Contingent goods, Effect of destruction of goods, Conditions and warranties,
Difference between condition and warranty.

Introduction:-

Goods form the subject matter of a contract of sale. As per Section 2(7) of the Sale of
Goods Act, goods means every kind of movable property other than actionable claims
and money; and includes stock and shares, etc.
In reality this is not a sale but an agreement to sell as one cannot transfer the property in
goods which is not in existence. In effect, this is provided by Subsection (3) of Section
6, which states that such a contract is a mere agreement to sell.
A seller may also contract to sell goods conditionally on their acquisition. If the goods
do not arrive or fail, no action can be taken against the seller, except in a case where the
seller himself prevents the goods from coming into existence. Subsection 2 of Section 6
lays down that a seller may also undertake to sell goods, the acquisition of which is
dependent upon a contingency.

Subject Matter of a Contract of Sale

Goods Act, goods means every kind of movable property other than actionable
claims and money; and includes stock and shares, etc.
According to Subsection (1) of Section 6, goods which form the subject matter of a
contract of sale may be either
a. Existing goods
1. Owned by the seller, or
2. Possessed by the seller.
b. Future goods
It may be noted that the term existing goods is followed by the words owned or
possessed by the seller. Future goods are not qualified by any such expression as they
have no existence at the time of the contract.
Contract of Sale of Future Goods may be,
a. Absolute, or
b. Conditional.

When the contract is absolute, the seller undertakes to unconditionally sell the goods to
be acquired at a later stage. Where the contract is conditional, he contracts to sell goods
conditionally on their acquisition.

An absolute contract for sale of future goods can be categorized into:
a. Present sale of future goods.
b. Present sale of a chance of obtaining goods, or a sale of a mere expectation
dependent upon a chance.

Present sale of future goods

a. In reality this is not a sale but an agreement to sell as one cannot transfer the property
in goods which is not in existence. In effect, this is provided by Subsection (3) of
Section 6, which states that such a contract is a mere agreement to sell.
In such contracts the property in the goods passes to the buyer at a later stage as in the
following cases:
i. If the seller after acquiring the goods, expresses an intention to execute the original
agreement.
In Lunn vs. Thornton, it was held that a deed of bargain and sale cannot pass the
property in goods which do not belong to the grantor at the time of execution of the
deed, unless there is some new act done by the grantor after he acquires the property,
indicating his intention that such subsequently acquired property should so pass.
ii. If the buyer gets control and possession of the goods under authority to seize them.
In Congreve vs. Evetts, growing crops were seized and taken possession under a bill of
sale. Before a sale could be executed, a judgment was delivered in favor of a creditor.
Consequently, the Sheriff seized the goods and sold them. The proceeds of the sale
were paid to the creditor. However, it was held that the purchaser of the bill of sale was
entitled to the proceeds.
i. Where the seller performs an act, thus irrevocably appropriating the goods to the
contract.
In Langton vs. Higgins, C agreed to sell to the plaintiff all the crop of oil of
peppermint growing on his farm in the year at a particular price. Subsequently, on Cs
request, the plaintiff sent bottles to C for filling the bottles with oil. C, having weighed
the oil, put it in those bottles, labeled them with the weight and prepared the invoices.
However, before all the bottles could be filled, he sold and delivered several of them to
the defendant. It was held that the putting of the oil was an act of appropriation and
hence the property vests in the plaintiff.
ii. If the goods can be ascertained by description, the equitable interest in them
passes to the buyer as soon as they are acquired by the seller.
In Tailby vs. Official Receiver, a bill of sale assigned in favor of the mortgagor all the
book debts due and owing or which might during the continuance of the security
become due and owing. In this case, it was held that future property, possibilities and
expectancies are assignable in equity for value.
b. Present sale of a chance of obtaining goods: Here the sale is similar to an agreement to
sell. When the buyer agrees to such a sale, he takes the risk of the happening of the event.
The buyers contract is absolute. However, it is conditional on the part of the seller on the
existence of the chance. The subject matter in such an agreement may turn out to be of a
greater value or of a smaller value. This can be illustrated with the help of an example.
A pearl fisherman may haul oysters from the sea. The buyer of pearl oysters from a
pearl fisherman purchases a chance. The oysters may either yield pearls of a greater
value than the price paid or they may yield pearls of a lower value or even of no value.
Whatever be the outcome, the buyers contract is absolute. As he has purchased a
chance, he has to abide by its consequences.

Conditional Sale of Future Goods
seller himself prevents the goods from coming into existence.
Contingent Goods
Subsection 2 of Section 6 lays down that a seller may also undertake to sell goods, the
acquisition of which is dependent upon a contingency.
In Jethalal C Thakkar vs. R N Kapur the defendant agreed to sell 1,000 shares of the
plaintiff within 12 months of the bank being converted into a Finance Corporation. In
case the first event failed to occur, he himself would take the 1,000 shares at the agreed
rate. The defendant failed to get the shares sold and consequently was sued by the
plaintiff.
In this case, it was held that a conditional obligation is a sort of quasi obligation
consisting of a possibility that a real obligation already exists, or may come into
existence in the future. The fulfillment of the condition is the transformation of the
potentiality into actuality. The failure of the condition is the failure of the chance to
become a fact.

Effect of Destruction of Goods

Goods Perishing before Making of Contract
Where there is a contract for the sale of specific goods, the contract is void if the goods
without the knowledge of the seller have, at the time when the contract was made,
perished or become so damaged as no longer to answer to their description in the
contract.
Goods Perishing before Sale but after Agreement to Sell
According to Section 8, where there is an agreement to sell specific goods, and
subsequently the goods without any fault on the part of the seller or buyer perish or
become so damaged as no longer to answer to their description in the agreement before
the risk passes to the buyer, the agreement is thereby avoided.
Conditions and Warranties
During negotiations, it is usual for the seller to make certain statements or
representations which induces the buyer to enter into the contract. Such representations
may take different forms. They may
a. Relate to a fact, that is not material to the contract and does not give rise to any
legal action. In Geddes vs. Penington, the seller of a horse maintained that the
horse was sound. However, the place from where the horse was bought was
misrepresented to the buyer. It was held that this misrepresentation was
immaterial and would not affect the contract in any way.
b. Be expressions of opinion or a mere commendation of ones wares. Such
representations are not part of the contract and will not give any right of action.
c. Relate to a material fact, but may not be made an integral part of the contract.
They do not carry any legal consequences. Where the buyer shows that he
would not have given his consent to the contract, but for the belief that the
statement was true, such representations:
I. Operate as an estoppel, which the maker cannot later deny.
II. May amount to innocent misrepresentations and will be a valid ground for
rescission and for a claim for damages.
III. May amount to fraudulent misrepresentations giving rise to a claim for
damages and rescission.
d. Relate to a material fact and may be an integral part of the contract.
According to Section 12(1), a stipulation in a contract of sale with reference to goods
which are the subject thereof may be a condition or a warranty.
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 [Section 12(2)].
On the other hand, 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 a right to reject
the goods and treat the contract as repudiated. [Section 12(3)]
Whether a stipulation in a contract of sale is a condition or a warranty depends in each
case on the construction of the contract. A stipulation may be a condition, though called
a warranty in the contract. [Section 12(4)]

Difference between Condition and Warranty
The question as to whether a particular stipulation is a condition or a warranty will
depend upon the facts and circumstances of each case. All obligations are not of equal
importance. The same obligation may be viewed differently by different persons and
may, by the same person, be viewed differently in different circumstances. Hence, it is
essential to determine the intention of the parties. If a stipulation is so vital, that it goes
directly to the root of the transaction, breach of which can be treated as a failure to
perform the contract, such a stipulation is a condition.
Warranties, on the other hand, are obligations which need to be performed. However, a
breach of warranty does not affect the substance of a contract so as to result in a
repudiation of the same. A breach of warranty can only give rise to a claim for damages.
The breach of a condition can be treated as a breach of warranty. However, a breach of
warranty cannot be treated as a breach of condition.
When Condition should be Treated as Warranty (Section 13)
In the following circumstances, a condition can be treated as warranty:
Where the buyer waives a condition or elects to treat the breach of condition as breach of
warranty (Subsection 1).
Where a contract of sale is not severable and the buyer has accepted the goods or part
thereof, the breach of any condition to be fulfilled by the seller can only be treated as a
breach of warranty, unless provided for otherwise in the contract.
Nothing in this section shall affect the case of any condition or warranty, fulfillment of
which is excused by law by reason of impossibility or otherwise.
In addition to ensuring compliance with the conditions of the contract and rescinding
the contract in case of non compliance, the buyer of goods has the following two rights:

a. He may waive the breach of condition and may proceed with the contract.

b. He has the discretion to treat the breach of condition as a breach of warranty. In
such a case the contract is not repudiated.
Where the buyer has chosen to waive the breach of condition, he cannot
repudiate the contract unless the seller commits another breach of condition.
Also, where the buyer rescinds the contract, he cannot proceed with the contract
without the prior approval of the promisor.

Summary:-
Goods Act, goods means every kind of movable property other than actionable claims
and money; and includes stock and shares, etc.

seller himself prevents the goods from coming into existence.

In this case, it was held that a conditional obligation is a sort of quasi obligation
consisting of a possibility that a real obligation already exists, or may come into
existence in the future. The fulfillment of the condition is the transformation of the
potentiality into actuality. The failure of the condition is the failure of the chance to
become a fact. However, a breach of warranty does not affect the substance of a contract
so as to result in a repudiation of the same. A breach of warranty can only give rise to a
claim for damages.

Questions:-

1. Write the subject matter of contract of sale.

Unit 19 : Implied Conditions
Objectives:-
In this lecture we will discuss implied conditions Sale by description (Section 15), Sale
by sample as well as by description, Condition as to quality or fitness, Condition as to
merchantability, Condition implied by custom, Implied warranties.

Introduction:-
According to Section 14(a), in a contract of sale subject to a contrary intention, there is an
implied condition on the part of the seller that, in case of a sale, he has a right to sell the
goods and that, in the case of an agreement to sell, he will have a right to sell the goods at
the time when the property is to pass.
Where there is a contract for the sale of goods by description, there is an implied
condition that the goods shall correspond with that description. According to Section
16(2), where goods are bought by description from a seller who deals in goods of that
description (whether he is the manufacturer or producer or not), there is an implied
condition that the goods shall be of merchantable quality. According to Section 14(b), in
a contract of sale unless the circumstances of the contract are such as to show a different
intention there is an implied warranty that the buyer shall have and enjoy quiet possession
of the goods.

Implied Conditions

Condition as to title
the time when the property is to pass.

In Rowland vs. Divall, R purchased a car from D and used it for several months.
However, D did not have a good title to the car and subsequently R had to surrender
the car to the true owner. It was held that R could recover the consideration paid by
him, as the consideration was not for the use of the vehicle but for the lawful possession
of the same.

Sale by description (Section 15)

Where there is a contract for the sale of goods by description, there is an implied
condition that the goods shall correspond with that description.

Where goods are sold by description, the buyer is entitled to reject them, if the same does
not correspond to the given description.

Sale by description can take place not only in the case of unascertained or future goods,
but also in the case of specific goods.

Where the contract is for supply of goods of a specified description, it is essential that the
goods should correspond to the given description and should be of merchantable quality.
The same condition would be applicable in a situation where the buyer did not previously
inspect the goods.

Sale by sample as well as by description

It is also provided by Section 15, that if the sale is by sample as well as by description, it
is not sufficient that the bulk of the goods correspond with the sample if the goods do not
also correspond with the description. It is essential that the goods should correspond with
the sample as well as with the description.

In Wallis vs. Pratt, there was a contract for sale of seeds referred to as Common English
Sainfoin. However, the seeds supplied to the buyer were of a different quality. The
defect also existed in the sample. The discrepancy in quality was discovered only after
the seeds were sown. The buyer could recover damages as there was a breach of
condition.

Condition as to quality or fitness [Section 16(1)]
Subject to the provisions of the Act and of any other law for the time being in force, there
is no implied warranty or condition as to the quality or fitness for any particular purpose
of goods supplied under a contract of sale, except as follows:

Where the buyer, expressly or by implication, makes known to the seller the particular
purpose for which the goods are required, so as to show that the buyer relies on the
sellers skill or judgment and the goods are of a description which it is in the course of
the sellers business to supply (whether he is the manufacturer or producer or not), there
is an implied condition that the goods shall be reasonably fit for such purpose [Section
16(1)].

Condition as to merchantability [Section 16(2)]
According to Section 16(2), where goods are bought by description from a seller who
deals in goods of that description (whether he is the manufacturer or producer or not),
there is an implied condition that the goods shall be of merchantable quality.

Provided that, if the buyer has examined the goods, there shall be no implied condition
as regards defects which such examination ought to have revealed. (Proviso to subsection
2)

Provided that, if the buyer has examined the goods, there shall be no implied condition
as regards defects which such examination ought to have revealed. (Proviso to subsection
2)

Under Subsection 2, for implying a condition that the goods shall be of merchantable
quality, it is essential that the goods should have been bought by description and from a
seller who deals in goods of that description.

Merchantable Quality means that the goods are of a certain quality wherein a
reasonable man acting under reasonable conditions would, after full examination of the
same, accept the goods in performance of the offer to buy, either for his use or for sale.

Presence of defects in the goods make them unfit for the purpose for which they are sold
and consequently they cease to be merchantable.

Goods may also be unmerchantable not only because of a defect in the physical
condition but also when:
a. A trade mark is infringed.
b. Their use is dangerous or injurious.
c. They are unfit for use.

CONDITION IMPLIED BY CUSTOM, SECTION 16(3)
An implied condition as to quality or fitness for a particular purpose may be annexed by
the usage of trade.
In certain cases, the purpose for which the goods are needed may be ascertained either
from the conduct of the parties or from the nature of description of the article
purchased.
In Dr Baretto vs. T R Price, a set of false teeth were purchased from a dentist. The set
could not be used by the buyer as it did not fit the buyers mouth. He could reject the
set as the purpose for which it was required was known by the dentist.

Implied Warranties

WARRANTY OF QUIET POSSESSION
According to Section 14(b), in a contract of sale unless the circumstances of the contract
are such as to show a different intention there is an implied warranty that the buyer shall
have and enjoy quiet possession of the goods.
In fact, what this section means is that nobody can interfere with the possession of goods
by the buyer, because of a defective title of the seller. If the buyer is in any way
prevented from the quiet enjoyment of the goods, he can claim damages from the seller.
Warranty of freedom from encumbrances
According to Section 14(c), in a contract of sale unless the circumstances of the contract
are such as to show a different intention there is an implied warranty that the goods shall
be free from any charge or encumbrance in favor of any third party not declared or
known to the buyer before or at the time when the contract is made.
This section deals with the cases where the buyers title to the goods is disturbed by the
existence of encumbrances not known or disclosed at the time of the contract. The
implied warranty relates not to the existence of undisclosed encumbrances, but only that
the goods should be free of them. The warranty is not broken by the mere fact that
encumbrances exist. What is necessary is that the buyer should be affected by them. It is
the responsibility of the seller to ensure that the encumbrances do not affect the buyer.
Warranty as to quality or fitness by usage of trade: [Section 16(3)]
According to this section, an implied warranty as to quality or fitness for a particular
purpose may be annexed by the usage of trade.

Warranty to disclose the dangerous nature of goods
Where a seller of goods is aware of the fact that the goods are dangerous, he should
disclose this fact to the buyer. Otherwise, he will be held liable for damages.
In Clarke vs. Army & Navy Co-operative Society Limited, A sold a tin of disinfectant
powder to C knowing fully well that if the tin was not opened with care, it was likely
to cause injury. In spite of this, A did not warn C about the inherent danger. C was
injured while opening the tin. A was held liable for damages.
Summary:-

the time when the property is to pass. Where goods are sold by description, the buyer is
entitled to reject them, if the same does not correspond to the given description.

According to Section 16(2), where goods are bought by description from a seller who
deals in goods of that description (whether he is the manufacturer or producer or not),
there is an implied condition that the goods shall be of merchantable quality. According
to Section 14(b), in a contract of sale unless the circumstances of the contract are such as
to show a different intention there is an implied warranty that the buyer shall have and
enjoy quiet possession of the goods.
Questions:-
1. What are the Implied Conditions of sale? Discuss with example.

Unit - 20 : Caveat Emptor
Objectives:-
The objective of this lecture is to study the concepts of caveat emptor.Transfer of
property, Specific goods, Unascertained goods and their appropriation, Goods on
approval or on sale or return, Reservation of right of disposal, Sale by non-owners.
Introductions:-
The doctrine of caveat emptor is re-emphasized by Section 16. A buyer who intends to
buy a glass bottle capable of holding boiling Sulphuric acid without cracking should
specify the purpose for which the bottle is required. If he fails to do so, he cannot expect
the seller to give him such a bottle.
The terms property and possession have different meanings. Even though the
property in the goods has passed to the buyer, the seller might still have possession of
the same. Property in the goods means ownership of the goods while possession of the
goods means mere custody or control of the goods. Thus, a servant or an agent
entrusted with goods has possession of the same, but not the property in them.
Section 20 lays down that where there is an unconditional contract for the sale of
specific goods in a deliverable state, the property in the goods passes to the buyer when
the contract is made, and it is immaterial whether the time of payment of the price or the
time of delivery of the goods, or both, is postponed.
According to Section 27, where there is a sale of goods by a person who is not the owner
or where a person sells goods without the authority or consent of the true owner, the
buyer of such goods does not acquire a good title. In such a case, the title of buyer is no
better than that of the seller. (Subsection 1)

Caveat Emptor
The doctrine of caveat emptor is re-emphasized by Section 16. A buyer who intends to
buy a glass bottle capable of holding boiling sulphuric acid without cracking should
specify the purpose for which the bottle is required. If he fails to do so, he cannot
expect the seller to give him such a bottle.
Example: A buys a horse from B for riding but did not mention this. The horse was
found fit only for carriage. A cannot claim damage.
However caveat emptor is subject to following exceptions:
1. One of the most important exceptions to the doctrine of caveat emptor are the
implied conditions of fitness for particular purpose and merchantability.
Where the buyer indicates to the seller the purpose for which the goods are required and
where he relies on the sellers judgment and skill and where the goods are those which
are dealt with by the seller in his course of business, then the doctrine of caveat emptor
will not apply. It is the duty of the seller to supply goods for the purpose for which it is
required.
In Bombay Burmah Trading Corporation vs. Agha Mohammad, a buyer of timber,
informed the seller that the timber was to be used for railway sleepers. It was held that
the buyer could reject the goods if it was found to be of an inferior quality.
2. Where the seller makes a false representation and conceals defects in the goods, and
the buyer relies on the sellers judgment, then the doctrine of caveat emptor will not be
applicable.
3. An implied condition as to quality or fitness for a particular purpose may be annexed
by the usage of trade
Transfer of Property
The performance of a contract of sale constitutes three stages:
I. Transfer of ownership of goods (title) from seller to the buyer
II. Transfer of possession of the goods
III. Passing of risk.
The terms property and possession have different meanings. Even though the
property in the goods has passed to the buyer, the seller might still have possession of
the same. Property in the goods means ownership of the goods while possession of
the goods means mere custody or control of the goods. Thus, a servant or an agent
entrusted with goods has possession of the same, but not the property in them.
Time when Property Passes
The time when property in the goods passes from the seller to the buyer is of
considerable importance. According to Section 26, unless otherwise agreed, the goods
remain at the sellers risk until the property therein is transferred to the buyer, but when
the property therein is transferred to the buyer, the goods are at the buyers risk,
whether delivery has been made or not except that where delivery has been delayed
through the fault of either buyer or seller, the goods are at the risk of the party in fault
as regards any loss which might not have occurred but for such fault.
Transfer of Property as between Seller and Buyer

a. Goods must be ascertained:
According to Section 18, where there is a contract for the sale of unascertained goods,
no property in the goods is transferred to the buyer unless and until the goods are
ascertained.
As per this section, the ascertainment of goods should be done before the property in
the goods passes to the buyer. In Commissioner of Sales Tax vs. Hussenali Adamji &
Co, it was held that where the contract is for a sale of unascertained goods, the property
in the goods cannot pass until the goods are ascertained.

b. Property in the goods passes when intended to pass:
According to Section 19
i. Where there is a contract for the sale of specific or ascertained goods the property in
them is transferred to the buyer at such time as the parties to the contract intend it
to be transferred.
ii. For the purposes of ascertaining the intention of the parties, regard shall be had to the
terms of the contract, the conduct of the parties and the circumstances of the case.

Section 19 is applicable only in case of ascertained or specific goods and is not
applicable to a contract of sale of unascertained goods.

In State vs. Rattan Lal, an analysis of milk taken by sample revealed that the milk was
contaminated. However, action could not be taken against the vendor because at that
time the property had not yet passed to him. The vendor could not be held liable for
selling adulterated milk.
iii. Unless a different intention appears, the rules contained in Sections 20 to 24 are
rules for ascertaining the intention of the parties as to the time at which the property in
the goods is to pass to the buyer. [Section 19(3)]

Specific Goods
the contract is made, and it is immaterial whether the time of payment of the price or
the time of delivery of the goods, or both, is postponed.
A conditional sale is subject to some condition. An unconditional sale on the other hand
is one where there is no condition attached to it. In an unconditional sale of specific
goods, the property in the goods is transferred when the contract is made and nothing
remains to be done except the delivery of the goods or the payment of the price. It is
also essential to show that the goods were in a deliverable state when the contract was
made.

Illustration
In Tarling vs. Baxter, there was a contract for sale of a certain haystack on the sellers
land at the price of 145 pounds on 4th January. The price was to be paid on 4th
February and the hay was allowed to remain on the sellers land until 1st May. When
the hay was accidentally destroyed by fire, it was held that the property in the goods
had passed to the buyer at the time of making the contract and hence the buyer was
required to bear the loss.

Where Goods are Not in a Deliverable State

Where there is a contract for the sale of specific goods and the seller is bound to do
something to the goods for the purpose of putting them into a deliverable state, the
property does not pass until such thing is done and the buyer has notice thereof.
(Section 21)
The sale contemplated under this section relates to a conditional sale of specific goods,
the property in the goods passing to the buyer only on the fulfillment of the condition.

Thus the following conditions are essential for the applicability of Section 21.
1. The goods should be specific goods (whether existing or future).
2. The seller should be required to do something so as to put the goods in a deliverable
state.
3. The seller should have fulfilled the obligation required by him as specified in point
(2).
4. The buyer should have notice of the fact that the seller has done that thing which
has the effect of putting the goods in a deliverable state.

Illustrations:
I. In Acraman vs. Morrice, there was a contract for sale of timber from oak trees. The
selected portions were marked out by the buyer. The seller was required to sever the
rejected portions of the trees. However, before he could remove the rejected
portions, the seller became bankrupt. It was held that the buyer could not take away
the selected portion as the property in goods had not yet passed to him.

II. In Underwood vs. Burgh Castle Cement Syndicate, there was a contract for sale of a
fixed condensing engine. According to the contract, the engine was to be severed
and delivered free on rail at a specified price. However, the goods were damaged
before it reached the railway. It was held that the property in the goods did not pass
as the goods were not in a deliverable state when it reached the railway

WHERE SPECIFIC GOODS ARE IN A DELIVERABLE STATE, BUT THE
SELLER HAS TO DO SOMETHING IN ORDER TO ASCERTAIN THE PRICE:
(SECTION 22)
Where there is a contract for the sale of specific goods in a deliverable state, but the
seller is bound to weigh, measure, test or do some other act with reference to the goods
for the purpose of ascertaining the price, the property does not pass until such act or
thing is done and the buyer has notice thereof.
In Simmons vs. Swift, there was a contract for sale of a stack of bark. The contract
stipulated that the bark was to be weighed by the agent of the buyer as well as the seller.
Part of the bark was weighed and taken delivery. However, the other part was carried
away by floods before it could be weighed. It was held that loss incurred on the un
weighted portion was to be borne by the seller as the property in those goods had not
passed to the buyer.

Unascertained Goods and their Appropriation: Section 23
Where there is a contract for the sale of unascertained or future goods by description
and goods of that description and in a deliverable state are unconditionally appropriated
to the contract, either by the seller with the assent of the buyer or by the buyer with the
assent of the seller, the property in the goods thereupon passes to the buyer. Such assent
may be express or implied, and may be given either before or after the appropriation is
made. [Section 23(1)]
Where in pursuance of the contract, the seller delivers the goods to the buyer or to a
carrier or other bailee (whether named by the buyer or not) for the purpose of
transmission to the buyer and does not reserve the right of disposal, he is deemed to
have unconditionally appropriated the goods to the contract. [Section 23(2)]
Section 23 requires that,
a. there should be an appropriation;
b. the appropriation should be unconditional;
c. the appropriation should be of goods of the description contracted for;
d. the appropriation should relate to goods in a deliverable state;
e. it should be done with the consent of the other party.

Goods on Approval or on Sale or Return: Section 24
When goods are delivered to the buyer on approval or on sale or return or other
similar terms, the property therein passes to the buyer,
I. When he signifies his approval or acceptance to the seller or does any
other act adopting the transaction.
II. If he does not signify his approval or acceptance to the seller but retains
the goods without giving notice of rejection then, if a time has been fixed
for the return of the goods, on the expiration of such time and, if no time
has been fixed on the expiration of a reasonable time.
When goods are sold on approval basis, it means that the buyer takes temporary
possession of the goods with an option to return them in case they are not satisfactory.
The principle underlying a contract for sale or return, is that the buyer takes
possession of the goods. He has a choice of returning the goods. However, the property
in the goods will pass to him if he accepts the goods, or if he does any act adopting the
transaction.
Illustration 1:
In Municipal Commissioners of Hoogly, Chinsurah Municipality vs. Spencer Limited,
the buyer of a tractor was given an option to reject the tractor if it were found to be old.
The agreement between the buyer and the seller was an oral agreement. Considering the
fact that the purchaser had used the tractor and that reasonable time had elapsed from
the date of purchase, it was held that the property in the goods had passed to the buyer.
As per this Section, there is no sale until the buyer,
a. has signified his approval,
b. has retained the goods beyond a reasonable time, and
c. has made return impossible by his own fault.

Illustration 2:
In Nirmalabai vs. State, certain ornaments were taken by a person on approval basis on
the condition that the ornaments would be returned by evening. In this case, the
following observations were made:
a. Where goods are delivered on approval basis, the property in the goods will pass
to the buyer, if the buyer fails to give approval or if the buyer retains the property
without giving notice of rejection.
b. If a time is fixed for return of the goods, the property will pass if goods are not
returned within that time.
c. If no time is fixed, the property in goods will pass on the expiration of a
reasonable time.
In the aforementioned case, the property in the goods had passed, as the ornaments
were not returned by evening and no notice of rejection was given to the seller.
Reservation of right of disposal: Section 25
Where there is a contract for the sale of specific goods or where goods are subsequently
appropriated to the contract, the seller may by the terms of the contract or
appropriation, reserve the right of disposal of the goods until certain conditions are
fulfilled. In such a case, notwithstanding the delivery of the goods to a buyer, or to a
carrier or other bailee for the purpose of transmission to the buyer, the property in the
goods does not pass to the buyer until the conditions imposed by the seller are fulfilled.
[Section 25(1)].
Where goods are shipped or delivered to a railway administration for carriage by
railway and by the bill of lading or railway receipt, as the case may be, the goods are
deliverable to the order of the seller or his agent, the seller is prima facie deemed to
reserve the right of disposal [Section 25(2)].

SALE BY NON-OWNERS

Subsection 1 is based on the principle nemo dat quod non habet which means that no
man can pass a better title than he possesses.
For example, at a public auction, there was a sale of a horse. The fact that the horse
was a stolen one was not known to the auctioneer. The person who purchased the horse
acquired it in good faith. However, it was held that the buyer did not get any title
against the true owner. Lee vs. Bayes.
Section 27, however, lays down certain exceptions to the rule nemo dat quod non
habet. The seller of goods can confer a better title to the buyer:
a. Where he sells the goods with the authority and consent of the true owner.
Sales under this category include those made by agents acting within the scope of their
authority (whether express or implied) and sales made in the course of business by
persons holding a limited interest in the goods.
For instance, where goods are handed over to an agent by the principal for a particular
purpose, and the agent exceeding the authority given to him sells the goods, the
principal is entitled to recover the goods in spite of the disposal.
b. Where the true owner is prevented by his conduct from denying the sellers authority
to sell.
To establish the doctrine of estoppel it should be proved that the conduct of the true
owner was such, so as to lead an innocent buyer to believe that the seller was the true
owner. The true owner should have acted in a manner, so as to be precluded from
denying the lawfulness of the transaction. Mere carelessness on the part of the true
owner to protect or guard his goods will not serve as an estoppel.
In Mohambaram vs. Ram Narayan, the owner of a bus engaged an agent to ply the bus
for hire. A letter signed by himself and addressed to the District Magistrate requesting
for grant of G permit to the agent, along with the registration certificate of the vehicle
was left with the agent. The agent fraudulently altered the letter into one addressed to
the D.S.P requesting him to transfer the registration in the name of the agent. After the
vehicle was registered in the name of the agent, he sold it to a third person who took it
in good faith. It was held that the bus owner could not have contemplated fraud by the
agent and hence he could not be prevented from challenging the title of the buyer.
c. The buyer of goods from a mercantile agent who has no authority to sell, gets a good
title to the goods if (a) the agent is in possession of the goods or documents of title to
the goods with the consent of the owner. (b) the agent sells the goods while acting in
the ordinary course of business of a mercantile agent (c) the buyer acts in good faith (d)
the buyer has not at the time of sale notice that the agent has no authority to sell.
In Folkes vs. King, a car was delivered to a mercantile agent for sale at a price not less
than 575 pounds. However, the agent sold the car for 140 pounds. The buyer purchased
the vehicle in good faith and without knowledge of any fraud. The true owner sued the
buyer for recovery of the car. It was held that the agent was in possession of the car for
the purpose of sale with the consent of the true owner. The purchaser of the car
acquired a good title to it.
d. Sale by one of the joint owners
If one of the several joint owners of goods has the sole possession of them by
permission of the co-owners, the property in the goods is transferred to any person who
buys them of such joint owner in good faith and has not at the time of the contract of
sale notice that the seller has no authority to sell them. (Section 28)
Illustration
A, B and C, joint Hindu brothers are owners of certain cattle. A cow is left in the
possession of A by the other brothers, B and C. A later sells the cow to D who
purchases in good faith. D acquires a valid title to the cow
e Sale by person in possession under a voidable contract
Where the seller of goods has obtained possession thereof under a contract voidable
under Section 19 or Section 19-A of the Indian Contract Act, 1872, but the contract has
not been rescinded at the time of the sale, the buyer acquires a good title to the goods,
provided he buys them in good faith and without notice of the sellers defect of title.
(Section 29)
f. Sale by seller in possession after sale: [(Section 30(1)]
Where a person, having sold goods, continues or is in possession of the goods or of the
documents of title to the goods, the delivery or transfer by that person or by a
mercantile agent acting for him, of the goods or documents of title under any sale,
pledge or other disposition thereof to any person receiving the same in good faith and
without notice of the previous sale shall have the same effect as if the person making
the delivery or transfer were expressly authorized by the owner of the goods to make
the same.
g. Sale by buyer in possession after having bought or agreed to buy goods.
Where a person, having bought or agreed to buy goods, obtains with the consent of the
seller possession of the goods or the documents of title to the goods, the delivery or
transfer by that person or by a mercantile agent acting for him, of the goods or documents
of title under any sale, pledge or other disposition thereof to any person receiving the
same in good faith and without notice of any lien or other right of the original seller in
respect of the goods shall have effect as if such lien or right did not exist [Section 30(2)]
The applicability of this subsection is dependent on the fulfillment of the following
conditions:
i.The person who is to pass title should have bought or agreed to buy the goods.
ii.He should have obtained possession of the goods or document of title to the
goods with the approval of the seller.
iii.The goods or documents of title to the goods should have been delivered to a
third person under a contract of sale, either by the buyer or his mercantile agent.
iv.The person receiving the goods or the documents should have taken it in good
faith and without notice of the lien or the right of the original seller.
h. Sale by an unpaid seller [Section 54(3)]
Where an unpaid seller who has exercised his right of lien or stoppage in transit re-sells
the goods, the buyer acquires a good title thereto as against the original buyer,
notwithstanding that no notice of the re-sale had been given to the original buyer.
As per Section 54(3), the validity of a re-sale is dependent upon:
I. The seller being an unpaid seller.
II. The exercise of the right of lien or stoppage in transit by the unpaid seller. (i.e,
the unpaid seller should have possession of the goods and the possession should
be lawful).
Summary:-
the contract is made, and it is immaterial whether the time of payment of the price or
the time of delivery of the goods, or both, is postponed.

Questions:-

1. Write short note on Caveat Emptor?

Unit - 21 : Performance of Contract of Sale
Objectives:-
The topics which will be discussed in this lecture are performance of contract of sale,
Delivery of goods, Rules as to delivery, Buyers right of examining the goods,
Acceptance of delivery (section 42), Buyer not bound to return rejected goods .

Introduction:-
Delivery of goods sold may be made by doing anything which the parties agree shall be
treated as delivery or which has the effect of putting the goods in the possession of the
buyer or of any person authorized to hold them on his behalf.


Where goods are delivered to the buyer which he has not previously examined, he is not
deemed to have accepted them unless and until he has had a reasonable opportunity of
examining them for the purpose of ascertaining whether they are in conformity with the
contract [Section 41(1)].

Unless otherwise agreed, where goods are delivered to the buyer and he refuses to accept
them, having the right to do so, he is not bound to return them to the seller, but it is
sufficient if he intimates to the seller that he refuses to accept them. (Section 43)

Performance of Contract of Sale


For the purpose of Section 31, the term acceptance is defined by Section 42 of the
Act. As per Section 42, the buyer is deemed to have accepted the goods when he
intimates to the seller that he has accepted them, or when the goods have been delivered
to him and he does any act in relation to them which is inconsistent with the ownership
of the seller, or when, after the lapse of a reasonable time, he retains the goods without
intimating to the seller that he has rejected them.

In a contract of sale, there is an implied undertaking that the seller will deliver to the
buyer and the buyer will accept the same and pay the price of the goods. Failure to
deliver the goods will make the seller guilty of breach of contract.

Unless otherwise agreed, delivery of the goods and payment of the price are concurrent
conditions, that is to say, the seller shall be ready and willing to give possession of the
goods to the buyer in exchange for the price and the buyer shall be ready and willing to
pay the price in exchange for possession of goods. (Section 32)

Where one party to the contract wrongfully refuses to discharge his obligation, the other
party is exonerated or discharged from fulfilling his promise.

Illustration:
In Pulgaon Cotton Mills vs. Gulabai, the plaintiff who had to take delivery of certain
goods on a particular date, made an application of insolvency before that date. The
interim receiver failed to act within a reasonable time to adopt the contract. It was held
that the application by the plaintiff made it clear that he did not intend to fulfill his
promise and the conduct of both the receiver and the plaintiff allowed the defendant to
treat the contract as rejected.

Delivery of Goods

buyer or of any person authorized to hold them on his behalf. (Section 33).
As per Section 2, the term delivery means a voluntary transfer of possession from one
person to another. Delivery does not necessarily mean a physical transfer of goods from
the seller to the buyer.
Delivery may be
a. Actual, or
b. Symbolic, or
c. Constructive.
Where the goods are physically delivered to the buyer it constitutes actual delivery.
Symbolic delivery takes place where the seller does anything which has the effect of
putting the buyer in a position of control in respect to the goods. For example, handing
over the key of the godown to the buyer involves a symbolic delivery of the goods.
Where a third party who is in possession of the goods of the seller, at the time of the
sale, makes known to the buyer that he holds the goods on his behalf, it amounts to a
constructive delivery

Rules as to Delivery
I. Delivery should have the effect of putting the goods in possession of the buyer
or in the possession of any person authorized to hold them on his behalf. It may
be actual, symbolic or constructive.
II. According to Section 32, in the absence of a contract to the contrary, payment
and delivery are concurrent conditions.
III. Effect of part delivery: A delivery of part of the goods in progress of the
delivery of the whole, has the same effect, for the purpose of passing the
property in such goods as a delivery of the whole; but a delivery of part of the
goods, with an intention of severing it from the whole, does not operate as a
delivery of the remainder (Section 34).

Illustration:
In Hammond vs. Anderson, a delivery order in respect of certain goods sold was
given to the buyer. The goods were lying at a wharf. The buyer weighed the
whole but took delivery of only a part of the goods. It was held that a delivery of
part of the goods in this case constituted a delivery of the whole.

iv Buyer to apply for delivery: Apart from any express contract, the seller of
goods is not bound to deliver them until the buyer applies for delivery. (Section 35)
As per Section 35, it is the responsibility of the buyer to apply for delivery, before he
can bring a suit against the seller for non-delivery.
Where goods are to be imported and where delivery of the goods is to be given at the
jetty, the seller is required to intimate the buyer about the arrival of the goods. It is only
then, that the obligation of the buyer to apply for delivery arises.
Illustration:
In M P V Sundarama Iyer & Co. vs. UVC Murgesa Mudaliar, the contract between two
parties provided a clause wherein it was agreed that if the buyer failed to take delivery
of the goods inspite of the sellers notice, the seller would have the right to dispose of
the goods by public auction at the buyers risk. It was held that Section 35 would not
have any application in this case because of the express contract between the two.
V Place of delivery: Whether it is for the buyer to take possession of the goods or for
the seller to send them to the buyer is a question depending in each case on the contract,
express or implied, between the parties. Apart from any such contract goods sold are to be
delivered at the place at which they are at the time of the sale, and goods agreed to be sold
are to be delivered at the place at which they are at the time of the agreement to sell, or, if
not then in existence, at the place at which they are manufactured or produced. [Section
36(1)]
VI Time of delivery: Where under the contract of sale the seller is bound to send the
goods to the buyer, but no time for sending them is fixed, the seller is bound to send
them within a reasonable time [Section 36(2)].
Demand or tender of delivery may be treated as ineffectual unless made at a reasonable
hour. What is a reasonable hour is a question of fact [Section 36(4)].
Illustration:
In Dinkarrai Lalitkumar vs. Sukhdayal Rombilas, on June 26, the defendants sold the
plaintiffs 33 bales of piece goods at the defendants option, ready and to be despatched
as early as possible. The plaintiffs took delivery of 22 bales while the remaining 11
bales could not be delivered by the defendants. It was held that the defendants were
guilty of breach of contract. A fortnights time from the date of contract was a
reasonable time and therefore July, 10 was to be taken as the due date of performance,
and any damages would have to be estimated based on this date.
VII Goods in possession of a third party: Where the goods at the time of sale are in
the possession of a third person, there is no delivery by the seller to the buyer unless
and until such third person acknowledges to the buyer that he holds the goods on his
behalf. However, where goods have been sold by issue or transfer of any document of
title to goods, the third partys consent is not required. [Section 36(3)].
Illustration:
On 15th April, a contract of sale was executed wherein A sold B, a certain quantity of
wool. On that particular day, the goods were in possession of a third person C. On
April, 19, C wrote a letter to B informing him that he would have no objection to the
goods being removed by B at any time. The letter of C was an acknowledgment by
him that he was in possession of the goods and that he held the goods on behalf of B. It
was held that there was a delivery of goods on April 19, as contemplated by Section
36(3). Premsingh vs. Debsingh
VIII Expenses of delivery: Unless otherwise agreed, the expenses of and incidental to
putting the goods into a deliverable state will be borne by the seller [Section 36(5)].
IX Delivery of wrong quantity: The quantity of goods delivered should be in
accordance with the terms of the contract. Section 37 contemplates three different
situations, where the seller delivers more than that contracted for or less than that
contracted for, or mixes the goods with goods of a different description.
X Installment Deliveries: Unless otherwise agreed, the buyer of goods is not bound to
accept delivery thereof by installments [Section 38(1)].
Where there is a contract for the sale of goods to be delivered by stated installments
which are to be separately paid for, and the seller makes no delivery or defective
delivery in respect of one or more installments or the buyer neglects or refuses to take
delivery of or pay for one or more installments, it is a question in each case depending
on the terms of the contract and the circumstances of the case, whether the breach of
contract is a repudiation of the whole contract, or whether it is a severable breach giving
rise to a claim for compensation but not to a right to treat the whole contract as
repudiated [Section 38(2)].
XI Delivery to a carrier or wharfinger (Section 39): Where, in pursuance of a
contract of sale the seller is authorized or required to send the goods to the buyer,
delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of
transmission to the buyer or delivery of the goods to a wharfinger for safe custody is
prima facie to be a delivery of the goods to the buyer. [Section 39(1)]
Where a person chooses another person to do some work, the other person is usually the
agent of the former. However, Section 39 makes a provision wherein the seller can
choose a carrier on behalf of the buyer, whether approved by the buyer or not. In such a
case, the delivery of goods to the carrier implies a delivery to the buyer. In all these
cases, the buyer will have to bear any loss that might arise in the course of transit or
while the goods are in the custody of the wharfinger.
In Surajmal Chandammal vs. Fatehchand Jaimal Rai, on deterioration of certain goods
during transit, the buyer could recover from the seller, only damages and not the price
paid, as the property in the goods had already passed to him.

Buyers Right of Examining the Goods
Where goods are delivered to the buyer which he has not previously examined, he is not
deemed to have accepted them unless and until he has had a reasonable opportunity of
examining them for the purpose of ascertaining whether they are in conformity with the
contract [Section 41(1)].
Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is
bound, on request to afford the buyer a reasonable opportunity of examining the goods
for the purpose of ascertaining whether they are in conformity with the contract.
[Section 41(2)]

Acceptance of Delivery (Section 42)
As per Section 42, the buyer is deemed to have accepted the goods when he intimates to
the seller that he has accepted them, or when the goods have been delivered to him and
he does any act in relation to them which is inconsistent with the ownership of the
seller, or when, after the lapse of a reasonable time, he retains the goods without
The applicability of Section 42 arises when the buyer performs any of the above
mentioned acts. The acts cited above may be done by the buyer, any time during the
period of examination of the goods or after the expiry of the reasonable time for
examination. When such an act is done, the buyer is deemed to have accepted the goods

In Nannier vs. Rayalu Iyer, the buyer took delivery of part of the goods, but later
repudiated the whole contract on the ground that the goods were not delivered within the
time prescribed. The seller accepted the repudiation and instituted a suit for recovery of
damages. The buyer contended that (a) the goods tendered were not of the required
quality (b) the seller would not have been able to deliver the goods within the time
prescribed. The buyer was held liable on the latter ground.
.
BUYER NOT BOUND TO RETURN REJECTED GOODS
Unless otherwise agreed, where goods are delivered to the buyer and he refuses to
accept them, having the right to do so, he is not bound to return them to the seller, but it
is sufficient if he intimates to the seller that he refuses to accept them. (Section 43)
Where goods are sent to the buyer and where it is discovered that the goods do not
answer to the description given, the buyer has the right to reject the goods. However,
the buyer is not bound to return the goods to the seller. While the goods are in his
possession, he occupies the position of a bailee and is required to take care of them. The
responsibility of removing the goods from the buyers possession lies with the seller.
Also, while the goods are in the possession of the buyer, all risks attached to such goods
will lie with the seller.
It was held in Caswell vs. Coare, where the seller does not remove the rejected goods
from the buyers possession, the buyer can claim from the seller, any reasonable
expenses incurred for taking care of the goods.
However, it is the responsibility of the buyer to keep the goods at the disposal of the
seller.

Summary:-

In a contract of sale, there is an implied undertaking that the seller will deliver to the
buyer and the buyer will accept the same and pay the price of the goods. Failure to
deliver the goods will make the seller guilty of breach of contract. Where one party to
the contract wrongfully refuses to discharge his obligation, the other party is exonerated
or discharged from fulfilling his promise.
buyer or of any person authorized to hold them on his behalf. (Section 33). Where a third
party who is in possession of the goods of the seller, at the time of the sale, makes
known to the buyer that he holds the goods on his behalf, it amounts to a constructive
delivery.
As per Section 42, the buyer is deemed to have accepted the goods when he intimates to
the seller that he has accepted them, or when the goods have been delivered to him and
he does any act in relation to them which is inconsistent with the ownership of the
seller, or when, after the lapse of a reasonable time, he retains the goods without

Questions:-

1. What is delivery of goods? What are the rules for delivery of goods?
Unit 22 : Re-Sale of Rejected Goods
Objectives:-
The objective of this lecture is to study and analyze re-sale of rejected goods, Rights
and duties of the buyer, & Duties of the buyer.
Introduction:-
The buyer has the right to sell the rejected goods in case the seller does not remove
them in spite of a notice of rejection. In such a case, the buyer may sell the goods
immediately, while the question as to whether the goods conformed to the contract or
not may be decided subsequently. Re-sale of rejected goods may also be resorted to,
where the goods are of a perishable nature or expensive to keep or of fluctuating value.
The rights of the buyer are 1. Right to have delivery of the goods as per the terms and
conditions of the contract. 2. Where the goods delivered to the buyer are in excess or
less than the quantity contracted for, the buyer can (a) accept the whole (b) reject the
whole (c) accept the quantity ordered and reject the rest.
On the other hand Duties of the Buyer are 1) The buyer is required to take delivery of
the goods and make payment according to the terms and conditions of the contract. 2).
Apart from any express contract, it is the duty of the buyer to apply for delivery.

Re-Sale of Rejected Goods
not may be decided subsequently. Re-sale of rejected goods may also be resorted to,
where the goods are of a perishable nature or expensive to keep or of fluctuating value.
In Chapman vs. Morton, certain goods were shipped to the buyer. After taking delivery
of the goods, the buyer informed the seller that the goods did not answer the description
given by the contract. He also indicated to the seller, that on failure to receive
instructions from him, the goods would be sold and consideration received would be
adjusted towards damages incurred. The seller contended that the sale was valid and
the buyer was liable for the price. The buyer, however, sold the goods in his own name
to a third person. The buyer was held liable for the price of the goods. In the given case
Lord Abinger made the following observation: If the defendant intended to renounce
the contract, he ought to have given the plaintiff distinct notice at once that he
repudiated the goods and that on such a day he should sell them by such a person for
the benefit of the plaintiff.
Burden of expense: Where a buyer incurs expenses as a bailee, he can recover the
same from the seller.
In Heilbutt vs. Hickson, under the terms of a contract, the buyer could reject the goods
in case the same were rejected by the sub-buyer. On rejection by the sub-buyer, the
buyer was entitled to recover the expenses incurred on sending the goods to and from
the sub-buyer and also those expenses incurred on warehousing and returning the goods
to the seller.

Rights and Duties of The Buyer
1. Right to have delivery of the goods as per the terms and conditions of the contract.
2. Where the goods delivered to the buyer are in excess or less than the quantity
contracted for, the buyer can (a) accept the whole (b) reject the whole (c) accept the
quantity ordered and reject the rest.
3. Unless there is a contract to the contrary, the buyer is not required to accept delivery
by installments.
4. Where goods are sent to the buyer by a route involving sea transit, the buyer has a
right to be informed of the same so as to enable him to insure the goods.

5. The buyer has the right to examine the goods before he accepts them.

6. In case of a breach of contract by the seller, the buyer has the following remedies:

Suit for damages
Under Section 57, he may sue the seller for recovery of damages due to non-
delivery.

Suit for price
Where the price has been paid, but the goods have not been delivered, the buyer
may recover the price.

Suit for specific performance
Under Section 58, the buyer may also insist on specific performance of the
contract to sell.

Suit for breach of warranty: Section 59
Where there is a breach of warranty by the seller, or where the buyer elects or is
compelled to treat any breach of a condition on the part of the seller as a breach
of warranty, the buyer is not by reason only of such breach of warranty entitled
to reject the goods; but he may
a. set-up against the seller the breach of warranty in diminution or
extinction of the price, or
b. sue the seller for damages for breach of warranty.
The fact that a buyer has set up a breach of warranty in diminution or extinction
of the price does not prevent him from suing for the same breach of warranty if
he has suffered further damage.[Section 59(2)]

Repudiation of the contract before the due date: (Section 60)
Where the seller repudiates the contract before the date of delivery, the other
may either treat the contract as subsisting and wait till the date of delivery, or he
may treat the contract as rescinded and sue for damages for the breach.

Suit for interest [Section 61(2)(b)]
In the absence of a contract to the contrary, the court may award interest at such
rate as it thinks fit on the amount of the price to the buyer in a suit by him for the
refund of the price in a case of a breach of the contract on the part of the seller
from the date on which the payment was made
Duties of the Buyer
1. The buyer is required to take delivery of the goods and make payment according to
the terms and conditions of the contract.
2. Apart from any express contract, it is the duty of the buyer to apply for delivery.
3. The buyers duty includes a demand to make delivery at a reasonable hour.
4. Where the seller agrees to deliver the goods at his own risk at a place other than
where they are sold, the buyer shall take any risk of deterioration in the goods
necessarily incident to the course of transit.
5. It is the duty of the buyer to give notice of rejection of goods to the seller.
6. The buyer should take delivery of the goods within a reasonable time after the
tender of delivery.
7. Where the property in the goods passes to the buyer, it is his duty to pay the price
according to the terms of the contract
8. Where the buyer wrongfully neglects or refuses to accept and pay for the goods, he
will have to compensate the seller, in a suit by him, for damages for non-acceptance
(Section 56).

Summary:-
not may be decided subsequently.
Re-sale of rejected goods may also be resorted to, where the goods are of a perishable
nature or expensive to keep or of fluctuating value. Suit for damages:- Under Section
57, he may sue the seller for recovery of damages due to non-delivery. Suit for price:-
Where the price has been paid, but the goods have not been delivered, the buyer may
recover the price.

Questions:-

1. What are the rights and duties of the buyer for sale of goods?

Unit - 23 : Rights Of An Unpaid Seller Against The
Goods
Objectives:-
In this lecture we will study the topics such as rights of an unpaid seller against the
goods, Rights of an unpaid seller, Unpaid sellers lien, Termination of lien, Rights of
the unpaid seller against the buyer personally.

Introduction:-

The term unpaid seller is defined by Section 45 of the Sale of Goods Act, 1930. As
per this section, the seller of goods is deemed to be an unpaid seller within the
meaning of the Act.

Where the property in goods has not passed to the buyer the unpaid seller has, in
addition to his other remedies, a right of withholding delivery similar to and
co-extensive with his rights of lien and stoppage in transit where the property has
passed to the buyer. [Section 46(2)].

Subject to the provisions of this Act, when the buyer of goods becomes insolvent, the
unpaid seller who has parted with the possession of the goods has the right of stopping
them in transit, that is to say, he may resume possession of the goods as long as they are
in the course of transit, and may retain them until payment or tender of the price.
(Section 50)

Where under a contract of sale the property in the goods has passed to the buyer and the
buyer wrongfully neglects or refuses to pay for the goods, according to the terms of the
contract, the seller may sue him for the price of the goods [Section 55(1)].

Rights of an Unpaid Seller Against the Goods
meaning of the Act.
1. When the whole of the price has not been paid or tendered.
2. When a bill of exchange or other negotiable instrument has been received as
conditional payment and the condition on which it was received has not been fulfilled
by reason of the dishonor of the instrument or otherwise.

Rights of an Unpaid Seller
As per Subsection (1) of Section 46, subject to the provisions of this Act and of any law
for the time being in force notwithstanding that the property in the goods may have
passed to the buyer, the unpaid seller of goods, as such, has by implication of law,
1. A lien on the goods for the price while he is in possession of them.
2. In case of the insolvency of the buyer a right of stopping the goods in transit
after he has parted with the possession of them.
3. A right of re-sale as limited by this Act.
Section 46(1) will be applicable only if the plaintiff proves that:
a. He is an unpaid seller.
b. The buyer is insolvent.
c. The goods were in transit.
d. The property in the goods has passed to the buyer.

Unpaid Sellers Lien (Section 47)
1. Subject to the provisions of this Act, the unpaid seller of goods who is in possession
of them is entitled to retain possession of them until payment or tender of the price
in the following cases, namely
a. Where the goods have been sold without any stipulation as to credit.
b. Where the goods have been sold on credit, but the term of credit has
expired.
c. Where the buyer becomes insolvent
2. The seller may exercise his right of lien notwithstanding that he is in possession of
the goods as an agent or bailee for the buyer.
In Imperial Bank vs. London & St Katherine Dock Co., it was held that even though the
delivery of a bill of lading transfers legal property, it does not affect the sellers right of
lien on the goods as long as they are in his possession.
Goods sold without any stipulation as to credit:
When goods are sold without any stipulation as to credit, the seller can retain the goods,
until the payment is made.
Goods sold on credit, but the term of credit has expired:
When goods are sold on credit, the possession of the goods is transferred to the buyer
immediately. However, if the seller has retained possession of the goods until the expiry
of the period of credit, the lien which was not available to him during that period, will
accrue to him on the expiry of the credit period, even though the buyer is not insolvent
at that time.
Where the buyer becomes insolvent:
The third case where the seller has a lien on the goods, is where the buyer becomes
insolvent.
The sellers lien is revived in case the time for payment has not arrived and the buyer
becomes insolvent. This is based on the rule, that where one of the parties to the contract
is unable to fulfill the promise required of him, the other party is absolved from
performing his obligation.
In E C Edulji vs. Cafe John Brothers, a second-hand refrigerator was purchased for
Rs.120. Later it was agreed between the vendee and the vendor that the refrigerator
should be put in order at a cost of Rs.320. The vendee took delivery of the refrigerator
on February, 20 and informed the vendor that the refrigerator was in good working
condition. Later, he informed the vendor that the refrigerator was not in working order.
The vendor took away two parts of the refrigerator for further repairs. As the full cost of
the original repairs had not been paid, the vendor claimed a lien on the parts taken. It
was held that when the contract was fully performed and when the goods were handed
back (although the cost of repairs had not been fully paid) the lien had come to an end,
and could not be revived because the buyer asked for further repairs.

Part Delivery (Section 48)
Where an unpaid seller has made part delivery of the goods, he may exercise his right
of lien on the remainder, unless such part delivery has been made under such
circumstances as to show an agreement to waive the lien.
A part delivery of goods does not amount to a full delivery of goods. Hence, an unpaid
seller who has made part delivery, can exercise his right of lien over the remaining
goods. In such a case, the seller has a lien not only for the proportion of price to be paid
on account of goods retained, but also for whatever portion of price that remains
unpaid. However, if delivery of part of the goods is intended to be a symbolic delivery
of the whole, the right of lien on the goods retained will come to an end.

Termination of lien (Section 49)
1.The unpaid seller of goods loses his lien thereon
a. When he delivers the goods to a carrier or other bailee for the purpose of transmission
to the buyer without reserving the right of disposal of the goods.
b. When the buyer or his agent lawfully obtains possession of the goods.
c. By waiver thereof.
2. The unpaid seller of goods, having a lien thereon does not lose his lien by reason only
that he has obtained a decree for the price of the goods.
Stoppage in Transit
(Section 50)
The following are the conditions required to be fulfilled for the applicability of Section
50.
a) The seller should be unpaid
b) The buyer must be insolvent
c) The property in the goods should have passed from the seller to the buyer
d) The goods should be in transit.
The right of stoppage of goods accrues to the seller because of the insolvency of the
buyer. Where during the course of transit, the seller discovers that the buyer is insolvent,
he may retake possession of the goods before the possession is transferred to the buyer.
It should also be noted that the right of stoppage is exclusive of the right of lien.

Rights of the unpaid seller against the buyer personally
An unpaid seller has the following rights against the buyer personally.
a. Suit for price (Section 55)
Where under a contract of sale the property in the goods has passed to the buyer and the
buyer wrongfully neglects or refuses to pay for the goods, according to the terms of the
contract, the seller may sue him for the price of the goods [Section 55(1)].
Where under a contract of sale, the price is payable on a certain day irrespective of
delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may
sue him for the price although the property in the goods has not passed and the goods
have not been appropriated to the contract [Section 55(2)].
b. Suit for damages for non-acceptance (Section 56)
Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the
seller may sue him for damages for non-acceptance.
c. Suit for interest (Section 61)
Where the buyer wrongfully refuses to accept and pay for the goods, the court may
award interest at such rate as it thinks fit on the amount of the price to the seller in a suit
by him for the amount of the price from the date of the tender of the goods or from the
date on which the price was payable.

Summary:-
meaning of the Act.
When goods are sold on credit, the possession of the goods is transferred to the buyer
immediately. However, if the seller has retained possession of the goods until the expiry
of the period of credit, the lien which was not available to him during that period, will
accrue to him on the expiry of the credit period, even though the buyer is not insolvent at
that time.
(Section 50)

Questions:-

1. What do you mean by an unpaid seller? Discuss the rights and duties of an unpaid
seller?


Mercantile agent means a mercantile agent having in the customary course of business
as such agent authority either to sell goods, or to consign goods for the purposes of sale,
or to buy goods, or to raise money on the security of goods. Price means the money
consideration for a sale of goods. A contract which contemplates transfer of title to goods
to the buyer immediately is a sale while a contract which does not contemplate a transfer
of title to goods immediately is an agreement to sell.
this, is bound to be of importance to all classes of the community. When goods are
delivered by one person to another for some purpose, and where it is agreed that on the
accomplishment of the purpose, the goods will be returned or disposed of according to
the directions of the person delivering it, the goods are said to have been bailed.
seller himself prevents the goods from coming into existence. According to Section
16(2), where goods are bought by description from a seller who deals in goods of that
description (whether he is the manufacturer or producer or not), there is an implied
condition that the goods shall be of merchantable quality. According to Section 14(b),
in a contract of sale unless the circumstances of the contract are such as to show a
different intention there is an implied warranty that the buyer shall have and enjoy quiet
possession of the goods.
better than that of the seller (Subsection 1). Delivery of goods sold may be made by
doing anything which the parties agree shall be treated as delivery or which has the effect
of putting the goods in the possession of the buyer or of any person authorized to hold
them on his behalf. (Section 33). Where a third party who is in possession of the goods of
the seller, at the time of the sale, makes known to the buyer that he holds the goods on
his behalf, it amounts to a constructive delivery.

Module 4 : Negotiable Instruments Act

Introduction

The Negotiable Instruments Act, 1881, (herein after referred to as Act), relates to
Promissory Notes, Bills of Exchange, Cheques and Hundies. The Act does not affect any
custom or usage nor does it affect the provisions of Section 31 and Section 32 of the
Reserve Bank of India Act, 1934.
According to Section 13 of the Act, Negotiable Instrument means a promissory note, bill
of exchange or cheque payable either to order or to bearer. There are basically two
parties to a promissory note. The person making or executing the note promising to pay
the amount stated therein is called the maker. A promissory note which does not state the
place at which it is made is not invalid. Also, a promissory note will not be invalid by the
mere fact that it contains a promise to pay at a certain place.
A cheque is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand. Cheque includes electronic image of a truncated
cheque and a cheque in electronic form [Section 6].

A cheque can be either an open cheque or a crossed cheque. Open cheques are those
cheques which can be encashed directly across the counter by presenting to the drawee
bank. According to section 30, the drawer of a bill of exchange is bound, in case of
dishonor by the drawee or acceptor thereof, to compensate the holder, provided due
notice of dishonor has been given to, or received by, the drawer as hereinafter provided.

A promissory note, bill of exchange or cheque payable to bearer is negotiable by the
delivery thereof. A promissory note, bill of exchange or cheque payable to order, is
negotiable by the holder by endorsement and delivery thereof. Section 15 of the Act
defines endorsement as the writing of a persons name on the face or back of a negotiable
instrument or on a slip of paper (called allonge) annexed thereto, for the purpose of
negotiation.

Objectives:-

The objective of this module is to study what are negotiable instruments, their types,
uses, importance and need in todays globalize environment. In this module we will
study the definition of negotiable instrument, Characteristics of a negotiable instrument,
Kinds of negotiable instruments, Promissory notes, Bills of exchange, Cheques, Modes
of crossing, Parties to negotiable instruments, Negotiation, Effects of endorsement,
Endorsement, Dishonor of a negotiable instrument.

Unit - 24 : Introduction to Negotiable Instruments
Objectives:-

This lecture consist of negotiable instruments, Definition of negotiable instrument,
Characteristics of a negotiable instrument, Kinds of negotiable instruments etc.

Introduction:-

The provisions of Section 31 states that no other person other than the Reserve Bank of
India or the Central Government, can draw, accept, make or issue any bill of exchange,
hundi or promissory note payable to bearer on demand nor make or issue any promissory
note payable to the bearer of the instrument.
Justice Willis in his book The Law of Negotiable Securities has defined a negotiable
instrument as an instrument, the property in which is acquired by anyone who takes it
bona fide, and for value, notwithstanding any defect of title in the person from whom he
took it, from which it follows that an instrument cannot be negotiable unless it is such
and in such a state that the owner could transfer the contract or engagement contained
therein by simple delivery of instrument. Demand Instrument is an instrument like
promissory note or a bill of exchange wherein time for payment is specified or is
payable at sight is an instrument payable on demand.

Negotiable Instruments

The Negotiable Instruments Act, 1881, (herein after referred to as Act), relates to
Promissory Notes, Bills of Exchange, Cheques and Hundies. The Act does not affect any
custom or usage nor does it affect the provisions of Section 31 and Section 32 of the
Reserve Bank of India Act, 1934. The provisions of Section 31 states that no other person
other than the Reserve Bank of India or the Central Government, can draw, accept, make
or issue any bill of exchange, hundi or promissory note payable to bearer on demand nor
make or issue any promissory note payable to the bearer of the instrument. Section 32
provides that a person is punishable with fine if he issues a bill or note payable to bearer
on demand or a note payable to bearer.

Definition of Negotiable Instrument
According to Section 13 of the Act, Negotiable Instrument means a promissory note,
bill of exchange or cheque payable either to order or to bearer.
Justice Willis in his book The Law of Negotiable Securities has defined a negotiable
instrument as an instrument, the property in which is acquired by anyone who takes it
bona fide, and for value, notwithstanding any defect of title in the person from whom he
took it, from which it follows that an instrument cannot be negotiable unless it is such
and in such a state that the owner could transfer the contract or engagement contained
therein by simple delivery of instrument.
Characteristics of a Negotiable Instrument
1. Free transferability is one of the most important characteristics of a negotiable
instrument. It can be transferred by mere delivery or by endorsement and delivery.
The former is known as payable to bearer and the latter payable to order.
2. The holder of the instrument is presumed to be the owner of the property contained
therein.
3. The holder in due course (one who acquires the instrument in good faith and for
consideration) gets it free from all defects including fraud provided he was not party
to it.
4. The holder in due course is entitled to sue for recovery of the sum in his own name.
5. The instrument is transferable till maturity and in case of cheque till it becomes stale
(on the expiry of six months from the date of the issue).
6. Under Sections 118 and 119 of the Act, negotiable instruments are subject to certain
presumptions in order to facilitate business transactions. It shall be presumed that
every Negotiable Instrument is drawn for consideration irrespective of consideration
mentioned in the document. Every bill is accepted within reasonable time before
maturity and transferred before its maturity. The instruments were endorsed in the
order in which they appear on it. It is presumed that the holder of instrument is
holder in due course. However, the above presumptions are rebuttable by evidence to
the contrary. The burden of proof lies on defendant and not upon the plaintiff.
Kinds of Negotiable Instruments

Negotiable instruments may be
a) Negotiable by Statute: The Negotiable Instruments Act recognizes only three
kinds of instruments under Section 13 promissory notes, bills of exchange and
cheques.
b) Negotiable by Custom or Usage: Certain instruments have acquired the character
of negotiability by the usage or custom of trade. In India, Government
promissory notes, bankers drafts and pay orders, hundies, delivery orders and
railway receipts for goods have been held to be negotiable by usage or custom.

We shall however, restrict our study to those instruments covered under Section 13 of
the Act which are classified below.

a. Bearer Instrument: A promissory note, bill of exchange or cheque is payable
to bearer when it is expressed to be so payable or when the last endorsement on
the instrument is an endorsement in blank. A person who is the lawful holder of
a bearer instrument can obtain payment on the instrument.
b. Order Instruments: An order instrument is one which is expressed to be
payable on order and when it is expressed to be payable to a particular person it
does not contain any words prohibiting transfer or indicating the intention that it
shall not be transferable.
c. Inland Instruments: An inland instrument is one which is drawn or made in India
upon any person resident therein, even though it is made payable in a foreign
country.
d. Foreign Instruments: A foreign instrument is one which is not an inland
instrument. A foreign instrument must be drawn outside India and made payable
outside or inside India or it must be drawn in India and made payable outside
India and drawn on a person resident outside India.
e. Demand Instruments: An instrument like promissory note or a bill of
exchange wherein time for payment is specified or is payable at sight is an
instrument payable on demand.
f. Ambiguous Instrument [Section 17]: An instrument which in form is such that
it may either be treated by holder as a bill or as a promissory note, like when the
drawer and the drawee are the same person or where the drawee is a fictitious
person the holder can choose to treat the instrument either as a bill of exchange
or a promissory note. Once decided on the type of the instrument he is bound by
his decision.

Illustration:

A draws a bill on B and negotiates it himself. B is a fictitious drawee. The holder
may treat the bill as a note made by A.

Inchoate or Incomplete Instrument: When one person signs and delivers to another,
a stamped instrument which is either wholly blank or incomplete, he thereby gives a
prima facie authority to the holder thereof to make or complete, as the case may be,
upon it a negotiable instrument, for any amount specified therein, and not exceeding the
amount, covered by the stamp. Such an instrument is called an inchoate instrument.

A owes B Rs.5,000. He gives B a blank acceptance on a bill which is sufficiently
stamped to cover any amount up to Rs.2,000. B endorses the bill to H, a holder in
due course. H who fills up the amount as Rs.2,000 can recover the amount.

Escrow: When a negotiable instrument is delivered conditionally or for a special
purpose as a collateral security or for safe custody only, and not for the purpose of
transferring absolutely property therein, it is called an escrow. The following example
clearly illustrates this.

A, the holder of a bill, endorses it to B or order for the express purpose that B may
get it discounted. B negotiates the bill to C who takes it bona fide and for value. C
is a holder in due course, and he acquires a good title to the bill.

Accommodation Bill: A bill which is drawn, accepted or endorsed without
consideration is called an accommodation bill. The party lending his name to oblige the
other party is known as the accommodating or accommodation party, and the party so
obliged is called the party accommodated. The accommodated party cannot, after he
has paid the amount of the bill, recover the amount from any person who became a
party to the bill for his accommodation. An accommodation bill can be negotiated after
maturity provided the person to whom it is negotiated takes it in good faith and for
consideration. Dishonor or failure to give notice of dishonor does not discharge the
prior parties from the liability.

Trade Bills: When a bill is drawn, accepted or endorsed for consideration it is called a
genuine trade bill.
Having understood the types and classifications of negotiable instruments we shall now
learn about promissory notes, bills of exchange and cheques.

Summary:-
Bearer Instrument is a promissory note, bill of exchange or cheque is payable to bearer
when it is expressed to be so payable or when the last endorsement on the instrument is
an endorsement in blank. A person who is the lawful holder of a bearer instrument can
obtain payment on the instrument.

Questions:-
1. What are the negotiable instruments? Discuss the features and types of negotiable
instruments.

Unit - 25 : Promissory Notes
Objectives:-
In this lecture we will through light on some very important topics such as promissory
notes, Parties to a promissory note, Essentials of a promissory note with some
provisions relating to it.

Introduction:-
Section 4 defines a promissory note as an instrument in writing (not being a bank note or
a currency note) containing an unconditional undertaking, signed by the maker to pay a
certain sum of money only to, or to the order of a certain person, or to the bearer of the
instrument.
There are basically two parties to a promissory note. The person making or executing
the note promising to pay the amount stated therein is called the maker. The person to
whom the amount is payable is called the payee.

Promissory Notes

Section 4 defines a promissory note as an instrument in writing (not being a bank note
or a currency note) containing an unconditional undertaking, signed by the maker to
pay a certain sum of money only to, or to the order of a certain person, or to the bearer
of the instrument. Section 1(4)(a) of IT Act 2000 excludes promissory notes, as
promissory note cannot be made by electronic means.

A promissory note normally states as follows:
I promise to pay S on order Rs.1,000.
I acknowledge myself to be indebted to S for Rs.2,000 to be paid on demand,
for value received.

Parties to a Promissory Note
There are basically two parties to a promissory note. The person making or executing
the note promising to pay the amount stated therein is called the maker.
The person to whom the amount is payable is called the payee.
Essentials of a Promissory Note

A promissory note should conform to certain requirements. They are:

i. It must be in writing.
The basic objective of insisting that a promissory note should be in writing is to
exclude an oral agreement from the purview of the Act. The writing on the
promissory note may be either in pencil or ink and also includes printing,
lithography or any other form of depicting the words in a viewable form.
As long as the requirements of Section 4 are complied with, a promissory note will
be held valid. Further, it is the intention of the maker which has to be looked into.
The mere absence of the word promise will not render a note invalid provided the
maker has given an unconditional undertaking to make payment. On the other hand,
there are instances where a note may satisfy all the conditions as required by
Section 4 and may yet, not be a promissory
Note. For example, a bankers deposit note in the form Received of A Rs.1000 to
be accounted for on demand duly signed by the maker is not a promissory note.

ii. It must contain an express promise to pay. An implied promise is not enough to
constitute a promissory note.

The following case of Bal Mukund vs. Munna Lal Ramji Lal (1970) aptly
describes this.
In the above case A executed a promissory note which stated I of my own free
will and accord approached B and borrowed from him the sum of Rs.100
bearing interest at the rate of 50 paise percent per mensem. I have, therefore,
executed these few presents by way of a promissory note so that it may serve as
evidence and be of use when needed. Held, the instrument is not a promissory
note as it does not contain an express undertaking to pay the amount mentioned in
it.
The following have been held to be promissory notes:
In Yeruganti Chinna vs. Kota Egiri we shall order the borrowed moneys to be
repaid was held to constitute a promissory note.
Rs.1,200 balance due to you I am still indebted and do promise to pay.
I do acknowledge myself to be indebted to X in Rs.1,000 to be paid on
demand for value received.
iii. The promise or undertaking to pay must be definite and unconditional.
In the case of Bardesley vs. Baldwin (1741), it was held that the promissory note
was a conditional one and hence, not enforceable. The facts of the case were: A
executed a promissory note stating I promise to pay Rs.1,000 to B, 30 days after
his marriage with C. It was held that this is not a promissory note as it is probable
that B may not marry C.
iv. The negotiable instrument must be signed by the maker without which it is
taken as incomplete and ineffective. The signature signifies that the person is personally
authenticating and giving effect to the contract contained in the instrument.
It was held in George vs. Surrey, that where the maker of a note is unable to write, he
may sign by affixing a mark in lieu of his signature. In certain cases, marks and initials
have been held to be signatures if they were intended to be such.

v. The negotiable instrument must clearly point out the maker. Another basic
requirement of a promissory note is that it should give a clear indication of the maker of
the note.
A promissory note may be made either jointly or jointly and severally. A promissory
note that reads I promise to pay and signed by two persons is deemed to have been
made jointly and severally by the two. A joint and several promissory note does not
consist of only one note. It consists of several notes. If three persons make a joint and
several promissory note, there are in fact four notes (i.e., one joint note of all the three
and three several notes of each of them).
vi. The sum payable must be certain without any scope of contingent additions or
subtractions.
Ambiguous promises invalidate the promissory note. For example, I promise to pay S
Rs.1,000 and all the other sums due to him.
The following have been held not to be promissory notes owing to uncertainty of the
sum payable.

a.I promise to pay A Rs.300 and all other sums which may become due to him.
b.I promise to pay A, Rs.500 after deducting any amount which he may owe me.
c.I promise to pay A, Rs.1,200 and all fines according to the rule.

In Official Liquidator vs. Bishan Singh, a document which acknowledged a debt and
contained an undertaking to repay the debt along with interest (interest rate was not
specified) was held not to be a promissory note as the sum payable was uncertain.
However, in Seth Tulsidass Lalchand vs. Rajagopal, it was held that where the interest
rate was not specified, a rate of six percent would be applicable as per Section 80 of the
Act.
vii. The payment must be in money and not in kind. If the instrument contains
agreement to pay in kind then it cannot be considered as a promissory note.
I promise to deliver to B 1,000 bags of wheat is not a promissory note as there is no
promise to pay in money.
viii. The promissory note should clearly point out the person who is to receive
payment on the note. The name of the payee may be indicated anywhere on the note
and so long as he can be ascertained the instrument will be a valid promissory note
subject to fulfillment of other conditions as required by Section 4.
When, at the time of making the note, the payee is known with certainty, the absence of
his name on the instrument will not render the promissory note invalid.

Consideration, Date, Place etc.
The maker of a note usually specifies that the note is being made for value received.
However, the absence of this statement will not render a note invalid. The making of a
promissory note presumes the existence of consideration, until the contrary is proved.

A promissory note which does not state the place at which it is made is not invalid.
Also, a promissory note will not be invalid by the mere fact that it contains a promise to
pay at a certain place.

Likewise, an undated instrument is not invalid. Every undated instrument will be
deemed to have been dated on the date of its delivery. Under Section 118(b) of the Act,
every dated instrument will be presumed to have been made and drawn on the date it
bears unless proved otherwise. A bank note or currency note is not a promissory note.

The maker of a note usually specifies that the note is being made for value received.
However, the absence of this statement will not render a note invalid. The making of a
promissory note presumes the existence of consideration, until the contrary is proved.

pay at a certain place.

Likewise, an undated instrument is not invalid. Every undated instrument will be
deemed to have been dated on the date of its delivery. Under Section 118(b) of the Act,
every dated instrument will be presumed to have been made and drawn on the date it
bears unless proved otherwise. A bank note or currency note is not a promissory note.

Ix The promissory note must be properly stamped in accordance with the provisions of
the Indian Stamp Act. Each stamp must be duly cancelled by the makers signature.

The stamp duty payable is dependent on the value of the note and whether the note is
payable on demand or at a future date. An unstamped promissory note is invalid and no
action can be entertained on such a note.

Section 17 of the Stamp Act, 1899 lays down that a promissory note should be stamped
before or at the time of its execution. Also, it is not compulsory to use adhesive stamps
while executing a promissory note. In case, an adhesive stamp is used, it should be
properly canceled so that it cannot be used again. A promissory note may also be
executed on paper on which adequate stamps have been embossed. In such a case, care
should be taken while writing the document. The matter should be written in such a
manner that the stamp appears on the face of the instrument and cannot be used for any
other instrument.
x It may be payable on demand or after a specified period.
Xi It cannot be made payable to bearer on demand.
Summary:-

pay at a certain place. A promissory note which does not state the place at which it is
made is not invalid. Also, a promissory note will not be invalid by the mere fact that it
contains a promise to pay at a certain place.
Questions:-
1. What is Promisory note? Discuss the parties to a promissory note?

Unit - 26 : Bills of Exchange
Objectives:-
The topics covered in this lecture will emphasize upon bills of exchange, Parties to a
bill of exchange, Essentials of bills of exchange, Bills in sets, Calculating maturity of
bill or not payable so many months after date or sight etc.

Introduction:-

According to Section 5, 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.
The parties to a Bill of Exchange are basically three. They assume different roles which
are:-
The person who draws the bill is called the Drawer.
The person on whom the bill is drawn is called the Drawee.
The person who accepts the bill (he may be the drawee or a stranger on behalf
of drawee) is called the Acceptor.
The person to whom the sum stated in the bill is payable (either the drawee or
any other person) is the Payee.

Bills of Exchange
This form of negotiable instrument has been in usage for a very long time. It was
initially used for payment of debts by traders residing in one country to another country
with a view to avoiding transmission of coins. Now-a-days it is used as trade bills both
for domestic as well as foreign trade known as inland bills and foreign bills
respectively.
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 bill of exchange cannot be made by electronic means and hence Section
1(4)(a) of IT Act applicable to cheques is not applicable to Bill of Exchange

Parties to a Bill of Exchange
There are basically three parties to a bill of exchange. They assume different roles
which are explained below:
The person who draws the bill is called the Drawer.
The person on whom the bill is drawn is called the Drawee.
The person who accepts the bill (he may be the drawee or a stranger on behalf
of drawee) is called the Acceptor.
The person to whom the sum stated in the bill is payable (either the drawee or
any other person) is the Payee.
The person who is in lawful possession of the bill is called the Holder.
The person who endorses the bill in favor of another person is called Endorser.
The person in whose favor the bill is endorsed is called the Endorsee.

Essentials of Bills of Exchange
i. It must be in writing.
ii. It must contain an unconditional order to pay when a bill of exchange is drawn
by the drawer it is assumed that the drawee has funds with him to pay to the
drawer. A bill of exchange contains an order by the drawer to the drawee, to
make payment to the payee. Therefore, if a bill contains a request to make
payment, it is likely to cause inconvenience and uncertainty. However, the use
of few expressions of politeness will not affect the validity of the bill. In Ruff vs.
Webb, an instrument that read Mr. AB will much oblige Mr. CD by paying to
the order of P was held to be a good bill. Excessive terms of politeness
should be avoided as it may give an impression that the communication
contained in the bill was not an order.
iii. It must be in writing.
iv. It must contain an unconditional order to pay when a bill of exchange is drawn
by the drawer it is assumed that the drawee has funds with him to pay to the
drawer. A bill of exchange contains an order by the drawer to the drawee, to
make payment to the payee. Therefore, if a bill contains a request to make
payment, it is likely to cause inconvenience and uncertainty. However, the use
of few expressions of politeness will not affect the validity of the bill. In Ruff vs.
Webb, an instrument that read Mr. AB will much oblige Mr. CD by paying to
the order of P was held to be a good bill. Excessive terms of politeness
should be avoided as it may give an impression that the communication
contained in the bill was not an order.
v. The sum payable must be certain.
vi. It must comply with other formalities like number, date and consideration,
stamp, etc.

A comparison can be made between a promissory note and a bill of exchange. This
may be summarized as follows:
The liability of the maker of a note is primary and absolute whereas the liability
of the drawer of a bill is secondary and conditional.
The maker of a note is in the same position as an acceptor of a bill. Therefore,
except in a case where the note is payable at a certain place, presentment of the
instrument and notice of dishonor is not required to make him liable.
A note cannot be made conditionally, whereas a bill may be accepted
conditionally. This is because in the case of a note, the maker is the originator of
the note whereas in the case of a bill, the role of the acceptor is secondary (i.e.,
he is not the originator of the bill).
The maker of a note stands in immediate relation with the payee where as the
drawer of a bill stands in immediate relation with the acceptor and not the payee.
A promissory note indorsed by the payee corresponds to an accepted bill payable
to the drawers order, the payee having the same rights and obligations as that of
the drawer of the accepted bill.

Bills in Sets

A bill may be drawn in sets when it has to be sent from one country to another. The
object is to avoid undue delay and unnecessary inconvenience which may arise due to
the loss or miscarriage of the bill during the transit and to ensure the safe transmission
of at least one part of the bill to the drawee. Bills are usually drawn in sets to avoid the
danger of loss. They are drawn in sets of three, each of which is called Via and as
soon as any one of them is paid, the others become inoperative.

A bill of exchange can be drawn in parts and all parts make a set and the whole set
constitutes only one bill. Each part must be numbered and must have reference to the
other parts, failure to do so will make that part a separate bill if it gets into the hands of
a holder in due course. When the payment is made on one of the parts the entire bill is
extinguished. All parts of the bill must be signed by the drawer and a stamp is affixed
on one part as only one part of the whole set needs to be accepted. When endorsement
is made to different persons, the endorsee and subsequent endorsers of each part are
liable on such parts as if these parts were separate bills. Where two or more parts of a
set are negotiated to different holders in due course, he who first acquires title to his
part is deemed to be the true owner of the bill.

A bill of exchange takes the form of a bank draft when it is drawn by one bank on
another bank, or on its own branch and is negotiable. It is almost like a cheque but
differs as it is drawn usually by a bank on its own branch and can easily be
countermanded and made payable to bearer.

At sight, On presentment, After sight: In a promissory note or bill of
exchange, the expressions at sight and on presentment means on demand. The
expression after sight means, in a promissory note, after presentment for sight, and, in
a bill of exchange after acceptance, or noting for non-acceptance, or protest for non-
acceptance. (Section 21)

Maturity: The maturity of a promissory note or bill of exchange is the date at which
it falls due. (Section 22)

Days of grace: Every promissory note or bill of exchange which is not expressed to be
payable on demand, at sight or on presentment is at maturity on the third day after the
day on which it is expressed to be payable.

Calculating maturity of bill or not payable so many months after date or sight: In
calculating the date at which a promissory note or bill of exchange, made payable at
stated number of months after date or after sight, or after a certain event, is at maturity,
the period stated shall be held to terminate on the day of months which corresponds
with the day on which the instrument is dated, or presented for acceptance or sight, or
noted for non-acceptance, or protested for non-acceptance, or the event happens, or
where the instrument is a bill of exchange made payable a stated number of months
after sight and has been accepted for honor, with the day on which it was so accepted. If
the month in which the period would terminate has no corresponding day, the period
shall be held to terminate on the last day of such month. (Section 23)

Calculating maturity of bill or note payable so many days after date or sight: In
calculating the date at which a promissory note or bill of exchange made payable a
certain number of days after date or after sight or after a certain event is at maturity, the
day of the date, or of presentment for acceptance or sight, or of protest for non-
acceptance, or on which the event happens, shall be excluded. (Section 24)

When day of maturity is a holiday: When the day on which a promissory note or bill
of exchange is at maturity is a public holiday, the instrument shall be deemed to be due
on the next preceding business day. (Section 25)

Explanation: The expression Public holiday includes Sunday, and any other day
declared by the Central Government, by notification in the Official Gazette, to be a
public holiday.

Summary:-

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 bill of exchange cannot be made by electronic means and hence Section
1(4)(a) of IT Act applicable to cheques is not applicable to Bill of Exchange. Days of
grace:- Every promissory note or bill of exchange which is not expressed to be payable
on demand, at sight or on presentment is at maturity on the third day after the day on
which it is expressed to be payable.

Questions:-

1. Bills of exchange is a very important document for the business, why? Discuss the
parties to a bills of exchange.

Unit - 27 : Cheques
Objectives:-
The topics covered in this lecture are cheques, Provisions in respect, of cheques,
Electronic cheque, Crossing of cheques, Modes of crossing, Crossing after issue of the
cheque, Capacity of parties, Parties to negotiable instruments, Liabilities of parties etc.

Introduction:-
cheque and a cheque in electronic form [Section 6].

A cheque should be signed by the drawer and should contain an unconditional order to a
specified banker, to pay on demand, a certain sum of money to or to the order of a
specified person or to the bearer of the instrument.

Provisions of electronic cheque has been made by Amendment Act, 2002. As per
Explanation I(a) to Section 6, A cheque in the electronic form means a cheque which
contains the exact mirror image of a paper cheque, and is generated, written and signed
by a secure system ensuring the minimum safety standards with the use of digital
signature (with or without biometrics signature) and asymmetric crypto system.

bank. Crossing of a cheque is a direction given to the paying bank to pay the money
generally to a bank or to a particular bank as the case may be.

Cheques

Provisions in respect of Cheques
cheque and a cheque in electronic form [Section 6]. The definition is amended by
Amendment Act, 2002, making provision for electronic submission and clearance of
cheque. The cheque is one form of bill of exchange. It is addressed to Banker. It cannot
be made payable after some days. It must be made payable on demand.
A cheque should be signed by the drawer and should contain an unconditional order to
a specified banker, to pay on demand, a certain sum of money to or to the order of a
specified person or to the bearer of the instrument. All cheques are bills of exchange
whereas all bills of exchange are not cheques. The fact that a cheque is ante-dated or
post-dated will not make it invalid. A post dated cheque is payable on or after the date it
bears. Even though the same rules are applicable to both bills and cheques, there are
some differences between the two. They are:
a. The drawee of a bill can be made liable on it, only after the bill is accepted by him.
On the other hand, a cheque does not require any acceptance and is intended for
immediate payment.
b. Three days of grace are usually allowed in case of a bill except where a bill is
payable on demand. A cheque, however is not entitled to any days of grace.
c. The drawee of a cheque is always a banker, whereas the drawee of a bill may be any
one including a banker.
d. A bill of exchange should be presented for payment. Failure to do so, normally
discharges the drawer from his liability on the bill. Delay in presenting a cheque
does not discharge the drawer of the cheque from his liability, except in a case
where the drawer has incurred damages because of the delay.
e. A cheque may be crossed but a bill of exchange cannot be crossed.
f. In case of dishonor of a bill, a notice of dishonor should be given to the drawer in
order to charge him. Notice of dishonor of cheque to the drawer, may not be
necessary in a large number of cases. (for e.g. cheque dishonored for want of
drawers funds with the bank).

Electronic Cheque
Explanation I(a) to Section 6, A cheque in the electronic form means a cheque which
contains the exact mirror image of a paper cheque, and is generated, written and signed
by a secure system ensuring the minimum safety standards with the use of digital
signature (with or without biometrics signature) and asymmetric crypto system.
Truncated Cheque
Explanation I(b) to section 6, A truncated cheque means a cheque which is truncated
during the clearing cycle, either by the clearing house during the course of a clearing
cycle, either by the clearing house or by the bank whether paying or receiving payment,
immediately on generation of an electronic image for transmission, substituting the
further physical movement of the cheque in writing.

Crossing of Cheques
bank. In this case, as the cheque is not required to go through a bank before being
presented to the drawee bank for payment, there are certain risks attached to such
cheques. If such a cheque is lost or stolen, the finder or the thief may get it encashed
with the drawee bank unless the drawer has in the meanwhile countermanded payment.
The concept of crossing cheques was introduced with a view to avoid the losses that may
result because of open cheques.
Crossing of a cheque is a direction given to the paying bank to pay the money generally
to a bank or to a particular bank as the case may be. The basic intention of crossing is to
secure payment to a bank in order to be able to locate the person for whose use the
money has been received and also to force the holder of the instrument to present it
through a source of recognized respectability.
It should be kept in mind that crossing of a cheque does not affect its negotiability unless
the words not negotiable are inserted in addition to the crossing. Where the words not
negotiable are added to the crossing, the cheque is not negotiable although it remains
transferable.

Modes of Crossing

According to Section 123, where a cheque bears across its face an addition of the words
and company or any abbreviation thereof, between two parallel transverse lines, or of
two parallel transverse lines simply, either with or without the words not negotiable,
that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed
generally.
Where a cheque is crossed generally, it is the responsibility of the drawee bank not to
make payment otherwise than to a bank. (Section 126)

a. Special Crossing: According to Section 124, where a cheque bears across its
face an addition of the name of a banker, either with or without the words not
negotiable that addition shall be deemed a crossing, and the cheque shall be
deemed to be crossed specially, and to be crossed to that banker.

Where a cheque is crossed specially, the drawee bank is obliged to make payment
only to the bank to whom the cheque is crossed or to its agent for collection.

b. Restrictive Crossing: In Restrictive Crossing the words Account Payee are
added to the general or special crossing. The words Account Payee on a
cheque are direction to the collecting banker that the amount collected on the
cheque is to be credited to the account of the payee. Account Payee cheques
are not negotiable.
c. Not Negotiable Crossing: According to Section 130 of the Act, the effect of the
words not negotiable on a crossed cheque is that the title of the transferee of
such a cheque cannot be better than that of its transferor. The addition of the
words not negotiable does not restrict the further transferability of the cheque.
The object of crossing a cheque not negotiable is to afford protection to the
drawer or holder of the cheque against miscarriage or dishonesty in the course
of transit by making it difficult to get the cheque so crossed cashed, until it
reaches its destination.

Crossing after issue of the cheque
According to Section 125:
Where a cheque is not crossed, the holder of the cheque may cross it either
generally or specially.
Where the cheque is crossed generally, the holder may cross it specially.
Where the cheque is crossed either generally or specially, the holder may add
the words not negotiable to the crossing.
A cheque that is crossed specially to a specified banker, may be crossed again by that
banker specially to another banker, his agent, for collection.

Illustrations
The following is an illustration of how a cheque may be crossed:
A draws a cheque on his bank (i.e., Andhra Bank) by crossing it generally. B
is the payee of the cheque. He receives the cheque and indorses it. This cheque
cannot be encashed directly over the counter of the drawee bank. B can encash
this cheque only through a bank account. B pays this cheque into his own
account at the Indian Bank. The cheque is collected and Bs account is credited
with the said amount while As account is debited.
In case the cheque received by B is crossed specially by him to the Indian
Bank, the same result will follow. If the Indian Bank is unable to present the
cheque, it may cross the cheque specially to another banker, its agent say, the
Hyderabad bank, for collection of the same.

A person who takes a cheque that bears the words not negotiable acquires no better
title than that of his immediate transferor. The true owner of the instrument can claim
the instrument or the money from the said person. However, under Sections 128 and
131, the paying and collecting bank will be exonerated from any liability if it can be
proved that the payment and collection were made in good faith and without
negligence.
For example, a cheque that is payable to bearer and crossed generally with the
words not negotiable is stolen and subsequently comes into the hands of B
who takes the instrument in good faith and gives value for it. B pays the
cheque into his own account and his bank collects the payment from the drawee
bank. By virtue of Sections 128 and 131, the drawee bank and the collecting
bank are exonerated from liability on the cheque. However, as B does not
acquire a good title to the cheque, he is liable to refund the money to the true
owner. The cheque in the given case is not negotiable and therefore as regards
the true owner, B is in no better position than his immediate transferor.

The protection available to the collecting banker under Section 131, is however subject
to the following conditions:
a. The collecting bank should have acted in good faith and without negligence. The
question as to whether a bank had acted negligently or not would depend on the
circumstances and facts of each case. It is not necessary that negligence should relate
only to collection of a cheque.

It was held in Central Bank of India Limited vs. Gopinathan Nair, that negligence in the
opening of an account of the customer may prevent the bank from seeking protection
under Section 131.

Similarly, in Orbit Mining and Trading Co. Limited vs. Westminister Bank Limited,
failure on the part of the collecting banker to make necessary inquiries about the
customer, his occupation, employer, etc., was held to constitute negligence. However, it
was also held that the collecting bank is not required to continually keep itself updated
as to the identity of the customers employer.

b. The collecting bank should have received payment on behalf of a customer.
Where the bank has received payment on behalf of a person who is not a customer of
the bank, then it cannot claim protection under Section 131.

c. Section 131 will not be applicable where the collecting bank is a holder for value.
This section affords protection to the bank only if bank is acting as an agent for
receiving payment. Where a bank advances money to the customer against the
cheque, even before the cheque is realized, then it is not an agent but is a holder for
value.

In Mclean vs. Clyesdale Banking Co., a customer had overdrawn his account with a
bank and later paid in a cheque to extinguish the overdraft. It was held that the bank
was a holder for value and not an agent for collection.

d. Lastly, the cheque should be crossed and the crossing should have been made
before the collecting bank receives the said cheque. Where an uncrossed cheque is
given to the bank for collection and where the bank crosses it, Section 131 cannot be
invoked.

Capacity of Parties
According to Section 26, every person is capable of contracting, according to the law to
which he is subject, may bind himself and be bound by the making, drawing,
acceptance, endorsement, delivery and negotiation of a promissory note, bill of
exchange or cheque.

This section lays down that the capacity of a person to incur liability on a negotiable
instrument is coextensive with his capacity to contract. A person who is not competent
to contract, cannot be made liable on the instrument. However, the incapacity of one of
the parties to the instrument will in no way reduce/absolve the liability of other
competent parties to the instrument.

Under Section 11 of the Indian Contract Act, a minors contract is void and cannot be
ratified by him after he attains majority.

According to Section 26, a minor may draw, indorse, deliver and negotiate such
instruments as to bind all parties except himself.

Nothing herein contained shall be deemed to empower a corporation to make, indorse
or accept such instruments except in cases in which, under the law for the time being in
force, they are so empowered.

Where several persons are mentioned in a negotiable instrument as makers, drawers,
acceptors, endorsers and one of them is a minor, except the minor, other competent
parties will not be discharged from their liability.

It was held in Burgess vs. Merill, that the holder of a negotiable instrument can sue all
the adult parties to a bill, to the exclusion of the minor.

A minor cannot bind himself by accepting a bill or making a note. However, all the
other competent parties to the instrument will be liable. In Sulochana vs. Pandyan Bank
Limited, where a promissory note was jointly executed by a minor and her father, it was
held that the father was liable on the note.

Even though the minor cannot be made liable on a bill or a note, he can acquire all the
rights under it, and where the minor becomes the holder he is entitled to sue all the prior
parties to the instrument.

In Sathrurasu vs. Bassappa, it was held that a promissory note payable on demand and
executed in favor of a minor is not void so as to disentitle him to sue on it.

In Exp Margrett, re Soltykoff, it was held that a minor cannot bind himself by accepting
a bill or making a note for necessaries supplied to him. However, the person who
supplies the necessaries is entitled to claim reimbursement from the property of the
minor.

Also, where a minor obtains a loan on a promissory note by falsely representing his age,
he can neither be compelled to pay damages for the fraud nor can he be forced to pay
back the amount of the loan.

In Indra vs. Anthiappa a note made by a person on attaining majority in renewal of a
previous note executed by him when he was a minor was held to be a nullity for want of
consideration.

Other than minors, a promissory note or a bill of exchange executed by lunatics,
persons of unsound mind and drunken persons will be unenforceable against them,
though other competent parties to the instrument will be liable.

A person of unsound mind will be liable on an instrument executed by him during a
period where he was capable of exercising rational judgment. Similar would be the case
of a drunken person. An instrument executed by a drunken person will not bind him if it
can be proved that the instrument was executed by him in his drunkenness and he was
unaware as to what it was.

Section 26 states that a person competent to contract, binds himself on any note, bill,
etc., executed by him. However, there is an exception to this rule. According to the
proviso to Section 26, a corporation under this section cannot bind itself upon an
instrument unless empowered in this behalf by the law for the time being in force. The
power to bind itself upon an instrument may either be express or implied. For example,
a company incorporated for the purpose of carrying on trade has implied power to
make, draw, accept and indorse a bill or a note. Where such a power is not implied, the
contractual capacity of the corporation can be ascertained from the memorandum of
association of the company.

Suit by a Person other than the Holder
Judicial opinion differs as to whether a person other than the holder can bring a suit
upon a negotiable instrument. Some have held the view that Section 78 of the Act does
not prevent a person other than the holder of the instrument from bringing a suit upon a
negotiable instrument. Thus, the true owner of an instrument may bring a suit upon it if
he is in a position to obtain a good discharge of liability for the person liable thereon.
In Assuram vs. Niranjandass, a note executed in favor of the firm was allotted to one of
the partners without any endorsement at the time of partition of the firm. The partner
could sue upon the instrument.
In Davvuru Jayarama Reddy vs. Revathi Mica Co., it was held that the firm could sue
upon the instrument, where a note was executed in favor of a person as partner of the
firm.

Parties to Negotiable Instruments
We have, while describing a promissory note, bill of exchange and cheque, also
discussed the various parties to each of these instruments. In addition, there are two
more parties common to these instruments holder and holder in due course.

1. Holder
According to Section 8 of the Act, a person is a holder of a negotiable instrument if
he is entitled in his own name (a) to the possession of the instrument, and (b) to
recover or receive its amount due from the parties thereto. To be a holder, the person
must be named in the instrument as the payee, or the endorsee or bearer thereof.

2. Holder in Due Course
A holder in due course can claim to be so, only if it can be proved that he acquired the
instrument for valuable consideration. According to the Indian Contract Act, one of the
essential requirements of a contract is the presence of consideration. It is also necessary
that the consideration is not illegal, immoral, opposed to public policy or injurious to a
third person. Further, Section 2(d) of the Indian Contract Act lays down that
consideration should pass at the desire of the promisor. Where consideration does not
pass at the desire of the promisor, the contract is not a valid contract
Time of acquisition of the instrument
The holder in due course should have acquired the instrument any time before the
amount became payable. Thus, if the instrument is acquired on the day the amount
becomes payable, the person taking it does not acquire the rights of a holder in due
course, as the said amount is payable at any time on that particular day.
Where a negotiable instrument is acquired by a person after the day the amount
becomes payable, such a person cannot take the place of a holder in due course. The
rights acquired by him are only coextensive with that of his immediate transferor.
It was held in Ramanadam Chettiar vs. Gundu Aiyyar, that a promissory note is a
continuing security and the fact that the note has been overdue for a long time at the
time of negotiation to the holder, will not prevent him as holder in due course from
enforcing the same.

Without notice of defect in title
A holder in due course should have acquired the instrument without having sufficient
cause to believe that any defect existed in the title of his immediate transferor.
According to English Law, a person can claim to be a holder in due course if he proves
that he has acquired the instrument in good faith irrespective of the fact that he was
negligent and reckless while acquiring the instrument.

Time of notice of defects
A person who takes an instrument fully aware of the defective title of his immediate
transferor is not a holder in due course. Notice of the defective title at the time when a
person takes the instrument is relevant. It is such notice which disqualifies him from
acting as a holder in due course. Any notice received by him after he has perfected his
title to the instrument, will not affect his right as a holder in due course.

Payment in Due Course
According to Section 10 of the Act, payment in due course means payment in
accordance with the apparent tenor of the instrument in good faith and without
negligence to any person in possession thereof under circumstances which do not afford
a reasonable ground for believing that he is not entitled to receive payment of the
amount therein mentioned

It was held in Morley vs. Culverwell, that the payment of a bill by the drawee or the
acceptor before its maturity amounts to a purchase of the bill. The drawee/acceptor in
such a case cannot be prevented from reissuing the said bill.
Privileges of a Holder in Due Course

A holder in due course obtains title to the instrument free from equity. He also enjoys
certain privileges. They are:
i. A person who has signed and delivered to another, a stamped but otherwise
inchoate instrument, is prevented from asserting, as against a holder in due
course, that the instrument has not been filled in accordance with the authority
given by him, the stamp being sufficient to cover the amount. (Section 20)
ii. Until the instrument is duly satisfied, every prior party to a negotiable
instrument is liable thereon to a holder in due course.
iii. If a bill or note is negotiated to a holder in due course, the other parties to the
bill or note cannot avoid liability on the ground that the delivery of the
instrument was conditional or for special purpose only. (Section 46)
iv. Once the negotiable instrument passes through the hands of a holder in due
course, it gets cleansed of all its defects, provided the holder is not a party to the
fraud. (Section 53)
v. The defenses on the part of a person liable on a negotiable instrument cannot be
set-up against a holder in due course if that negotiable instrument has been lost,
or obtained from such person by means of an offense or fraud or unlawful
consideration.
vi. The law presumes every holder as a holder in due course, although the
presumption is rebuttable.
vii. The validity of the instrument as originally made or drawn cannot be denied by
the maker/drawer/acceptor for honor in a suit initiated by a holder in due course.
viii. The endorser of a negotiable instrument cannot, in a suit thereon by a
subsequent holder, deny the signature or capacity to contract of any prior party
to the instrument. (Section 122)

Liabilities of Parties

Liability of Drawer
According to section 30, the drawer of a bill of exchange is bound, in case of dishonor
by the drawee or acceptor thereof, to compensate the holder, provided due notice of
dishonor has been given to, or received by, the drawer as hereinafter provided.
The liability of the drawer on a bill of exchange is secondary in nature. It is the acceptor
of the bill who is primarily responsible to make payment. By drawing a bill, the drawer
undertakes that,

a) On presentment of the same to the acceptor, it will be accepted and duly
honored, and
b) If dishonored by the acceptor either by failure to make payment or by non-
acceptance he will compensate the holder or any endorser provided due notice
of dishonor has been given to him.

The liability of a drawer arises only when there is a dishonor of the bill. Until then the
drawer is not liable on the bill. In case the bill is dishonored and notice of the same is
given to him, the drawer will be liable to make payment to the payee

Liability of Drawee
The relationship between a banker and a customer is one of a debtor and creditor. In
addition, the banker also undertakes to honor the customers cheques as long as there
are funds available in the customers account. The banker while fulfilling the obligation
to honor the customers cheques may permit him to overdraw to a certain limit
(provided there is a valid agreement to that effect).
Similarly, the customer undertakes to draw cheques in a proper manner so as to enable
the banker to honor the same
Where a customer has two accounts at a bank, the banker cannot transfer funds from
one account to the other without obtaining the approval of the customer Greenhalgh vs.
Union Bank of Manchester.

Following are some of the instances where a banker may refuse to honor the
customers cheques.
i. Where a postdated cheque is presented for payment prior to the date it bears,
then the banker will be justified in refusing to honor the cheque.
ii. Where a customer does not have sufficient funds to his credit (i.e., there are no
funds or funds available are not enough to cover the amount of the cheque), then
the banker may dishonor the cheque.
iii. If the funds of the customer are subject to a lien by the banker, the customers
cheque is likely to be dishonored.
iv. A banker will also be justified in dishonoring a cheque that is ambiguous,
unclear or contains a material alteration.
v. The cheques of a customer who has been declared insolvent is also liable to be
dishonored.
vi. Similarly, where the customer has countermanded payment, the banker is
justified in refusing payment of the customers cheques.
vii. Where the banker receives notice of either the customers death or insanity, he
may refuse payment. However, any payment made before notice of death will
be valid.

Liability of the Drawee Bank for Wrongful Dishonor
A drawee bank is liable to make payment only if the cheque is presented to it during the
usual banking hours. Where the bank holds sufficient funds of the customer but
wrongfully dishonors the customers cheque, then it is liable not only for any monetary
loss suffered by the customer but also for loss or injury to the reputation of the
customer.

It should be noted that a drawee bank is liable only to the drawer in case of wrongful
dishonor of a cheque. Thus, the holder of a cheque cannot enforce payment upon the
same from the bank as there is no privity of contract between the two. This is the case,
even when the bank has sufficient funds of the customer. The remedy of the holder of a
cheque lies against the drawer of the cheque and not against the bank.

Liability of the Drawee Bank where the Drawers Signature is Forged
It is the responsibility of the drawee bank to get acquainted with its customers
signature and hence when payment is made on a cheque that bears the forged signature
of the customer, the bank cannot claim statutory protection. This is the case, even when
the forgery cannot be distinguished from the customers signature as per the banks
records. On the other hand Section 85 of the Act provides protection to a drawee bank
paying a cheque that carries a forged endorsement. According to this section, where a
cheque payable to order purports to be indorsed by or on behalf of the payee, and the
bank on which it is drawn makes payment in due course, then the bank is discharged
from its liability notwithstanding the fact that the endorsement of the payee might turn
out to be forged.

Liability of Endorser (Section 35)
According to Section 35, in the absence of a contract to the contrary, whoever, indorses
and delivers a negotiable instrument before maturity, without, in such endorsement,
expressly excluding or making conditional his own liability, is bound thereby to every
subsequent holder, in case of dishonor by the drawee, acceptor or maker, to compensate
such holder for any loss or damage caused to him by such dishonor, provided due
notice of dishonor has been given to, or received by, such endorser as hereinafter
provided.

Every endorser after dishonor is liable as upon an instrument payable on demand.

An endorser of a negotiable instrument is in the position of a new drawer and his
relationship with the holder of the instrument is conditional. By endorsing a bill, the
endorser undertakes that the instrument will be accepted and paid according to its tenor
on presentment and in case it is dishonored, he will compensate the holder or a
subsequent endorser who is compelled to pay for it, subject to due notice of dishonor
being given to him.

It should be noted that the endorsers liability under this section will not commence
until the indorsed instrument is delivered to the transferee. Also due notice of dishonor
of the instrument should be given to him in order to make him liable on the instrument.

In LLoyd vs. Howard, it was held that an endorsee for collection cannot maintain a suit
against the endorser.

Liability of Prior Parties (Section 36)
According to Section 36, every prior party to an instrument will remain liable to every
subsequent party, until the instrument is duly discharged or satisfied. When the liability
of all the parties to the instrument is extinguished and when payment is made at or after
maturity either by the acceptor/maker as the case may be, then the instrument will be
deemed to be duly satisfied. A payment which is made prior to the date of maturity does
not result in a discharge of the instrument. Such an instrument can be re-negotiated by
the acceptor. However, he cannot enforce payment on it from a party to whom he was
previously liable.

Liability of Acceptor of Forged Endorsement (Section 41)
Where the acceptor of a bill, accepts it fully aware of the fact that the endorsement on
the bill is a forgery, he cannot later deny his liability by pleading that the endorsement
was a forged one. In such a case, he cannot challenge the holders title to the bill on the
ground of forgery, when he himself has accepted the bill knowing fully well that the
endorsement was a forged one. As a consequence, he will be liable to make payment
twice, i.e., to the holder of the bill and also to the true owner of the instrument

Acceptors Liability on a Bill drawn in a Fictitious Name
According to Section 42, an acceptor of a bill of exchange drawn in a fictitious name
and payable to the drawers order is not, by reason that such name is fictitious, relieved
from liability to any holder in due course claiming under an endorsement by the same
hand as the drawers signature, and purporting to be made by the drawer.

Summary:-
cheque and a cheque in electronic form [Section 6]. The definition is amended by
Amendment Act, 2002, making provision for electronic submission and clearance of
cheque. The cheque is one form of bill of exchange. It is addressed to Banker. It cannot
be made payable after some days. It must be made payable on demand.
cheques.

Under Section 11 of the Indian Contract Act, a minors contract is void and cannot be
ratified by him after he attains majority. According to Section 26, a minor may draw,
indorse, deliver and negotiate such instruments as to bind all parties except himself.
Questions:-
1. What is crossing of cheques? Discuss the modes of crossing of cheques.

Unit - 28 : Negotiation
Objectives:-
The students will study in this lecture what is negotiation, negotiation by Endorsement,
effects of endorsement, instrument endorsed in blank, partial endorsement, Difference
between the Assignment and Negotiation.

Introduction:-
As between parties standing in immediate relation, delivery to be effectual must be
made by the party making, accepting or indorsing the instrument, or by a person
authorized by him in that behalf. A promissory note, bill of exchange or cheque payable
to bearer is negotiable by the delivery thereof.

According to Section 48, subject to the provisions of Section 58, a promissory note, bill
of exchange or cheque (payable to order), is negotiable by the holder by endorsement
and delivery thereof. Instruments payable to order are negotiable only if they are
indorsed by the holder followed by delivery of the instrument.

An instrument that is previously payable to order may be later endorsed in blank and
delivered so as to convert it into an instrument transferable by mere delivery and one
payable to the bearer. According to Section 56, no writing on a negotiable instrument is
valid for the purpose of negotiation if such writing purports to transfer only a part of the
amount appearing to be due on the instrument; but where such amount has been partly
paid, a note to that effect may be indorsed on the instrument, which may then be
negotiated for the balance.

Negotiation

Section 46 of the Act reads as follows:
The making, acceptance or endorsement of a promissory note, bill of exchange or
cheque is completed by delivery, actual or constructive.
authorized by him in that behalf.
delivery thereof.
A promissory note, bill of exchange or cheque payable to order, is negotiable by the
holder by endorsement and delivery thereof.

For Example
1. A makes a promissory note in favor of B in respect of a debt owed by A to B.
After As death, the note is found among some of his papers. B cannot recover the
amount on this instrument, even if it is delivered to him.
2. A the drawee receives a bill from B who is the holder of the same. A accepts the
bill. However, on learning that the drawer has become bankrupt, he cancels his
acceptance and returns the bill to the holder. B cannot recover the amount from A
as A had never delivered the accepted bill to B.
3. A makes a note in favor of B and hands it over to his agent for delivery. B does
not acquire a right to the note until it is delivered to him. On the other hand, A can
revoke the note any time before it is delivered.

Negotiation by Endorsement (Section 48)
According to Section 48, subject to the provisions of Section 58, a promissory note, bill
of exchange or cheque (payable to order), is negotiable by the holder by endorsement
and delivery thereof.

Instruments payable to order are negotiable only if they are indorsed by the holder
followed by delivery of the instrument. Where such an instrument is delivered by the
holder without indorsing it, the instrument is said to have been merely assigned and not
negotiated. A person taking such an instrument only acquires the rights of an assignee
of an ordinary chose-in-action.

The holder of a negotiable instrument indorsed in blank may, without signing his own
name, by writing above the endorsers signature a direction to pay to any other person
as endorsee, convert the endorsement in blank into an endorsement in full; and the
holder does not thereby incur the responsibility of an endorser. (Section 49)
For example, A who is the holder of an instrument that has been indorsed in blank by
B, writes the words Pay to C or order above Bs signature. Here, a blank
endorsement is converted into full. A will not be liable as endorser. The endorsement
made by him serves as an endorsement in full from B to C.

Effects of Endorsement

The endorsement of a negotiable instrument followed by delivery transfers to the
endorsee the property therein with the right of further negotiation but the endorsement
may, by express words, restrict or exclude such right, or may merely constitute the
endorsee an agent to indorse the instrument, or to receive its contents for the endorser, or
for some other specified person. (Section 50)

According to Section 50, endorsement may be either unconditional or restrictive. Where
there is an unconditional endorsement of an instrument followed by an unconditional
delivery so as to transfer the property in the instrument to the endorsee, then the
endorsee will be vested with the right to sue all the parties whose names appear on the
instrument. Further, he may negotiate the bill with anyone he pleases. However, he
cannot sue third parties on the original consideration.

Similarly, an endorsee of a promissory note can sue prior parties on the note itself and
cannot sue them (an exception being his immediate transferor) on the original
consideration unless he is also the assignee of the original debt.

Where an instrument is indorsed restrictively, it implies that the instrument cannot be
negotiated further. The person to whom the bill is restrictively indorsed, can deal with the
bill only as directed by the endorser. By this, he is empowered to receive payment on the
bill and to sue any party whom the endorser could have sued. However, he cannot
transfer his rights to any other person unless authorized to do so.

Section 50 lays down that where a bill is indorsed with an intention of restricting its
further negotiability, then such an endorsement should contain express words to that
effect. The mere fact that a special endorsement is not accompanied by words of
negotiability does not make it restrictive.

In Rahmath Bi vs. Angappa Raja, a note was indorsed for collection. In this case, it was
observed that though the endorsement was without consideration, the endorsee could
file an insolvency petition against the maker for non-payment of the note. It was also
held that the endorser could join in as an additional petitioner.

Where a restrictive endorsement permits further transferability of the instrument,
then all the subsequent endorsees who take the instrument will be vested with the
same rights and liabilities as the first endorsee under the restrictive endorsement.

Conditional Endorsement
The endorser of a negotiable instrument may, by express words in the endorsement,
exclude his own liability thereon, or make such liability or the right of the endorsee to
receive the amount due thereon depend upon the happening of a specified event
although such event may never happen.

Where an endorser so excludes his liability and afterwards becomes the holder of the
instrument, all the intermediate endorsers are liable to him (Section 52).

Instrument Endorsed In Blank
An instrument that is previously payable to order may be later endorsed in blank and
delivered so as to convert it into an instrument transferable by mere delivery and one
payable to the bearer.

Unlike Section 49 which deals with conversion of a blank endorsement into full,
Section 55 deals with the effect of a blank endorsement followed by a full endorsement.
Where an endorsement in blank is followed by an endorsement in full, the instrument
remains payable to bearer and is negotiable against all the parties prior to the endorser
in full. The endorser in full is liable to the holder who acquires the instrument by
endorsement and any subsequent person who derives title to the instrument from the
holder.

For example, A who is the payee holder of a bill indorses it in blank to B who
indorses it in full to C as Pay C or order. C later transfers the instrument to D
without any endorsement. D as the bearer of the instrument can either recover the
amount or he may sue the drawer, the acceptor or A, but he cannot sue B or C.

Partial Endorsement
According to Section 56, no writing on a negotiable instrument is valid for the purpose
of negotiation if such writing purports to transfer only a part of the amount appearing to
be due on the instrument; but where such amount has been partly paid, a note to that
effect may be indorsed on the instrument, which may then be negotiated for the balance.

For Example
A the holder of a bill for Rs.1,000 indorses it as Pay B or order Rs 700. The said
endorsement is partial and not valid.

A the holder of a bill for Rs.1,200 makes the following endorsement. Pay Rs.700 to
B or order and Pay Rs.500 to C or order. Even though the total amount of the bill has
been negotiated, B and C are endorsees for only a part of the amount and hence the
endorsement is invalid.

Assignment
When a person transfers his right to receive the payment of a debt, assignment of the
debt takes place.

Difference between the Assignment and Negotiation
a) Assignment is made in writing and signed by the transferor. Negotiation requires
mere delivery of a bearer instrument and endorsement and delivery of an order
instrument to effectuate a transfer.
b) Notice of transfer of actionable claim (debt) must be given by the transferee to the
debtor in case of assignment in order to complete his title. No such notice is
necessary in case of negotiation.
c) The title of the assignee is subject to all the defects, equities of the assigner. In case
of negotiation the title of the transferee is better than that of the transferor.
d) Consideration is presumed in case of negotiation. In case of assignment, the
transferee must prove consideration for the transfer.

Summary:-
authorized by him in that behalf.
delivery thereof. A promissory note, bill of exchange or cheque payable to order, is
negotiable by the holder by endorsement and delivery thereof.
cannot sue third parties on the original consideration.

Questions:-
1. Discuss the meaning and types of endorsement.
Unit - 29 : Ndorsement
Objectives:-
The objective of this lecture is to study endorsement, Dishonor of a negotiable
instrument, Noting and protest in detail.

Introduction:-
Section 15 of the Act defines endorsement as the writing of a persons name on the face
or back of a negotiable instrument or on a slip of paper (called allonge) annexed
thereto, for the purpose of negotiation.

Non-acceptance of a bill or non-payment results in dishonor of the instruments.
promissory note, bill of exchange or cheque is said to be dishonored by non-payment
when the maker of the note, acceptor of the bill or drawee of the cheque makes default
in payment upon being duly required to pay the same. (Section 92).

According to Section 99, noting means the recording of the fact of dishonor by a notary
public upon the instrument within a reasonable time after dishonor. Noting of the
instrument, helps in substantiating the fact of dishonor.

Endorsement


An endorsement can be blank or general, special or full, restrictive, partial and
conditional or qualified. An endorsement is said to be blank or general if the endorser
signs his name only on the face or back of the instrument. If the endorser signs his
name and adds a direction to pay the amount mentioned in the instrument to, or to
the order of a specified person, the endorsement is said to be special or in full. An
endorsement is restrictive which prohibits or restricts the further negotiation of the
instrument. An endorsement is partial which purports to transfer to the endorsee
only a part of the amount payable on the instrument. An endorsement is conditional
or qualified which limits or negatives the liability of the endorser

Dishonor of a Negotiable Instrument
Non-acceptance of a bill or non-payment results in dishonor of the instruments.
Dishonor by Non-acceptance
A bill of exchange is dishonored by non-acceptance:
i. When the drawee does not accept it within 48 hours from the time of
presentment for acceptance.
ii. When presentment for acceptance is excused and the bill remains unaccepted.
iii. When the drawee is incompetent to contract.
iv. When the drawees acceptance is a qualified one.
v. When the drawee is a fictitious person or after reasonable search cannot be
found.

Where a bill has been dishonored by non-acceptance, the holder of the instrument
acquires an immediate right to proceed against the drawer and other endorsers. He is
not required to wait till the date of maturity of the bill or present it for payment.

Dishonor by Non-payment
promissory note, bill of exchange or cheque is said to be dishonored by non-payment
when the maker of the note, acceptor of the bill or drawee of the cheque makes default
in payment upon being duly required to pay the same. (Section 92). An instrument is
also dishonored by non-payment when presentment for payment is excused and the
instrument when overdue remains unpaid. (Section 76)

Notice of Dishonor
When a negotiable instrument is dishonored either by non-acceptance or by non-
payment, the holder of the instrument or some party liable thereon must give a notice of
dishonor to all the prior parties whom he wants to make liable. Each party receiving
notice of dishonor must, in order to render any prior party liable to himself, give notice
of dishonor to such party within a reasonable time unless such party otherwise receives
due notice. Notice of dishonor is so necessary that an omission to give it discharges all
parties. If the instrument deposited with an agent for presentment is dishonored, the
notice of dishonor may be given either by the agent or by the principal himself. The
agent may give notice to his principal within a reasonable time, and the principal may
give notice within a reasonable time to the parties sought to be held liable.

Notice of dishonor must be given to all the parties whom the holder seeks to make
liable. It need not be given to the acceptor of a bill or to the maker of a note or the
drawee of a cheque. It may be given to the party liable or his duly authorized agent or
where he has died, to his legal representative, or where he has been declared insolvent,
to his assignee. When the party to whom notice of dishonor is dispatched is dead, but
the party dispatching the notice is ignorant of his death, the notice is sufficient.

Notice of Dishonor when Unnecessary
i. When notice is expressly waived:
Notice of dishonor may be expressly waived by the person entitled to it. Waiver may
be indicated on the instrument itself by using words such as notice of dishonor
waived or any other similar expression. Waiver can be either express or implied. It
may be made at the time of drawing or indorsing the instrument, before the time for
giving notice has arrived or after the omission to give notice.
For example, where the drawer of a bill informs the holder that the bill will be
dishonored on presentment, notice of dishonor is dispensed with.

ii. Where the drawer countermands payment:
When the drawer countermands payment, there is no need for a notice of dishonor.
The reason behind this is that the drawer himself is responsible for preventing the
holder from obtaining payment.

iii. When the party is not likely to suffer any damage for want of notice:
It is not necessary either to present the instrument nor give a notice of dishonor if it can
be shown that when the bill was drawn there were no funds of the drawer in the hands
of the drawee.
For example, A has a balance of Rs.200 in his bank account. In spite of not having
authority to overdraw, he draws a cheque for Rs.800. In this case, notice of dishonor
can be dispensed with.
Similarly, where a cheque that is presented for payment, is returned unpaid with the
words refer to drawer, notice of dishonor by the holder is not necessary to charge the
drawer. The payee or the endorser will be discharged only if due notice of dishonor is
not given to him in time.
In Chunilal vs. Chandra, it was held that where a cheque was dishonored because of the
closure of the drawers account with the bank, notice of dishonor was not required as
the drawer would not suffer any damage for want of notice.
iv. When the party entitled to notice cannot after due search be found:
Notice of dishonor need not be given, where in spite of the reasonable efforts and
enquiries made by the holder, the party entitled to receive notice cannot be
located or traced.

v.Where the party required to give notice, is unable to do so, without any
fault of his:
Where notice of dishonor could not be given due to accident, sickness or any
other calamity involving the holder or his agent, such omission is excusable.
Also, where delay in giving notice of dishonor is due to extraneous factors
beyond the control of the holder, such delay is excused. However, due notice will
have to be given once the cause of delay comes to an end.

vi. When one of the drawers is also an acceptor:
Where one of the drawers is also an acceptor, notice of dishonor is not required to
be given to him, as he must have been aware of the fact of dishonor.

vii. When the note is not negotiable:
When a promissory note that is not negotiable is indorsed, the endorsee is only an
assignee and cannot enforce any claim against the maker and the endorsers. In
such a case, failure to give notice of dishonor, is unlikely to affect the interest of
any party.

viii. When notice of dishonor is waived impliedly:
Notice of dishonor is said to have been waived impliedly, where the person
entitled to receive notice, having full knowledge of facts, agrees, after dishonor,
to unconditionally make payment of the amount due on the instrument.

Noting and Protest
According to Section 99, noting means the recording of the fact of dishonor by a notary
public upon the instrument within a reasonable time after dishonor.
Noting of the instrument, helps in substantiating the fact of dishonor. It is left to the
discretion of the holder whether to opt for noting or not. In case the holder does not opt
for noting of the instrument, his rights as a holder are in no way affected. Where the
holder goes in for noting, the notary or his clerk first makes a demand upon the drawee
either for acceptance of the instrument or for payment and on refusal by the drawee,
notes the bill. A bill that is noted must contain the fact of dishonor, the date of dishonor,
the reasons for dishonor, if the instrument is not expressly dishonored the reason why
the holder treats it as dishonored and the notary charges.

It was held in Bombay City Bank vs. Moonjee Hurridoss Bourke, that mere noting of the
bill cannot be treated as evidence of presentment or dishonor of the bill, even if it bears
the name of the notary in full.

Protest
When a promissory note or bill of exchange has been dishonored by non-acceptance or
non-payment, the holder may, within a reasonable time cause such dishonor to be noted
and certified by a notary public. Such certificate is called a protest. (Section 100)

When the acceptor of a bill of exchange has become insolvent, or his credit has been
publicly impeached, before the maturity of the bill, the holder may, within a reasonable
time, cause a notary public to demand better security of the acceptor, and on its being
refused may, within a reasonable time, cause such facts to be noted and certified as
aforesaid. Such a certificate is called a protest for better security.

Summary:-
It is not necessary either to present the instrument nor give a notice of dishonor if it can
be shown that when the bill was drawn there were no funds of the drawer in the hands
of the drawee. For example, A has a balance of Rs.200 in his bank account. In spite of
not having authority to overdraw, he draws a cheque for Rs.800. In this case, notice of
dishonor can be dispensed with.
Noting of the instrument, helps in substantiating the fact of dishonor. It is left to the
discretion of the holder whether to opt for noting or not. In case the holder does not opt
for noting of the instrument, his rights as a holder are in no way affected.

Questions:-

1. Short note on noting charges.


The provisions of Section 31 states that no other person other than the Reserve Bank of
India or the Central Government, can draw, accept, make or issue any bill of exchange,
hundi or promissory note payable to bearer on demand nor make or issue any promissory
note payable to the bearer of the instrument.


A bill of exchange cannot be made by electronic means and hence Section 1(4)(a) of IT
Act applicable to cheques is not applicable to Bill of Exchange. Days of grace:- Every
promissory note or bill of exchange which is not expressed to be payable on demand, at
sight or on presentment is at maturity on the third day after the day on which it is
expressed to be payable.

cheques.
cannot sue third parties on the original consideration. Section 15 of the Act defines
endorsement as the writing of a persons name on the face or back of a negotiable
instrument or on a slip of paper (called allonge) annexed thereto, for the purpose of
negotiation.

Module 5 : Indian Partnership Act
Introduction:-

A partnership is a type of business entity in which partners (owners) share with each
other the profits or losses of the business. Partnerships are often favored over
corporations for taxation purposes, as the partnership structure does not generally incur a
tax on profits before they are distributed to the partners (i.e. there is no dividend tax
levied). "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.

At least two members are required to start a partnership business. But the number of
members should not exceed 10 in case of banking business and 20 in case of other
business. The partners should always carry on any kind of lawful business. Like sole
proprietorships, partnership businesses can be formed easily without any compulsory legal
formalities. Partnership firm cannot take any action in a court of law against any other
parties for settlement of claims. 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.

Anyone who by words spoken or written or by conduct represent himself, or knowingly
permits himself to be represented, to be a partner in a firm, is liable as a partner in that
firm to anyone who has on the faith of any such representation given credit to the firm,
whether the person representing himself or represented to be a partner does or does not
know that the representation has reached the person so giving credit. The dissolution of a
partnership between all the partners of a firm is called the "dissolution of the firm".

Objectives:-
One of the very important module of the syllabus is Indian Partnership Act, in this topic
students we learn partnership, definition of "partnership", "partner", "firm" and "firm-
name". Characteristics of partnership firm, advantages of partnership, disadvantages of
partnership, Effects of Non-Registration of a firm implied authority of partner as agent of
the firm, partner by holding out, minors admitted to the benefits of partnership,
introduction of a new partner, retirement, expulsion of a partner, dissolution of a
partnership firm, registration of a partnership firm, Distinction between Dissolution of
Partnership and Dissolution of Partnership Firm.
Unit 30 : Partnership
Objectives:-
The objective of this lecture is to study the meaning of partnership, Definition in civil
law, definition of "partnership", "partner", "firm" and, firm-name, characteristics of
partnership firm.

Introduction:-
A partnership is a strategic alliance or relationship between two or more people in common
view of sharing the profits or losses of the business.. The partners share the profits and
losses of the partnership according to an agreed percentage of profits in the partnership
deed.
In a partnership business, there must be an agreement between all the partners. The main
objective of every partnership firm is to make and share the profits of the business.

Partnership

A partnership is a type of business entity in which partners (owners) share with each
other the profits or losses of the business. Partnerships are often favored over
corporations for taxation purposes, as the partnership structure does not generally incur a
tax on profits before they are distributed to the partners (i.e. there is no dividend tax
levied). However, depending on the partnership structure and the jurisdiction in which it
operates, owners of a partnership may be exposed to greater personal liability than they
would as shareholders of a corporation.

deed. Generally, any partner can bind the partnership to another party, and if necessary, the
personal resources of each partner can be called on to pay obligations of the partnership.

A partnership, just like as sole proprietorship, is not a separate legal entity from its owners
hence the need to call on private assets when partnership fails to settle any obligation. A
partnership must be dissolved if the ownership changes, as when a partner leaves or dies. If
the business is to continue as a partnership after this occurs, a new partnership must be
created and new partnership agreement be signed.
Definition in civil law

In civil law systems, a partnership is a nominate contract between individuals who, in a
spirit of cooperation, agree to carry on an enterprise; contribute to it by combining
property, knowledge or activities; and share its profit. Partners may have a partnership
agreement, or declaration of partnership and in some jurisdictions such agreements may
be registered and available for public inspection. In many countries, a partnership is also
considered to be a legal entity, although different legal systems reach different
conclusions on this point.

DEFINITION OF "PARTNERSHIP", "PARTNER", "FIRM" AND "FIRM-
NAME".

"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.

Persons who have entered into partnership with one another are called individually,
"partners" and collectively "a firm", and the name under which their business is carried
on is called the "firm-name".

Characteristics Of Partnership Firm:

1. Two or more members:
At least two members are required to start a partnership business. But the number of
members should not exceed 10 in case of banking business and 20 in case of other
business.
Partnership agreement:
In a partnership business, there must be an agreement between all the partners. This
agreement must contain-
The amount of initial capital contributed by each partner
Profit or loss sharing ratio for each partner
Salary or commission payable to the partners, if any
Duration of business, if any
Name and address of the partners and the firm
Duties and powers of each partner;
Nature and place of business; and
Any other terms and conditions to run the business

2. Competence of partners:
Since individuals join hands to become partners, it is necessary that they must be
competent to enter into a partnership. Thus, minors, lunatics and insolvent people are not
eligible to become partners. However, a minor can be admitted to the benefits of
partnership i.e., he can have a share in the profits only.

3. Lawful business:
The partners should always carry on any kind of lawful business. To start a business in
smuggling, black marketing, etc., is not termed as a partnership business in the eye of the
law. Again, doing social work is not termed as a partnership business.

4. Sharing of profits:
The main objective of every partnership firm is to make and share the profits of the
business. In the absence of any agreement for profit sharing, it should be shared
equally among the partners. Suppose, there are two partners in the business and they earn
a profit of Rs.20,000. They may share the profits equally i.e., Rs.10,000 each or in any
other agreed proportion, say one forth and three fourth i.e. Rs.5,000/- and Rs.15,000/-

5. Unlimited liability:
Just like a sole proprietorship, the liability of partners in a partnership is also unlimited.
This means, if the assets of the firm are insufficient to meet the liabilities, the personal
properties of the partners, if any, can be utilized to meet the business liabilities. Suppose,
the firm has to make payment of Rs.25,000/- to the suppliers for some goods. The partners
are able to arrange for only Rs.19,000/- from the business. The balance amount, of
Rs.6,000/- will have to be arranged from the personal properties and assets of the partners.

6. Voluntary registration:
It is not compulsory to register the partnership firm. However, if the partnership firm is not
registered, it will be deprived of certain legal benefits; therefore it is desirable to register.

Summary:-

Lawful business:- The partners should always carry on any kind of lawful business. To
start a business in smuggling, black marketing, etc., is not termed as a partnership business
in the eye of the law. Again, doing social work is not termed as a partnership business.

Questions:-

1. Partnership is an agreement between two or more partners for any business with profit
motive, discuss.

Unit 31 : Advantages of Partnership
Objectives:-
This lecture emphasizes upon the advantages of partnership, disadvantages of partnership,
Effects of Non-Registration of a Firm, the conduct of the business.

Introductions:-
Like sole proprietorships, partnership businesses can be formed easily without any
compulsory legal formalities. It is not necessary to get the firm registered. In a partnership
firm all the partners share the business risks.

All the partners are jointly liable for the debt of the firm. They can share the liability among
themselves or any one can be asked to pay all the debts even from his personal properties
depending on the arrangement made between the partners. Since the total number of
partners cannot exceed 20, the capital to be raised is always limited. It may not be possible
to start a very large business in partnership form.

Advantages Of Partnership

1. Easy to form:-
Like sole proprietorships, partnership businesses can be formed easily without any
compulsory legal formalities. It is not necessary to get the firm registered. A simple
agreement or partnership deed, either oral or in writing, is sufficient to create a partnership.

2. Availability of large resources:
Since two or more partners join hands to start a partnership business, it may be possible to
pool together more resources as compared to a sole proprietorship. The partners can
contribute more capital, more effort and more time for the business.

3. Better decisions:
The partners are the owners of the business. Each of them has equal right to participate in
the management of the business. In case of any conflict, they can sit together to solve the
problem. Since all partners participate in the decision-making process, there is less scope
for reckless and hasty decisions.

4. Flexibility in operations:
A partnership firm is a flexible organization. At any time, the partners can decide to change
the size or nature of the business or area of its operation. There is no need to follow any
legal procedure. Only the consent of all the partners is required.

5. Sharing risks:
In a partnership firm all the partners share the business risks. For example, if there are
three partners and the firm makes a loss of Rs.12,000 in a particular period, then all
partners may share it and the individual burden will be Rs.4000 only. Because of this, the
partners may be encouraged to take up more risk and hence expand their business more.

6. Protection of interest of each partner:
In a partnership firm, every partner has an equal say in decision making and the
management of the business. If any decision goes against the interest of any partner, he can
prevent the decision from being taken. In extreme cases an unsatisfied partner may
withdraw from the business and can dissolve it. In such extreme cases the partnership
deed is required. In absence of the partnership deed, no legal protection is given to the
partners.

7. Benefits of specialization:
Since all the partners are owners of the business, they can actively participate in every
aspect of business as per their specialization, knowledge and experience. If you want to
start a firm to provide legal consultancy to people, then one partner may deal with civil
cases, one in criminal cases, and another in labour cases and so on as per the individual
specialization. Similarly, two or more doctors of different specialization may start a clinic
in partnership.

Disadvantages Of Partnership

1. Unlimited liability:
All the partners are jointly liable for the debt of the firm. They can share the liability among
themselves or any one can be asked to pay all the debts even from his personal properties
depending on the arrangement made between the partners.

2. Uncertain life:
The partnership firm has no legal existence separate from its partners. It comes to an end
with death, insolvency, incapacity or the retirement of a partner. Further, any unsatisfied or
discontent partner can also give notice at any time for the dissolution of the partnership.

3. Lack of harmony:
In a partnership firm every partner has an equal right to participate in the management.
Also, every partner can place his or her opinion or viewpoint before the management
regarding any matter at any time. Because of this, sometimes there is a possibility of
friction and discontent among the partners. Difference of opinion may lead to the end of the
partnership and the business.

4. Limited capital:
Since the total number of partners cannot exceed 20, the capital to be raised is always
limited. It may not be possible to start a very large business in partnership form.

5. No transferability of share:
If you are a partner in any firm, you cannot transfer your share or part of the company to
outsiders, without the consent of other partners. This creates inconvenience for the partner
who wants to leave the firm or sell part of his share to others.

Effects of Non-Registration of a Firm

The effects of non-registration are as follows:-
1. Partnership firm cannot take any action in a court of law against any other parties for
settlement of claims.

2. In case there is any dispute among partners, it is not possible to settle the disputes
through a court of law.

3. No separate legal existence:
Just like sole proprietorships, partnership firms also has no separate legal existence from its
owners. The partnership firm is just a name for the business as a whole. If someone sues
the firm, it is as good as someone suing all the partners.

4. Restriction on transfer of interest:
No partner can sell or transfer his share or part or partnership of the firm to any one without
the consent of the other partners. For example, A, B, and C are three partners. If A wants
to sell his share to D as his health problems prevent him from working, he can not do so
until B and C both agree.

5. Continuity of business:
A partnership firm comes to an end on death, lunacy or bankruptcy of any partner. Even
otherwise, it can stop its business at the will of the partners. At any time, they may take a
decision to end their partnership.

The Conduct of the Business

Subject to contract between the partners
a. every partner has a right to take part in the conduct of the business;

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 a 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 the partners;

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
authorized agents shall have a right of access to and to inspect and copy any of the
books of the firm.

Summary:-

All the partners are jointly liable for the debt of the firm. They can share the liability
among themselves or any one can be asked to pay all the debts even from his personal
properties depending on the arrangement made between the partners. Since the total
number of partners cannot exceed 20, the capital to be raised is always limited. It may not
be possible to start a very large business in partnership form. Uncertain life:-
The partnership firm has no legal existence separate from its partners. It comes to an end
with death, insolvency, incapacity or the retirement of a partner. Further, any unsatisfied
or discontent partner can also give notice at any time for the dissolution of the
partnership.

Questions:-

1. What are the merits and demerits of a partnership firm?

Unit 32 : Mutual Rights And Liabilities Of Partners
Objective:-
This lecture comprises of rights and duties of partners after a change in the firm, implied
authority of partner as agent of the firm, partner by holding out, minors admitted to the,
benefits of partnership, retirement of a partner, expulsion of a partner, dissolution of a
partnership firm.

Introduction:-
The partners are entitled to share equally in the profits earned, and shall contribute
equally to the losses sustained by the firm, a partner shall indemnify the firm for any loss
caused to it by his willful neglect in the conduct of the business of the firm.
Subject to the provisions of section 22, the act of a partner which is done to carry on, in
the usual way, business of the kind carried on by the firm, binds the firm.

Anyone who by words spoken or written or by conduct represent himself, or knowingly
permits himself to be represented, to be a partner in a firm, is liable as a partner in that
firm to anyone who has on the faith of any such representation given credit to the firm,
whether the person representing himself or represented to be a partner does or does not
know that the representation has reached the person so giving credit.

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.

A partner may not be expelled from a firm by any majority of the partners, save in the
exercise in good faith or powers conferred by contract between the partners.

Mutual Rights and Liabilities of Partners

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 per cent. per annum;
e) the firm shall indemnify a partner in respect of payments made and liabilities
incurred by him
f) in the ordinary and proper conduct of the business; and
g) in doing such act, in an emergency, for the purpose of protecting the firm from loss,
as would be done by a person of ordinary prudence, in his own case, under similar
circumstances; and
h) a partner shall indemnify the firm for any loss caused to it by his willful neglect in
the conduct of the business of the firm.

Rights and Duties of Partners After a Change in the Firm

Subject to contract between the partners, -

(a) 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, and 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, the mutual rights and duties of the partners in respect
of the other adventures or undertakings are the same as those in respect of the original
adventures or undertakings.

Implied Authority of Partner as Agent of the Firm

(1) 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 proceeding filed on behalf of the firm,
(e) admit any liability in a suit or proceeding against the firm,
(f) acquire immovable property on behalf of the firm,
(g) transfer immovable property belonging to the firm, or
(h) enter into partnership on behalf of the firm.

PARTNER BY HOLDING OUT

(1) Anyone who by words spoken or written or by conduct represent himself, or
knowingly permits himself to be represented, to be a partner in a firm, is liable as a
partner in that firm to anyone who has on the faith of any such representation given
credit to the firm, whether the person representing himself or represented to be a partner
does or does not know that the representation has reached the person so giving credit.

(2) Where after partner's death the business continued in the old firm-name, the
continued use of that name or of the deceased partner's name as a part thereof shall not
of itself make his legal representative or his estate liable for any act of the firm done
after his death.

MINORS ADMITTED TO THE BENEFITS OF PARTNERSHIP

(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.

(2) Such minor has a right to such share of the property and of the profits of the firm as
may be agreed upon, and he may have access to and inspect and copy any of the
accounts of the firm.

(3) Such minor's share is liable for the acts of the firm but the minor is not personally
liable for any such act.

(4) Such minor may not sue the partners for an account or payment of his share of the
property or profits of the firm, save when severing his connection with the firm, and in
such case the amount of his share shall be determined by a valuation made as far as
possible in accordance with the rules contained in section 48 :

Provided that all the partners acting together or any partner entitled to dissolve the firm
upon notice to other partners may elect in such suit to dissolve the firm, and thereupon
the Court shall proceed with the suit as one for dissolution and for settling accounts
between the partners and the amount of the share of the minor shall be determined along
with the shares of the partners.

(5) At any time within six months of his attaining majority, or of his obtaining
knowledge that he had been admitted to the benefits of partnership, whichever date is
later, such person may give public notice that he has elected to become or that he has
elected not to become a partner in the firm, and such notice shall determine his position
as regards the firm :

Provided that, if he fails to give such notice, he shall become a partner in the firm on the
expiry of the said six months.

(6) Where any person has been admitted as a minor to the benefits of partnership in a
firm, the burden of proving the fact that such person had no knowledge of such
admission until a particular date after the expiry of six months of his attaining majority
shall lie on the person asserting that fact.

(7) Where such person becomes a partner

(a) his rights and liabilities as a minor continue upto the date on which he becomes a
partner, but he also becomes personally liable to third parties for all acts of the firm
done since he was admitted to the benefits of partnership, and
(b) his share in the property and profits of the firm shall be the share to which he was
entitled as a minor.

(8) Where such person elects not be to become a partner, -

(a) his rights and liabilities shall continue to be those of a minor under the section upto
the date on which he gives public notice;
(b) his share shall not be liable for any acts for the firm done after the date of the notice;
and
(c) he shall be entitled to sue the partners for his share of the property and profits in
accordance with sub-section (4).

(9) Nothing in sub-sections (7) and (8) shall affect the provisions of section 28.

Introduction of a New Partner.

(1) Subject to contract between the partners and to the provisions of section 30, no person
shall be introduced as a partner into a firm without the consent of all the existing partners.

(2) Subject to the provisions of section 80, a person who is introduced as a partner into a
firm does not thereby become liable for any act of the firm done before he became a
partner.

RETIREMENT OF A PARTNER

(1) A partner may retire
(a) with the consent of all the otter partners,
(b) in accordance with an express agreement by the partners, or
(c) where the partnership is at will, by giving notice in writing to all the other partners
of his intention to retire.

(2) A retiring partner may be discharged from any liability to any third party for acts of
the firm done before his retirement by an agreement made by him with such third party
and the partners of the reconstituted firm, and such agreement may be implied by a
course of dealing between such third party and the reconstituted firm after he had
knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners
continue to be liable as partners to third parties for any act done by any of them which
would have been an act of the firm if done before the retirement, until public notice is
given of the retirement

Provided that a retired partner is not liable to any third party who deals with the firm
without knowing that he was a party.

(4) Notices under sub-section (3) may be given by the retired partner or by any partner
of the reconstituted firm.

EXPULSION OF A PARTNER

(1) A partner may not be expelled from a firm by any majority of the partners, save in
the exercise in good faith or powers conferred by contract between the partners.

(2) The provisions of sub-sections (2), (3) and (4) of section 32 shall apply to an
expelled partner as if he were a retired partner.

RIGHTS OF OUTGOING PARTNER TO CARRY ON COMPETING
BUSINESS

(1) An outgoing partner may carry on a business competing with that of the firm and he
may advertise such business, but subject, to contract to the contrary, he may not
a) use the firm-name,

(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before he ceased to be
a partner.

(2) AGREEMENT IN RESTRAINT OF TRADE.

A partner may make an agreement with his partners that on ceasing to be a partner he
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.

Dissolution of a Partnership Firm

The dissolution of a partnership between all the partners of a firm is called the
"dissolution of the firm".

1. COMPULSORY DISSOLUTION

A firm is dissolved

(a) by the adjudication of all the partners or of all the partners but one as insolvent, or

(b) by the happening of any event which makes it unlawful for the business of the firm
to be carried on or for the partners to carry it on in partnership:

Provided that, where more than one separate adventure or undertaking is carried on by
the firm, the illegality of one or more shall not of itself cause the dissolution of the firm
in respect of its lawful adventures and undertakings.

2. DISSOLUTION BY NOTICE OF PARTNERSHIP AT WILL

(1) Where the partnership is at will, the firm may be dissolved by any partner giving
notice in writing to all the other partners of his intention to dissolve the firm.

(2) The firm is dissolved as from the date mentioned in the notice as the date of
dissolution or, if no date is so mentioned, as from the date of the communication of the
notice.

3. DISSOLUTION ON THE HAPPENING OF CERTAIN
CONTINGENCIES

Subject to contract between the partners a firm is dissolved
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more adventures or undertakings, by the
completion thereof;
c) by the death of a partner; and
(d) by the adjudication of a partner as an insolvent.

4. DISSOLUTION BY THE COURT

At the suit of a partner, the Court may dissolve a firm on any of the following grounds,
namely :-

(a) that a partner has become of unsound mind, in which case the suit may be brought as
well by the next friend of the partner who has become of unsound mind as by any other
partner;

(b) that a partner, other than the partner suing, has become in any way permanently
incapable of performing his duties as partner;

(c) that a partner, other than the partner suing, is guilty of conduct which is likely to
affect prejudicially the carrying on of the business regard being had to the nature of the
business;

(d) that a partner, other than the partner suing, willfully or persistently commits breach of
agreements relating to the management of the affairs of the firm of the conduct of its
business; or otherwise so conducts himself in matters relating to the business that it is not
reasonably practicable for the other partners to carry on the business in partnership with
him;

(e) that a partner, other than the partner suing, has in any way transferred the whole of his
interest in the firm to a third party, or has allowed his share to be charged under the
provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure,
1908, or has allowed it to be sold in the recovery of arrears of land revenue or of any dues
recoverable as arrears of land revenue due by the partner;

(f) that the business of the firm cannot be carried on save at a loss; or

(g) on any other ground which renders it just and equitable that the firm should be
dissolved.

Summary:-

It can be summarized after studying this lecture that the Partner can be retired :-

(a) with the consent of all the otter partners,

(b) in accordance with an express agreement by the partners, or

(c) where the partnership is at will, by giving notice in writing to all the other partners
of his intention to retire.

On the other hand a partner can be expelled from the partnership if

(1) A partner may not be expelled from a firm by any majority of the partners, save in
the exercise in good faith or powers conferred by contract between the partners.

(2) The provisions of sub-sections (2), (3) and (4) of section 32 shall apply to an
expelled partner as if he was a retired partner.

Questions:-
1. What are the mutual rights and duties of partners? Discuss.
2. Explain the term dissolution. What are the different modes of dissolution.

Unit - 33 : Registration Of A Partnership Firm
Objectives:-
We in this lecture study the registration of a partnership firm, appointment of registrar of
firms and deputy and assistant, registrars of firms, application for registration, Distinction
between Dissolution of Partnership and Dissolution of Partnership Firm.

Introduction:-
When the Registrar is satisfied that the provisions of section 58 have been duly complied
with, he shall record an entry of the statement in a register called the Register of Firms,
and shall file the statement. On the date such entry is recorded and such statement is filed,
the firm shall be deemed to be registered.

Dissolution of a firm means that the firm closes its business and comes to an end, while
dissolution of a partnership means termination of old partnership agreement and a
reconstitution of firm due to admission, retirement and death of a partner. In dissolution
of a partnership the remaining partners may agree to carry on the business under a new
agreement.

Registration of a Partnership Firm

i. When the Registrar is satisfied that the provisions of section 58 have been duly
complied with, he shall record an entry of the statement in a register called the Register
of Firms, and shall file the statement. [19 On the date such entry is recorded and such
statement is filed, the firm shall be deemed to be registered.

ii. The firm, which is registered, shall use the brackets and word (Registered)
immediately after its name.

APPOINTMENT OF REGISTRAR OF FIRMS AND DEPUTY AND
ASSISTANT REGISTRARS OF FIRMS

(1) The State Government may, by notification in the Official Gazette, appoint a
Registrar of Firms who shall exercise, perform and discharge the powers, functions and
duties of the Register under this Act throughout the State of Maharashtra.

(2) The State Government may likewise appoint one or more Deputy Registrars of
Firms and Assistant Registrars of Firms who shall exercise, perform and discharge all
or such of the powers, functions and duties of the Registrar and in such areas as the
State Government may, by notification in the Official Gazette, specify.

(3) The officers appointed under sub-section (1) and sub-section (2) shall be deemed to
be public servants within the meaning of section 21 of the Indian Penal Code.

APPLICATION FOR REGISTRATION

(1) Subject to the provisions of sub-section of sub-section (1A), the registration of a firm
effected by sending by post or delivering to the Registrar of the area in which any place
of business of the firm is situated or proposed to be situated, a statement in the prescribed
form and accompanied by the prescribed fee and a true copy of the deed of partnership
stating :

(a) The firm-name,
(aa) The nature of business of the firm;
(b) The place or principal place of business of the firm,
(c) The names of any other places where the firm carries on business,
(d) The date when each partner joined the firm,
(e) The names in full and permanent addresses of the partners, and
(f) The duration of the firm.

The statement shall be signed by all the partners, or by their agents specially authorized
in this behalf.

(1A) The statement under sub-section (1) shall be sent or delivered to the Registrar within
a period of one year from the date of constitution of the firm:

Provided that in the case of any firm carrying on business on or before the date of
commencement of the Indian Partnership (Maharashtra Amendment) Act, 1984, such
statement shall be sent or delivered to the Registrar within a period of one year firm such
date.
(2) Each person signing the statement shall also verify it in the manner prescribed.

(3) A firm shall not have any of the names or emblems specified in the Schedule to the
Emblems and Names (Prevention of Improper Use) Act, 1950, or any colourable
imitation thereof, unless permitted so to do under that Act, or any name which is likely to
be associated by the public with the name of any other firm on account of similarity, or
any name which, in the opinion of the Registrar, for reasons to be recorded in writing, is
undesirable:

Provided that nothing in this sub-section shall apply to any firm registered under any such
name before the date of the commencement of the Indian Partnership (Maharashtra
Amendment) Act, 1984.

(4) Any person aggrieved by an order of the Registrar under sub-section (3), may, within
30 days from the date of communication of such order, appeal to the officer not below the
rank of Deputy Secretary to Government authorized by the State Government in this
behalf, in such manner, and on payment of such fee, as may be prescribed. On receipt of
any such appeal, the authorized officer shall, after giving an opportunity of being heard to
the appellant, decide the appeal, and his decision shall be final.

Distinction between Dissolution of Partnership and Dissolution of
Partnership Firm

We have already studied that on the occasion of admission, retirement and death existing
partnership comes to an end, but the business of the firm continues under a new
agreement.

When a firm decides to wind up its business operations under any of the circumstances
mentioned, it stands dissolved. Dissolution of a partnership firm is different from the
dissolution of a partnership.

agreement.

Summary:-

agreement.

Questions:-

1. Write the procedure for the registration of a partnership firm.

Summary of the module:-


All the partners are jointly liable for the debt of the firm. They can share the liability
among themselves or any one can be asked to pay all the debts even from his personal
properties depending on the arrangement made between the partners.

EXPULSION OF A PARTNER:- (1) A partner may not be expelled from a firm by any
majority of the partners, save in the exercise in good faith or powers conferred by
contract between the partners. (2) The provisions of sub-sections (2), (3) and (4) of
section 32 shall apply to an expelled partner as if he were a retired partner

Module 6 : Consumer Protection Act, [Copra] 1986

INTRODUCTION:-
The earlier principle of Caveat Emptor or let the buyer beware which was prevalent
has given way to the principle of Consumer is King. The origins of this principle lie in
the fact that in todays mass production economy where there is little contact between the
producer and consumer, often sellers make exaggerated claims and advertisements, which
they do not intend to fulfill.

The main objective of the act is to provide for the better protection of consumers. Unlike
existing laws, which are punitive or preventive in nature, the provisions of this Act are
compensatory in nature. The Act is intended to provide simple, speedy and inexpensive
redressal to the consumers grievances, and reliefs of a specific nature and award of
compensation wherever appropriate to the consumer.

OBJECTIVES:-
The objective of this module is to study the Consumer Protection Act,1986, with its
introduction, object of the Consumer Protection Act, 1986, extend and coverage of the
act, definitions of important terms, state commission, national commission, how to file a
complaint, procedure for filing the appeal, speedy disposal.

Unit 34 : Introduction To Consumer Protection Act,
[Copra] 1986
Objectives:-
In this lecture we will study the following:- consumer protection act, [copra] 1986, object
of the consumer protection act, 1986, extend and coverage of the act.

Introduction:-
The need to recognize and enforce the rights of consumers is being understood and
several laws have been made for this purpose. In India, we have the Indian Contract Act,
the Sale of Goods Act, the Dangerous Drugs Act, the Agricultural Produce (Grading and
Marketing) Act, the Indian Standards Institution (Certification Marks) Act, The
Prevention of Food Adulteration Act, the Standards of Weights and Measures Act, the
Trade and Merchandise Marks Act, etc which to some extent protect consumer interests.
Therefore the need for a more simpler and quicker access to redressal to consumer
grievances was felt and accordingly, it lead to the legislation of the Consumer Protection
Act, 1986.

Consumer Protection Act, [Copra] 1986

they do not intend to fulfill. This leaves the consumer in a difficult position with very few
avenues for redressal. The onset on intense competition also made producers aware of the
benefits of customer satisfaction and hence by and large, the principle of consumer is
the king is now accepted. The need to recognize and enforce the rights of consumers is
being understood and several laws have been made for this purpose. In India, we have the
Indian Contract Act, the Sale of Goods Act, the Dangerous Drugs Act, the Agricultural
Produce (Grading and Marketing) Act, the Indian Standards Institution (Certification
Marks) Act, The Prevention of Food Adulteration Act, the Standards of Weights and
Measures Act, the Trade and Merchandise Marks Act, etc which to some extent protect
consumer interests.
However, these laws required the consumer to initiate action by way of a civil suit, which
involved lengthy legal process proving, to be too expensive and time consuming for lay
consumers. Therefore, the need for a more simpler and quicker access to redressal to
consumer grievances was felt and accordingly, it lead to the legislation of the Consumer
Protection Act, 1986.

Object of the Consumer Protection Act, 1986

compensatory in nature. The act is intended to provide simple, speedy and inexpensive
compensation wherever appropriate to the consumer. The act has been amended in 1993
both to extend its coverage and scope and to enhance the powers of the redressal
machinery. The basic rights of consumers as per the Consumer Protection

Act (CPA) are

1. The right to be protected against marketing of goods and services which are hazardous
to life and property

2. The right to be informed about the quality, quantity, potency, purity, standard and price
of goods, or services so as to protect the consumer against unfair trade practices

3. The right to be assured, wherever possible, access to variety of goods and services at
competitive prices

4. The right to be heard and be assured that consumers interests will receive due
consideration at appropriate forums

5. The right to seek redressal against unfair trade practices or restrictive trade practices or
unscrupulsous exploitation of consumers

6. The right to consumer education

Extend and Coverage of the Act:-

The salient features of the Act are summed up as under:-

- The Act applies to all goods and services unless specifically exempted by the Central
Government.

- It covers all the sectors whether private, public or cooperative.

- The provisions of the Act are compensatory in nature. It enshrines the following rights
of consumers:-

- Right to be protected against the marketing of goods and services which are hazardous
to life and property.

-Right to be informed about the quality, quantity, potency, purity, standard and price of
goods or services so as to protect the consumer against unfair trade practices;

-Right to be assured , wherever possible , access to a variety of goods and services at
competitive prices;

-Right to be heard and to be assured that consumers interests will receive due
consideration at appropriate forums;

-Right to seek redressal against unfair trade practices unscrupulous exploitation of
consumers; and

-Right to consumer education

-The Act envisages establishment of Consumer Protection Councils at the Central and
State levels, whose main objects will be to promote and protect the rights of the
consumers.

The CPA extends to the whole of India except the State of Jammu and Kashmir and
applies to all goods and services unless otherwise notified by the Central Government.

Summary:-

In India, we have the Indian Contract Act, the Sale of Goods Act, the Dangerous Drugs
Act, the Agricultural Produce (Grading and Marketing) Act, the Indian Standards
Institution (Certification Marks) Act, The Prevention of Food Adulteration Act, the
Standards of Weights and Measures Act, the Trade and Merchandise Marks Act, etc
which to some extent protect consumer interests.
However, these laws required the consumer to initiate action by way of a civil suit, which
involved lengthy legal process proving, to be too expensive and time consuming for lay
consumers. Therefore, the need for a more simpler and quicker access to redressal to
consumer grievances was felt and accordingly, it lead to the legislation of the Consumer
Protection Act, 1986.

Questions:-

1. Write a note on Consumer Protection Act and discuss its functions.

Unit - 35 : Definitions of Important Terms
Objectives:-
This lecture will guide about the some important definitions relating to COPRA, such as
who is a consumer, who can file a complaint, what constitutes a complaint, where to file
a complaint etc.

Introduction:-
Before studying the provisions of the CPA, it is necessary to understand the terms used in
the Act. Let us understand some of the more important definitions. Complainant Means

1. A consumer; or

2. Any voluntary consumer association registered under the Companies Act,1956 or
under any other law for the time being in force; or

3. The Central Government or any State Government, who or which makes a complaint;
or

4. One or more consumers where there are numerous consumers having the same interest.

Goods means goods as defined in the Sale of Goods Act, 1930. Under that act, goods
means every kind of movable property other than actionable claims and money and
includes stocks and shares, growing crops, grass and things attached to or forming part of
the land which are agreed to be severed before sale or under the contract of sale.

All of us are consumers of goods and services. For the purpose of the Consumer
Protection Act,the word Consumer has been defined separately for goods and
services. For the purpose of goods, a consumer means a person belonging to the
following categories:-

(i) One who buys or agrees to buy any goods for a consideration which has been paid or
promised or partly paid and partly promised or under any system of deferred payment;

(ii) It includes any user of such goods other than the person who actually buys goods and
such use is made with the approval of the purchaser.

Definitions of Important Terms

Before studying the provisions of the CPA, it is necessary to understand the terms used in
the Act. Let us understand some of the more important definitions. Complainant Means

1. A consumer; or

2. Any voluntary consumer association registered under the Companies Act,1956 or
under any other law for the time being in force; or

3. The Central Government or any State Government, who or which makes a complaint;
or

4. One or more consumers where there are numerous consumers having the same interest

Complaint means any allegation in writing made by a complainant that :-

1. An unfair trade practice or a restricted trade practice has been adopted by any trader

2. The goods bought by him or agreed to be bought by him suffer from one more defects

3. The services hired or availed of or agreed to be hired or availed of by him suffer from
deficiency in any respect

4. The trader has charged for the goods mentioned in the complaint a price excess of the
price fixed by or under any law for the time being in force or displayed on the goods or
any package containing such goods.

5. Goods which will be hazardous to life and safety when used, are being offered for sale
to the public in contravention of the provisions of any law for the time being in force,
requiring traders to display information in regard to the contents, manner and effect of
use of such goods ;with a view to obtaining any relief provided by law under the CPA.

Goods means goods as defined in the Sale of Goods Act, 1930. Under that act, goods
means every kind of movable property other than actionable claims and money and
includes stocks and shares, growing crops, grass and things attached to or forming part of
the land which are agreed to be severed before sale or under the contract of sale.

Service is defined to mean service of any description which is made available to potential
users and includes the provision of facilities in connection with banking, financing,
insurance, transport, processing, supply of electrical or other energy, board or lodging or
both, housing construction, entertainment, amusement or the purveying of news or other
information but does not include the rendering of any service free of charge or under a
contract of personal service.

Consumer dispute means dispute where the person against whom a complaint has been
made, denies or disputes the allegation contained in the complaint.

Restrictive Trade Practice means any trade practice which requires a consumer to buy,
hire, or avail of any good or as the case may be, services as a condition precedent for
buying, hiring or availing of any other goods or services.

Unfair Trade Practice means unfair trade practice as defined under the Monopolies and
Restrictive Trade Practices Act. The MRPT act has defined certain practices to be unfair
trade practices. The detailed definition is given in the Consumer Protection Act, 1986 as
amended by the Consumer Protection (Amendment) Act. 1993. It means a trade practice
which, for the purpose of promoting the sale, use or supply of any goods or for the
provision of any service, adopts any unfair method or

unfair or deceptive practice including any of the following practices, namely: -

(a) False or misleading representation,
(b) Bargain price
(c) Offering of gifts, prize, contest etc.
(d) Non compliance of product safety standard.
(e) Hoarding or destruction of goods.

The Act may be consulted before filing a complaint for unfair trade practice.

Defect means any fault, imperfection or shortcoming in the quality, quantity, potency,
purity or standard which is required to be maintained by or under any law for the time
being in force or under any contract, express or implied, or as is claimed by the trade in
any manner whatsoever in relation to any goods.

Deficiency means any fault, imperfection or shortcoming or inadequacy in the quality,
nature and manner of performance which is required to be maintained by or under any
law for the time being in force or has been undertaken to be performed by a person in
pursuance of a contract or otherwise in relation to any service.

WHO IS A CONSUMER?

All of us are consumers of goods and services. For the purpose of the Consumer
Protection Act, the word Consumer has been defined separately for goods and
services. For the purpose of goods, a consumer means a person belonging to the
following categories:

(i) One who buys or agrees to buy any goods for a consideration which has been paid or
promised or partly paid and partly promised or under any system of deferred payment;

(ii) It includes any user of such goods other than the person who actually buys goods and
such use is made with the approval of the purchaser.

Note:- A person is not a consumer if he purchases goods for commercial or resale
purposes however, the word commercial does not include use by consumer of goods
bought and used by him exclusively for the purpose of earning his livelihood, by means
of self employment.

- For the purpose of services, a consumer means a person belonging to the following
categories:

(i) One who hires or avails of any service or services for a consideration which has been
paid or promised or partly paid and partly promised or under any system of deferred
payment;

i.It includes any beneficiary of such service other than the one who actually hires or
avails of the service for consideration and such services are availed with the approval of
such person.

WHO CAN FILE A COMPLAINT
The following can file a complaint under the Act:-
- A consumer
- Any voluntary consumer organization registered under the Societies Registration
Act,1860 or under the Companies Act,1956 or under any other law for the time being in
force.
- The Central Government
- The State Government or Union Territory Administrations.
- One or more consumers on behalf of numerous consumers who are having the same
interest
(Class action complaints)

STRUCTURE

-To provide simple, speedy and inexpensive redressal of consumer grievances, the Act
envisages a three- tier quasijudicial machinery at the National, State and District levels.

National Consumer Disputes Redressal Commission - known as National
Commission.
Consumer Disputes Redressal Commissions known as State Commission.
Consumer Disputes Redressal Forums- known as District Forum.

-The provisions of this Act are in addition to and not in derogation of the provisions of
any other law for the time being in force

WHAT CONSTITUTES A COMPLAINT?

Under the Act, a complaint means any allegation in writing made by a complainant in
regard to one or more of the following:-
- Any unfair trade practice as defined in the Act or restrictive trade practices like tie-up
sales adopted by any trader.
- One or more defects in goods. The goods hazardous to life and safety, when used,are
being offered for sale to public in contravention of provisions of any law for the time
being in force.
- Deficiencies in services.
- A trader charging excess of price.
(i) Fixed by or under any law for the time being in force; or
(ii) Displayed on goods; or
(iii) Displayed on any packet containing such good;

WHERE TO FILE A COMPLAINT
Consumer Protection Councils
The interests of consumers are enforced through various authorities set up under the
CPA. The CPA provides for the setting up of the
a) Central Consumer Protection Council,
b) the State Consumer Protection Council and
c) the District Forum

(a) Central Consumer Protection Council

The Central Government has set up the Central Consumer Protection Council which
consists of the following members :-
(a) The Minister in charge of Consumer Affairs in the Central Government who is its
Chairman, and
(b) Other official and non-official members representing varied interests
The Central council consists of 150 members and its term is 3 years. The Council meets
as and when necessary but at least one meeting is held in a year.

(b) State Consumer Protection Council

The State Council consists of :-
(a) The Minister in charge of Consumer Affairs in the State Government who is its
Chairman, and
(b) Other official and non-official members representing varied interests

The State Council meets as and when necessary but not less than two meetings must be
held every year.
Redressal Machinery under the Act

The CPA provides for a 3 tier approach in resolving consumer disputes. The District
Forum has jurisdiction to entertain complaints where the value of goods / services
complained against and the compensation claimed is less than Rs. 5 lakhs, the State
Commission for claims exceeding Rs. 5 lakhs but not exceeding Rs. 20 lakhs and the
National Commission for claims exceeding Rs. 20 lakhs.

(c) District Forum

Under the CPA, the State Government has to set up a district Forum in each district of the
State. The government may establish more than one District Forum in a district if it
deems fit. Each District Forum consists of :-
(a) A person who is, or who has been, or is qualified to be, a District Judge who shall be
its President
(b) Two other members who shall be persons of ability, integrity and standing and have
adequate knowledge or experience of or have shown capacity in dealing with problems
relating to economics, law, commerce, accountancy, industry, public affairs or
administration, one of whom shall be a woman.

Appointments to the State Commission shall be made by the State Government on the
recommendation of a Selection Committee consisting of the President of the State
Committee,

The Secretary - Law Department of the State and the secretary in charge of Consumer
Affairs

Every member of the District Forum holds office for 5 years or upto the age of 65 years,
whichever is earlier and is not eligible for re-appointment. A member may resign by
giving notice in writing to the State Government whereupon the vacancy will be filled up
by the State Government.

The District Forum can entertain complaints where the value of goods or services and the
compensation, if any, claimed is less than rupees five lakhs. However, in addition to
jurisdiction over consumer goods services valued upto Rs. 5 lakhs, the District Forum
also may pass orders against traders indulging in unfair trade practices, sale of defective
goods or render deficient services provided the turnover of goods or value of services
does not exceed rupees five lakhs.

A complaint shall be instituted in the District Forum within the local limits of whose
jurisdiction -

(a) The opposite party or the defendant actually and voluntarily resides or carries on
business or has a branch office or personally works for gain at the time of institution of
the complaint; or

(b) Any one of the opposite parties (where there are more than one) actually and
voluntarily resides or carries on business or has a branch office or personally works for
gain, at the time of institution of the complaint provided that the other opposite
party/parties acquiescence in such institution or the permission of the Forum is obtained
in respect of such opposite parties; or

(c) The cause of action arises, wholly or in part.

Summary:-

compensation wherever appropriate to the consumer.

Service is defined to mean service of any description which is made available to potential
users and includes the provision of facilities in connection with banking, financing,
insurance, transport, processing, supply of electrical or other energy, board or lodging or
both, housing construction, entertainment, amusement or the purveying of news or other
information but does not include the rendering of any service free of charge or under a
contract of personal service. Consumer dispute means dispute where the person against
whom a complaint has been made, denies or disputes the allegation contained in the
complaint.

Questions:-

1. How and where a complaint can be filed by the consumer?

Unit - 36 : State Commission
Objectives:-
The important topics we study in this lecture are State Commission, National
Commission.

Introduction:-
Every member of the National Commission shall hold office for a term of five years or
upto seventy years of age, whichever is earlier and shall not be eligible for
reappointment.

State Commission

The Act provides for the establishment of the State Consumer Disputes Redressal
Commission by the State Government in the State by notification. Each State
Commission shall consist of:-

(a) A person who is or has been a judge of a High Court appointed by State Government
(in consultation with the Chief Justice of the High Court ) who shall be its President;

(b) Two other members who shall be persons of ability, integrity, and standing and have
adequate knowledge or experience of, or have shown capacity in dealing with, problems
administration, one of whom must be a woman.

Every appointment made under this hall be made by the State Government on the
recommendation of a Selection Committee consisting of the President of the State
Commission, Secretary -

Law Department of the State and Secretary in charge of Consumer Affairs in the State.


The State Commission can entertain complaints where the value of goods or services and
the compensation, if any claimed exceed Rs. 5 lakhs but does not exceed Rs. 20 lakhs;

The State Commission also has the jurisdiction to entertain appeal against the orders of
any District Forum within the State The State Commission also has the power to call for
the records and appropriate orders in any consumer dispute which is pending before or
has been decided by any District Forum within the State if it appears that such District
Forum has exercised any power not vested in it by law or has failed to exercise a power
rightfully vested in it by law or has acted illegal with material irregularity.

National Commission

The Central Government provides for the establishment of the National Consumer
Disputes Redressal Commission The National Commission shall consist of :-

(a) A person who is or has been a judge of the Supreme Court, to be appoint by the
Central Government (in consultation with the Chief Justice of India ) who be its
President;

(b) Four other members who shall be persons of ability, integrity and standing and have
adequate knolwiedge or experience of, or have shown capacity in dealing with, problems
administration, one of whom shall be a woman

Appointments shall be by the Central Government on the recommendation of a Selection
Committee consisting of a Judge of the Supreme Court to be nominated by the Chief
Justice of India, the Secretary in the Department of Legal Affairs and the Secretary in
charge of Consumer Affairs in the Government of India.

Every member of the National Commission shall hold office for a term of five years or
upto seventy years of age, whichever is earlier and shall not be eligible for
reappointment.

The National Commission shall have jurisdiction :-

(a) To entertain complaints where the value of the goods or services and the
compensation, if any, claimed exceeds rupees twenty lakhs:

(b) To entertain appeals against the orders of any State Commission; and

(c) To call for the records and pass appropriate orders in any consumer dispute which is
pending before, or has been decided by any State Commission where it appears to the
National Commission that such Commission has exercised a jurisdiction not vested in it
by law, or has failed to exercise

a jurisdiction so vested, or has acted in the exercise of its jurisdiction illegally or with
material irregularity.

Complaints may be filed with the District Forum by :-

1. The consumer to whom such goods are sold or delivered or agreed to be sold or
delivered or such service provided or agreed to be provided

2. Any recognised consumer association, whether the consumer to whom goods sold or
delivered or agreed to be sold or delivered or service provided or agreed to be provided,
is a member of such association or not

3. One or more consumers, where there are numerous consumers having the same interest
with the permission of the District Forum, on behalf of or for the benefit of, all
consumers so interested

4. The Central or the State Government.

On receipt of a complaint, a copy of the complaint is to be referred to the opposite party,
directing him to give his version of the case within 30 days. This period may be extended
by another 15 days. If the opposite party admits the allegations contained in the
complaint, the complaint will be decided on the basis of materials on the record.

Where the opposite party denies or disputes the allegations or omits or fails to take
any action to represent his case within the time provided, the dispute will be settled
in the following manner :-

I. In case of dispute relating to any goods : Where the complaint alleges a defect in the
goods which cannot be determined without proper analysis or test of the goods, a sample
of the goods shall be obtained from the complainant, sealed and authenticated in the
manner prescribed for referring to the appropriate laboratory for the purpose of any
analysis or test whichever may be necessary, so as to find out whether such goods suffer
from any other defect. The appropriate laboratory would be required to report its finding
to the referring authority, i.e. the District Forum or the State Commission within a period
of fortyfive days from the receipt of the reference or within such
extended period as may be granted by these agencies.

Summary:-

It summarizes that State Commission Act provides for the establishment of the State
Consumer Disputes Redressal Commission by the State Government in the State by
notification. Each State Commission shall consist of:-

(a) A person who is or has been a judge of a High Court appointed by State Government
(in consultation with the Chief Justice of the High Court ) who shall be its President;

(b) Two other members who shall be persons of ability, integrity, and standing and have
adequate knowledge or experience of, or have shown capacity in dealing with, problems
administration, one of whom must be a woman.


Questions:-

1. Write a note on State Commission and National Commission.
Unit 37 : Filing of Complaint
Objectives:-

Remedies available to a consumer with COPRA will be studied in this Act such as how to
file a complaint, relief available to the consumers, procedure for filing the appeal, speedy
disposal.

Introduction:-

Procedures for filing complaints and seeking redressal are simple.
There is no fee for filing a complaint before the District Forum, the State Commission or
the National Commission. ( A stamp paper is also not required) There should be 3 to 5
copies of the complaint on plain paper.

The thrust of the Act is to provide simple, speedy and inexpensive redressal to
consumers grievances. To ensure speedy disposal of consumers grievances, the
following provisions have been incorporated in the Act and the rules farmed there under:-
It is obligatory on the complainant or appellant or their authorized agents and the
opposite parties to appear before the Forum/Commission on the date of hearing or any
other date to which hearing could be adjourned.

How to File a Complaint

Procedures for filing complaints and seeking redressal are simple.
There is no fee for filing a complaint before the District Forum, the State
Commission or the National Commission. ( A stamp paper is also not required)
There should be 3 to 5 copies of the complaint on plain paper.
The complainant or his authorized agent can present the complaint in person.
The complaint can be sent by post to the appropriate Forum / Commission.
A complaint should contain the following information

(a) The name, description and the address of the complainant.

(b) The name, description and address of the opposite party or parties, as the case may be,
as far as they can be ascertained;
(c) The facts relating to complaint and when and where it arose;

(d) Documents, if any, in support of the allegations contained
in the complaint.

(e) The relief which the complainant is seeking.

The complaint should be signed by the complainant or his authorized agent.
The complaint is to be filed within two years from the date on which cause of
action has arisen.

Relief Available to the Consumers

Depending on the nature of relief sought by the consumer and facts, the Redressal
Forums may give orders for one or more of the following reliefs:-
a) Removal of defects from the goods,
b) Replacement of the goods;
c) Refund of the price paid;
d) Award of compensation for the loss or injury suffered;
e) Removal of defects or deficiencies in the services;
f) discontinuance of unfair trade practices or restrictive trade practices or direction
not to repeat them;
g) Withdrawal of the hazardous goods from being offered to sale; or
h) Award for adequate costs to parties.

Procedure for Filing the Appeal:-

- Appeal against the decision of a District Forum can be filed before the State
Commission within a period of thirty days. Appeal against the decision of a State
Commission can be filed before the National Commission within thirty days. Appeal
against the orders of the National Commission can be filed before the Supreme Court
within a period of thirty days.
There is no fee for filing appeal before the State Commission or the National
Commission.
Procedure for filing the appeal is the same as that of complaint, except the
application should be accompanied by the orders of the District/State Commission
as the case may be and grounds for filing the appeal should be specified.

Speedy Disposal


opposite parties to appear before the Forum/Commission on the date of hearing or
any other date to which hearing could be adjourned.

The National Commission, State Commission and District Forums are required to
decide complaints, as far as possible, within a period of three months from the date of
notice received by the opposite party where complaint does not require analysis or
testing of the commodities and within five months if it requires analysis or testing of
commodities.

The National Commission and State Commissions are required to decide the appeal
as far as possible, within 90 days from the first date of hearing.

Read the following questions for a better understanding of the Act:

Q1. I have instituted a complaint before the Consumer Court against a Medical
Practitioner. My complaint has been challenge on the ground that a Medical
Practitioner cannot be sued under the Consumer Act. What does law provide?

Ans. Yes, a medical practitioner can be sued under the Consumer Protection Act 1986 for
his or her professional negligence resulting in damage to patient. Section 2 (d) in defining
a consumer in Clause (ii) uses the expression hires and avails of. The word hire
means employ of wages or fees. Secondly the words any service in s. 2 (d) (ii) in
Consumer Protection Act. A eloquent to bring the delinquent medical practitioners within
the ambit of Consumer Protection Act.

Thirdly, s. 2 (o), Consumer Protection Act which defines service exempts only two types
of services, one service free of charge and another contract of personal service
postulates a relationship of master and servant. A medical man whose service is
requisitioned for a patient answers the clause contract of service but never a contract
of personal service. So, a negligent medical professional can be proceeded under the
Consumer Protection Act 1986.

Q2. I had purchased seeds from a party. The seeds did not germinate. The other
party took the plea that I was not a consumer. Whether purchase of seeds for the
purpose of agriculture is purchase for commercial purpose?

Ans: Purchase made for agriculture is not for commercial purpose. Therefore, the
complainant is a consumer and entitled to seek redressal of his grievance in a Consumer
Court against the party which supplied defective seed to him.

Q3. I had got a confirmed ticket on Sahara Airways. The flight was later cancelled
on account of technical snag. Is it a deficiency in service?

Ans: Cancellation of flight on account of technical snag is not deficiency in service as it
is due to unavoidable circumstances. However, you ought to be allowed refund of the fare
but no compensation can be granted on account of any loss suffered by you (if any)
because of the said cancellation.

Q4. I was allotted a Maruti Car. There was a delay in delivery ofthe car.
Subsequently, the dealer called upon me to make further payment as the price of the
car had gone up. Am I liable to bear the price increase on account of delay caused
by the dealer?

Ans: You are not liable to pay any price increase in the above mentioned circumstances
since the increase in price is totally on account of the delay on the part of the dealer for
which a consumer cannot be made to suffer.

Q5. Does rejection of application for grant of loan by a Bank constitute deficiency in
service for which I can approach the Consumer Court?

Ans: The Bank has a wide discretion in the matter of granting loans and advances and
continuing disbursement of loans sanctioned .The Consumer Courts cannot sit in
judgement over the discretion exercised by the Bank and as such you will not succeed in
any such action, if taken by you.

Summary:-

opposite parties to appear before the Forum/Commission on the date of hearing or
any other date to which hearing could be adjourned.

Questions:-

1. Write the procedure for filing an appeal by the consumer.


they do not intend to fulfill.

compensation wherever appropriate to the consumer. Restrictive Trade Practice means
any trade practice which requires a consumer to buy, hire, or avail of any good or as the
case may be, services as a condition precedent for buying, hiring or availing of any other
goods or services.

Unfair Trade Practice means unfair trade practice as defined under the Monopolies and
Restrictive Trade Practices Act. The MRPT act has defined certain practices to be unfair
trade practices. The detailed definition is given in the Consumer Protection Act, 1986 as
amended by the Consumer Protection (Amendment) Act. 1993.

Module 7 : Foreign Exchange Management Act 1999

Introduction:-

The Foreign Exchange Regulation Act of 1973 (FERA) in India was repealed on 1 June,
2000. It was replaced by the Foreign Exchange Management Act (FEMA), which was
passed in the winter session of Parliament in 1999. Enacted in 1973, in the backdrop of
acute shortage of Foreign Exchange in the country, FERA had a controversial 27 year
stint during which many bosses of the Indian Corporate world found themselves at the
mercy of the Enforcement Directorate (E.D.).

The object of the Act is to consolidate and amend the law relating to foreign exchange
with objective of facilitating external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market in India.

The Intent of this Act is to consolidate and amend the law relating to foreign exchange
with the objective of facilitating external trade and payments and for promoting the
orderly development and maintenance of foreign exchange market in India.

SECTION 6 - deals with capital account transactions. This section allows a person to
draw or sell foreign exchange from or to an authorized person for a capital account
transaction. RBI in consultation with Central Govt. has issued various regulations on
capital account transactions in terms of sub-sect ion (2)and (3 )f section 6. The
Enforcement Directorate, with its Headquarters at New Delhi has seven zonal offices at
Bombay, Calcutta, Delhi, Jalandhar, Madras, Ahmedabad and Bangalore.

Objectives:-

Foreign Exchange Management Act, Objectives And Extent Of FEMA, Broad Scheme
of The Foreign, exchange management act, 1999, enforcement directorate, organizational
set-up, staff, functions procedural provisions.

Unit 38 : Foreign Exchange Management Act

Objectives:-
This lecture consist of FOREIGN EXCHANGE MANAGEMENT ACT, objectives and
Extent of FEMA.

Introduction:-

passed in the winter session of Parliament in 1999.
FEMA extends to the whole of India. It applies to all branches, offices and agencies
outside India owned or controlled by a person who is a resident of India and also to any
contravention there under committed outside India by any person to whom this Act
applies.

Foreign Exchange Management Act
mercy of the Enforcement Directorate (E.D.). Any offense under FERA was a criminal
offense liable to imprisonment, whereas FEMA seeks to make offenses relating to foreign
exchange civil offenses.
FEMA, which has replaced FERA, had become the need of the hour since FERA had
become incompatible with the pro-liberalization policies of the Government of India.
FEMA has brought a new management regime of Foreign Exchange consistent with the
emerging frame work of the World Trade Organization (WTO). It is another matter that
enactment of FEMA also brought with it Prevention of Money Laundering Act, 2002
which came into effect recently from 1 July, 2005 and the heat of which is yet to be felt
as Enforcement Directorate would be investigating the cases under PMLA too.
Unlike other laws where everything is permitted unless specifically prohibited, under
FERA nothing was permitted unless specifically permitted. Hence the tenor and tone of
the Act was very drastic. It provided for imprisonment of even a very minor offence.
Under FERA, a person was presumed guilty unless he proved himself innocent whereas
under other laws, a person is presumed innocent unless he is proven guilty.
So The Parliament has enacted the Foreign Exchange Management Act, 1999 to replace
the Foreign Exchange Regulation Act, 1973. This Act came into force on the 1st day of
June, 2000. To investigate provisions of the Act, the Central Govt. have established the
Directorate of Enforcement with Director and other officers as officers of the
Enforcement.

This Act extends to the whole of India and will also apply to all branches, offices and
agencies outside India owned or controlled by a person resident in India. It will also be
applicable to any contravention committed outside India by any person to whom this Act
is applicable.

Objectives and Extent of FEMA
The Intent of this Act is to consolidate and amend the law relating to foreign exchange
with the objective of facilitating external trade and payments and for promoting the
orderly development and maintenance of foreign exchange market in India.
applies.
Except with the general or special permission of the Reserve Bank of India, no person
can :-
Deal in or transfer any foreign exchange or foreign security to any person not
being an authorized persons.
Make any payment to or for the credit of any person resident outside India in any
manner;
Receive otherwise through an authorized person, any payment by order or on
behalf of any person resident outside India in any manner;
Reasonable restrictions for current account transactions as may be prescribed.
Any person may sell or draw foreign exchange to or from an authorized person for a
capital account transaction. The Reserve Bank may, in consultation with the Central
Government, specify:-
any class or classes of capital account transactions which are permissible;
the limit up to which foreign exchange shall be admissible for such transactions
However, the Reserve Bank cannot impose any restriction on the drawing of foreign
exchange for payments due on account of amortization of loans or for depreciation of
direct investments in the ordinary course of business.
The Reserve Bank can, by regulations, prohibit, restrict or regulate the following :-
transfer or issue of any foreign security by a person resident in India;
transfer or issue of any security by a person resident outside India;
transfer or issue of any security or foreign security by any branch, office or
agency in India of a person resident outside India;
any borrowing or lending in foreign exchange in whatever form or by whatever
name called;
any borrowing or tending in rupees in whatever form or by whatever name called
between a person resident in India and a person resident outside India;
deposits between persons resident in India and persons resident outside India;
export, import or holding of currency or currency notes;
transfer of immovable property outside India, other than a lease not exceeding
five years, by a person resident in India;
acquisition or transfer of immovable property in India, other than a lease not
exceeding five years, by a person resident outside India;
giving of a guarantee or surety in respect of any debt, obligation or other liability
incurred
o (i) by a person resident in India and owed to a person resident outside
India or
o (ii) by a person resident outside India.
A person, resident in India may hold, own, transfer or invest in foreign currency, foreign
security or any immovable property situated outside India if such currency, security or
property was acquired, held or owned by such person when he was resident outside India
or inherited from a person who was resident outside India.
A person resident outside India may hold, own, transfer or invest in Indian currency,
security or any immovable property situated in India if such currency, security or
property was acquired, held or owned by such person when he was resident in India or
inherited from a person who was resident in India.
The Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in India
of a branch, office or other place of business by a person resident outside India, for
carrying on any activity relating to such branch, office or other place of business. Every
exporter of goods and services must :-
furnish to the Reserve Bank or to such other authority a declaration in such form
and in such manner as may be specified, containing true and correct material
particulars, including the amount representing the full export value or, if the full
export value of the goods is not ascertainable at the time of export, the value
which the exporter, having regard to the prevailing market conditions, expects to
receive on the sale of the goods in a market outside India;
furnish to the Reserve Bank such other information as may be required by the
Reserve Bank for the purpose of ensuring the realization of the export proceeds
by such exporter.
The Reserve Bank may, for the purpose of ensuring that the full export value of the goods
or such reduced value of the goods as the Reserve Bank determines, having regard to the
prevailing market-conditions, is received without any delay, direct any exporter to
comply with such requirements as it deems fit.
Where any amount of foreign exchange is due or has accrued to any person resident in
India, such person shall take all reasonable steps to realize and repatriate to India such
foreign exchange within such period and in such manner as may be specified by the
Reserve Bank.
Section3
Except as provided in the FEMA Act, rules and RBI permission, no person shall: Deal in/
transfer any forex to any person not being an authorized person Make any payment to or
for the credit of any non resident Receive otherwise through an authorized person, any
payment by order or on behalf of any non resident Enter into any financial transaction in
India as consideration for or in association with acquisition or creation or transfer of a
right to acquire, any asset outside India by any person.
Summary:-
applies. FEMA, which has replaced FERA, had become the need of the hour since FERA
had become incompatible with the pro-liberalization policies of the Government of India.
FEMA has brought a new management regime of Foreign Exchange consistent with the
emerging frame work of the World Trade Organization (WTO).
applies. A person resident outside India may hold, own, transfer or invest in Indian
currency, security or any immovable property situated in India if such currency, security
or property was acquired, held or owned by such person when he was resident in India or
inherited from a person who was resident in India.

Questions:-
1. Write the establishment and functioning of FEMA, 1999.

Unit 39 : Broad Scheme of the Foreign Exchange
Management Act, 1999
Objectives:-
In this lecture we will discuss about the Broad Scheme of The Foreign Exchange
Management Act, 1999, Enforcement Directorate.

Introduction:-

SECTION 3- Prohibits dealings in foreign exchange except through an authorized
person. This Section says that no person can, without general or special permission of the
RBI-
(a) Deal in or transfer any foreign exchange or foreign securities to any person being an
authorized person (corresponding to sections 8 and 19 of FERA).
The Directorate of Enforcement is mainly concerned with the enforcement of the
provisions of the Foreign Exchange Management Act to prevent leakage of foreign
exchange which generally occurs through the following malpractices
1) Remittances of Indians abroad otherwise than through normal banking channels, i.e.
through compensatory payments.

Broad Scheme Of The Foreign Exchange Management Act,
1999

SECTION 3 - Prohibits dealings in foreign exchange except through an authorized
person. This Section says that no person can, without general or special permission of the
RBI-
a) Deal in or transfer any foreign exchange or foreign securities to any person being an
authorized person (corresponding to sections 8 and 19 of FERA).
b) Make any payment to or for the credit of any person resident outside India in any
manner (corresponding to section 9(l)(a) of FERA).
c) Receive otherwise through an authorized person, any payment by order or on behalf
of any person resident outside India in any manner (corresponding to section 9(1)(b)
of FERA) and
d) Enter into any financial transaction in India as consideration for or in association with
acquisition or creation or transfer of a right to acquire, any asset outside India by any
person (corresponding to sections 9(l)(f) & (g) of FERA).

SECTION 4 - restrains any person resident in India from acquiring, holding, owning,
possessing or transferring any foreign exchange, foreign security or any immovable
property situated outside India except as specifically provided in the Act. The terms
"foreign exchange" and "foreign security" are defined in sections 2(n) and 2(o)
respectively of the Act. The Central Govt. has made Foreign Exchange Management
(Current Account Transactions) Rules, 2000.
SECTION 6 - deals with capital account transactions. This section allows a person to
draw or sell foreign exchange from or to an authorized person for a capital account
transaction. RBI in consultation with Central Govt. has issued various regulations on
capital account transactions in terms of sub-sect ion (2)and (3 )f section 6.
SECTION 7 - deals with export of goods and services. Every exporter is required to
furnish to the RBI or any other authority, a declaration etc. etc. regarding full export
value.
SECTION 8 - casts the responsibility on the persons resident in India who have any
amount of foreign exchange due or accrued in their favour to get same realized and
repatriated to India within the specific period and the manner specified by RBI.
SECTIONS 10 and 12 - deals with duties and liabilities of the Authorized persons.
Authorized person has been defined in Sec.2(c) of the Act which means an authorized
dealer, money changer, off shore banking unit or any other person for the time being
authorized to deal in foreign exchange or foreign securities.
SECTIONS 13 and 15 - of the Act with penalties and enforcement of the orders of
Adjudicating Authority as well power to compound contraventions under the Act.
SECTION 36 to 37 - pertains to the establishment of Directorate of Enforcement and the
powers to investigate the violation of any provisions of Act, rule, regulation,
notifications, directions or order issued in exercise of the powers under this Act. The
Director of Enforcement and other officer of Enforcement not below the rank of Asstt.
Director have been empowered to take up investigations.

Enforcement Directorate
The Directorate of Enforcement is mainly concerned with the enforcement of the
provisions of the Foreign Exchange Management Act to prevent leakage of foreign
exchange which generally occurs through the following malpractices
1. Remittances of Indians abroad otherwise than through normal banking
2. channels, i.e. through compensatory payments.
3. Acquisition of foreign currency illegally by person in India.
4. Non-repatriation of the proceeds of the exported goods.
5. Unauthorised maintenance of accounts in foreign countries.
6. Under-invoicing of exports and over-invoicing of imports and any other type of
invoice manipulation.
7. Siphoning off of foreign exchange against fictitious and bogus imports land by.
8. Illegal acquisition of foreign exchange through Hawala.
9. Secreting of commission abroad.

Directorate has to detect cases of violation and also perform substantial adjudicatory
functions to curb such malpractices.
Summary:-
SECTION 4 - restrains any person resident in India from acquiring, holding, owning,
possessing or transferring any foreign exchange, foreign security or any immovable
property situated outside India except as specifically provided in the Act. The terms
"foreign exchange" and "foreign security" are defined in sections 2(n) and 2(o)
respectively of the Act. The Central Govt. has made Foreign Exchange Management
(Current Account Transactions) Rules, 2000.
Questions:-
1. Discuss the BROAD SCHEME OF THE FOREIGN EXCHANGE MANAGEMENT
ACT, 1999.

Unit - 40 : Organisation Set-UP OF {Fema}
Objectives:-
In this lecture we will study the Organization Set-Up, Staff, Functions, Procedural
Provisions of FEMA.

Introduction:-
The Enforcement Directorate, with its Headquarters at New Delhi has seven zonal offices
at Bombay, Calcutta, Delhi, Jalandhar, Madras, Ahmedabad and Bangalore.

The total sanctioned strength of staff of all categories is 813. The main functions of the
Directorate are such:-

1) To collect and develop intelligence relating to violation of the provisions of Foreign
Exchange Regulation Act and while working out the same, depending upon the
circumstances of the case:

Organisational Set-Up
at Bombay, Calcutta, Delhi, Jalandhar, Madras, Ahmedabad and Bangalore. The zonal
offices are headed by the Deputy Directors. The Directorate has nine sub-zonal offices at
Agra, Srinagar, Jaipur, Varanasi, Trivandrum, Calicut, Hyderabad, Guwahati and Goa,
which are headed by the Assistant Directors. The Directorate has also a Unit at Madurai,
which is headed by a Chief Enforcement Officer. Besides, there are three Special
Directors of Enforcement and one Additional Director of Enforcement.
Staff
The total sanctioned strength of staff of all categories is 813 - The breaking up is as
under:-

Category "A" Officers
(Class I officers)
54
Category "B" Officers
(Class II officers)
l53
Category "C" Officers
(CLASS III officers)
440
Category "D" Officers
(Class IV officers)
166

Functions
The main functions of the Directorate are as under:
1. To collect and develop intelligence relating to violation of the provisions of Foreign
Exchange Regulation Act and while working out the same, depending upon the
circumstances of the case:
2. To conduct searches of suspected persons, conveyances and premises for seizing
incriminating materials (including Indian and foreign currencies involved) and/or.
3. To enquire into and investigate suspected violations of provisions of the Foreign
Exchange Management Act.
4. To adjudicate cases of violations of Foreign Exchange Management Act for levying
penalties departmentally and also for confiscating the amounts involved in
contraventions;
5. To realise the penalties imposed in departmental adjudication;
In addition to the above functions relating to the Foreign Exchange Management Act, the
Directorate also processes and recommends cases for detention of habitual offenders
under the Conservation of Foreign Exchange and Prevention of smuggling Activities Act,
1974 (52 of 1974), which provides inter-alia for detention of a person with a view to
preventing him from acting in a manner prejudicial to the conservation and augmentation
of foreign exchange.
Procedural Provisions
For enforcing the provisions of various sections of FEMA, 1999, the officers of
Enforcement Directorate of the level of Assistant Director and above will have to
undertake the following functions:-
1. Collection and development of intelligence/information.
2. Keeping surveillance over suspects.
3. Searches of persons/vehicles as per provisions of Income-tax Act, 1961.
4. Searches of premises as per provisions of Income-tax Act, 1961.
5. Summoning of persons for giving evidence and producing of documents as per
provisions of Income-tax Act, l96l.
6. Power to examine persons as per provisions of Income-tax Act, 196l.
7. Power to lcall for any information/document as per provisions of Income- tax Act,
1961.
8. Power to seize documents etc. as per provisions of Income-tax Act, 196l.
9. Custody of documents as per Income-tax Act, 196l.
10. Adjudication and appeals- Officers of and above the rank of Dy Director of

Enforcement, are empowered to adjudicate cases of contravention of the provisions of the
Act; these proceedings which are quasi-judicial in nature, start with the issuance of show
cause notice; in the event of cause shown by the Notice-not being found satisfactory,
further proceedings are held, vis. personal hearing, in which the noticee has a further
right to present his defence, either in person or through any authorized representative; on
conclusion of these proceedings, the adjudicating authority has to examine and consider
the evidence on record, in its entirety and in case the charges not being found proved, the
noticee is acquitted, and in the event of charges being found substantiated, such penalty,
as is considered appropriate as per provisions of section 13 of the Act can be imposed,
besides confiscation of amount involved in these contraventions.

The penalty imposed has to be deposited in the concerned office of the Dy. Director
within 45 days of the date of receipt of the Adjudication order. In case the party feels
aggrieved by the orders of the adjudicating authority, he/she/they can refer appeal, before
the Appellate Tribunal/Special Director (Appeal), Foreign Exchange. Whereas, another
appeal lies to the High Court, against the order of the Appellate Tribunal, however, only
in the matters involving question/points of Law.

Summary:-
at Bombay, Calcutta, Delhi, Jalandhar, Madras, Ahmedabad and Bangalore. The zonal
offices are headed by the Deputy Directors. The Directorate has nine sub-zonal offices at
Agra, Srinagar, Jaipur, Varanasi, Trivandrum, Calicut, Hyderabad, Guwahati and Goa,
which are headed by the Assistant Directors. The Directorate has also a Unit at Madurai,
which is headed by a Chief Enforcement Officer. Besides, there are three Special
Directors of Enforcement and one Additional Director of Enforcement.

Questions:-

1. Write about the organizational set up and functioning of FEMA.


mercy of the Enforcement Directorate (E.D.).


development and maintenance of foreign exchange market in India. FEMA extends to the
whole of India. It applies to all branches, offices and agencies outside India owned or
controlled by a person who is a resident of India and also to any contravention there
under committed outside India by any person to whom this Act applies.
The Reserve Bank may, for the purpose of ensuring that the full export value of the goods
or such reduced value of the goods as the Reserve Bank determines, having regard to the
prevailing market-conditions, is received without any delay, direct any exporter to
comply with such requirements as it deems fit.

Bibliography

Element of Mercantile Law - Gulshan SS (2003), Excel Books, N. Delhi
Principle of Mercantile Law - Avatar Singh
Business Law - Gulshan & Kapoor
Principle of Mercantile Law - Maheshwari & Maheshwari
SEBI Act.
Taxmans Company Act 1998
Company Law & Secretarial Law- Garg K.C., Chawla R.C.
Business Law- M C Kuchhal
Laws Relating to Monopolies, restrictive and unfair trade practices

Business Economic Laws

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