Business Law for MBA

7/28/2019 Business Law for MBA

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Business Law

Law of contract, meaning of contract, agreement, essential elements of a valid contract,

classification of contracts, proposal and acceptance, free consent, void agreements.

Negotiable instruments act 1881: Nature and Characteristics of Negotiable instruments, Kinds

of Negotiable Instruments Promissory Notes, Bills of Exchange and Cheques. Parties to

Negotiable Instruments, Negotiation, Presentment, Discharge and Dishonor of Negotiable

Instrument, Law of agency, Bailment & Pledge.

Sale of goods act 1930: Definition of Sale, Sale v/s Agreement to Sell, Goods, price and Time,

Condition and Warranties, Express and Implied Condition, Doctrine of Caveat Emptor ,

Performance of Contract of sale, Right of Unpaid Seller. Intellectual property law, law relating to

patents, law relating to copyrights, law relating to trade mark

Advice ON BUSINESS LAW can help you to deal with regulations affecting your

business/industry, employment law issues and how to handle disputes, employment contract

terms for new employees, protecting your intellectual property and copyright and drawing up a

standard terms of trade contract. It can also assist with the legalities of a specific contract for a

specific piece of work. You can also learn how to protect yourself against bad debts, better

understand the legal requirements of your insurance needs and set terms and conditions for the

sale of your products or services.

advice on a range of issues such as contracts, intellectual

property, terms and conditions and employment law

What else a solicitor will help with

They will act for you in a legal dispute and if you have to go to court. They can also give you

advice if you have a website and are unsure about its legal ins and outs. They can also give you

advice on financial matters such as how to keep your taxes to a minimum.


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The effects of a flawed legal system on the business environment may be found in many

areas which are only too familiar to businessmen. Here are some examples of what

usually happens in the absence of appropriate and enforced legal rules:

" The effects on contracts: Respect for contractual obligations will be left entirely to the

good will of the contracting parties, agreements will be binding only to the extent their

beneficiaries have effective power to make them so, and resorting to extra-legal means

will become an ordinary method of enforcement.

* The effect on property rights: Individuals and corporations will tend to acquire only

the assets over which they can maintain effective property rights. Many will prefer to

liquidate their assets and keep them in the form of deposits or portfolio investments

abroad, putting pressure on the value of the local currency.

" Effect on corporations: Most companies will take the form of closed corporations

where shares are held by reliable friends and relatives, thus barring the formation of large

domestic joint-stock companies and depriving ordinary citizens of opportunities to own

stock portfolios.

" Effect on the banking system: Banks will lend only to those who can offer real assets

as collateral, or to those who have effective, namely political, power in the society, thus

limiting the growth of the banking sector and of new investment while reinforcing the

concentration of wealth. Debt recovery will become a major problem for banks,

threatening their very existence. Both the banking system and the capital market will not

properly function in the absence of an adequate regulatory framework strictly supervised

by efficient agencies. Furthermore, different types of financial mechanisms will emerge,

promising quick and lucrative returns, but ending in failures which may affect the

economy as a whole.

" Effect on the transfer of technology: The inflow of foreign direct investment, which


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normally introduces more modern technology, will slow down. Weak protection of

intellectual property rights will stifle invention and the development of new ideas.

method of procurement, preferring to deal with familiar and reliable sources. They will

also tend to seek favors from public officials through illegal means.

" Effect on ongoing legislation and regulation: Weak or ineffective laws usually lead to the

enactment of further laws and regulations. An over-regulated economy undermines new

investment, increases the cost of existing ones, and leads to the spread of corruption. The

multiplication of laws and regulations also reduces their quality and the chances of their

enforcement. The absence of judicial review, or its high cost, and delays in the administration

of justice add to the negative impact.

* Effect on the extent of criminal offenses in the economic sphere: Weak, ineffective, or

excessive laws lead to tax evasion, smuggling, and the growth of organized crime.

What is Business Law? Businesses interact in many and varied ways. To name just a few types

of business transactions, there are contracts, mergers and acquisitions, leasing, etc. How these

transactions are carried out is overseen by Business Law. Additionally, how businesses are

formed is a large part of Business law. This area of law is very wide-ranging, although it deals

primarily with defining the rights and responsibilities of businesses, rather than enforcing these

laws.

Because of its extensive scope, Business law has spawned a large number of legal practice area

subcategories, which include Sales and Secured Transactions, Banking, Landlord-Tenant,

Mortgages, Real Estate Transactions, Debtor and Creditor, Bankruptcy, Consumer Credit,

Negotiable Instruments, and Contracts.

Business law and Commercial law are very closely related, so much so that the terms are often

used interchangeably and the legal issues they address frequently overlap. The Uniform


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Commercial Code (UCC) is the principal presiding authority over commercial transactions.

Business Law

Business.gov helps small businesses understand their legal requirements and locate

government services from federal, state and local agencies. Business.gov is an official

site of the U.S. Small Business Administration.

- Definition

Commercial law (sometimes known as business law) is the body of law that governs

business and commercial transactions. It is often considered to be a branch of civil law

and deals with issues of both private law and public law. Commercial law includes within

its compass such titles as principal and agent; carriage by land and sea; merchant

shipping; guarantee; marine, fire, life, and accident insurance; bills of exchange and

partnership. It can also be understood to regulate corporate contracts, hiring practices,

and the manufacture and sales of consumer goods.

aws

Most aspects of running a business have some legal consequences. Whether your

business is just starting up, expanding, or winding down, you must comply with the

federal, state, and local laws that govern your business activities.

- Employment Law for Businesses

The e laws Advisors are interactive e-tools that provide easy-to-understand information

about a number of federal employment laws. Each Advisor simulates the interaction you

might have with an employment law expert. It asks questions and provides answers based

on responses given.

- Self-Employment Assistance

Self-Employment Assistance offers dislocated workers the opportunity for early reemployment. Theprogram is designed to encourage and enable unemployed workers to


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create their own jobs by starting their own small businesses. Under these programs,

States can pay a self-employed allowance, instead of regular unemployment insurance

benefits, to help unemployed workers while they are establishing businesses and

becoming self-employed. Participants receive weekly allowances while they are getting

their businesses off the ground.

inesses

Broad ranging material on business laws, regulations, structuring, capital, taxes,

securities, employment, contracts, labor & more

A corporation is a legal entity created through the laws of its state of incorporation.

Individual states have the power to promulgate laws relating to the creation, organization

and dissolution of corporations. Many states follow the Model Business Corporation Act.

A partnership is a for-profit business association of two or more persons.

Because the

business component is defined broadly by state laws and because "persons" caninclude

individuals, groups of individuals, companies, and corporations, partnershipsare highly

adaptable in form and vary in complexity. Each partner shares directly in the

organization's profits and shares control of the business operation. Theconsequence of

this profit sharing is that partners are jointly and independently liable for thepartnership's


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debts.

The Uniform Commercial Code (UCC or the Code), first published in 1952, is one of a

number of uniform acts that have been promulgated in conjunction with efforts to

harmonize the law of sales and other commercial transactions in all 50 states within the

United States of America. The goal of harmonizing state law is important because of the

prevalence of commercial transactions that extend beyond one state. For example, goods

may be manufactured in State A, warehoused in State B, sold from State C and delivered

in State D. The UCC therefore achieved the goal of substantial uniformity in commercial

laws and, at the same time, allowed the states the flexibility to meet local circumstances.

The UCC deals primarily with transactions involving personal property (movable

property), not real property (immovable property).

LAW OF CONTRACT:

WHAT IS A CONTRACT?

Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement

enforceable

by law. Section 2(e) defines agreement as every promise and every set of promises forming

consideration for each other. Section 2(b) defines promise in these words:When the person

to whom the proposal is made signifies his assent thereto, the proposal is said

to be accepted.

A proposal when accepted, becomes a promise. From the above definition of promise, it is

obvious that an agreement is an accepted proposal.


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The two elements of an agreement are:

(i) offer or a proposal

(ii) an acceptance of that offer or proposal.

What agreements are contracts? All agreements are not studied under the Indian Contract Act,as some of them are not contracts. Only those agreements which are enforceable at law arecontracts. The Contract Act is the law of those agreements which create obligations, and in caseof a breach of a promise by one party to the agreement, the other has a legal remedy.Thus, a contract consists of two elements:(i ) an agreement(ii ) legal obligation, i.e., it should be enforceable at law.However, there are some agreements which are not enforceable in a law court. Suchagreements do not give rise to contractual obligations and are not contracts.

Examples (1) A invites B for dinner in a restaurant. B accepts the invitation. On the appointed day, Bgoes to the restaurant. To his utter surprise A is not there. Or A is there but refuses toentertain B. B has no remedy against A. In case A is present in the restaurant but B fails toturn-up, then A has no remedy against B.(2) A gives a promise to his son to give him a pocket allowance of Rupees one hundred everymonth. In case A fails or refuses to give his son the promised amount, his son has no remedyagainst A.In the above examples promises are not enforceable at law as there was no intention tocreate legal obligations. Such agreements are social agreements which do not give rise tolegal consequences. This shows that an agreement is a broader term than a contract. And,therefore, a contract is an agreement but an agreement is not necessarily a contract.

Object and Scope:The Law of Contract deals with agreements which can be enforced through courts of law.The Law of Contract is the most important part of commercial law because every commercialtransaction starts from an agreement between two or more persons.According to Salmond a contract is an agreement creating and defining obligations betweenthe parties. According to Sir William Anson, A contract is an agreement enforceable at lawmade between two or more persons, by which rights are acquired by one or more to acts orforbearances on the part of the other or others.The object of the Law of Contract is to introduce definiteness in commercial and othertransactions. How this is done can be illustrated by an example. X enters into a contract todeliver 10 to What agreements are contr acts? All agreements are not studied under the IndianContract Act, as some of them are not contracts. Only those agreements which are enforceableat law are contracts. The Contract Act is the law of those agreements which create obligations,and in case of a breach of a promise by one party to the agreement, the other has a legalremedy.Thus, a contract consists of two elements:(i ) an agreement(ii ) legal obligation, i.e., it should be enforceable at law.However, there are some agreements which are not enforceable in a law court. Suchagreements do not give rise to contractual obligations and are not contracts.


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Examples (1) A invites B for dinner in a restaurant. B accepts the invitation. On the appointed day, Bgoes to the restaurant. To his utter surprise A is not there. Or A is there but refuses toentertain B. B has no remedy against A. In case A is present in the restaurant but B fails toturn-up, then A has no remedy against B.(2) A gives a promise to his son to give him a pocket allowance of Rupees one hundred everymonth. In case A fails or refuses to give his son the promised amount, his son has no remedyagainst A.In the above examples promises are not enforceable at law as there was no intention tocreate legal obligations. Such agreements are social agreements which do not give rise tolegal consequences. This shows that an agreement is a broader term than a contract. And,therefore, a contract is an agreement but an agreement is not necessarily a contract.Object and Scope:The Law of Contract deals with agreements which can be enforced through courts of law.The Law of Contract is the most important part of commercial law because every commercialtransaction starts from an agreement between two or more persons.According to Salmond a contract is an agreement creating and defining obligations between

the parties. According to Sir William Anson, A contract is an agreement enfor ceable at lawmade between two or more persons, by which rights are acquired by one or more to acts orforbearances on the part of the other or others.The object of the Law of Contract is to introduce definiteness in commercial and othertransactions. How this is done can be illustrated by an example. X enters into a contract to deliver10 tons of coal of Y on a certain date. Since such a contract is enforceable by the courts, ns of coalof Y on a certain date. Since such a contract is enforceable by the courts,

What agreements are contracts? All agreements are not studied under the Indian Contract Act,as some of them are not contracts. Only those agreements which are enforceable at law arecontracts. The Contract Act is the law of those agreements which create obligations, and in case

of a breach of a promise by one party to the agreement, the other has a legal remedy.Thus, a contract consists of two elements:(i ) an agreement(ii ) legal obligation, i.e., it should be enforceable at law.However, there are some agreements which are not enforceable in a law court. Suchagreements do not give rise to contractual obligations and are not contracts.Examples (1) A invites B for dinner in a restaurant. B accepts the invitation. On the appointed day, Bgoes to the restaurant. To his utter surprise A is not there. Or A is there but refuses toentertain B. B has no remedy against A. In case A is present in the restaurant but B fails toturn-up, then A has no remedy against B.(2) A gives a promise to his son to give him a pocket allowance of Rupees one hundred everymonth. In case A fails or refuses to give his son the promised amount, his son has no remedyagainst A.In the above examples promises are not enforceable at law as there was no intention tocreate legal obligations. Such agreements are social agreements which do not give rise tolegal consequences. This shows that an agreement is a broader term than a contract. And,therefore, a contract is an agreement but an agreement is not necessarily a contract.Object and Scope:The Law of Contract deals with agreements which can be enforced through courts of law.


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The Law of Contract is the most important part of commercial law because every commercialtransaction starts from an agreement between two or more persons.According to Salmond a contract is an agreement creating and defining obligations betweenthe parties. According to Sir William Anson, A contract is an agreement enforceable at lawmade between two or more persons, by which rights are acquired by one or more to acts orforbearances on the part of the other or others.The object of the Law of Contract is to introduce definiteness in commercial and othertransactions. How this is done can be illustrated by an example. X enters into a contract to deliver10 tons of coal of Y on a certain date. Since such a contract is enforceable by the courts,

Law of Contracts creates rights in person as distinguished from rights in rem. Rights in rem aregenerally in regard to some property as for instance to recover land in an action of ejectment.Such rights are available against the whole world. Rights in personam are against or in respectof a specific person and not against the world at large.Examples (1) A owns a plot of land. He has a right to have quiet possession and enjoyment of the same. Inother words every member of the public is under obligation not to disturb his quiet possessionand enjoyment. This right of A against the whole world is known as right in rem .(2) A is indebted to B for Rs. 100. It is the right of B to recover the amount from A. This rightof B against A is known as right in personam. It may be noted that no one else (except B) has aright to recover the amount from A. The law of contracts is concerned with rights in personam only and not with rights in rem.ESSENTIAL ELEMENTS OF A VALID CONTRACTWe have seen that the two elements of a contract are:(1) an agreement;(2) legal obligation.Section 10 of the Act provides for some more elements which are essential in orderto constitute a valid contract. It reads as follows:

All agreements are contracts if they are made by free consent of parties, competent tocontract, for a lawful consideration and with a lawful object and are not hereby expresslydeclared to be void. Thus, the essenti al elements of a vali d contr act can be summed up as follows1. Agreement.2. Intention to create legal relationship.3. Free and genuine consent.4. Parties competent to contract.5. Lawful consideration.6. Lawful object.7. Agreements not declared void or illegal.

8. Certainty of meaning.9. Possibility of performance.10. Necessary Legal Formalities.These essential elements are explained briefly.1. AgreementAs already mentioned, to constitute a contract there must be an agreement. An agreement iscomposed of two elements offer and acceptance. The party making the offer is known as theofferor, the party to whom the offer is made is known as the offeree. Thus, there are essentially


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to be two parties to an agreement. They both must be thinking of the same thing in the samesense. In other words, there must be consensus-ad-idem.Thus, where A who owns 2 cars x and y wishes to sell car x for Rs. 30,000. B, anacquaintance of A does not know that A owns car x also. He thinks that A owns only cary and is offering to sel l the same for the stated pri ce. H e gives his acceptance to buy the same.There is no contract because the contracting parties have not agreed on the same thing atthe same time, A offering to sell his car x and B agreeing to buy car y. There is noconsensus-ad-idem.2. Intention to create legal relationshipAs already mentioned there should be an intention on the part of the parties to the agreementto create a legal relationship. An agreement of a purely social or domestic nature is not acontract.Examples (1) There was an agreement between Rose Company and Crompton Company, where of theformer were appointed selling agents in North America for the latter. One of the clausesincluded in the agreement was: This arrangement is not... a formal or legal agreement andshall not be subject to legal jurisdiction in the law courts . This agreement was not a legally

binding contract as the parties intendednot to have legal consequences(2) An agreement contained a clause that it shall not give rise to any legal relationships,or be legally enforceable, but binding in honour only . The agreement did not give rise to legalrelations and, therefore, was not a contract.(3) An aged couple (C and his wife) held out a promise by correspondence to their niece andher husband (Mrs. and Mr. P.) that C would leave them a portion of his estate in his will, if Mrs. and Mr. P would sell their cottage and come to live with the aged couple and to share thehousehold and other expenses. The young couple sold their cottage and started living with theaged couple. But the two couples Subsequently quarreled and the aged couple repudiated theagreement by requiring the young couple to stay somewhere else. The young couple filed a suitagainst the aged couple for the breach of promise.Held: That there was intention to create legal relations and the young couple couldrecover damages3. Free and genuine consentThe consent of the parties to the agreement must be free and genuine. The consent of theparties should not be obtained by misrepresentation, fraud, undue influence, coercion ormistake. If the consent is obtained by any of these flaws, then the contract is not valid.4. Parties competent to contractThe parties to a contract should be competent to enter into a contract. According to Section 11,every person is competent to contract if he(i ) is of the age of majority,(ii ) is of sound mind, and

(iii ) is not disqualified from contracting by any law to which he is subject.

CLASSIFICATION OF CONTRACTS:Contracts may be classified in terms of their (1) validity or enforceability, (2) mode of formation, or (3) performance.1. Classification according to validity or enforceabilityContracts may be classified according to their validity as(i ) valid,


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(ii ) voidable,(ii i ) void contracts or agreements,(iv ) illegal, or(v ) unenforceable.A contract to constitute a valid contract must have all the essential elements discussedearlier. If one or more of these elements is/are missing, the contract is voidable, void, illegalor unenforceable.As per Section 2 ( i ) a voidable contract is one which may be repudiated at the will of oneof the parties, but until it is so repudiated it remains valid and binding. It is affected by aflaw (e.g., simple misrepresentation, fraud, coercion, undue influence), and the presence of anyone of these defects enables the party aggrieved to take steps to repudiate the contract.It shows that the consent of the party who has the discretion to repudiate it was not free.An unenforceable contract is neither void nor voidable, but it cannot be enforced in the courtbecause it lacks some item of evidence such as writing, registration or stamping. For instance, anagreement which is required to be stamped will be unenforceable if the same is not stamped atall or is under-stamped. In such a case, if the stamp is required merely for revenue purposes, as in

the case of a receipt for payment of cash, the required stamp may be affixed on payment of

OFFER/PROPOSALA proposal is defined as when one person signifies to another hi s willingness to do or toabstain from doing anything, with a view to obtaining the assent of that other to such act orabstinence, he is said to make a proposal. [Section 2 (a)]. An offer is synonymous withproposal. The offeror or proposer expresses his willingness to do or not to do (i.e.,abstain from doing) something with a view to obtain acceptance of the other party to such actor abstinence. Thus, there may be positive or negative acts which the proposer is willingto do.Examples (1) A offers to sell his book to B. A is making an offer to do something, i.e., to sell his book. It isa positive act on the part of the proposer.(2) A offers not to file a suit against B, if the latter pays A the amount of Rs. 200 outstanding.Here the act of A is a negative one, i.e., he is offering to abstain from filing a suit.HOW AN OFFER IS MADE?An offer can be made by ( a ) any act or ( b ) omission of the party proposing by which he intendsto communicate such proposal or which has the effect of communicating it to the other (Section3). An offer can be made by an act in the following ways:(a ) by words (whether written or oral). The written offer can be made by letters, telegrams,telex messages, advertisements, etc. The oral offer can be made either in person or overtelephone.(b ) by conduct. The offer may be made by positive acts or signs so that the person acting or

making signs means to say or convey. However silence of a party can in no case amount to offerby conduct.An offer can also be made by a party by omission (to do something). This includes such conductor forbearance on ones part that t he other person takes it as his willingness or assent.An offer implied from the conduct of the parties or from the circumstances of the caseis known as implied offer.Examples (1) A proposes, by letter, to sell a house to B at a certain price. This is an offer by an act bywritten words (i.e., letter). This is also an express offer.


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(2) A proposes, over telephone, to sell a house to B at a certain price. This is an offer by act (byoral words). This is an express offer.

(3) A owns a motor boat for taking people from Bombay to Goa. The boat is in the waters atthe Gateway of India. This is an offer by conduct to take passengers from Bombay to Goa. He

need not speak or call the passengers. The very fact that his motor boat is in the waters nearGateway of India signifies his willingness to do an act with a view to obtaining the assent of theother. This is an example of an implied offer.(4) A offers not to file a suit against B, if the latter pays A the amount of Rs. 200 outstanding.This is an offer by abstinence or omission to do something.Specific and General OfferAn offer can be made either:1. to a definite person or a group of persons, or2. to the public at large.The first mode of making offer is known as specific offer and the second is known as ageneral offer. In case of the specific offer, it may be accepted by that person or group of persons to whom the same has been made. The general offer may be accepted by any oneby complying with the terms of the offer.The celebrated case of Car li l l v. Carbolic Smoke Ball Co., (1813) 1 Q.B. 256 is an excellentexample of a general offer and is explained below.Examples (1) A offers to sell his house to B at a certain price. The offer has been made to a definiteperson, i.e., B. It is only B who can accept it .The general offer creates for the offeror liability in favour of any person who happens to fulfilthe conditions of the offer. It is not at all necessary for the offeree to be known to the offeror atthe time when the offer is made. He may be a stranger, but by complying with the conditions of the offer, he is deemed to have accepted the offer.Essential requirements of a valid offerAn offer must have certain essentials in order to constitute it a valid offer. These are:1. The offer must be made with a view to obtain acceptance [Section 2(a)].2. The offer must be made with the intention of creating legal relations.3. The terms of offer must be definite, unambiguous and certain or capable of being madecertain (Section 29). The terms of the offer must not be loose, vague or ambiguous.Examples (1) A offers to sell to B a hundred quintals of oil . There is nothing whatever to showwhat kind of oil was intended. The offer is not capable of being accepted for want of certainty.(2) A who is a dealer in coconut oil only, offers to sell to B one hundred quintals of oil . Thenature of A s trade affords an indication of the meaning of the words, and there is a valid offer.4. An offer must be distinguished from ( a ) a mere declaration of intention or ( b ) aninvitation to offer or to treat.

Offer vis-a-vis declaration of intention to offerA person may make a statement without any intention of creating a binding obligation.It may amount to a mere declaration of intention and not to a proposal.Examples (1) An auctioneer, N advertised that a sale of office furniture would take place at a particularplace. H travelled down about 100 Km to attend the sale but found the furniture waswithdrawn from the sale. H sued the auctioneer for his loss of time and expenses.


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(2) A father wrote to his would-be son-in-law that his daughter would have a share of what hewould leave at the time of his death. At the time of death, the son-in-law staked his claim in theproperty left by the deceased.Held: The son-in- laws claim must fail as there was no offer from his father -in-law creating abinding obligation. It was just a declaration of intention and nothing more

(1) Held : that there was no contract.(2) Termination or Lapse of an Offer(3) An offer is made with a view to obtain assent thereto. As soon as the offer is accepted it

becomes a contract. But before it is accepted, it may lapse, or may be revoked. Also, theofferee may reject the offer. In these cases, the offer will come to an end.

(4) Essential Requirements of a Valid Offer(5) 1. Must be made with a view to obtain acceptance.(6) 2. Must be made with the intention of creating legal relations.(7) 3. Terms of offer must be definite, unambigous and certain or capable of being made

certain.(8) 4. It must be distinguished from mere declaration of intention or an invitation to offer.(9) 5. It must be communicated to the offeree.(10) 6. The offer must not contain a term the non-compliance of which may be

assumed to amount to acceptance.(11) 7. A tender is an offer as it is in response to an invitation to offer.

(12) 8. The Special terms, forming part of the offer, must be duly brought to thenotice of the offeree at the time the offer is made.

(13) 9. Two identical cross-offers do not make a contract.(14) (1) The offer lapses after stipulated or reasonable time. [Section 6(2)] The offer(15) must be accepted by the offeree within the time mentioned in the offer and if no(16) time is mentioned, then within a reasonable time. The offer lapses after the time

stipulated in the offer expires if by that time offer has not been accepted. If no time(17) is specified, then the offer lapses within a reasonable time. What is a reasonable(18) time is a question of fact and would depend upon the circumstances of each case.(19) 2. An offer lapses by the death or insanity of the offerer or the offeree before(20) acceptance. Section 6(4) provides that a proposal is revoked by the death or

insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. Therefore, if the acceptance is made in ignorance of thedeath, or insanity of offerer, there would be a valid contract. Similarly, in the case of thedeath of offeree before acceptance, the offer is terminated.

(21) 3. An offer terminates when rejected by the offeree.(22) 4. An offer terminates when revoked by the offerer before acceptance.(23) 5. An offer terminates by not being accepted in the mode prescribed, or if no

mode is prescribed, in some usual and reasonable manner.(24) 6. A conditional offer terminates when the condition is not accepted by the

offeree.(25) 7. Counter offer. An offer terminates by counter-offer by the offeree. When in

place of accepting the terms of an offer as they are, the offeree accepts the same subjectto certain condition or qualification, he is said to make a counter-offer. The followinghave been held to be counter-offers:


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(26) (i ) Where an offer to purchase a house with a condition that possession shall begiven on a particular day was accepted varying the date for possession

(27) (ii ) An offer to buy a property was accepted upon a condition that the buyersigned an agreement which contained special terms as to payment of deposit, making outtitle completion date, the agreement having been returned unsigned by the buyer

(28) (i i i ) An offer to sell rice was accepted with an endorsement on the sold andbought note that yellow and wet grain will not be accepted

(29) (iv ) Where an acceptance of a proposal for insurance was accepted in all itsterms subject to the condition that there shall be no assurance till the first premium waspaid.

(30) meaning of consent: it means an act of assenting to an offer. According tosection 13, "Tow or more persons are said to consent when they agree upon the samething in the same thing in same sense." Thus, consent involves identity of minds inrespect of the subject matter of the contract. In English Law, this is called ' consensus- ad-idem'.

(31) Effect of Absence of consent:(32) (33) Free consent: Meaning of consent: it means an act of assenting to an offer.

According to section 13, "Tow or more persons are said to consent when they agreeupon the same thing in the same thing in same sense." Thus, consent involves identity of minds in respect of the subject matter of the contract. In English Law, this is called'consensus-ad-idem'.

(34) Meaning of Free consent: It is one of the essential elements of a valid contractas it is evidenced by section 10 which provides that all agreements are contracts if theyare made by the free consent of the parties... according to section 14, consent is said tobe free when it is not caused by (a) Coercion, or (b)Undue influence, or (c) Fraud, or (d)Misrepresentation, or (e) Mistake.

(35) (36) Effect of Absence of free consent:(37) When there is consent but it is not free (i.e. when it is caused by coercion or

undue influence or fraud or misrepresentation), the contract is usually voidable at theoption of the party whose consent was so caused.

(38) 1. COERCION(39) (40) Meaning of coercion[section 15]: It means compelling a person to enter into a

contract, by use of physical force/activities forbidden by Indian penal code, OR threatensto do activities forbidden by I.P.C, OR threatens to damages the property. Effect of coercion: Voidable and can be canceled at the option of aggrieved party. OR A 'suicide anda 'threat to commit suicide' are not punishable but an attempt to commit suicide ispunishable under the Indian penal code. X threatens to kill Y if he does not sell his housefor Rs. 1,00,000 to X. Y sells his house to X and receives the payments. Here, V's consenthas been obtained by coercion. Hence, this contract

(41) is voidable at the option of Y. If Y decides to avoid the contract, he will have toreturn Rs 1,00,000 which he had received from X. "Y" (aggrieved party) will return Rs.


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1,00,000 "X" (defendant party) will return the house and any benefit from the goods.When voidable contract cannot be canceled: When the third party become interestedinto a voidable contract. E.g. A obtain the car of B through coercion. Let, A sold it to"C" an innocent buyer, now B cannot get the contract canceled. When the aggrievedparty ratify/confirm/affirm then contract can not be cancel. 2. UNDUE INFLUENCE:Meaning of Undue influence[section 16(1)]: The term 'undue influence' meansdominating the will of the other person to obtain an unfair advantage over the other.According to section 16(1), a contract is said to be induced by undue influence

(42) 1. where the relations subsisting between the parties are such that one of them isin a position to dominate the will of the other, and

(43) 2. the dominant party uses that position to obtain an unfair advantage over theother.

(44) (45) When two-partner are in relation, and one of them is dominant and other is in

weaker position and dominant person takes undue-Advantage, then it is called"Undue-influence." No presumption of domination of will According to judicial decisions held invarious cases, there is no presumption of undue influence in the following relationships:

(46) 1. Husband and wife(47) 2. landlord and tenant(48) 3. Creditor and debtor(49) (50) Effect of undue influence [section 19A]: when consent to an agreement is caused

by undue influence, the agreement is a contract voidable at the option of the partywhose consent was so caused. Comparison between coercion and undue influence:Similarities: In case of both coercion and undue influence, the consent is not free andthe contract is voidable at the option of the aggrieved party. 3. FRAUD Meaning andessential elements of fraud [section 17] : The term 'fraud' means a false representationof fact made willfully with a view to deceive the other party. Fraud includes following:

Wrong suggestion about a fact, knowing that it is not-true;Note: In case of fraud, the seller is always liable even though buyer has an opportunity to check the fraud.

Any activity fitted (supported) to deceive. It covers those acts which deceive but are notcovered under any other clause.

Effect of Fraud[section-19] The effects of fraud are as follows: (a) The party whose consent wascaused by fraud can rescind (cancel) the contract but he cannot do so in the following cases:

Where silence amounts to fraud, the aggrieved party cannot rescind the contract if he hadthe means of discovering the truth with ordinary diligence;

Where the party gave the consent in ignorance of fraud;Where the party after becoming aware of the fraud takes a benefit under the contract;


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Where an innocent third party before the contract is rescinded acquires for consideration

some interest in the property passing under the contract.Where the parties cannot be restored to their original position.

(b) The party whose consent was caused by fraud may, if he thinks fit, insist that the contractshall be performed and that he shall be put in the position in which he would have been if therepresentation made had been true.1. The party whose consent was caused by fraud, can claim damage if he suffers some loss.

Weather silence is fraud? Comment: General concept: According to explanation to section 17,"Mere silence as to facts likely to affect the willingness of a person to enter into a contract isnot fraud". In other words, Silence is not fraud. It is buyer, who must check the goods &suitability. E.g. X purchased a used computer from Z thinking it as a computer imported fromUSA, Z failed to disclose the fact to X. On knowing the fact X wants to repudiate the contract.So, here X cannot repudiate/rescind/cancel the contract. Exceptions to the general rule: Thegeneral rule that silence does not amount to fraud has the following exceptions. Where thecircumstances of the case are such that, regard being had to them, it is the duty of the personkeeping silence to speak. Such duty arises in the following two cases:

When silence is equivalent to speech: E.g. "A student of BBA select a Business law-book andasks the seller". If seller don't stop me from buying this book, I will assume that "it is best".The seller remained silent here the student will treat "silence" as speech. If the book wasinferior, then it is a case of fraud.

Disclosure of dangerous nature: E.g. Shyam sold his horse to Ram a buyer for Rs. 11000/-Shyam knows that horse was "wicked" but fails to disclose it to buyer. Here seller hascommitted fraud by remaining silent.

4. Misrepresentation The term "misrepresentation" means a false representation of fact made

innocently or non-disclosure of a material fact without any intention to deceive the other party.Section 18 defines the term "misrepresentation" as follows "Misrepresentation" means andincludes-

The positive assertion, in a manner not warranted by the information of the person makingit, of that which is not true, though he believes it to be true;

Any breach of duly which, without an intent to deceive, gains an advantage to the personcommitting it, or anyone claiming under him, by misleading an other to his prejudice or to theprejudice of anyone claiming under him;

Causing, however innocently, a party to an agreement, to make a mistake as to the substanceof the thing which is the subject of the agreement.Essential elements of misrepresentation:

By a party to a contract: The representation must be made by a party to a contract or byanyone with his connivance or by his agent. Thus, the misrepresentation by a stranger to thecontract does not affect the validity of the contract.

False representation: There must be a false representation and it must be made without theknowledge of its falsehood i.e. the person making it must honestly even it is to be true.

Representation as to fact: The representation must relate to a fact. In other words, a mereopinion, a statement of expression or intention does not amount to misrepresentation.


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"Innocent misstatement made into good faith OR without any intention to cause loss" E.g. Afarmer says that his land is very productive and produces 100 quintal per acre. This ismisrepresentation and buyer can cancel the contract. Note: When the buyer has anopportunity to check the misrepresentation, but he fails then buyer cannot cancel the contract.E.g. An owner of factory, while selling his factory, express his opinion as my factory produces1000 kg per ann-um and requested the buyer to find out exact production by checking"production-record". If the buyer fails to check the production record then buyer cannotblame seller. Effect of misrepresentation[section 19] The effects of misrepresentation are asfollows:1. Right to rescind the contract The party whose consent was caused by misrepresentation canrescind (cancel) the contract but he cannot do so in the following cases:

where the party whose consent was caused by misrepresentation had the means of discovering the truth with ordinary diligence;

where the party gave the consent in ignorance of misrepresentation;

where the party after becoming aware of the misrepresentation, takes a benefit under thecontract;

where an innocent third party, before the contract is rescinded, acquires for considerationsome interest in the property passing under the contract;

where the parties cannot be restored to their original position.

(b) Right to insist upon performance The party whose consent was caused by misrepresentationmay if he thinks fit, insist that the contract shall be performed, and that he shall be put in theposition in which he would have been if the representation made had been true.Comparison between fraud and misrepresentation Similarities: There are basically twosimilarities in case of fraud and misrepresentation as follows:1. In both the cases, a false representation is made by a party;2. In both the cases, the contract is voidable at the option of the party whose consent is obtainedby fraud or misrepresentation.

5. Mistake Meaning of mistake [section 20] A mistake is said to have occurred where theparties intending to do one thing by error do something else. Mistake is "erroneous belief"concerning something. Classification of Mistake of Law: (a) Mistake of Indian Law(In sense of penalty): The contract is not voidable because everyone is supposed to know the law of hiscountry. e.g. disobeying traffic rules" (b) Mistake of Foreign Law(void-ab-initio): A mistake of

foreign law is treated as mistake of fact, i.e. the contract is void if both the parties are under amistake as to a foreign law because one cannot be expected to know the law of other country.Mistake of fact Mistake of fact be either Unilateral mistake or Bi lateral mistake. Unilateralmistake [section 22]: The term 'unilateral mistake' means where only one party to theagreement is under a mistake. According to section 22, "A contract is not voidable merelybecause it was caused by one of the parties to it being under a mistake as to matter of fact."Bilateral mistake [section 22]: The term 'bilateral mistake' means where both the parties to theagreement are under a mistake. According to section 20, "where both the parties to anagreement are under a mistake as to a matter of fact essential to the agreement, the agreement


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is void." thus, the following three conditions must be satisfied before declaring a contract voidunder this section:1. Both the parties must be under a mistake2. Mistake must be of fact but not of law.

According to explanation to section 20. "An erroneous opinion as to the value of the thingwhich forms the subject matter of agreement is not to be deemed a mistake as to a matter of fact." Note: Mistake about price is valid.Void Agreements:A void contract, also known as a void agreement, is not actually a contract. A void contractcannot be enforced by law. Void contracts are different from voidable contracts, which arecontracts that may be (but not necessarily will be) nullified.An agreement to carry out an illegal act is an example of a void contract or void agreement.For example, a contract between drug dealers and buyers is a void contract simply because theterms of the contract are illegal. In such a case, neither party can go to court to enforce thecontract. A void contract is void ab initio, i e from the beginning while a voidable contract canbe voidable by one or all of the parties

A contract can also be void due to the impossibility of its performance. E g: If a contract isformed between two parties A & B but during the performance of the contract the object of thecontract becomes impossible to achieve (due to action by someone or something other than thecontracting parties), then the contract cannot be enforced in the court of law and is thus void.A void contract can be one in which any of the prerequisites of a valid contract is/are absent forexample if there is no contractual capacity, the contract can be deemed as void. In fact,voidmeans that a contract does not exist at all. The law can not enforce any legal obligation toeither party especially the disappointed party because they are not entitled to any protectivelaws as far as contracts are concerned.Features of Void agreements:

An agreement made by incompetent parties (Minor/Incapacitated Person) is void.Any agreement with a bilateral mistake is void.Agreements which have unlawful consideration is void.Agreement with a unlawful object is void.Agreements made without consideration is void.Agreement in restraint of marriage of any major person is void (absolute restriction).Agreement in restraint of trade is void.(reasonable reason)Agreement in restraint of legal proceedings is void.An agreement the terms of which are uncertain is void.An agreement by way of wager (betting/gambling) is void.An agreement contingent upon the happening of an impossible event is void.Agreement to do impossible acts is void.

Distinction Between Void and Voidable ContractsCertain defenses generally those that affect assent can render a contract voidable by the

aggrieved party. Other defenses typically those that pertain to law and public policy mayrender a contract void. The distinction is not clear-cut; for example, while defenses such asincapacity, duress or mistake generally render a contract merely voidable, if the circumstancesprevented a meeting of the minds, the contract will be deemed void. Likewise, contracts with anillegal purpose will generally be deemed void unless the parties are not in pari deli cto .


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The legal effects of a contract being deemed voidable as opposed to void are:1) Where a contract is merely voidable, the innocent party may enforce the contract, but the

contract cannot be enforced against him. If a

contract is void, neither party can enforce the contract.

2) Rights in a voidable contract are transferable; rights cannot be transferred in a voidcontract.

3) If a party improperly transfers property to a bona fide purchaser for value, the injuredparty may recover the property if the contract governing the transaction is void but not if itwas voidable.

4) Voidable contracts may be ratified by the party with the power to avoid the contract oncethe reason for such avoidance such as minor age, mental impairment, duress, undue influenceor mistake no longer exists. Void contracts cannot be ratified.Negotiable Instruments Act, 1881Negotiable Instruments Act, 1881 was passed by British India and for over 130 years andexcept for amendments, the question of revising the act as a whole never been raised.Important Characteristics of Negotiable InstrumentsFollowing are the important characteristics of negotiable instruments:(1) The holder of the instrument is presumed to be the owner of the propertycontained in it.(2) They are freely transferable.(3) A holder in due course gets the instrument free from all defects of title of any previousholder.(4) The holder in due course is entitled to sue on the instrument in his own name.

(5) The instrument is transferable till maturity and in case of cheques till it becomes stale (onthe expiry of 6 months from the date of issue).

(6) Certain equal presumptions are applicable to all negotiable instruments unless the contraryis proved.History:The history of the present Act is a long one. The Act was originally drafted in 1866 by the 3rdIndia Law Commission and introduced in December, 1867 in the Council and it was referred toa Select Committee. Objections were raised by the mercantile community to the numerousdeviations from the English Law which it contained. The Bill had to be redrafted in 1877. Afterthe lapse of a sufficient period for criticism by the Local Governments, the High Courts and thechambers of commerce, the Bill was revised by a Select Committee. In spite of this Bill couldnot reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to bereferred to a new Law Commission. On the recommendation of the new Law Commission theBill was re-drafted and again it was sent to a Select Committee which adopted most of theadditions recommended by the new Law Commission. The draft thus prepared for the fourthtime was introduced in the Council and was passed into law in 1881 being the NegotiableInstruments Act, 1881 (Act No.26 of 1881)The most important class of Credit Instruments that evolved in India were termed Hundi.Their use was most widespread in the twelfth century, and has continued till today. In a sense,they represent the oldest surviving form of credit instrument. These were used in trade andcredit


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transactions; they were used as remittance instruments for the purpose of transfer of fundsfrom one place to another. In Modern era Hundi served as Travellers Cheques.Types of Negotiable InstrumentsAccording to Section of the Negotiable Instruments Act means "A negoti able in strument meansa promissory note, bill of exchange or cheque payable either to order or to bearer.' [3] But inSection 1, it is also described that Local extent, Saving of usage relating to hundis, etc.,Commencement. -It extends to the whole of India but nothing herein contained affects theIndian Paper Currency Act, 1871, Section 2, or affects any local usage relating to anyinstrument in an oriental language. Provided that such usages may be excluded by any wordsin the body of the instrument, which indicate and intention that the legal relations of the partiesthereto shall be governed by this Act; and it shall come into force on the first day of March,1882. [3]Classification of Negotiable InstrumentsThe negotiable instruments may be classified as under:(1) Bearer I nstruments

A promissory note, bill of exchange or cheque is payable to bearer when (i) it is expressed to be

so payable, or (ii) the only or last endorsement on the instrument is an endorsement in blank, Aperson who is a holder of a bearer instrument can obtain the payment of the instrument.(2)Order I nstruments A promissory note, bill of exchange or cheque is payable to order (i) which is expressed to be sopayable; or (ii) which is expressed to be payable to a particular person, and does not containany words prohibiting transfer or indicating an intention that it shall not be transferable.(3) Inl and I nstruments (Section 11)A promissory note, bill of exchange or cheque drawn or made in India, and made payable, ordrawn upon any person, resident in India shall be deemed to be an inland instrument. Since apromissory note is not drawn on any person, an inland promissory note is one which is madepayable in India. Subject to this exception, an inland instrument is one which is either:(i) drawn and made payable in India, or

(ii) drawn in India upon some persons resident therein, even though it is madepayable in a foreign country.(4) Foreign I nstruments An instrument which is not an inland instrument, is deemed to be a foreign instrument. Theessentials of a foreign instrument include that:(i) it must be drawn outside India and made payable outside or inside India; or(ii) it must be drawn in India and made payable outside India and drawn on aperson resident outside India.(5) Demand I nstruments (Section 19)A promissory note or a bill of exchange in which no time for payment is specified

is an instrument payable on demand.(6) Time I nstruments Time instruments are those which are payable at sometime in the future. Therefore, apromissory note or a bill of exchange payable after a fixed period, or after sight, or on specifiedday, or on the happening of an ev~nt which is certain to happen, is known as a time instrument.The expression "after slight" in a promissory note means that the payment cannot bedemanded on it unless it has been shown to the maker. In the case of bill of exchange, the


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expression "after sight" means after acceptance, or after noting for non-acceptance or afterprotest for non-acceptance.Ambiguous I nstruments (Section 17)An instrument, which in form is such that it may either be treated by the holder as a bill or as anote, is an ambiguous instrument. Section 5(2) of the English Bills of Exchange Act providesthat where in a bill, the drawer and the drawee are the same person or where the drawee is afictitious person or a person incompetent to contract, the holder may treat the instrument, athis option, either as a bill of exchange or as a promissory note.Bill drawn to or to the order of the drawee or by an agent on his principal, or by one branch of a bank on another or by the direction of a company or their cashier are also ambiguousinstruments. A promissory note addressed to a third person may be treated as a bill by suchperson by accepting it, while a bill not addressed to anyone may be treated as a note. But wherethe drawer and payee are the same e.g., where A draws a bill payable to A's order, it is not anambiguous instrument and cannot be treated as a promissory note. Once an instrument hasbeen treated either as a bill or as a note, it cannot be treated differently afterwards.I nchoate or I ncomplete I nstrument (Section 20)(i ) Pr omissory N otes

A "promissory note" is 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 moneyto, or to the order of, a certain person, or only to bearer of the instrument. (Section 4)Part ies to a Promi ssory N ote: A promissory note has the following parties:(a) The maker: the person who makes or executes the note promising to pay theamount stated therein.(b) The payee: one to whom the note is payable.(c) The holder: is either the payee or some other person to whom he may haveendorsed the note.(d) The endorser .(e) The endorsee.Essenti als of a Promissory N ote: To be a promissory note. an instrument must possess the following essentials: (a) It must be inwriting. An oral promise to pay will not do.(b) It must contain an express promise or clear undertaking to pay. A promise topay cannot be inferred. A mere acknowledgement of debt is not sufficient. If A writes to B "Iowe you (I.O.U.) Rs. 500",there is no promise to pay and the instrument is not a promissorynote.(c) The promise or undertaking to pay must be unconditional. A promise to pay "when able",or "as soon as possible", or "after your marriage to I?", is conditional. But a promise to payafter a specific' time or on the happening of an event which must happen, is not conditional,e.g. "I promise to pay Rs. 1,000 ten days after the death of B", is unconditional.

(d) The maker must sign the promissory note in token of an undertaking to payto the payee or his order.(e) The maker must be a certain person, Le., the note must show clearly who isthe person engaging himself to pay. .(f) The payee must be certain. The promissory note must contain a promise topay to some person or persons ascertained by name or designation or totheir order.(g) The sum payable must be certain and the amount must. not be capable of contingent additions or subtractions. If A promises to pay Rs. 100 and all other


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sums which shall become due to him, the instrument is not a promissory note.(h) Payment must be in legal money of the country. Thus, a promise to pay Rs. 500 and deliver10 quintals of rice is not a promissory note.(i) It must be properly stamped in accordance with the provisions of the IndianStamp Act. Each stamp must be duly cancelled by maker's signature or initials.(j) It must contain the name of place, number and the date on which it is made.However, their omission will not render the instrument invalid, e.g. if it isundated, it is deemed to be dated on the date of delivery.Note: A promissory note cannot be made payable or issued to bearer, no matter whether it ispayable on demand or after a certain time(Section 31 of the RBI Act).(ii ) Bil ls of Exchange A "bill of exchange" is an instrument in writing containing an unconditional order, signed bythe maker, directing a certain person to pay a certain sum of money only to or to the order of, acertain person or to the bearer of the instrument. (Section 5)The definition of a bill of exchange is very similar to that of a promissory note and for most of the cases the rules which apply10 promissory notes are in general applicable

Ito bills. There are however, certain important points of distinction between the two.Part ies to bil ls of exchange The following are parties to a bill of exchange:(a) The Drawer: the person who draws the bill.(b) The Drawee: the person on whom the bill is drawn.(c) The Acceptor: one who accepts the bill. Generally, the drawee is the acceptor but a strangermay accept it on behalf of the drawee.

(d) The payee: one to whom the sum stated in the bill is payable, either the drawer or any otherperson may be the payee.(e) The holder: is either the original payee or any other person to whom, thepayee has endorsed the bill. In case of a bearer bill, the bearer is the holder.(f) The endor ser: when the holder endorses the bill to anyone else he becomesthe endorser.(g) The endor see: is the person to whom the bill is endorsed.(h) Drawee in case of need: Besides the above parties. another person calledthe "drawee in case of need", may be introduced at the option of the drawer. The name of such a person may be inserted either by the drawer or by any endorser in order that resortmay be had to him in case of need, i.e., when the bill is dishonoured by either non-acceptanceor non-payment.(i) Acceptor f or honour: Further, any person may voluntarily become a party to a bill asacceptor. A person, who on the refusal by the original drawee to accept the bill or to furnish

better security, when demanded by the notary, accept the bill supra protest i n order tosafeguard the honour of the drawer or any endorser, is called the acceptor for honour.Essenti als of a Bil l of E xchange: (1) It must be in writing.(2) It must contain an unconditional order to pay money only and not merely a request(3) It must be signed by the drawer.(4) The parties must be certain.(5) The sum payable must also be certain.(6) It must comply with other formalities e.g. stamps, date, etc.


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Di stinction between B il l of Exchange and Promissory Note The following are the important points of distinction between a bill of exchangeand a promissory note:(a) A promissory note is a two-party instrument, with a maker (debtor) and a payee (creditor).In a bill. there are three parties-drawer, drawee and payee, though any two out of the threecapacities may be filled by one and the same person. In a bill; the drawer is the maker whoorders the drawee to pay the bill to a person called the payee or to his order. When the draweeaccepts the bill he is called the acceptor,(b) A note cannot be made payable to the maker himself, while in a bill, the drawer and payeemay be the same person.(c) A note contains an unconditional promise by the maker to pay to the payee or his order; ina bill there is an unconditional order to the drawee to pay according to the directions of thedrawer.(d) A note is presented for payment without any prior acceptance by the maker. A bill payableafter sight must be accepted by the drawee or someone else on his behalf before it can bepresented for payment.(e) The liability of the maker of a pro-note is primary and absolute, but the liability of the

drawer of a bill is secondary and conditional.(f) Foreign bill must be protested for dishonour but no such protest is necessary in the case of anote.(g) When a bill is dishonoured, due notice of dishonour is to be given by the holder to thedrawer and the intermediate endorsee, but no such notice need to be given in the case of a note.(h) A bill can be drawn payable to bearer provided it is not payable on demand.A promissory note cannot be made payable to be3rer, even if it is made payable otherwise thanon demand.H ow Bill of Exchange Originates - F orms of B il ls of Exchange.Bills of exchange were originally used for payment of debts by traders residing in one countryto another country with a view to avoid transmission of coin. Now-a-days they are used more astrade bills both in connection with domestic trade and foreign trade and are called inland billsand foreign bills respectively.I nland Bill s (Sections 11 and 12)A bill of exchange is an inland instrument if it is (i) drawn or made and payable in India, or (ii)drawn in India upon any person who is a resident in India, even though it is made payable in aforeign country. But a promissory note to be an inland shouid be drawn and payable in India,as it has no drawee.Two essential conditions to make an inland instrument are:(1) the instrument must have been drawn or made in India; and(2) the instrument must be payable in India or the drawee must be in India.Examples: A bill drawn in India, payable in USA, upon a person in India is aninland instrument. A bill drawn in India and payable in India but drawn on a person in USA is

also an inland instrument or made in IndiaF oreign Bills All bills which are not inland are deemed to be foreign bills. Normally foreign billsare drawn in sets of three copies.Tr ade Bi ll A bill drawn and accepted for a genuine trade transaction is termed as a trade bill. When atrader sells goods on credit, he may make use of a bill of exchange. Suppose A sells goods worthRs. 1,000 to B and allows him 90 days time to pay the price, A will draw a bill of exchange on B,in the following terms: "Ninety days after date pay A or order, the sum of one thousand rupees


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only for value received". A will sign the bill and then present it to B for acceptance. This isnecessary because, until a bill is accepted by the drawee, nobody has either rights orobligations. If B agrees to obey the order of A, he will accept the bill by writing across its facethe word "accepted" and signing his name underneath and then delivering the bill to theholder. B, the drawee, now becomes the acceptor of the bill and liable to its holders. Such a billis a genuine trade bill.Accommodation Bi ll All bills are not genuine trade bills, as they are often drawn for accommodating a party. Anaccommodation bill is a bill in which a person lends or gives his name to oblige a friend orsome person whom he knows or otherwise. In other words, a bill which is drawn, accepted orendorsed without consideration is called an accommodation bill. The party lending his name tooblige the other party is known as the accommodating or accommodation party, and the partyso obliged is called the party accommodated. An accommodation party is not liable on theinstrument to the party accommodated because as between them there was no considerationand the instrument was merely to help, But the accommodation party is liable to a holder forvalue, who takes the accommodation bill for value, though such holder may not be a holder indue course. Thus, A may be in need of money and approach his friends B and C who, instead of

lending the money directly, propose to draw an "Accommodation Bill" in his favour in thefollowing form:"Three months after date pay A or order, the sum of Rupees one thousand only'BToCSpecimen of a Bank Draft A.B.C. Bank X.Y.Z. Branch No..................... Date...................On demand pay 'A ' or order the sum of rupees one thousand fi ve hundred only f or value received.Rs. 1,500/- Sd./ M anager To' B' Br anch, (Place) In the above demand draft the drawer is X.Y.Z. Branch, the drawee is 'B' branch and thepayee is 'A'.(ii i) Cheques Section 6 of the Act provides that a cheque is a bill of exchange drawn on a specified banker,and not expressed to be payable otherwi se than on demand. Simply stated, a cheque is a bill of exchange drawn on a bank payable always on demand. Thus, a cheque is a bill of exchangewith

two additional qualifications, namely: (i) it is always drawn on a banker, and (ii) it is alwayspayable on demand. A cheque being a species of a bill of exchange, must satisfy all therequirements of a bill; it does not, however, requi re acceptance.Note: By virtue of Section 31 of the Reserve Bank of India Act, no bill of exchange or hundi canbe made payable to bearer on demand and no promissory note or a bank draf t can be made payable to bearer at all , whether on demand or af ter a specif ied time. Onl y a cheque can be payable to bearer on demand.Part ies to a cheque The following are the parties to a cheque:


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(a) The drawer: The person who draws the cheque.(b) The drawee: The banker of the drawer on whom the cheque is drawn.(c), (d), (e) and (f) The payee, holder, endorser and endorsee: same as in thecase of a bill.Essenti als of a Cheque (1) It is always drawn on a banker.

(2) It is always payable on demand.

(3) It does not require acceptance. There is, however, a custom among banks to mark chequesas good for purposes of clearance.(4) A cheque can be drawn on bank where the drawer has an account.(5) Cheques may be payable to the drawer himself. It may be made payable tobearer on demand unlike a bill or a note.(6) The banker is liable only to the drawer. A holder -has no remedy against the banker if acheque is dishonoured.(7) A cheque is usually valid for fix months. However, it is not invalid jf it is post dated or ante-dated.(8) No Stamp is required to be affixed on cheques.Di stinction between Cheques and B il ls of Exchange As a general rule, the provisions applicable to bills payable on demand apply tocheques, yet there are few points of distinction between the two, namely:(a) A cheque is a bill of exchange and always drawn on a banker, while a bill maybe drawn on anyone, including banker.(b) A cheque can only be drawn payable on demand, a bill may be drawn payableon demand, or on the expiry of a specified' period after sight or date.(c) A bill payable after sight must be accepted before payment can be demanded,a cheque does not require acceptance and is intended for immediate payment.(d) A grace of 3 days is allowed in the case of time bills, while no grace is given.

in the case of a cheque, for payment.(e) The drawer of a bill is discharged, if it is not presented for payment, but thedrawer of a cheque is discharged only if he suffers any damage by delay inpresentment for payment.(f) Notice of the dishonour of a bill is necessary, but not in the case of a cheque.(g) The cheque being a revocable mandate, the authority may be revoked by countermandingpayment, and is determined by notice of the customer's death or insolvency. This is not so inthe case of bilt(h) A cheque may be crossed, but not a bi l l A cheque is a bill of exchange drawn on a specified banker and always payable on demand. Acheque is always drawn on a particular banker and is always payable on demand.Consequently, all cheques are bills of exchange but all bills are not cheques.Specimen of a Cheque ABC Bank Date_____________ Pay 'A;--------------------------------------------------------------------------------or thebearersum of rupees---------------------------------------------------------------------------------only.A/c No---------LF------Sd/-


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No---------------------

may be termed as the obligations and rights of the banker. These are:1. Obligation to honour cheques of the customers.2. Obligation to collect cheques and drafts on behalf of the customers.3. Obligation to keep proper record of transactions with the customer.4. Obligation to comply with the express standing instructions of the customer. 5. Obligationnot to disclose the state of customer's account to anyone else.6. Obligation to give reasonable notice to the customer, if the banker wishes toclose the account.7. Right of lien over any goods and securities bailed to him for a general balanceof account.8. Right of set off and right of appropriation.9. Right to claim incidental charges and interest as per rules and regulations of the bank as communicated to the customer at the time of opening the account.Liability of a BankerBy opening a current account of a customer, the banker becomes liable to his debtor to theextent of the amount so received in the said account and undertakes to honour the chequesdrawn by the customer so long as he holds sufficient funds tothe customer's credit. If a banker, without justification, fails to honour t1is customer's cheques,he is liable to compensate the drawer for any loss or damage suffered by him. But the payee orholder of the cheque has no cause of action against the banker as the obligation to honour acheques is only towards the drawer.The banker must also maintain proper and accurate accounts of credits and debits. He musthonour a cheque presented in due course. But in the following circumstances, he must refuse to

honour a cheque and in some others he may do so.8. When Banker must Refuse Payment

In the following cases the authority of the banker to honour customer's cheque comes to anend, he must refuse to honour cheques issued by the customer:(a) When a customer countermands payment Le., where or when a customer, after issuing acheque issues instructions not to honour it, the banker must not pay it.(b) When the banker receives notice of customer ' s death. When customer has been adjudged an insolvent.(d) When the banker receives notice of customer's insanity.(e) When an order (e.g., Garni shee Order) of the Court, prohibits payment.(f ) When the customer has given notice of assignment of the credit balance of hi s account.(g) When the holder's title is defective and the banker comes to know of it.(h) When the customer has given notice for cl osing hi s account.When Banker may Refuse PaymentIn the following cases the banker may refuse to pay a customer's cheque:(a) When the cheque is post-dated.(b) When the banker has not sufficient funds of the drawer with him and there is nocommunication between the bank and the customer to honour the cheque.(c) When the cheque is of doubtful legality.


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(d) When the cheque is not duly presented, e.g., it is presented after bankinghours.(e) When the cheque on the face of it is irregular, ambiguous or otherwise materially altered.(f) When the cheque is presented at a branch where the customer has no account.(g) When some persons have joint account and the cheque is not signed jointly by all or by thesurvivors of them.(h) When the cheque has been allowed to become stale, Le., it has not been presented with in six months of the date menti oned on i t.Protection of Paying Banker (Sections 10, 85 and 128)Section 85 lays down that where a cheque payable to order purports to be endorsed by or onbehalf -of the payee the banker is discharged by payment in due course. He can debit theaccount of the customer with the amount even though the endorsement turns out subsequentlyto have been forged, or the agent of the payee without authority endorsed it on behalf of thepayee. It would be seen that the payee includes endorsee. This protection is granted because abanker cannot be expected to know the signatures of all the persons in the world. He is onlybound to know the signatures of his own customers.Therefore, the forgery of drawer's signature will not ordinarily protect the banker but even in

this case, the banker may debit the account of the customer, if it can show that the forgery wasintimately connected with the negligence of the customer and was the proximate cause of loss.I n the case of bearer cheques, the rule is that once a bearer cheque, always a bearer cheque.Where, therefore, a cheque originally expressed by the drawer himself to be payable to bearer,the banker may ignore any endorsement on the cheque. He will be discharged by payment indue course. But a cheque which becomes bearer by a subsequent endorsement in blank is notcovered by this Section. A banker is discharged from liability on a crossed cheque if he makespayment in due course.Payment in due Course (Section 10)Any person liable to make payment under a negotiable instrument, must make the payment of the amount due thereunder in due course in order to obtain a valid discharge againstholder.A payment in due course means a payment in accordance with the apparent tenor of theinstrument, in good faith and without negligence to any person in possessionthereof. .A payment will be a payment in due course if:(a) it is in accordance with the apparent tenor of the instrument, i.e. accordingto what appears on the face of the instrument to be the intention of the parties;1(b) it is made in good faith and without negligence, and under circumstanceswhich do not afford a ground for believing that the person to whom it is made is not entitled toreceive the amount;(c) it is made to the person in possession of the instrument who is entitled as holder to receive

payment;

(d) payment is made under circumstances which do not afford a reasonable ground believingthat he is not entitled to receive payment of the amount mentioned in the instrument; and(e) payment is made in money and money only.Under Sections 10 and 128, a paying banker making payment in due course isprotected.Collecting Banker


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Collecting Banker is one who collects the proceeds of a cheque for a customer. Although abanker collects the proceeds of a cheque for a customer purely as a matter of service, yet theNegotiable Instruments Act, 1881 indirectly imposes statutory obligation, statutory in nature.This is evident from Section 126 of the Act which provides that a cheque bearing a "generalcrossing" shall not be paid to anyone other than banker and a cheque which is "speciallycrossed" shall not be paid to a person other than the banker to whom it is crossed. Thus, apaying banker must pay a generally crossed cheque only to a banker thereby meaning that itshould be collected by another banker. While so collecting the cheques for a customer, it isquite possible that the banker collects for a customer, proceeds of a cheque to which thecustomer had no title in fact. In such cases, the true owner may sue the collecting banker for"conversion". At the same time, it cannot be expected of a banker to know or to ensure that allthe signatures appearing in endorsements on the reverse of the cheque are genuine. The bankeris expected to be conversant only with the signatures of his customer. A customer to whom acheque has been endorsed, would reque~t his banker to collect a cheque. In the event of theendorser's signature being proved to be forged at iater date, the banker who collected theproceeds should not be held liable for the simple reason that he has merely collected theproceeds of a cheque. Section 131 of the Negotiable Instruments Act affords statutory

protection in such a case where the customer's title to the cheque which the banker hascollected has been questioned. It reads as follows:"A banker who has in good faith and without negligence received payment for a customer of acheque crossed generally or specifically to himself -shall not, in case the title to the chequeproves defective, incur any liability to the true owner of the cheque by reason of only havingreceived such payment.Explanation: A banker receives payment of a crossed cheque for a customer within themeaning of this section notwithstanding that he credits his customer's account with the amountof-the cheque before receiving payment thereof."The requisites of claiming protection under Section 131 are as follows:Overdue, Stale or Out-of-date ChequesA cheque is overdue or becomes statute-barred after three years from its due date of issue. Aholder cannot sue on the cheque after that time. Apart from this provision, the holder of acheque is required to present it for payment within a reasonable time, as a cheque is not meantfor indefinite circulation. In India, a cheque, which has been in circulation for more than sixmonths, is regarded by bankers as stale. If, as a result of any delay in presenting a cheque, thedrawer suffers any loss, as by the failure of the bank, the drawer is discharged from liability tothe holder to the extent of the damage.Liability of EndorserIn order to charge an endorser, it is necessary to present the cheque for payment within areasonable time of its delivery by such endorser. 'A' endorses and delivers a cheque to B, and Bkeeps it for an unreasonable length of time, and then endorses and delivers it to C. C presents itfor payment within a reasonable time after its receipt by him, and it is dishonoured. C can

enforce payment against B but not against A, as qua A, the cheque has become stale.Rights of Holder against BankerA banker is liable to his customer for wrongful dishonour of his cheque but it is not liable tothe payee or holder of the cheque. The holder has no right to en.t0rce payment from the bankerexcept in two cases, namely, (i) where the holder does not present the cheque within areasonable time after issue, and as a result the drawer suffers damage by the failure of thebanker in liquidation proceedings; and (ii) where banker pays a crossed cheque by mistakeover the counter, he is liable to the owner for any loss occasioned by it.Crossing of Cheques


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A cheque is either "open" or "crossed". An open cheque can be presented by the payee to thepaying banker and is paid over the counter. A crossed cheque cannot be paid across thecounter but must be collected through a banker.A crossing is a direction to the paying banker to pay the money generally to a banker or to aparticular banker, and not to pay otherwise. The object of crossing is to secure payment to abanker so that it could be traced to the person receiving the amount of the cheque. Crossing isa direction to the paying banker that the cheque should be paid only to a banker or a specifiedbanker. To restrain negotiability, addition of words "Not Negotiable" or "Account PayeeOnly" is necessary. A crossed bearer cheque can be negotiated by delivery and crossed ordercheque by endorsement and delivery. Crossing affords security and protection to the holder of the cheque.Modes of Crossing (Sections 123-131A)There are two types of crossing which may be used on cheque, namely: (i) General,and (ii) Special. To these may be added another type, Le. Restrictive crossing.It is general crossing where a cheque bears across its face an addition of two parallel transverselines and/or the addition of the words "and Co." between them, or addition of "notnegotiable". As stated earlier, where a cheque is crossed generally, the paying banker will pay

to any banker. Two transverse parallel lines are essential for a general crossing (Sections 123-126).In case of general crossing, the holder or payee cannot get the payment over the counter of thebank but through a bank only. The addition of the words "and Co." do not have anysignificance but the addition of the words "not negotiable" restrict the negotiability of thecheque and in case of transfer, the transferee will not give a better title than that of atransferor.Where a cheque bears across its face an addition of the name of a banker, either with orwithout the words "not negotiable" that addition constitutes a crossing and the cheque iscrossed specially and to that banker. The paying banker will pay only to the banker whosename appears across the cheque, or to his collecting agent. Parallel transverse lines are notessential but the name of the banker is the insignia of a special crossing.In case of special crossing, the paying, banker is to honour the cheque only when it isprescribed through the bank mentioned in the crossing or it's agent bank.Account Payee' s Crossing: Such crossing does, in practice, restrict negotiability of a cheque. Itwarns the coll ecting banker that the proceeds are to be credited only to the account of thepayee, or the party named, or his agent. If the collecting banker allows the proceeds of acheque bearing such crossing to be credited to any other account, he will be guilty of negligenceand will not be entitled to the protection given to collecting banker under Section 131. Suchcrossing does not affect the paying banker, who is under no duty to ascertain that the cheque isin fact collected for the account of the person named as payee.* Specimen of a general crossing * Specimen of a special crossing Not Negotiable Crossing

A cheque may be crossed not negotiable by writing across the face of the cheque the words"Not Negotiable" within two transverse parallel lines in the case of a general crossing or alongwith the name of a banker in the case of a special crossing. Section 130 of the NegotiableInstruments Act provides "A person taking a cheque crossed generally or specially bearing ineither case with the words "not negotiable" shall not have and shall not be capable of giving, abetter title to the cheque than that which the person from whom he took it had". The crossingof cheque "not negotiable" does not mean that it is non-transferable. It only deprives theinstrument of the incident of negotiability. Normally speaking, the essential feature of anegotiable instrument as opposed to chattels is that a person who takes the instrument in good


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faith, without negligence, for value, before maturity and without knowledge of the defect in thetitle of the transferor, gets a good title to the instrument. In other words, he is called a holder indue course who acquires an indisputable title to the cheque. (When the instrument passesthrough a holder-in-due course, it is purged of all defects and the subsequent holders also getgood title). It is exactly this important feature which is taken away by crossing the cheque "notnegotiable". In other words, a cheque crossed not negotiable" is like any other chattel andtherefore the transferee gets same title to the cheque which his transferor had. That is to saythat the transferee cannot claim the rights of a holder-in-due-course. So long as the title of thetransferors is good, the title of the transferees is also good but if there is a taint in the title tothe cheque of one of the endorsers, then all the subsequent transferees' title also become taintedwith the same defect-they cannot claim to be holders-in-due-course.MaturityCheques are always payable on demand but other instruments like bills, notes, etc. may bemade payable on a specified date or after the specifiedMaturity is the date on which the payment of an instrument falls due. Every instrumentpayable at a specified period after date or after sight is entitled to three days of grace. Such abill or note matures or falls due on the last day of the grace period, and must be presented for

payment on that day and if dishonoured, suit can be instituted on the next day after maturity.If an instrument is payable by instalments, each instalment is entitled to three days of grace. Nodays of grace are allowed for cheques, as they are payable on demand.Where a note or bill is expressed to be payable on the expiry of specified number of monthsafter sight, or after date, the period of payment terminates on the day of the month whichcorresponds with the date of instrument, or with the date of acceptance if the bill be acceptedor presented for sight, or noted or protested for non-acceptance. If the month in which theperiod would terminate has no corresponding day, the period shall be held to terminate on thelast day of such month.HolderAccording to Section 8 of the Act a person is a holder of a negotiable instrument who is entitledin his own name (i) to the possession of the instrument, and (ii) to recover or receive its amountfrom the parties thereto. It is not every person in possession of the instrument who is called aholder. To be a holder, the person must be named in the instrument as the payee, or theendorsee, or he must be the bearer thereof. A person who has obtained possession of aninstrument by theft, or under a forged endorsement, is not a holder. as he is not entitled torecover the instrument. The holder implies de jure (holder in law) holder and not de facto (holder in fact) holder. An agent holding an instrument for his principal is not a holderalthough he may receive its payment.Holder in Due CourseSection 9 states that a holder in due course is (i) a person who for consideration, obtainspossession of a negotiable instrument if payable to bearer, or (ii) the payee or endorsee thereof,if payable to order, before its maturity and without having sufficient cause to believe that any

defect existed in the title of the person from whom he derived his title.In order to be a holder in due course, a person must satisfy the following conditions:(i) He must be the holder of the instrument.(ii) He should have obtained the instrument for value or consideration.

(iii) He must have obtained the negotiable inst

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