MEANING OF LAW

Law means a uniform rule of conduct which is applicable

equally to all the people of the State. Law prescribes and
regulates general conditions of human activity in the state.
It further means a definite rule of conduct which governs
human relations.

In simple words, Law is a definite rule of behavior which is

backed by the sovereign power of the State. It is a general
rule of human conduct in society which is made and
enforced by the government each Law is a binding and
authoritative rule or value or decision. Its every violation is
punished by the state.
 Nature/Features of Law
1. Law is a general rule of human behavior in the state.
It applies to all people of the state. All are equally
subject to the laws of their State. Aliens living in the
territory of the State are also bound by the laws of
the state.
2. Law is definite and it is the formulated will of the
State. It is a rule made and implemented by the
state.
3. State always acts through Law. Laws are made and
enforced by the government of the State.
4. Law creates binding and authoritative values or
decisions or rules for all the people of state.
 Nature/Features of Law
5. Sovereignty of State is the basis of law and its
binding character.
6. Law is backed by the coercive power of the State.
Violations of laws are always punished.
7. Punishments are also prescribed by Law.
8. The courts settle all disputes among the people on
the basis of law.
9. In each State, there is only one body of Law.
10. Legally, Law is a command of the sovereign. In
contemporary times laws are made by the
representatives of the people who constitute the
legislature of the State. Laws are backed by on public
opinion and public needs.
 Nature/Features of Law
• 11. The purpose of Law is to provide peace, protection,
and security to the people and to ensure conditions for
their all round development. Law also provides
protection to the rights and freedoms of the people.
• 12. All disputes among the people are settled by the
courts on the basis of an interpretation and application
of the laws of the State.
• 13. Rule of law, equality before law and equal
protection of law for all without any discrimination, are
recognised as the salient features of a modern legal
system and liberal democratic state.
 Sources of Law
1. Custom:
Custom has been one of the oldest sources of law. In ancient times,
social relations gave rise to several usages, traditions and customs.
These were used to settle and decide disputes among the people.
Customs were practiced habitually and violations of customs were
disapproved and punished by the society. Initially social institutions
began working on the basis of several accepted customs.

Gradually, the State emerged as the organized political institution of

the people having the responsibility to maintain peace, law and
order; naturally, it also began acting by making and enforcing rules
based upon customs and traditions. In fact, most of the laws had
their birth when the State began converting the customs into
authoritative and binding rules. Custom has been indeed a rich
source of Law.
 Sources of Law
2 Religion and Morality
Religion and religious codes appeared naturally in every society
when human beings began observing, enjoying and fearing natural
forces. These were accepted as superior heavenly forces (Gods and
Goddesses) and worshiped.
Religion then started regulating the behavior of people and began
invoking “Godly sanction”, “fear of hell”, and “possible fruits of
heaven”, for enforcing the religious codes. It compelled the people
to accept and obey religious codes. Several religions came forward
to formulate and prescribe definite codes of conduct. The rules of
morality also appeared in society. These defined what was good &
what was bad, what was right and what was wrong.
 Sources of Law
3. Legislation:
Since the emergence of legislatures in 13th century, legislation has
emerged as the chief source of Law. Traditionally, the State depended
upon customs and the decrees or orders of the King for regulating the
behavior of the people. Later on, the legislature emerged as an organ
of the government. It began transforming the customary rules of
behavior into definite and enacted rules of behavior of the people.

The King, as the sovereign, started giving these his approval. Soon
legislation emerged as the chief source of law and the legislature got
recognition as the Legal Sovereign i.e. law-making organ of the State.
In contemporary times, legislation has come to be the most potent,
prolific and direct source of law. It has come to be recognized as the
chief means for the formulation of the will of the State into binding
rules.
 Sources of Law
4. Delegated Legislation:
Because of several pressing reasons like paucity of time, lack of
expertise and increased demand for law-making, the legislature of a
State finds it essential to delegate some of its law-making powers to
the executive. The executive then makes laws/rules under this
system. It is known as Delegated Legislation. Currently, Delegated
Legislation has come to be a big source of Law. However, Delegated
Legislation always works under the superior law-making power of
the Legislature.
 Sources of Law
5. Judicial Decisions:
In contemporary times, Judicial Decision has come to be an
important source of Law. It is the responsibility of the courts to
interpret and apply laws to specific cases. The courts settle the
disputes of the people in cases that come before them. The
decisions of the courts – the judicial decisions, are binding on the
parties to the case. These also get accepted as laws for future cases.
But not all judicial decisions are laws.
Only the judicial decisions given by the apex court or the courts
which stand recognized as the Courts of Record, (like the Supreme
Court and High Courts of India) are recognized and used as laws
proper. Lower Courts can settle their cases on the basis of such
judicial decisions.
 Sources of Law
6. Equity:
Equity means fairness and sense of justice. It is also a source of Law.
For deciding cases, the judges interpret and apply laws to the
specific cases. But laws cannot fully fit in each case and these can
be silent in some respects. In all such cases, the judges depend on
equity and act in accordance with their sense of fair play and
justice. Equity is used to provide relief to the aggrieved parties and
such decisions perform the function of laying down rules for the
future. As such equity acts as a source of law.
 Types of Law
Broadly speaking there are two main kinds of Law:
(i) National Law i.e. the body of rules which regulates the actions of
the people in society and it is backed by the coercive power of the
State.
(ii) International Law i.e. the body of rules which guides and directs
the behavior of the states in international relations. It is backed by
their willingness and consent that the states obey rules of
International Law. It is a law among nations and is not backed by
any coercive power.
 Types of Law
National Law

CONSTITUTIONAL
ORDINARY LAW
LAW

PUBLIC
PUBLIC PRIVATE
LAW LAW
GENERAL PUBLIC
LAW ADMINTRATIVE
LAW
 Types of Law
Constitutional Law:
Constitutional Law is the supreme law of the country. It stands
written in the Constitution of the State. The Constitutional
Law lays down the organization, powers, functions and inter-
relationship of the three organs of government. It also lays
down the relationship between the people and the
government as well as the rights, freedoms (fundamental
rights) and duties of the citizens. It can be called the Law of
the laws in the sense all law-making in the State is done on
the basis of powers granted by the Constitutional Law i.e. the
Constitution.
 CONSTITUTION OF INDIA
According to Wade and Philips:
"Constitution means a document having a special legal sanctity
which sets out the framework and the principal functions of
the organs of the Government of a State and declares the
principles governing the operation of those organs.
What is special about the Constitution of India?
Indian Constitutions is not the product of any revolution but of
the research and deliberations of a body of eminent
representatives of the people who sought to improve upon
the existing systems of administration, makes a retrospect of
the constitutional development indispensable for a proper
understanding of this Constitution.
 Types of Law
Statute Law or Ordinary Law:
It is also called the national law or the municipal law. It is
made by the government (legislature) and it determines and
regulates the conduct and behaviour of the people. It lays
down the relations among the people and their associations,
organisations, groups and institutions. The legislature makes
laws, the executive implements these and judiciary interprets
and applies these to specific cases.
 Types of Law
Private Law:
Private Law regulates the relations among individuals. It lays
down rules regarding the conduct of the individual in society
and his relations with other persons. It guarantees the
enjoyment of his rights. It is through this law that the State acts
as the arbiter of disputes between any two individuals or their
groups. Ex: Contract Law, Property Law, Succession Law ,Family
Law etc.
Public Law:
The law which regulates the relations between the individual
and the State is Public Law. It is made and enforced by the
State on behalf of the community. Ex:- Constituional Law,
Criminal Laws etc.
 Types of Law
General Law:
It lays down the relations between the private citizens (Non-
officials or who are not members of the civil service) and the
State. General Public Law applies to all the citizens in their
relations with the State.
Administrative Law:
It lays down the rules governing the exercise of the constitutional
authority which stands delegated by the Constitution of the State
to all the organs of government. It also governs the relations
between the civil servants and the public and lays down the
relations between the civil servants and the State. In some States
like France, Administrative Law is administered by Administrative
Courts and General Law is administered by ordinary courts.
However in countries like India, Britain and the USA the same
courts administer both the General Law and Administrative Law.
STRUCTURE OF COURTS IN INDIA
SUPREME COURT

HIGH COURTS

DISTRICT COURTS

SUBORDINATE
COURTS
 FUNCTIONS OF COURTS
SUPREME COURT
It is an Apex Court in India
Its decisions are binding on Lower Courts and Citizen of country
It can transfer judges of High Courts
It can moves any case from any court to itself
It can transfer cases from High court to another
HIGH COURT
It can hear appeal from lower courts
It can deals with cases within the jurisdiction of the state
It exercises superintendence and control over courts below it
DISTRICT COURT
Deals with cases arises within district
Consider appeals on decision given by lower courts
Decides cases involving serious criminal offences
SUBORDINATE COURTS
Consider cases of criminal and civil in nature
 MEANING OF INDIAN CONTRACT ACT,1872
The Indian Contract Act, 1872
It is the law relating to Contracts in India. It came into force on September
1, 1872 and is extended to the whole of India except to the state of Jammu
and Kashmir.

CONTRACT MEANS:
The term 'Contract' has been defined in Section 2(h) of the Indian Contract
Act, 1872. It defines the Contract as an agreement enforceable by law.
An agreement cannot become a contract unless it can be enforceable by
law. To be enforceable by law, a contract must contain all the essential
elements of a valid contract as defined in Section 10.
 Essential Elements of a Contract
1. Agreement - Offer and Acceptance
2. Legal purpose
3. Lawful Consideration
4. Capacity to contract
5. Consent to contract
6. Lawful object
7. Certainity
8. Possibility of Performance
9. Not expressly declared void
10. Legal formalities like Writing, Registration etc.
Offer or Proposal
Section 2(a) of the Indian Contract Act, 1872 defines the term "Proposal" as when one
person signifies to another his willingness to do or to abstain from doing something
with a view to obtaining the assent of the other to such an act or abstinence, he is
said to make a proposal. The person making the 'proposal' or 'offer' is called the
'promisor' or 'offeror', the person to whom the offer is made is called the 'offeree'.
 Essential Elements of a Contract
Acceptance
Acceptance means the expression of assent to whom the proposal is made in a
Contract. Acceptance may be expressed either by conduct or by implied
circumstances. However, silence cannot be prescribed as a mode of acceptance.
Consideration
Consideration means 'something in return'. According to section 2(d) of the Indian
Contract Act, "When at the desire of the promisor, the promisee or any other person
has done or abstained from doing, or does or abstains from doing, or promises to do
or abstain from doing something, such act or abstinence is called a consideration for
the promisee."
Capacity to Contract
It says, "Every person is competent to contract, who is of the age of majority,
according to law, which he is subject to also who is of sound mind and who is
not disqualified from contracting by any law to which he is the subject“.
Consent to contract
All the parties must have agreed upon the subject matter of the agreement in
the same sense. Section 14 says that if the agreement is induced by coercion,
fraud misinterpretation or mistake, it is said to be "no free consent" and such
a contract is voidable and cannot be enforceable by law.
 Essential Elements of a Contract
Lawful object
If the object in the agreement is unlawful, the agreement is void.
Certainty
Every agreement of the contract must be certain. If the agreement is not certain or
incapable of being made certain, it is void.
Possibility of Performance
Every contract must be capable of performance. Otherwise, the agreement is void. An
agreement to do an impossible act whether physically or legally, is void.
Not expressly declared void
The agreement must not have been expressly declared to be void under the Act.
Examples of such agreements are restrainment of trade, marriage, legal proceedings
and wagering agreements. Such agreements are not enforceable by law.
Legal formalities like Writing, Registration etc.
A contract may be oral or in writing according to the Indian Contract Act. In certain
special cases the agreement must be in written. In some cases like contracts by
companies, selling or buying of shares etc., the contract must be registered.
 Privity of Contract & Void Agreement
Doctrine of Privity of Contract

The doctrine of privity means that a contract cannot, as a general rule, confer rights
or impose obligations arising under it on any person except the parties to it.“

Void Agreement
Section 2 (g) of the Indian Contract Act, states “that a void agreement is one which
is not enforceable by law. A void agreement does not create rights, obligations or
duties. It does not give rise to any legal consequences. Such agreements are void ab
initio”. The courts can only enforce those agreements that according to Section 10
fulfill the conditions of the Indian Contract Act. It should not be declared void by
any law in the country. There is a difference between void agreements and void
contracts.
Void Agreement
A void agreement is not valid.
The agreement is not enforceable by law.
It is void from the very beginning of the making of the agreement.
 CONTINGENT CONTRACT
CONTINGENT CONTRACT
"A contingent contract is a contract to do or not to do something, if some event, collateral to such
contract does or does not happen." Thus it is a contract, the performance of which is dependent
upon, the happening or non-happening of an uncertain event, collateral to such contract.

Illustration A contract to indemnify B upto Rs20,000, in consideration of B paying Rs1,000 annual

premium, if B’s factory is burnt. This is a contingent contract.

Any ordinary contract can be changed into a contingent contract, if its performance is made
dependent upon the happening or non-happening of an uncertain event, collateral to such
contract. For example, the following are contingent contracts:

(a) A contracts to sell B 10 bales of cotton for Rs20, 000, if the ship by which they are coming
returns safely.

(b) A promises to give a loan of Rs1, 000 to B, if he is elected the president of a particular
association.

(c) A promises to pay Rs50, 000 to B if a certain ship does not return, of course after charging
usual premium. (It is a contract of insurance.)

(d) C advances a loan of Rs10, 000 to D and M promises to C that if D does not repay the loan, M

will do so. (It is a contract of guarantee.)

 QUASI CONTRACT
Quasi Contract
Quasi contract is a binding obligation that is imposed by the courts to avoid
injustice or unjust enrichment.
Alternative ways of describing a quasi contract are:
1. An implied-in-law contract imposed by the courts to prevent injustice.
2. A special form of contract that lacks mutual assent of the parties but which is
imposed on the parties by the courts to avoid injustice.
3. A situation in which there is an obligation as if there was a contract, although
the technical requirements of a contract have not been fulfilled.
For example:
P agrees to work for D for one year, payment of the $30,000 salary to be made at
the end. P works for six months, then unjustifiably quits. P cannot recover "on the
contract," because he has not substantially performed. But he will probably be
allowed to recover in quasi-contract, for the fair value of the benefits he has
conferred on D. The court will estimate these benefits (which will probably be
one-half of the $30,000 annual salary), and will subtract the damage to D of P's
not performing the second six months.
 Performance of contract

Performance of contract
The term ‘Performance of contract‘ means that both, the promisor, and the
promisee have fulfilled their respective obligations, which the contract placed
upon them. For instance, A visits a stationery shop to buy a calculator. The
shopkeeper delivers the calculator and A pays the price. The contract is said to
have been discharged by mutual performance.
Example
A promises to deliver goods to B on a certain day on payment of Rs 1,000. A expires
before the contracted date. A‘s representatives are bound to deliver the goods
to B, and B is bound to pay Rs 1,000 to A‘s representatives.
 Types of Performance
Actual Performance
When a promisor to a contract has fulfilled his obligation in accordance with the
terms of the contract, the promise is said to have been actually performed. Actual
performance gives a discharge to the contract and the liability of the promisor
ceases to exist. For example, A agrees to deliver10 bags of cement at B’s factory and
B promises to pay the price on delivery. A delivers the cement on the due date and B
makes the payment. This is actual performance.
Actual performance can further be subdivided into substantial performance, and
partial Performance
Substantial Performance
This is where the work agreed upon is almost finished. The court then orders that
the money must be paid, but deducts the amount needed to correct minor existing
defect. Substantial performance is applicable only if the contract is not an entire
contract and is severable. The rationale behind creating the doctrine of substantial
performance is to avoid the possibility of one party evading his liabilities by claiming
that the contract has not been completely performed. However, what is deemed to
be substantial performance is a question of fact to be decided in both the case. It
will largely depend on what remains undone and its value in comparison to the
contract as a whole.
 Types of Performance
Partial Performance
This is where one of the parties has performed the contract, but not completely, and the
other side has shown willingness to accept the part performed. Partial performance may
occur where there is shortfall on delivery of goods or where a service is not fully carried out.
There is a thin line of difference between substantial and partial performance. The two
following points would help in distinguishing the two types of performance.

Partial performance must be accepted by the other party.

In other words, the party who is at the receiving end of the partial performance has a
genuine choice whether to accept or reject. Substantial performance, on the other hand, is
legally enforceable against the other party .
Payment is made on a different basis from that for substantial performance.
It is made on quantum meruit, which literally means as much as is deserved. So, for
example, if half of the work has been completed, half of the negotiated money would be
payable. In case of substantial performance, the party that has performed can recover the
amount appropriate to what has been done under the contract, provided that the contract is
not an entire contract. The price is thus, often payable in such circumstances, and the sum
deducted represents the cost of repairing defective workmanship.
 Types of Performance
Attempted Performance
When the performance has become due, it is sometimes sufficient if the promisor
offers to perform his obligation under the contract. This offer is known as
attempted performance or more commonly as tender. Thus, tender is an offer of
performance, which of course, complies with the terms of the contract. If goods
are tendered by the seller but refused by the buyer, the seller is discharged from
further liability, given that the goods are in accordance with the contract as to
quantity and quality, and he may sue the buyer for.breach of contract if he so
desires. The rationale being that when a person offers to perform, he is ready,
willing and capable to perform. Accordingly, a tender of performance may operate
as a substitute for actual performance, and can effect a complete discharge.
 Discharge of Contract
Discharge of a contract :- It implies termination of contractual
obligations. This is because when the parties originally entered into the
contract, the rights and duties in terms of contractual obligations were set
up. Consequently when those rights and duties are put out then the contract
is said to have been discharged. Once a contract stands discharged, parties to
it are no more liable even though the obligations under the contract remain
incomplete.
A Contract is deemed to be discharged, that is, concluded and no longer
binding, in the following circumstances:
Discharge by performance.
Discharge of Contract by Substituted Agreement.
Discharge by lapse of time.
Discharge by operation of law.
Discharge by Impossibility of Performance.
Discharge by Recession
Discharge by breach.
 Discharge of Contract
Discharge by performance
Where both the parties have either carried out or tendered (attempted) to carry out
their obligations under the contract, is referred to as discharge of the contract by
performance. Because performance by one party constitutes the occurrence of a
constructive condition, the other party’s duty to perform is also triggered, and the
person who has performed has the right to receive the other party’ s performance.
The overwhelming majority of contracts are discharged in this way.
Discharge of Contract by Substituted Agreement
A contract emanates from an agreement between the parties. It thus follows that, the
contract must also be discharged by agreement. Therefore, what is required,
inevitably, is mutuality. Discharge by substituted agreement arises when a contract is
abandoned, or the terms within it are altered, and both the parties are in conformity
over it.
For example, A and B enter into some agreement, and A wants to change his mind
and not to carry out his terms of the contract. If he does this unilaterally then he will
be in breach of contract to B. However, if he approaches B and states that he would
like to be released from his liabilities under the contract then the latter might agree.
In that case the contract is said to be discharged by (bilateral) agreement. In effect B
has promised not to sue A if he does not perform his part of the contract and the
consideration for his promise is A ‘s promise not to sue B. Discharge by agreement
may arise in the following ways.
 Discharge of Contract
Novation
The term novation implies the substitution of a new contract for the original one. This
arrangement may be either with the same parties or with different parties. For a
novation to be valid and effective, the consent of all the parties, including the new
one(s), if any, is essential. Moreover, the subsequent or second agreement must be
one capable of enforcement in law, the consideration for which is the exchange of
promises not to enforce the original contract.

Alteration
This refers to a change in one or more of the terms of a contract with the consent of
all the contracting parties. Alteration results in a new contract but parties to it
remain the same. Here the assumption is that both the parties are to gain a fresh but
different benefit from the new agreement. Remission This means the acceptance (by
the promisee) of a lesser sum than what was contracted for, or a lesser fulfillment of
the promise made. As per Section 63, ‘every promisee may (a) remit or dispense with
it, wholly or in part, or (b) extend the time of performance, or (c) accept any other
satisfaction instead of performance’.
 Discharge of Contract
Waiver
The term waiver implies abandonment or relinquishment of a right. Where a party
deliberately abandons its rights under the contract, the other party is released of its
obligations, otherwise binding upon it.
Discharge by lapse of time
A contract stands discharged if not enforced within a specified period called the
‘period of limitation‘. The Limitation Act, 1963 prescribes the period of limitation
for various contracts. For instance, period of limitation for exercising right to
recover an immovable property is twelve years, and right to recover a debt is three
years. Contractual rights become time barred after the expiry of this limitation
period. Accordingly, if a debt is not recovered within three years of its payment
becoming due, the debt ceases to be payable and is discharged by lapse of time.
Discharge by Impossibility of Performance
• Sometimes after a contract has been established, something might occur, though
not at the fault of either party, which can render the contract impossible to
perform, or illegal, or radically different from that originally undertaken.
 Discharge of Contract
Discharge By Breach of Contract :-
When one party violates the conditions of lawful contract it is called breach of
contract. When there is a breach by one party the other party gets a right not to
perform his obligations it may also take action against the other party who has failed
to perform.

Example :- "A" agrees to deliver one cycle to "B" on Sunday. He does not deliver the
cycle on Sunday. There is breach of contract .
Discharge By Recession :-
It means remedy for inducing a contract which is rejected one or all the terms of the
contract are cancelled. It discharges to parties from obligations of the original
contract.

Example :- Mr. Richard promises to deliver a house to Mr. Singh on Friday. Before the
Friday both agree that the contract will not be performed. The parties have
cancelled the contract.
 Unit-2, INDEMNITY AND GUARANTEE

Indemnity and Guarantee are a type of contingent contracts, which are

governed by Contract Law. Simply put, indemnity implies protection
against loss, in terms of money to be paid for loss. Indemnity is when one
party promises to compensate the loss occurred to the other party, due to
the act of the promisor or any other party. On the other hand,
the guarantee is when a person assures the other party that he/she will
perform the promise or fulfill the obligation of the third party, in case
he/she default.
Key Differences between Indemnity and Guarantee
The following are the major differences between indemnity and guarantee:
1) In the contract of indemnity, one party makes a promise to the other that
he will compensate for any loss occurred to the other party because of the
act of the promisor or any other person. In the contract of guarantee, one
party makes a promise to the other party that he will perform the
obligation or pay for the liability, in the case of default by a third party.
Key Differences between Indemnity and Guarantee

2) Indemnity is defined in Section 124 of Indian Contract Act, 1872, while in

Section 126, Guarantee is defined.
3) In indemnity, there are two parties, indemnifier and indemnified but in the
contract of guarantee, there are three parties i.e. debtor, creditor, and
surety.
4) The liability of the indemnifier in the contract of indemnity is primary
whereas if we talk about guarantee the liability of the surety is secondary
because the primary liability is of the debtor.
5) The purpose of the contract of indemnity is to save the other party from
suffering loss. However, in the case of a contract of guarantee, the aim is
to assure the creditor that either the contract will be performed, or
liability will be discharged.
6) In the contract of indemnity, the liability arises when the contingency
occurs while in the contract of guarantee, the liability already exists.
 Example of Indemnity and Guarantee
Example
Indemnity
Mr. Joe is a shareholder of Alpha Ltd. lost his share certificate. Joe applies for
a duplicate one. The company agrees, but on the condition that Joe
compensates for the loss or damage to the company if a third person brings
the original certificate.
Guarantee
Mr. Harry takes a loan from the bank for which Mr. Joesph has given the
guarantee that if Harry default in the payment of the said amount he will
discharge the liability. Here Joseph plays the role of surety, Harry is the
principal debtor and Bank is the creditor.
Conclusion
After having a deep discussion on the two, now we can say that these two
types of contract are different in many respects. In indemnity, the promisor
cannot sue the third party, but in the case of guarantee, the promisor can do
so because after discharging the creditor’s debts he gets the position of the
creditor.
 Bailment and Pledge
Bailment refers to hand over or assignment the goods, which involves
change in possession but not in the ownership of goods. It is the transfer of
goods from one party to another party for some specific purpose. It is not
same as pledge, which is just a variant of bailment
Pledge implies a contract, in which an article is delivered or say deposited
with the money lender, as security for repayment of a debt owed by him/her
or performance of promise.
Definition of Pledge
The pledge is a variety of bailment in which goods are transferred from one
party to another party as security for the payment against debts owed by
him. The person who delivers the goods is known as Pawnor whereas the
receiver of goods is known as Pawnee.
When the objective of the transferring the goods is completed or say when
the payment for debt for which goods are pledged, is met, then the receiver
shall return the goods to its real owner. However, if he fails to redeem the
goods within a reasonable time, then the receiver has the right to sell the
goods after giving a proper notice to its owner.
 Pledge
It is the duty of the Pawnee to take good care of the goods, as he takes
care of his own goods as well as he should not use the goods without the
permission of its owner. Moreover, the pawnor must tell all the defects in
the goods.
Example: Money taken as debt from the money lender by pledging gold as
security against it is an example of Pledge.
 Bailment
Definition of Bailment
A contract in which the goods are handed over by one party to another party
for a specific reason, which is expressed or implied for a short period. The
person who delivers the goods is termed as bailor whereas the receiver of
the goods is termed as bailee.
When the purpose of delivering the goods is accomplished, the bailee should
return the goods to its actual owner. Here the word goods may include all the
movable items, but property and money do not come under the definition of
goods. While the transfer of goods the ownership of goods remain with the
bailor only the possession of goods transfers for a limited period.
The receiver of the goods should take good care of the goods as he takes care
of his own goods as well as he should not use the goods without the
permission of its owner except for the purpose specified. It is the duty of the
bailor to tell the faults in the goods.
 Bailment
The delivery of goods can be done in three ways: Actual Delivery, Symbolic
Delivery, Constructive Delivery. The Bailment is divided into two
categories:
Gratuitous Bailment – Either for the sole benefit of Bailor or Bailee.
For example, borrowing a friend's car. A gratuitous bailee is liable for loss
of the property only if the loss is caused by the bailee's gross negligence.
Non-gratuitous Bailment – For the Mutual Benefit of both the parties.
For example, “A” hires “B’s” car. Here B is the bailor and receives the hire
charges and A is the bailee and enjoys the use of the car.
Similarly, when you give your PC or laptop for repair to some techie, both
you and the computer techie are going to be benefited by this contract –
while you get your computer repaired, he gets his fees or charges.
 AGENCY
Agency-As a general rule one person cannot, by contract with another,
confer rights or impose liabilites on a third person, yet, he may represent
another for the purpose of bringing him into legal relation with a third party.
Employment for this purpose is called agency." For Example- A authorises B
to let his houses to tenants, to recover the rents from them and to maintain
the houses 10 good order. Here it will be said at A is the principal B is the
agent and the relation between A and B will be called agency.
The term "Agency" is no where been defined under the Indian Contract Act.
But according to one judicial decision A contract of agency is the
employment of a person by another in order to bring the later into legal
relation with third person."
In the modern age due to commercial business a person can neither
contacts with another nor can be enters in to transactions himself alone. He
gets his works done through his servant’s representatives or agents and this
process or medium is called agency.
 AGENCY
Definition of Agent and Principal- An "agent" is a person employed to do any act
for another, or to represent" another in dealings with third persons.
The person. For whom such act is done, or who is so represented, is called 'Principal'.
Fiduciary relationship between two parties in which one (the 'agent') is under the
control of (is obligated to) the other (the 'principal') . The agent is authorized by the
principal to perform certain acts, for and on behalf of the principal. The principal is
bound by the acts of the agent, performed in carrying out entrusted duties and
within the scope of agent's authority. An agency can be created by (1) express
agreement, whether oral or written, (2) implication, based on the custom or
practice of the trade, or (3) conduct of the principal.
Essentials of Agency –
1. Principal must be competent to contract- Any person who is of the age of
majority according to the law to which he is subject, and who is of sound mind,
may employ an agent." Thus, it follows that a minor cannot appoint an agent to act
for himself. The appointment of an agent involves a contract and a minor’s contract
is void. Thus, it is clear that a minor himself cannot employ an agent and the
appointment of an agent by a minor will be void. Thus, an agent may be appointed
only by a person who is competent to Contract .
 AGENCY
2). Agent must be competent -As between the principal and third persons,
any person may become an agent, but no person who is not of the age of
majority and of sound mind can become an agent, so as to be responsible
to his principle
3). No consideration is necessary to create an agency- No consideration is
necessary to create agency.” Although an agent is generally remunerated
by way of commission for services rendered yet no consideration is
immediately necessary at the time of his appointment .
For example, let's say Mr. Shyam was out of town for one day and he
authorizes Mr. Ram to open store for one day .Mr. Ram contracts with M/s
Super Bakery to buy 500 Buns. M/s Super Bakery delivers the buns, but Mr.
Ram fails to pay the bill. As the principal, Mr. Shyam is legally responsible
for Super Bakery bill even though shyam never personally made this
business deal. If Super Bakery decides to sue for collection of the bill,
they'll likely sue Shyam and Ram .As long as Ram was properly acting as
agent when he made this deal, he's not legally responsible.
Definition Sale Of Goods
Sale Of Goods Act
A contract of sale is a legal contract an exchange of goods, services or property to
be exchanged from seller to buyer for an agreed upon value in money paid or the
promise to pay same. It is a specific type of legal contract.
Meaning Of Goods
“Goods” means every kind of movable 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
Meaning of Sale and agreement to sell.—
(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to
transfer the property in goods to the buyer for a price. There may be a contract of sale
between one part-owner and another.
(2) A contract of sale may be absolute or conditional.
(3) Where under a contract of sale the property in the goods is transferred from the
seller to the buyer, the contract is called a sale, but where the transfer of the property
in the goods is to take place at a future time or subject to some condition thereafter to
be fulfilled, the contract is called an agreement to sell.
(4) An agreement to sell becomes a sale when the time elapses or the conditions are
fulfilled subject to which the property in the goods is to be transferred.
 CONDITIONS AND WARRANTIES

Conditions and Warranties : In a contract of sale , parties make certain

stipulations i.e agree to certain terms. All stipulations cannot be treated
on the same footing . Some may be intended by the parties to be of
fundamental nature, e.g quality of goods to be supplied, the breach of
which, therefore will be regarded s breach of contract. Some may be
intended by the parties to be binding, but of a subsidiary or inferior
character e.g time of payment , so that breach of these items will not put
an end to the contract but will make the party committing the breach
liable to damages, the former stipulations are called “conditions” and
“latter warranties”.
 Meaning of Condition and Warranty

In a contract of sale, the subject matter is ‘goods’. There are millions of

sale transactions which occur in the normal course, all around the world.
There are certain provisions which need to be fulfilled because it is
demanded by the contract. These prerequisites can either be a condition
and warranty. The condition is the fundamental stipulation of the contract
of sale whereas Warranty is an additional stipulation.
In other words, condition is the arrangement, which should be present at
the time of happening of another event. Warranty is a written guarantee,
issued to the buyer by the manufacturer or seller, committing to repair or
replace the product, if required, within specified time. Check out this
article, in which we have presented the difference between condition and
warranty in sale of goods act.
 Differences Between Condition and Warranty
Key Differences Between Condition and Warranty
The following are the major differences between condition and warranty in
business law:
A condition is an obligation which requires being fulfilled before another
proposition takes place. A warranty is a surety given by the seller regarding
the state of the product.
The condition is vital to the theme of the contract while Warranty is
ancillary.
Breach of any condition may result in the termination of the contract while
the breach of warranty may not lead to the cancellation of the contract.
Violating a condition means violating a warranty too, but this is not the case
with warranty.
In the case of breach of condition, the innocent party has the right to rescind
the contract as well as a claim for damages. On the other hand, in breach of
warranty, the aggrieved party can only sue the other party for damages.
 Sale of Goods Act
Terms Implied By The Sale Of Goods Act
These terms are implied into the contracts that including in the sale of goods act.
The defendant will be given an action for the damages if they breach the terms of
sale of goods act.
Where the slightness of the breach renders it unreasonable for a non-consumer
buyer to reject the goods, for breach of the implied terms as to description, quality
or fitness or sample, then the buyer can only claim damages for a breach of
warranty. This amendment moderates the traditionally strict approach of English
Law to contractual breach in a commercial context.
Express Conditions & Warranties :-
Conditions and warranties may be either express or implied. They are said to be
express when terms of contract exclusively provides for them. They are said to be
implied when law deems their existence in contract even though without their
actually having been put in the contract.
IMPLIED CONDITIONS AND WARRANTIES:-
Those conditions are not included in the contract but the law presumes their
existence in the contract are called implied conditions.
Following conditions are included by law in to a contract of sale of goods.
1. Right To Sell :-This right is considered as an implied conditions in every sale
contract. It is presumed that he can sell the goods and he can enter in sale
 Sale of Goods Act
2. Sale By Description :-
In this case implied condition is that goods shall the correspond with the
description. A buyer can reject if the goods if these are not according the
description.
3. Sale By Sample :-
In this case goods must be supplied according the sample agreed upon
condition.
i. The buyer may be able to compare the sample with the bulk.
ii. The goods should be free from any defect.
iii. The bulk should match with the quality of the sample.
4. Sale By Sample & Description :-
In this case goods supplied must correspond with sample and description
both. So there is implied condition in it that if bulk does not match with
one even then buyer may reject the goods.
5. Condition of Merchantable Quality :-
Merchantable quality means that the goods must be sale able in the
market as goods of that description are sold. In case of any defect a seller
must inform the buyer. It is implied condition
 Sale of Goods Act
6. Conditions As Quality To Fitness :-
Sometimes buyer informs the seller that he wants to purchase the goods
for particular purpose. It is implied condition that goods shall serve the
purpose of buyer. As the buyer relays on the sellers skill then seller should
provide the goods according the description.

7. Wholesomeness Condition :-
It means conductive to health. When someone makes a sale of contract
about the eatable goods this condition is applied. If some one supply the
goods and it damages to health then supplier will be liable for damages.

Example :- Sams Food Company supplied food on the marriage party of

Mr. Vicky. After eating the food people were infected and died. The
company was held liable in damages.
 Caveat Emptor
Caveat Emptor‘ is the Latin term for “Let the Buyer Beware.” It is a doctrine
that often places the burden on buyers to reasonably examine property and
goods before they purchase it and take responsibility for its condition. It is
mostly applicable to items that are not covered under a strict warranty.
Under the principle of caveat emptor, the buyer cannot recover damages
from the seller for defects on the property or goods that rendered the same
unfit for use. The only exception was if the seller actively concealed latent
defects or otherwise made material misrepresentations amounting to fraud.
The general rule of law dictates that a purchaser assumes the risk of his/her
purchase. The intent of the rule is to place a duty of care on the buyer in
selecting an item and putting forth appropriate inquiry before completing
the sale. In this way, the seller is also protected from liability for buyer’s
remorse.
 Exceptions to the Rule of ‘Caveat Emptor’

Sale by Description:
Section 15 of the Sales of Goods Act, 1930 defines ‘Sale by Description’ as
‘Where there is a contract for the sale of goods by description, there is an
implied condition that the goods shall correspond with the description;
and, 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.’
The term ‘correspond to description’ as used in Section 15 means the
buyer must get the article or goods that was described in the contract. The
buyer must contract for the goods as described so that any change in the
description makes the goods substantially different from those that were
described so as to constitute a failure of consideration.
 Exceptions to the Rule of ‘Caveat Emptor’
Purchase by Samples and Description
When goods are bought with a sample and a description and the bulk of the
goods do not match the sample goods or the description of the goods given
by the seller, then the buyer can reject the goods as it is expected that the
bulk of the goods will match the sample and the description of the goods as
given by the seller to the buyer.
Fitness for Purpose:
The buyer informs the seller the purpose for which he requires the goods and
he then has to rely completely on the skill and the judgement of the seller. In
such cases, it is expected that the goods so obtained by the buyer from the
seller, serve the purpose and if it is not so, then the buyer may reject the
goods.
Merchantable Quality:
The Sale of Goods Act, 1930 does not define ‘merchantable quality’ but it is
widely used in commercial law. It means that the goods comply with the
description given by the seller in the contract. If the goods have any defect,
they are not of merchantable quality.
 Exceptions to the Rule of ‘Caveat Emptor’
Usage of Trade:
Where the usage or trade annexes an implied condition or warranty as to quality or
fitness for a particular purpose and seller deviates from that, then the rule of
caveat emptor does not apply.
Sale by Sample:
In a contract of sample by sale implies an undertaking by the seller that the goods
which are to be supplied in bulk will be similar to the sample given to the buyer. If
the goods supplied do not correspond with the sample, it amounts to breach of
contract by the seller, and the buyer is entitled to reject the goods. If the buyer
accepts the goods instead then the contract is not severable.
Consent by Fraud:
Where the seller makes a false statement intentionally to the buyer and the buyer
relies on it or where the seller knowingly conceals the defects in the good, the
doctrine of caveat emptor does not apply as the buyer did not give his consent
freely. He was kept in the dark regarding the contract that he entered into with the
seller.
 Warranty
Definition of Warranty
A warranty is a guarantee given by the seller to the buyer about the quality,
fitness and performance of the product. It is an assurance provided by the
manufacturer to the customer that the said facts about the goods are true
and at its best. Many times, if the warranty was given, proves false, and the
product does not function as described by the seller then remedies as a
return or exchange are also available to the buyer i.e. as stated in the
contract.
A warranty can be for the lifetime or a limited period. It may be either
expressed, i.e., which is specifically defined or implied, which is not
explicitly provided but arises according to the nature of sale like:
Warranty related to undisturbed possession of the buyer.
The warranty that the goods are free of any charge.
Disclosure of harmful nature of goods.
Warranty as to quality and fitness
 Unpaid Seller
The seller who has not received price of goods sold or the seller
who has got his negotiable instrument dishonored will become
Unpaid Seller. Those rights can be classified into two groups.
They are as follows.
Rights against Goods
Rights against Buyer
What are the Rights of Unpaid Seller against Goods
When goods are in existence and title has not gone to buyer,
Unpaid Seller can exercise the rights against goods. These
rights are categorized into three types. They are as follows.
Right of lien
Right of stoppage in transit
Right to Re-Sell
 Unpaid Seller

• Right of lien
• Right to retain goods by unpaid seller till amount is recovered is called
right of lien. If unpaid seller wants to exercise right of lien, he has to fulfill
the following conditions.
• He must be unpaid seller
• There should be no credit terms in the Contract of Sale.
• After completion of credit period, right of lien can be exercised.
• The unpaid seller should have obtained those goods lawfully.
• Amount must be due on those goods only against which right of lien is
decided.
•
 Unpaid Seller
• Right of stoppage in transit
• Unpaid Seller has right to stop the goods in the transit itself. To exercise
this right the following conditions are to be fulfilled.
• He must be unpaid seller.
• Buyer must be insolvent.
• There should be no credit terms in the Contract of Sale. After expiry of
Credit period, this right can be exercised.
• Amount must be due on those goods only against which this right is
desired.
 Unpaid Seller
• Right to re-sale
• The unpaid seller can re-sell the goods for non-payment of price by buyer.
He can exercise this right when the goods are of perishable nature while
doing so it is beneficiary to the seller to give a notice to buyer with regard
to resale. If such notice is given seller can claim loss. If any on resale from
the buyer. On the other hand if there is profit on resale the former buyer
cannot claim that profit. If notice is not given the seller has to face adverse
consequence. If there is any loss on re-sale, that loss cannot be recovered
from buyer. But in case of profit, seller has responsibility to pay that
amount of profit to buyer.

•
 Unpaid Seller
What are the Rights of Unpaid Seller against Buyer
At times it becomes inevitable choice to exercise rights on buyer for non-payment
of price. The unpaid seller can file suits against the buyer as explained below.
Right to sue for price
• It is fundamental right of buyer to file a suit for recovery of unpaid price. In the
case of sale. Suit will be made for price balance, but not for compensation.
Right to sue to interest
• If the buyer makes unreasonable delay for making payment, the seller has right to
claim interest also.
• Right to sue for compensation
• When an agreement to sell is breached, the seller can see only for compensation
for the breach of Contract. Under such circumstances he cannot sue for price.
• Right to Sue for anticipatory contract
• When an agreement to sell is breached by buyer before date of performance. It is
called anticipatory breach. Then also seller can sue for compensation.

•
 Negotiable Instrument
Documents of a certain type which are used in commercial transactions and
monetary dealings, are known Negotiable instruments.
“Negotiable” means transferable by delivery and
“instrument” means a written document by which a right is created in
favor of some person. Thus, negotiable instrument means a document
which is transferable by delivery.
A Negotiable Instrument is that document that includes a ‘promise to pay’
a certain amount of money to the bearer of the document. Its a mode of
transferring a debt from one person to another. Negotiable Instruments
are always in written form.
Examples of Negotiable instruments are- a cheque, a promissory note, a
bill of exchange.
 CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT
1. A negotiable instrument must be in writing, which includes typing, printing, engraving.
2. The instrument must be signed by the maker or drawer.
3. There must be a promise if it is promissory note or order to pay if it is bill of exchange.
4. The promise or order must be unconditional. If it is conditional the instrument is not negotiable
5. A negotiable instrument must call for payment in money. If the promise or order is for anything
else, the instrument is not negotiable.
6. The instrument must not only call for payment in money but also for a certain sum.
7. A negotiable instrument must be payable at a time which is certain to arrive which
may be payable either on demand or at a particular time or at a determinable future
time. If it is payable when convenient, the instrument is not negotiable because the
day of payment may not arrive. The requirement that there must be a time certain
to arrive does not mean that the instrument must specify a fixed date for payment.
8. A negotiable instrument must be payable to order or bearer: Without the words order
or bearer, the instrument would not be negotiable because, if they were not there,
no one but the payee could present them for payment. If it is merely payable to Ram,
it is not negotiable. It is not necessary that instrument actually use the words‘
order’ or ‘bearer’. And other words indicating the same intention are sufficient. Pay
to holder could be used in place of ‘order’ or ‘bearer’.
9. In the case of a bill of exchange or cheque, the drawee must be named or described
with reasonable certainty. The purpose of this requirement is to enable the holder of
the instrument to know to whom he must go for payment.
 Presumptions as to Negotiable Instruments
Since the philosophy underlying the law of Negotiable instruments is that business
transactions should be facilitated by making available evidence of right to money that will
pass freely from hand to hand. In order to facilitate the free transfer of negotiable
instruments from one party to another, the Act provides that until the contrary
is proved, the following presumptions shall be made :
1. That every negotiable instrument was made or drawn, accepted, endorsed and negoti
ated or transferred for consideration.
2. That it bears the date on which it was made or drawn.
3. Every accepted bill was accepted within reasonable time after its date and before its maturity.
4. That every transfer of a negotiable instrument was made before maturity.
5. Endorsements appearing on it were made in the order in which they appear thereon.
6. Where an instrument has been lost or destroyed, that it was duly stamped and the
stamp was duly cancelled.
7. That the holder of the instrument is a holder in due course.
The object of these presumptions is to declare the instrument as valid and in good order it a suit
is filed in respect of negotiable instrument, the Court will presume that the instrument was
in good order and valid. If any party challenges its validity, he shall have to prove to the
contrary. These presumptions are necessary in the case of negotiable instruments ,as they
are credit instruments and intended to be created as money which can pass freely
from hand to hand. Negotiable instruments act includes only three types of instruments :
• 1. Promissory note. 2. Bill of Exchange. 3. Cheque.
 TYPES OF NEGOTIABLE INSTRUMENTS

PROMISSORY NOTES:
A promissory note is an instrument in writing. It contains an unconditional
undertaking which is signed by the maker to pay of certain sum of money to, to
the order of certain person, or to the bearer of the instruments. The person, who
makes the promissory note, promises to pay and is called the maker. The person
to whom the payment is to be mode is called the payee.
Essential features:
The promise must be in writing.
The promise must be signed by the maker or payer.
The promise must be unconditional.
The amount to be paid must be definite in terms of money.
It must be payable on demand or at a fixed or determinable future date.
It must be payable to a definite person. The Payee must be certain.
Promissory note must bear stamp at the rate prescribed by law of a country.
 PROMISSORY NOTES
It must contain an express promise or clear undertaking to pay: A promise to pay
cannot beinferred; it must be express. A mere acknowledgement is not enou
gh. The following are not promissory notes, as there is no promise to pay:
• (a) “Mr. A.I.O.U. Rs. 500”.
• (b) “I am liable to pay you Rs. 1,000”.
• (c) “I have taken from you Rs. 150; whenever you ask for it; I have to pay”
But the following is a promise to pay:
• (a) “I promise to pay Ram or order Rs.1,500.”
• (b) “Ram, I owe you Rs. 1,500 and promise to pay the same for value recei
ved.”
• (c)“I promise to payRam 1,500 at Kanpur.”Although the promise to pay may b
e opposed to public policy and unenforceable, once a promissory note
is executed the promise to pay is performed because a promissory note
amounts in law to payment and what vitiates a promise does not vitiate a
payment .
 TYPES OF NEGOTIABLE INSTRUMENTS
BILL OF EXCHANGE:
A bill of exchange is an instrument in writing containing an un conditional order
signed by the maker, directing 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
definition of Bill of Exchange is very similar tothat of promissory note and for mo
st purposes the rules which apply to notes are in general applicable to bills.
The fundamental ingredients are the same. The drawer like the makers must be
certain, the order to pay must beunconditional, the amount of Bill and the payee a
nd the drawer, must be certain and the contract must be in writing.
The maker of a note corresponds to the acceptor of a bill, and when a note is end
orsed it is exactly similar to a bill, for then it is an order by the endroser of the note
upon the maker to pay the endorsee. The endorser is, as it were, the drawer ,maker
the acceptor and the endorsee is the payee. But a bill differs from a note in some
particulars.
 BILL OF EXCHANGE
Essentials:
1.It must be in writing and may be in any language.
2. It must be an order to pay by the drawer to the drawee.
3.The order to pay must be unconditional. If the order to pay is conditional, the bill
of exchangebecomes invalid.
4. There are three parties in a bill of exchange.
(a) Drawer: The personwho makes the bill.
• (b) Drawee: The person who is ordered to pay or on whom the bill is drawn.
• (c) Payee: The person who is to receive the payment.
5.The bill must be signed by the drawer otherwise it will become an inchoate instrume
nt.
6. The order to pay must be of a certain sum and it must be in money only.
7. The payee and drawee must be certain.
8. It must be properly stamped under the Indian Stamp Act.
Illustrations: Please let the bearer have Rs. 15000 and oblige.
We hereby authorize you to pay on our account to the order of X, Rs 65000.
Difference between Promissory and Bill of Exchange

Promissory Note Bill of Exchange

1. It contains an unconditional 1. It contains an unconditional order.
promise.
2. There are two parties – 2. There are three parties –
· the maker and · the drawer,
· the payee. · the drawee and
· the payee.
3. It is made by the debtor. 3. It is made by the creditor.
4. Acceptance is not required 4. Acceptance by the drawee is a must
5. The liability of drawer is primary and 5. The liability of the maker/drawer is
absolute as well. secondary. Also, it is conditional upon
non-payment by the drawee.
 TYPES OF NEGOTIABLE INSTRUMENTS
CHEQUE:
A cheque is a bill of exchange drawn on a specified banker. It is expressed to
be payable otherwise than on demand.
Essentials:
In writing
Express order to pay
Definite and unconditional order
Signed by drawer
Order to pay certain amount
Payable on demand
Parties:
Drawer: The maker of a bill of exchange.
Drawee: The person directed to pay the money by the drawer.
Payee: To whom or to whose order the money ore directed to be paid by the
instruments. The person named in the instrument only.
 Difference between Cheque and Bill of Exchange
1. A cheque is always drawn on banker,while a bill may be drawn on anyone, including banker.
2. A cheque’s payment is made when it has been demanded whereas in case of a bill its
nature may be such that payment has to be made on demand or after expiry
expiry of a certain period after date or sight.
3. In case of a cheque a bearer can get payment on demand but a bill's payment can not
be demanded by the bearer.
4. Acceptance of bill is necessary for the demand of its payment, in case of cheque
acceptance is not required and is aimed for quick payment.
5. In case of bills ordinarily a provision for grace days is made (which is generally of
• 3 days) whereas in case of cheques no such grace is allowed.
6. In the absence of presentment of a bill for payment the liability of bill’s drawer
ceases, whereas liability of cheque’s drawer ceases when the delay caused in presentment
for payment results in damages.
7. Notice must be served when the bill is dishonoured, but when a cheque is not honoured, no
such notice is necessary.
8. A cheque being a revocable order the authority may be revoked by countermanding
payment, and is determined by notice of the customer’s death or insolvency. In case of a bill
the position is different, it can not be revoked.
9. A cheque may be crossed to secure its payment, no such crossing can be done in case
of a bill.
 Holder and Holder in due course
A holder of negotiable instrument is a person who is entitled to be legally in
possession of the instrument and to recover or receive the amount due thereon
from the parties to the instrument (Sec.8). A A person who has obtained
possession of the instrument by illegal means,e.g. by theft, or under a forged endor
sement, is not a holder. He cannot recover amount from the parties thereto.
A holder in due course is a person who obtained possession of the instrument for
valuable consideration before its maturity, (i.e before the amount mentioned
in it becomes payable), and had no cause to believe that any defect existed in the
title of the person from whom he derived title . It follows from the above that a
person is a holder in due course if:
(a) he has obtained instrument for valuable consideration. Where instrument is
obtained by gift or by illegal means,the holder can not become a holder in due
course.
(b) he has obtained the instrument complete and regular in all respects.
(c) he has become the holder before its maturity.
(d) he has obtained the instrument in good faith. Good faith simply means that a pers
ontakes the instrument without sufficient cause to believe that any defect existed
in thetitle of the person fromwhom it is received. So where an instrument was torn
intopieces and then pasted or the amount on the billwas erased, it should have aro
use suspicion and the holder may not be called holder in due course.
 Holder and Holder in due course
• Special Rights or Privileges of a Holder in due course
According to Sec.53 of the Act, once a negotiable instrument passes through the hands
of a holder in due course, it gets cleansed of all defects, unless he himself
was party to fraudor illegality committed regarding the instrument. The
rights of a holder in due course can be summed up as follows :
1. He gets a good title to the instrument even though the title of the transferor is
defective. Thus, he may get a better title than that of the transferor ;e.g. if A steals
a bill from B and endorses to C,a holder due course, C can recover the amount from
B, although A cannot recover from B.
2. Every prior party to a negotiable instrument is liable thereon to a holder in due
course untill theinstrument is duly satisfied.
3. A holder in due course can sue all the parties liable to pay in his own name.
4. The holder in due course gets a good title even though the instrument was originally
and inchoatestamped instrument and the transferor completed the instrument for a
sum greater than what wasintended by the maker. He can recover the full amount
provided the stamps affixed were sufficientto cover the amount.
5. Where a bill is drawn payable to drawer’s order in fictitious name and endorsed by
the same asdrawer’s signature, the acceptor cannot plead, by way of defence, then
the bill is drawn in fictitiousname.
 Holder and Holder in due course
• 6. In the eyes of the law, every holder is a holder in due course unless proved ot
herwise.
• 7. Even though between the immediate parties to an instrument it was caused
by fraudetc., oncethe instrument passes through the hands of a holder in due co
urse, it ispurged of all defects, andany person acquiring it takes it free of all defect
s, unless he was himself apart to the fraud.
• 8. The maker of promissory note, the drawer of bill of exchange or cheque,
andacceptor of abill for the honour of the drawer, in a suit thereon by the holder
in duecourse, is not permitted todeny the validity of the instrument as originally
made or drawn. (A minor can plead minority).
• 9. The indorser of a negotiable instrument, in a suit thereon by the holder in due
course, course,is not allowed to deny the signature or the capacity to contract of
any prior party to the instrument.
• 10. In case of forged instrument, a holder in due course will get no title because i
t amounts to complete absence of title rather than a meredefect in title. (Sec.58).
 Negotiation

Negotiation of an instrument is the process by which the ownership of an instrument

is transferred from one person to another.
When a note, bill or cheque is transferred to any person, so as to constitute that
person the holder thereof, the instrument is said to be negotiated. It can also be
transferred (by a separate deed of assignment); butin that case, the privileges of
negotiation will not be available to the assignee, i.e., he will not enjoy the rights
of a holder in due course.
The object of negotiation of instruments and their assignment is the same, i.
e. the transfer of ownership from one person to another but there are some
points of distinction between the two which are as under
 Difference between Negotiation and Assignment
Negotiation Assignment

Mere delivery in case of bearer instrument A separate deed of assignment is essential.

and endorsement and delivery in case of
an order instrument are
sufficient to transfer title.
Notice of transfer is not required to debtor. Notice of assignment must be given to the
debtor.
Consideration is presumed incase Consideration must be proved by the assignee.
of negotiable instrument.
The transferee, as holder in due The assignee gets only the right of transferor.
course may get a better title than
his transferee.
The Negotiable instrument Act The Negotiable instrument Act does not
deal with transfer of instrument by deal with transfer of negotiable instruments by
negotiation. negotiation.
 How Negotiation is Effected
A negotiable instrument payable to bearer can be negotiated by mere delivery
merely handing over theinstrument to the transferee, and no writing is
necessary. When negotiable instrument is payable to order, it is
negotiated by the holder by endorsement anddelivery. Endorsement or
endorsement means signature of the holder made with the object of
transferring the instrument. Endorsement may be made on the back or face
of the instrument.If there is no space on the instrument the endorsement m
ay be made on a slip of paper attached to it. Such a slip called Allonge .
It will be noticed that delivery of the instrument to the transferee or his
agent is essential of both the bearer and order instruments .
Thus, where A endorses a bill in favor of B and puts it in his desk-
drawer, there is no negotiation as the bill has not been delivered to B. If
A dies and the bill is found by B in the drawer, B cannot sue on it because
the bill was neverdelivered by A toB.Delivery of the instrument must be
voluntary on the part of the holder and must be made
with the intention of passing property in the instrument to the person to
whom it is delivered.
So that a thief cannot get a good title to the instrument, nor can a finder of a
lost instrument.A negotiable instrumentcan be negotiated till payment or
satisfaction. After payment or satisfaction it cannot be negotiated.
 ENDORSEMENT
When the maker or holder of a negotiable instrument signs the same otherwise than as
such make for the purpose of negotiation, on the face or back thereof, or a slip of paper
annexed thereto called allonge or so sign for the same purpose a stamped paper intended to
be completed as a negotiable instrument, he is said to endorse the same and is called as
endorser.
Classes of Endorsement
An endorsement may be (i) General or blank, (ii) Special or Full (iii) Restrictive, (iv) Partia
l, or(v) Conditional or qualified.
1. An endorsement is blank or general where the endorser merely writes his signature on
the back of the instrument, e.g., a bill payable to “Ram or order” and he writes on back of
its back “Ram”, it is endorsement in blank and the bill has become payable to bearer.
2. An endorsement is full or special where the endorser mentions the name of the person
to whom the money due on the instrument is to be paid. Where a bill is payable to “Ram or
order” and Ram writes on the back of the instrument‘Pay to Sham’ or ‘Pay to Sham or order’,
and signs, it is a full endorsement.
3. An endorsement is restrictive if it restricts further negotiation of an instrument, e.g.,
‘Pay Sham only’, or ‘Pay Sham for my use’ or ‘Pay Sham on account of Radha’.
4. An endorsement is Partial which purports to transfer to the indorsee a part only of the
amount payable on instrument; but a partial endorsement does not operate as a negotiation
of the instrument; e.g. , A sells a bill forRs.1000 endorses it thus: ‘Pay B or order Rs.500’
or ‘Pay Rs.500 to Band Rs.500 to C’, the endorsement is partial and invalid.
5. An endorsement is conditional or qualified which limits or negatives the liability of
the endorser. Forex:, where the indorser makes it clear that he does not incur the liability
of an endorser towards the indorsee or subsequent holders he makes a ‘Sans Recourse’ or
‘Without Recourse’ endorsement. He may endorse thus: ‘Pay Sham or order Sans Recourse’,
or ‘Pay Sham or order without recourse to me’. In cases, if the instrument is dishonour
he cannot be called upon to pay.
 Requisities of valid endorsement
1. It should be done on the instrument or allonge.
2. It must be done by the maker/drawer/payee/holder/indorser of the instrument.
3. It must be signed.
4. Though no specific words are prescribed for endorsement yet the words used mus
t clear the intention of the indorser to transfer the ownership of the instrument.
5. It must be completed by subsequent delivery of the instrument to the endorsee.
Legal provisions regarding endorsements
The Negotiable Instrument Act contains many provisions regarding endorsement :
1. Effect of Endorsement. The endorsement of a negotiable instrument followed by
delivery, transfers to the endorsee the property therein with the rights of further
negotiation. Thus the endorsee acquires property or interest in
the instrument as older. He can also negotiate further if not restricted by
are stricted endorsement by the endorser.
2. Who can endorse. According to section 51. ‘Every sole maker, drawer, payee or
endorsee or all ofseveral joint makers, drawers, payees or endorsees, of negotiable
instrument may endorse and negotiate thesame’. Thus, in case the instrument is
heldjointly by a number of persons, endorsement by all of them isessential, one ca
n not present the other.
3. Time. A negotiable instrument may be negotiated until its payment has been mad
e' by the makerdrawee or acceptor at or after maturity not after its payment.
 Requisities of valid endorsement
4. Endorsement for a part of the amount. The instrument must be endorsed for its
entire amount : 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’. Thus an endorsement for a part of
the amount of the instrument is invalid. But in cases where an instrument has been
partly paid, it may be negotiated for the balance of the amount provided a note to
that effect is given on the instrument. If the endorser intends to transfer the
document to two or more endorses separately, it will not constitute a valid
endorsement .
5. The legal representative of a deceased person cannot negotiate by delivery only a
promissory note, bill of exchange or cheque payable to order and endorsed by the
deceased but not delivered. Thus if the endroser dies after endrosing the
instrument payable to order but without delivering the same to the endorsee, the
endrosement not valid and his legal representative cannot complete the negotiatio
n by mere delivery thereof.
6. Unless the contrary is proved it is presumed that ‘the endorsements appearing
upon negotiable instrument were made in the order in which they appear
thereon’. It means that the endorsement which appears on the instrument first is
presumed to have been made earlier to the second one.
 Dishonour of Bill
• A bill of exchange may be dishonoured either by nonacceptance or by non-
payment. A promissory note or cheque is dishonoured by non-payment as
acceptance is not required in their case.
• When an instrument is dishonoured the holder must give notice of
dishonour to the drawer or maker or his previous holders if he wants to
make them liable .
• Dishonour of a bill by nonacceptance : A bill is said to be dishonoured by
not acceptance when :
• 1. Drawee does not accept it within 48 hours from the time of presentment
for acceptance;
• 2. Presentment for acceptance as excused and the bill remains unaccepted
• 3. Drawee is incompetent to contract;
• 4. Drawee is a fictitious person;
• 5. Drawee, after a reasonable search, cannot be found; and
• 6. Acceptance is qualified and the holder opts to treat it as dishonour
 Dishonour of an instrument
• Dishonour of an instrument by nonpayment : A promissory note, a bill of
exchange or cheque is said to be dishonoured by non payment when the maker of
the note,acceptor of the bill or drawee banker of the cheque makes default in
payment on being duly required to pay the same. A negotiable instrument is also
deemed to be dishonoured by non payment when presement for payment is
excuse and the instrument remains unpaid on maturity; and instrument when
overdue, remains unpaid.
Effect of Dishonour :The drawer and all the endorsers of the bill are liable to the
holder if the bill is dishonoured either by the non-acceptance or by the non-
payments provided he gives them notice of dishonour. The drawee is liable only
when there is dishonour by nonpayment.Consequence of failure to give notice: Any
person towhom notice of dishonour is notgiven is discharged from his obligations u
nder the instrument. He is notliable to pay and nosuit can be filed against him.
• When notice of dishonour is excused: It is not necessary to give notice of dishonour
in the following cases and to the following parties :
1. To the maker of a dishonoured promissory note.
2. To the drawee or acceptor of a dishonoured bill or cheque.
3. When it is dispensed with by the party entitled to it.
4. In order to charge the drawer of a cheque when he has countermanded payment.
 Dishonour of an instrument

• 5. When the party charged could not suffer damage for want of notice.
• 6. When the party entitled to notice cannot be found.
• 7. To charge the drawer when the acceptor is also the drawer.
• 8. When the promissory note is not negotiable.
• 9. Where the party entitled to notice promises to pay the amount after t
he dishonour.
• 10. When the omission to give notice is caused by unavoidable circumsta
nces.
 Discharge of Parties from Liabilites
• Discharge of Parties from Liabilities
• The liability of a party to a negotiable instrument may be discharged or ter
minated in any one of the following ways -
• 1. By payment in due course of the amount due.
• 2. By the holder discharging or releasing the maker, acceptor or endorser.
• 3. By cancellation of a party’s name by the holder.
• 4. By operation of law, e,g., by the insolvency of the debtor.
• 5. By the holder allowing the drawee more than 48 hours of accepting the
bill.
• 6. By taking qualified acceptance all previous parties are discharged.
• 7. By nonpresentment of a cheque for payment within a reasonable time o
f its issue, if the bank fails, the drawer is discharged.
• 8. By endorsement of an order cheque by payee the banker is discharged b
y payment in due course even if the endrosement turns out to be a forgery.
• 9. By material alteration. Any material alternation of a negotiable instrume
nt rendersthe same void asagainst any one who is a party thereto at the ti
me of alternationand does not consent thereto.
 Discharge of Parties from Liabilites
• Some examples of Material Alteration:- Alteration of
• (1) the date of the instruments or indorsements
• (2) the sum of payment,
• (3) the time of payment,
• (4) the place of payment,
• (5) the rate of interest,
• (6) the addition of a new party,
• (7) the tearing of the instrument in a material part, are material alteration.
A correction of a mistake, or an alteration made to carry out the common
intention of the parties made before the instrument is issued or with the
consent of the parties does not amount to material alteration. It does not
make the instrument void. When a person accepts an altered instrument ; he
can not afterwards raise objections to those alterations which existed
at the time of acceptingthe instrument. Where any material alteration is made
by an endorsee it discharges his endorser from all liability to him
in repect of consideration thereof .