Q.1 Define and explain Promissory Note and bill of exchange.

Definition
 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 money to, or to the order of, a
certain person or to the bearer of the instrument

Examples of Promissory Notes

 “A” signs instruments in the following terms:
"I acknowledge myself to be indebted to 'B' in Rs. 1000, to be paid on demand, for value received."

 Followings are Not Promissory Notes.

(i) "Mr. B, I.O.U. (I owe you) Rs. 1000."

(ii) "I promise to pay B Rs. 1500 on D's death, provided he leaves me enough to pay that sum,"

(iii) "I promise to pay B Rs. 500 seven days after my marriage with C."

Essentials or Characteristics of a Promissory Note

 From the definition, it is clear that a promissory note must have the following essential elements.
(1) In writing - A promissory note must be in writing. Writing includes print and typewriting.

(2) Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere acknowledgement of
indebtedness is not sufficient.

 Notice that the use of the word `promise' is not essential to constitute an instrument as promissory
note.
(3) Unconditional - The promise to pay must not be conditional. Thus, instruments payable on performance
or non-performance of a particular act or on the happening or non-happening of an event are not
promissory notes.

(4) Signed by the Maker – The promissory note must be signed by the maker, otherwise it is of no effect.

(5) Certain Parties - The instrument must point out with certainty the maker and the payee of the promissory
note.

(6) Certain sum of money - The sum payable must be certain or capable of being made certain.

(7) Promise to pay money only - If the instrument contains a promise to pay something in addition money, it
cannot be a promissory note.

(8) Number, place, date etc - These are usually found in a promissory note but are not essential in law. If a
promissory note does not bear a date, it is deemed to have been made when it was delivered.

(9) It may be payable in installments

(10) It may be payable on demand or after a definite period - Payable 'on demand' means payable
immediately or any time till it becomes time-barred. A demand promissory note becomes time barred on
expiry of 3 years from the date it bears.

(11) It cannot be made payable to bearer on demand or even payable to bearer after a certain period

(12) It must be duly stamped under the Indian Stamp Act - It means that the stamps of the requisite amount
must have been affixed on the instrument and duly cancelled either before or at the time of its execution. A
promissory note, which is not so stamped, is a nullity.
BILL OF EXCHANGE

 A 'bill of exchange' is defined by as an instrument in writing, containing an unconditional order, signed by

the maker, directing a certain person to pay a certain sum of money only to or to the order of, a certain
person, or to the bearer of the instrument.

Characteristic Features of a Bill of Exchange

1. It must be in writing.

2. It must contain an order to pay and not a promise or request.

3. The order must be unconditional.

4. There must be three parties, viz., drawer, drawee and payee.

5. The parties must be certain.

6. It must be signed by the drawer.

7. The sum payable must be certain or capable of being made certain.

8. The order must be to pay money and money alone.

9. It must be duly stamped as per the Indian Stamp Act.

10. Number, date and place are not essential.

Difference Between Bill of Exchange and Promissory Note:

A bill of exchange differs from a promissory note on the following points:

Promissory Note Bill of Exchange

1) There are only two parties – the maker
(debtor) and the payee (creditor).
2) A note contains an unconditional promise
by the maker to pay the payee.
3) No prior acceptance is needed.
4) The liability of the maker or drawer is
primary and absolute.
5) No notice of dishonour need be given.
1) There are three parties – the drawer, the
drawee and the payee- although any two of these
capacities may be filled by one and the same
person.
2) It contains an unconditional order to the
drawee to pay according to the drawer`s directors.
3) A bill payable `after sight` must be accepted
by the drawee or his agent before it is presented
for payment.
4) The liability of the drawer is secondary and
conditional upon non-payment by the drawee.
5) Notice of dishonour must be given by the
holder to the drawer and the intermediate
endorsers to hold them liable thereon.
6) The maker or drawer does not stand in
immediate relation with the acceptor drawee.

6) The maker of the note stands in immediate

relation with the payee.

Q.2 State with reasons whether following statements are true or false.
a) All negotiable instruments are governed by Negotiable Instruments Act.

Negotiable instruments may be defined as written documents which can be transferred from
one person to another to make payments until the final payment is made. In India, the
Negotiable Instruments Act, 1881 contains the rules relating to negotiable instruments.
According to Section, 13 of this Act, a negotiable instrument means “a promissory note, bill
of exchange or cheque, payable either to order or to bearer whether the words “order” or
“bearer” appear on the instrument or not.”

b) A bill of exchange can be crossed.

c) A cheque is always payable on demand.

d) Generally, every holder of a negotiable instrument is presumed by law to be holder-in-due

course.

e) An unstamped negotiable instrument signed but blank in some respect is called an inchoate
instrument.

f) Crossing a cheque amounts to a material alteration which requires authentication.

Q.3 Write Notes

a)    Crossing of cheque

Crossing of cheques
 Crossing is a unique feature associated with a cheque affecting to a certain extent the obligation of the
paying banker and also its negotiable character. It is a peculiar method of modifying the instrument to the
banker for payment of the cheque.
 Crossing on a cheque is a direction to the paying banker by the drawer that payment should not be made
across the counter. The payment on a crossed cheque can be collected only through a banker.
 Crossing of a cheque is effected by drawing two parallel transverse lines with or without the words 'and
company' or any abbreviation thereof. A cheque that is not crossed is called an `open cheque`.

Significance of crossing
 As payment cannot be claimed across the counter on a crossed cheque, crossing of cheques serves as a
measure of safety against theft or loss of cheques in transit.

Types of crossing
 Crossing may be either
(1) General - to mean as where a cheque bears across its face an addition of the words 'and company' or
any abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines
simply, either with or without the words 'not negotiable', that addition shall be deemed a crossing and
the cheque shall be deemed to be crossed generally

(2) Special - implies the specification of the name of the banker on the face of the cheque

 The object of special crossing is to direct the drawee banker to pay the cheque only if it is presented through
 the particular bank mentioned therein. Thus, it makes the cheque system still safer.

Not Negotiable Crossing

 A person who takes such a cheque shall not have and shall not be capable of giving a better title to the
cheque than that which the person, from whom he took it in the first instance, had. Thus, by including the
words 'not negotiable', the cheque is deprived of its special feature of negotiability. A bank, therefore,
should be extra careful in paying such cheques.
Account Payee Crossing (A/c Payee Crossing)

 An A/c payee crossing signifies that the drawer intends the payment to be credited only to the payee’s
account and in none else. The addition of 'A/c payee' to a crossing has no legal sanctity and the paying
banker may ignore such a direction without being liable for any damages.

Not Negotiable, A/c Payee Crossing

 The instrument is rendered not negotiable (making the 'paying banker' responsible to see that payment is
made to the person who is entitled to receive it) plus A/c payee crossing directs the collect ing banker to
collect it for the payee only.
Who can cross a cheque

 A cheque may be crossed by any of the following:

1. The drawer of a cheque.

2. The holder of a cheque.

3. The Banker, in whose favour the cheque has been crossed specially.

b)    Sec. 138 of Negotiable Instrument Act

 The word 'negotiable' means transferable from one person to another, and the term 'instrument' means 'any
written document by which a right is created in favour of some person.' Thus, the negotiable instrument is a
document by which rights vested in a person can be transferred to another person in accordance with the
provisions of the Negotiable Instruments Act, 1881.
 The term 'negotiable instrument' has been defined as - A 'negotiable instrument' means a promissory note,
bill of exchange or cheque payable either to order or to bearer."

MAIN FEATURES OF A NEGOTIABLE INSTRUMENT

 An instrument may be negotiable either by

(1) Statute - Promissory notes, bills of exchange and cheques are negotiable instruments under the Negotiable
Instruments Act, 1881; or

(2) By usage - Bank notes, bank drafts, share warrants, bearer debentures, dividend warrants, scripts and
treasury bills

 An instrument is to be called 'negotiable' if it possesses the following characteristic features:

1) Freely transferable - Transferability may be by
(a) delivery, or
(b) by endorsement and delivery.
2) Holder's title free from defects: The holder (of the negotiable instrument) in due course acquires a good title
not withstanding any defect in a previous holder's title. A holder in due course is one who receives the
instrument for value and without any notice as to the defect in title of the transferor.
3) The Holder can sue in his own Name - Another characteristic feature of a negotiable instrument, is that its
holder in due course, can sue on the instrument in his own name.
4) A negotiable instrument can be transferred infinitum, i.e., can be transferred any number of times till its
 maturity.
5) A negotiable instrument is subject to certain presumptions.

Presumptions as to negotiable instruments [Sections 118-119]

1) As to Consideration - Every negotiable instrument is deemed to have been made, drawn, and accepted
endorsed, negotiated or transferred for consideration.
2) As to date- Every negotiable instrument bear the date on which it is made or drawn.

3) As to Acceptance- Every bill of exchange was accepted within a reasonable time after the date mentioned
therein and before the date of its maturity.

4) As to Transfer- Every transfer of a negotiable instrument was made before the date of its maturity in case
of an instrument payable otherwise than on demand.

5) As to the order of Endorsements - The endorsements appearing on it were made in the order in which they
appear thereon.

6) As to lost Instruments - Where an instrument has been lost or destroyed, that it was duly stamped and the
stamp was duly cancelled.

7) As to holder-in-due course - The holder of the instrument is a holder in due course.

8) As to dishonour - If a suit is filed upon an instrument, which has been dishonoured, the Court
shall, on proof of the protest, presume the fact of dishonour unless it is disproved

Q.4 What is a Contract sale of goods? Distinguish between

A] Sale and Bailment

SL.
Act Sale Bailment
No.
Sale is defined under
Bailment is defined under Sec. 148 of
1 Act Sec. 4(3) of the Sales of
the Indian Contract Act, 1872.
Goods Act, 1930.
Transfer of In a sale the transfer of
ownership Vs. ownership takes place In a Bailment, transfer of possession
2
Transfer of from the seller to the takes place from the bailer to the bailee.
Possession buyer.
Only one party is under In Bailment, the reason for transfer of
Reason for
3 a mistake, the contract is possession may either safe custody
transfer
not void. usage, carriage etc.
In a sale, the buyer may In Bailment, the bailee can use the goods
4 Use of goods use the goods in any only accordingly to the direction of the
way he likes. bailor.
5 Consideration In a sale, the In a Bailment, the consideration need not
consideration is always be money as it may be the understanding
in terms of money. to return the goods bailed
 on accomplishment of the purpose.
In a sale, there is no
In a Bailment, the goods are necessarily
return of goods from the
6 Return of goods returned after the specified time or
buyer to the seller,
accomplishment of the purpose.
unless there is a breach.
In a sale, any profit
Profit accrued in accrued in goods sold is In a Bailment, any profit accrued on
7
goods the property of the goods bailed is the property of the bailer.
buyer.
In a Bailment, if the goods are lost or
In a sale, if the goods
damaged, the loss is to be borne by the
are lost or damaged, the
8 Loss of goods bailee but only if he is guilty
loss is to be borne by the
of negligence and carelessness in taking
buyer.
care of goods bailed
In a sale, the question of
any charge to be paid by In a Bailment, the bailor has to repay the
Payment of
9 the seller to the buyer charges which the bailee has incurred in
charges
or vice versa does not keeping the goods safe
arise.

In sale title and possession both get transfered while in contract of bailment only
possession get transfered. Sale is governed by the Transfer of property Act and latter
by the Indian Contract Act1872

In case of sales,the return of goods in contract of sale is not possible. whereas in

contract of bailment,the bailee must return the goods to the bailor on the
accomplishment of the purpose for which the bailment was made.

B] Sale and Mortgage

C] Sale and Gift

Both words are related with transfer of immovable asset. But sale deed is money based while
Gift deed is not based on cash transaction... For an example Father or mother give the asset
through Gift Deed and depends on State Governments gives registration amount deduction
for Gift Deed. 

Even though relatives and the Gift deed has been registered, the sale deed is powerful.

Government earns through the registration amount. So, to avoid to loose the money, if both
parties or non relatives, Govt wont accept the registration under Gift Deed.

D] Sale and Pledge.

Q.5 Write Notes

a)          Earnest Money

What is an Earnest Money Deposit?

It's a good faith deposit but not to be confused with a down payment. When buyers
execute a purchase contract, the contract specifies how much money the buyer is
initially putting up to secure the contract, to show "good faith," and how much money
all together will be deposited as a down payment. The balance is generally financed as
a mortgage or a combination of mortgages. An earnest money deposit says to the
seller: "Yes, I am serious enough about buying your house that I'm willing to put my
money where my mouth is."

So, How Much is Enough?

Because there is no set amount, it varies from market to market and across the
country. Where I work in California, deposits are generally 1 to 3 percent of the sales
price. Buyers here do not often put down more than 3% since most sign a liquidated
damages clause that limits the seller to 3% of the purchase price as damages in the
event of a default. But it's not unusual for a buyer purchasing a $300,000 home to put
down $1,000, especially if the buyer is obtaining 100% financing. In those scenarios,
the deposit is most often refunded to the buyer and subsequently used as a credit
toward closing costs because the financing makes up the entire purchase price.

If it's a seller's market, with many buyers fighting over limited inventory, it makes
logical sense for the buyer to put down a much larger earnest money deposit to entice
the seller to accept the offer. In buyer's markets, a larger earnest money deposit might
entice a seller to accept a much lower purchase price. So you see, it all depends.

Be Careful to Whom You Give Your Earnest Money Deposit

A reader from New Brunswick, Canada, Sylvie Schriver, claims she lost her $2,500
earnest money deposit by handing it over to an individual who professed to be a real
estate broker. She says the broker stole a brokerage's logo and business supplies to
make it appear that he was legitimate; however, he vanished when Sylvie called to ask
questions about her mortgage. When she reported the crook to the police, she then
discovered that others had filed complaints. Sadly, at that point, Sylvie's money was
gone.

 Never give an earnest money deposit to the seller.

 Make the deposit payable to a reputable third party such as a well known real
estate brokerage, legal firm, escrow company or title company.
 Verify that the third party will deposit the funds into a separately maintained
trust account.
 Obtain a receipt.
 It is not advisable to authorize a release of your earnest money (or a pass-
through) until your transaction closes.

Is Your Earnest Money Deposit Refundable Upon Cancellation?

First, read your contract. Laws vary from state to state. In California, standard C.A.R.
purchase contracts allow for the return of the earnest money deposit to the buyer
within a specified time period, by default 17 days, should the buyer elect to cancel the
transaction. If, at that point, the seller refused to return the deposit without cause, the
seller could end up paying a $1,000 civil penalty to the buyer.

Upon cancellation, the sellers and buyers are asked to sign mutual release instructions.
If an agreement cannot be reached, the party holding the earnest money deposit will
continue to hold it until an agreement is reached. If no agreement has been reached
after a few years, escrow companies then send the parties a certified letter asking for
mutual instructions. The letter says if nobody responds within a certain time period,
then escrow will return the money to the buyer. If the seller contests the action then,
after 3 years, escrow will send the money to the state of California, presumably to
help balance our budget deficit.

Case in Point

A buyer's $1,000 was deposited into escrow two years ago. Unknown to the seller or
real estate agent, a week before closing escrow, the buyer decided to buy another
property and entered escrow at a different title company. A few days before she was
scheduled to close on the first property, the buyer completed her final walk-
through and declared there were water stains on the ceiling. There was no evidence of
water stains on the ceiling. But that didn't stop the buyer from canceling the escrow.
The sellers believe the buyer has forfeited her deposit. The buyer believes it should be
returned. Two years later, the money is still sitting in escrow.

b)       Caveat Emptor

Caveat Emptor: 

What do you mean by Caveat Emptor? 

Ans: Section 16 of the Indian Sale of Goods Act begins with the enunciation of the
principle involved in the maxim caveat emptor. It states that subject to the
provisions of the Act and any other law for the time being in force, there is no
implied warranty or condition as to the quality of fitness for any particular purpose
of the goods supplied under the contract of sale. The principle of Caveat Emptor
(let the buyer beware) lays down that it is the duty of the buyer to satisfy himself
before purchasing the article, that the article which he buys, is the one he wants. 

the exceptions to the principle of Caveat Emptor. 

Ans: The two important exceptions to the principle are- 

a.Where the buyer- 

i)expressly or by implication makes known to the seller the particular purpose for
which the goods are required so as to show that the buyer relies on the sellers skill
or judgement; and 

ii)the goods are of a description which the seller supplies in the course of his
business (whether he himself manufactures them or not). 

c)   Unpaid seller

Who is an unpaid seller? What are his rights against goods?  

Ans: An unpaid seller is one who is not paid for the goods sold by him. Any seller
would be deemed to be an unpaid seller if: 

-The whole price is not paid or tendered. 

-.The credit period allowed has passed and the payment is due. 

-The negotiable instrument issued against payment has been dishonoured. 

-The buyer is declared insolvent. 

His rights against goods are: 

Rights when the property is passed to the buyer: 

i)Right of lien. 

ii)Right of stoppage in transit. 

iii)Right of resale. 
Rights when the property has not passed to the buyer  

i)Right of withholding delivery. 

ii)Right of stoppage in transit. 

What are the rights of an unpaid seller against the buyer?  

Ans: If the goods are delivered to the buyer, the unpaid seller has a right to sue the
buyer for recovery of price, including costs of suit, customary interest and
damages, if any. 

If the buyer takes the delivery of the goods from the seller, by issuing a cheque and
later the cheque gets bounced, the unpaid seller can sue the buyer under the
Negotiable Instruments Act, 1881. Such a buyer is liable for punishment with
imprisonment or a fine. 

What is sellers lien? 

Ans: Sellers lien refers to the sellers right to retain the possession of goods until
certain charges due in respect of them are paid. The unpaid seller of goods who is
in possession of them is entitled to retain possession of them until payment or
tender of the price in the following cases: 

Where the goods have been sold without any stipulation as to credit; 

Where the goods have been sold on credit but the term of credit has expired; 

Where the buyer becomes insolvent. 

. What is meant by stoppage in transit? 

Ans: Stoppage in transit is one of the rights of an unpaid seller. This right consists
of stopping the goods while they are in the possession of a carrier or lodged at any
place in the course of transmission to the buyer. The seller can resume the
possession of the goods and retain until the price is tendered or paid. 

Describe the rights of an unpaid seller to stop the goods in transit.  

Ans: They are: 

a)The buyer of goods must have become insolvent. 

b)The goods should be in possession of a middleman or some person intervening

between the vendor who has parted with the goods and a buyer who has not
received them. 

c)The goods must be in transit or in possession of a middleman for the purpose of

transit. 

d)The sellers right of stoppage in transit can be exercised as long as the goods are
in transit and not yet delivered to the buyer. 

e)The seller may retain the goods until price is tendered or paid. 

Q.6 Discuss the conditions and warranties under Sale of Goods Act

Ans: Condition Warranty 

a) A condition is a stipulation essential to the main purpose of the contract, the

breach of which gives a right to treat the contract as repudiated. 

A warranty is a stipulation collateral to the main purpose of the contract, the breach
of which gives rise to a claim for damages, but not a right to reject the goods and
treat the contract as repudiated. 

b) Condition is essential to the main purpose. 

b) Warranty is incidental or collateral to the main purpose. 

c) Breach of a condition may be treated as breach of warranty. 

c) Breach of warranty cannot be treated as breach of condition. 

Explain the difference between condition and warranty with an example. 

Ans: X sells food-stuff to Y. The contract between X and Y states that the food to
be sold should be fit for consumption and this is the essential term in the contract.
So, if it contains any poisonous substance, Y is entitled to reject the food-stuff and
to repudiate the contract This essential term is called a condition. 

On the other hand, if the contract stipulates that the food-stuff should be packed in
1 kilo box but the seller packs it in half-kilo box, only an auxiliary or minor term
of the contract is broken, Y may be able to claim compensation in respect of its
breach, but not avoid the contract. Such an auxiliary term is called warranty. 

When is condition treated as a warranty? 

Ans: In certain circumstances, a condition may be treated as a warranty: 

a)Election in the hands of the buyer-Where a seller failed to fulfill a condition in a

contract of sale; the buyer has a right to waive such condition or elect to treat the
breach of condition as a breach of warranty. It depends upon the consent of the
buyer, not the seller. 

b)If a contract of sale is not severable and the buyer has accepted the goods partly,
this is called part-performance. In such a case, it cannot be treated as a breach of
condition by the seller but it can be treated as a breach of warranty. 

However, if the parties have an express contract, the seller is liable for the breach
of condition and not for breach of warranty. 

c)Impossibility of performance: If the seller is unable to perform his contract due

to impossibility, then also a condition is treated as a warranty. 

Explain the various implied conditions and warranties governing the transaction of
sale of goods. 

Ans: The implied warranties in a sale are: 

a) Undertaking as to the title: In every contract of sale, there is- 

An implied condition on the part of the seller that- 

i)In the case of a sale, he has a right to sell the goods; 

ii)In the case of agreement to sell, he will have the right to sell the goods as the
time when the property is to pass. 

An implied warranty that the buyer shall have and enjoy quiet possession of the
goods. 
An implied warranty that the goods shall be free from any charge or encumbrance,
not known or declared to the buyer. 

Or State the implied conditions and warranties in the contract of sale.  

Ans: Implied conditions: 

a.Condition as to title. (Sec. 14) 

b.Sale by description. (Sec. 15) 

Sale by description: In a sale by description, there is an implied condition that the

goods shall correspond with the description. If such a sale is also by sample, the
goods must correspond to both description and sample. 

In a contract for the sale of goods by description- 

- the buyer does not see the goods physically, he trusts the description; 

- the goods supplied by the seller must correspond to the description; 

- the law implies a condition precedent that the goods which the seller has offered
to deliver or delivered, should answer to the description 

-an undertaking by the seller to supply the goods on description is an implied

condition, It is not an implied warranty. 

Sale by sample as well as description. 

Sale by sample. (Sec. 17). 

A sale by sample is a contract for sale where there is a term in the contract, express
or implied, to that effect that: 

ii)the bulk shall correspond with the sample in quality. 

iii)The buyer shall have a reasonable opportunity of comparing the bulk with the
sample. 

iv)The goods shall be free from any defect that would not be apparent on
examination of the sample. 

v)If the seller supplies the bulk that does not correspond with the sample in quality,
it is a clear breach of condition. 
Condition as to wholesomeness. 

Implied warranties: 

a.Quiet possession. [Sec. 14(b)]. 

b.Free from encumbrances. [Sec. 14(c)] . 

c.Sale of dangerous goods. 

Time of payment is not essence of contract but time of delivery of goods is, unless specified otherwise - Unless a
different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to
be of the essence of a contract of sale. Whether any other stipulation as to time is of the essence of the contract
or not depends on the terms of the contract. [section 11]. As a general rule, time of payment is not essence of
contract, unless there is specific different provision in Contract. In other words, time of payment specified is
‘warranty’. If payment is not made in time, the seller can claim damages but cannot repudiate the contract.

Caveat Emptor - The principle termed as ‘caveat emptor’ means ‘buyer be aware’. Generally, buyer is expected
to be careful while purchasing the goods and seller is not liable for any defects in goods sold by him. This
principle in basic form is embodied in section 16 that subject to provisions of Sale of Goods Act and any other
law, there is no implied condition or warranty  as to quality or fitness of goods for any particular purpose. As
per section 2(12), “Quality of goods” includes their state or condition.

Transfer of property as between seller and buyer - Transfer of general property is required in a sale. ‘Property’
means legal ownership. It is necessary to decide whether property in goods has transferred to buyer to determine
rights and liabilities of buyer and seller. Generally, risk accompanies property in goods i.e. when property in
goods passes, risk also passes. If property in goods has already passed on to buyer, seller cannot stop delivery of
goods even if in the meanwhile buyer has become insolvent. - - - Where there is a contract for the sale of
unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are
ascertained. [section 18].

Property passes when intended to pass - Where there is a contract for the sale of specific or ascertained goods
the property in them is transferred to the buyer at such time as the parties to the contract intend it to be
transferred. [section 19(1)].  For the purpose of ascertaining the intention of the parties regard shall be had to the
terms of the contract, the conduct of the parties and the circumstances of the case. [section 19(2)]. Unless a
different intention appears, the rules contained in sections 20 to 24 are rules for ascertaining the intention of the
parties as to the time at which the property in the goods is to pass to the buyer. [section 19(3)].

Specific goods in a deliverable state - Where there is an unconditional contract for the sale of specific goods in a
deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial
whether the time of payment of the price or the time of delivery of the goods, or both, is postponed. [section 20].

Auction sale - Auction sale is special mode of sale. The sale is made in open after making public
announcement. Buyers assemble and make offers on the spot. Person offering to pay highest price gets the
goods. Usually, auctioneer is appointed to conduct auction. Higher and higher bids are offered and sale is
complete when auctioneer accepts a bid.- - - In the case of a sale by auction— (1) where goods are put up for
sale in lots, each lot is prima facie deemed to be the subject of a separate contract of sale; (2) the sale is
complete when the auctioneer announces its completion by the fall of the hammer or in other customary manner;
and, until such announcement is made, any bidder may retract his bid; (3) a right to bid may be reserved
expressly by or on behalf of the seller and, where such right is expressly so reserved, but not otherwise, the
seller or any one person on his behalf may, subject to the provisions hereinafter contained, bid at the auction; 
(4) where the sale is not notified to be subject to a right to bid on behalf of the seller, it shall not be lawful for
the seller to bid himself or to employ any person to bid at such sale, or for the auctioneer knowingly to take any
bid from the seller or any such person; and any sale contravening this rule may be treated as fraudulent by the
buyer; (5) the sale may be notified to be subject to a reserved or upset price; (6) if the seller makes use of
pretended bidding to raise the price, the sale is voidable at the option of the buyer. [section 64].

Delivery of goods to buyer - The Act makes elaborate provisions regarding delivery of goods to buyer. It is the
duty of the seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms
of the contract of sale. [section 31]. Unless otherwise agreed, delivery of the goods and payment of the price are
concurrent conditions, that is to say, the seller shall be ready and willing to give possession of the goods to the
buyer in exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for
possession of the goods. [section 32]. - - Note that this is ‘unless otherwise agreed’, i.e. buyer and seller can
agree to different provisions in respect of payment and delivery.

Acceptance of goods by buyer - Contract of Sale is completed not by mere delivery of goods but by acceptance
of goods by buyer. ‘Acceptance’ does not mean mere receipt of goods. It means checking the goods to ascertain
whether they are as per contract. - - -  Where goods are delivered to the buyer which he has not previously
examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of
examining them for the purpose of ascertaining whether they are in conformity with the contract. [section
41(1)]. - - Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on
request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining
whether they are in conformity with the contract. [section 41(2)].

Buyer’s and Seller’s duties  - The Act casts various duties and grants certain rights on both buyer and seller.

Rights of unpaid seller against the goods - After goods are sold and property is transferred to buyer, the only
remedy with seller is to approach Court, if the buyer does not pay. Seller has no right to take forceful possession
of goods from buyer, once property in goods is transferred to him. However, the Act gives some rights to seller
if his dues are not paid.

Suits for breach of the contract - Unpaid seller can exercise his rights to the extent explained above. In
addition, seller can exercise following rights in case of breach of contract. Buyer has also rights in case of
breach of contract.

Measure for compensation and  damages – The Sale of Goods Act does not specify how to measure damages.
However, since the Act is complimentary to Contract Act, measure of compensation and damages will be as
provided in sections 73 and 74 of Contract Act.

Q.7 State with reasons whether following statements are true or false:

a)    No consideration----No contract

Consideration:-
Consideration for a particular promise exists where some right, interest, profit or benefit
accrues (or will accrue) to the promisor as a direct result of some forbearance, detriment, loss
or responsibility that has been given, suffered or undertaken by the promisee. The
consideration must be executor or executed, but not past. Consideration is executor.
Consideration can be anything of value (such as an item or service), which each party to a
legally-binding
contract must agree to exchange if the contract is to be valid. If only one party offers
consideration, the agreement is not legally a binding contract. In its
traditional form, consideration is expressed as the requirement that in order for parties to be
able to enforce a promise, they must have given something for it (quid pro quo): something
must be given or promised in exchange or return for the promise.
 contract:-
A contract is an exchange of promises between two or more parties to do or refrain from
doing an act which is enforceable in a court of law. It is where an unqualified
offer meets a qualified acceptance and the parties reach Consensus In Idem. The parties must
have the necessary capacity to contract and the contract must not be either trifling,
indeterminate, impossible or illegal.

Hence by watching both definitions you can understand that contract required benefit for both
parties. If there is no consideration for one party it means that party is not getting any benefit
so. If there is no benefit for both party it means why they will make contract. And if benefit is
only for one party then that is no contract because it is not full feeling contract first essential
of exchange of promises, goods, services or something worth full for both parties.

b)    Contract and agreement mean the same

1. A contract is a written or verbal agreement that is enforceable by law.  An

agreement is the same, however it is typically not enforced by the law.
2. A contract is a formal agreement which is legally binding, usually created for business
purposes, or to ensure the safety of one’s assets.  Agreements are informally made with
family and friends, they are similar to promises.
Contracts involve a universal acceptance of the terms and the stipulations are deemed
possible to attain by all parties.  Agreements have universal acceptance, however there is no
guarantee of attainment by parties and it can be changed at any time by either participant

c)    All agreements are contracts.

All contracts are agreement but all agreement are not contracts
Answer; A contract is a legally binding agreement or relationship that exists between two or
more parties to do or abstain from performing certain acts. A contract can also be defined as a
legally binding exchange of promises between two or more parties that the law will enforce.
For a contract to be formed an offer made must backed acceptance of which there must be
consideration. Both parties involved must intend to create legal relation on a lawful matter
which must be entered into freely and should be possible to perform.
An agreement is a form of cross reference between different parties, which may be written,
oral and lies upon the honor of the parties for its fulfillment rather than being in any way
enforceable.

d)    If there is no legal obligation, there is no contract.

According to section 2(h) of the Indian Contract Act: " An agreement enforceable by law is a
contract." A contract therefore, is an agreement the object of which is to create a legal
obligation i.e., a duty enforceable by law.
From the above definition, we find that a contract essentially consists of two elements: (1) An
agreement and (2) Legal obligation i.e., a duty enforceable by law. We shall now examine
these elements detail.

As stated above, an agreement to become a contract must give rise to a legal obligation i.e., a
duty enforceable by law. If an agreement is incapable of creating a duty enforceable by law.
It is not a contract.

Agreements of moral, religious or social nature e.g., a promise to lunch together at a friend's
house or to take a walk together are not contracts because they are not likely to create a duty
enforceable by law for the simple reason that the parties never intended that they should be
attended by legal consequences

e)    An agreement entered into by a minor can not be enforced by law

The parties to an agreement must be competent to contract. But the question that arises now
is that what parties are competent and what are not. The contracting parties must be of the age
of majority and of sound mind and must not be disqualified by any law to which they are
subject (sec.11). If any of the parties to the agreement suffers form minority, lunacy, idiocy,
drunkenness etc. The agreement is not enforceable at law, except in some special cases e.g.,
in the case of necessaries supplied to a minor or lunatic, the supplier of goods is entitled to be
reimbursed from their estate (sec 68).

f)     All contracts have to be in writing to become an enforceable contract.

. According to the Indian contract Act, a contract to be valid, must be in writing and
registered. For example, it requires that an agreement to pay a time barred debt must be in
writing and an agreement to make a gift for natural love and affection must be in writing and
registered to make the agreement enforceable by law which must be observed.

Q.8 Decide the following cases. Give the reasons.

A] Ramesh promises his wife to bring a beautiful sari if she sings a song. The wife obliges
and sings a song. But, Ramesh refuses to buy the sari for her. His wife Ruchi wants to sue her
husband for his failure. Decide.

Ans- Ruchi, wife of Ramesh cannot bring legal action against her husband Ramesh for failure
of performance. The agreement lacks the intention to create legal relationship. In the family
relationship of husband and wife, there is no legal relationship.

B] Srinivas  agrees to pay Rs.50,000/- to Mahesh if the later brings God before him. Mahesh
agrees to pay the same amount, in the event of his failure. This agreement is executed on a
stamped paper, with two witnesses. Mahesh has failed to perform. Srinivas plans to go to a
court of law for recovering the amount, executed on a stamp paper. Decide.

Answer: The agreement between Srinivas and Mahesh is not a valid contract. It is a void
agreement as per Section 56 of Indian Contract Act, 1872 as “An agreement to do an
impossible act in itself is void.” The agreement is void from the beginning as bringing God in
physical form is an impossible act

Q.9 Write Notes

A] Coercion

"Coercion" is the committing, or threatening to commit, any act forbidden by the Indian
Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice
of any person whatever, with the intention of causing any person to enter into an agreement.
(45 of 1860.)

Criminal Law, Contracts. Constraint; compulsion; force. It is positive or presumed.

Positive or direct coercion takes place when a man is by physical force compelled to do an
act contrary to his will; for example, when a man falls into the hands of the enemies of his
country and they compel him, by a just fear of death, to fight against it.

It is presumed where a person is legally under subjection to another and is induced in

consequence of such subjection to do an act contrary to his will. A married woman, for
example, is legally under the subjection of her husband, and if in his company she commit a
crime or offence, (except the offence of keeping a bawdy-house, in which case she is
considered by the law as a principal), she is presumed to act under this coercion.

As will is necessary to the commission of a crime or the making of a contract, a person

coerced into either has no will on the subject and is not responsible.

B] Undue Influence

(1) A contract is said to be induced by "under influence" where the relations subsisting
between the parties are such that one of the parties is in a position to dominate the will of the
other and uses that position to obtain an unfair advantage over the other. 
 
(2) In particular and without prejudice to the generally of the foregoing principle, a person is
deemed to be in a position to dominate the will of another -
 
(a) where he hold a real or apparent authority over the other, or where he stands in a fiduciary
relation to the other; or
 
(b) where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental or bodily distress.
 
(3) Where a person who is in a position to dominate the will of another, enters into a contract
with him, and the transaction appears, on the face of it or on the evidence adduced, to be
unconscionable, the burden of proving that such contract was not induced by undue influence
shall be upon the person in a position to dominate the will of the other.
 

C] Fraud

A fraud is an intentional or deliberate misrepresentation of facts. According to Indian

Contract Act, Fraud means and includes any of the following acts done with intention to
deceive or induce a person to enter into a contract: 

The suggestion that a fact is true when it is not so and the person making the suggestion is
ware of its falsehood; 
Active concealment of a fact by a person who has knowledge or belief of the fact; 
Promise made without any intention of performing it; 
Any other act fitted to deceive; 
Any such act or commission that the law declares as fraudulent. 

D] Misrepresentation

Misrepresentation refers to misstatement of a fact or material of a contract. It includes: 

a)Positive assertion of fact or information that is not true; 
b)Any breach of duty which gains an advantage to the person committing it; 
c)Causing a party to an agreement to make a mistake in the subject matter or substance of the
agreement. 

E] Mistake

Mistake is of two kinds- of fact or of law. 

a) Mistake of fact: There are two principles: 

i.Where both the parties to an agreement are under a mistake as to a matter of fact essential to
the agreement, the agreement is void. Mistake in this case, arises as to the identity of the
person or as to the subject matter of the contract. A mistake of fact may be either bilateral or
unilateral. A bilateral or mutual mistake as to an existing fact essential to the agreement. 
E.g. A agrees to sell to B a specific cargo of goods supposed to be on its way from England to
Mumbai. It turns out that before the day of the bargain, the ship conveying the cargo is cast
away and sinks. Neither party was aware of the facts. The agreement is void. 

ii.Where a contract is not voidable merely because it was by one of the parties to it being
under a mistake as to a matter of fact. In other words, mistake must be mutual and not
unilateral. Both the parties must be labouring under such a mistake. 
b) Mistake of law: This provides that a contract is not voidable because it was not caused by a
mistake as to any law in force in India. This is based on the maxim Ignorantia juris non
excusat. 

Distinguish between Mistake of law and mistake of fact. 

Mistake of law 
Mistake of fact 

1. A mistake of fact vitiates a contract 

1. Generally, a mistake of law does not vitiate a contract. 

2. Where there is mutual mistake as to an existing fact material to the agreement, the contract
is void. 
2. In most cases the contract is not voidable. 

Q.10 State with reasons whether following statements are true or false:

A] A company is a distinct person, with its own independent identity

On incorporation under law, a company becomes a separate legal entity as compared to

its members. The company is different and distinct from its members in law. It has its
own name and its own seal, its assets and liabilities are separate and distinct from those of
its members. It is capable of owning property, incurring debt, borrowing money, having a
bank account, employing people, entering into contracts and suing and being sued
separately. 
.

B] Common seal is the signature of the company

A company is a artificial person and does not have a physical presence. Therefore, it acts
through its Board of Directors for carrying out its activities and entering into various
agreements. Such contracts must be under the seal of the company. The common seal is
the official signature of the company. The name of the company must be engraved on the
common seal. Any document not bearing the seal of the company may not be accepted as
authentic and may not have any legal force. 

C] A person who assumes the task of promotion of the company is called

“Promoter”

Promotion refers to the entire process by which a company is brought into existence. It
starts with the conceptualization of the birth of a company and determination of the
purpose for which it is to be formed. The persons who conceive the company and invest
the initial funds are known as the promoters of the company. The promoters enter into
preliminary contracts with vendors and make arrangements for the preparation,
advertisement and the circulation of prospectus and placement of capital. However, a
 person who merely acts in his professional capacity on behalf of the promoter (eg lawyer,
CA, etc) for drawing up the agreement or other documents or prepares the figures on
behalf of the promoter and who is paid by the promoter is not a promoter.

A promoter of a Company is the person who takes preliminary steps for the purpose of
formation and incorporation of a Company. A promoter may be an individual,
association, partner or a company. 

D]A private company is allowed to raise funds from the public.

In terms of Section 3(1)(iii) of the Companies Act, 1956 and articles of association of the
Company, the characteristics of a Private Company are :- 
Restricts the right of members to transfer its shares 
Limits the number of its members to fifty. In determining this number of 50, employee-
members and ex-employee members are not to be considered. 
Prohibits an invitation to the public to subscribe to any shares in or the debentures of the
company 
Any invitation or acceptance of deposits from persons other than its members, directors or
relatives is hereby prohibited. 

E] The certificate of incorporation can be cancelled by the Registrar of Companies,

when the certificate is found irregular.

The certification of incorporation is conclusive evidence about registration and

compliance of all the legal requirements. Date of certificate of incorporation is date of
birth of a company.

Once a company is registered, the certificate of incorporation cannot be challenged,

though there may be irregularities prior to registration. A company obtains separate legal
existence only after it is registered under the Companies Act. By virtue of this legal
existence, the company comes into being as a separate person, distinct from the persons
who form it. The company becomes a body corporate, with perpetual succession.

Once company is registered, the only method to end it is through the process of winding
up. The certificate of incorporation cannot be cancelled by the Registrar of Companies,
even if irregular.

F] In the eyes of law, shareholders of the company are part owners.-false

A company is regarded as a legal entity in its own right and , as such , its members have
limited liability for its debts and obligations. The company is able to own property in its
own name and issue shares to raise capital. It is able to sue debtors and similarity be sued
by its creditors. besides, shareholders and directors cannot be considered as the agents or
trustees of a company. Finally, a fundamental characteristic of corporate separate
personality is that of perpetual succession, which results in a continuation of the
company’s existence regardless of its members.

Q.11 Define Company. Write the essential features of a company

In common usage, ‘Company’ means an association of persons associated for some common
purpose. The common object may be business, charity, research etc. The persons are united
for achieving a common objective, normally, for earning profits, which are shared by the
investors.
Definition of Company: Section 3 (1) (i) of the Companies Act, 1956 defines a company as:
“A company registered and formed under this Act or an existing company.”
The above definition does not give clear description about the company. The definition
provided by Haney gives a better view about the essential elements of a company. According
to Haney,
“A company is an incorporated association which is an artificial person created for by law,
having a separate entity, with a perpetual succession and a common seal.”
The characteristics of the company give a better picture about the essential elements
mentioned in the above definition. Let us discuss those characteristics that describe the
company, comprehensively.
1.3 CHARACTERISTICS OR ESSENTIAL FEATURES OF A COMPANY
1. Registration: A company is to be compulsorily registered under the Companies Act.
2. Artificial Person: A company is an artificial person. “Company is an artificial person,
invisible, intangible and existing only in the eyes of law.” It is created under the law, not
itself a human being. It is called a person as it is clothed with certain rights and obligations.
3. Separate Legal Entity: A company can enter into contracts with its directors, its
shareholders and outsiders. It functions through its board of directors. A company is a distinct
person, with its own independent identity.
4. Common Seal: Common seal is the signature of the company. As company is an artificial
person, it is not bestowed with the body of a human being. The company has a separate legal
existence through its common seal. The use of common seal is provided in the articles of
association of the company.
5. Separate Property: A company can open a bank account in its name. It can exercise the
entire powers incidental to the attainment of the objects of the company. A company can
enter into contracts, through its board of directors. Shareholders are not, in the eyes of the
law, part owners of the company.
6. Company to Sue and be Sued: A company can sue and be sued in its name. The company’s
right to sue arises as and when some loss is caused to the company. In case of breach of
performance by any third party, the company can sue the third party in its name.

Q.12 Discuss the case of Solomon Vs. Soloman and Co.Ltd.State the principle laid down
in the said case.

One Man Company: When a single person holds almost all the shares of the company, it is
called ‘One Man Company’. Such a company has a legal personality, if it complies with the
necessary requirements of registration (Solomon Vs A. Solomon & Co. Ltd.). Such
companies may be public or private companies. Usually, they are private companies.
Solomon Vs A. Solomon & Co. Ltd.: In Solomon Vs A. Solomon & Co. Ltd. (1897) AC
22, it has been held that in common law, a company is a ‘legal person or has a legal entity
separate from its members and is capable of surviving beyond the lives of its members.’
In this case, one Solomon was a shoe manufacturer. He incorporated a company named
Solomon and Co. Ltd. He took over the entire business of a running concern. Solomon and
theFormation and Incorporation of Companies seven subscribers to the memorandum were he
and his family members. Solomon and his two sons were the Directors of the Company. The
business of the company was transferred for £30,000. Solomon took 20,000 share of 1 £ each
and debentures worth 10,000 in consideration.
The Company went into liquidation, within a year. On winding up, the unsecured creditors
contended that the company was not having independent existence as Solomon was the
Managing Director of the company and the entire company was under his control. They
further contended that Solomon was holding majority of the shares and therefore, the
company was merely a sham. Their contention was that the limited firm was only a guise to
conceal the real identity of the persons who own. However, it was held that Solomon and Co.
Ltd. fulfilled all the requirements of the legislature. Further, it was held that the company
cannot be equated with the members comprising it. The company was not the agent of
Solomon. It was therefore, treated as a company, distinct and independent corporation. A
company has, therefore, a separate legal existence, and is altogether a different person even
from its directors and members.
Corporate Veil: On incorporation, a company assumes a separate personality of its own,
called the ‘Corporate veil’. On incorporation, the veil is drawn between the company and its
members. The advantages of the incorporation –separate entity – were allowed only to those
who make an honest use of the ‘company’.
Lifting Corporate Veil: There may be circumstances in which the privileges of ‘separate
entity, may be misused. In such cases, the court, may disregard the corporate veil. Ignoring
separate entity or overlooking corporate personality is known as the phenomenon of lifting
corporate veil’. Lifting corporate veil is an exception to the decision in Solomon’s case.
In the case of dishonest and fraudulent use of the facility of corporation, the law lifts the
corporate veil and identifies the persons who are behind the scene and responsible for the
perpetration of the fraud. (Life Insurance Corporation of India Vs. Escorts Ltd. (1986).
Overlooking the corporate personality or separate entity is known as “the phenomenon of
lifting the corporate veil.”

Conclusion
1. The question of whether the negative aspects of the decision in Salomon's case
outweigh the good ones is best left unanswered for it is far too broad. One is inclined
towards the view that the principle of separate legal entity established in Salomon's
case has been instrumental in the development of modern capitalism and the immense
social and economic wealth which it has generated. The House of Lords extended the
principle so far as to cover small private enterprises. This move has had several
 negative consequences over time. However, it is also true that these have been largely
neutralised by joint legislative and judicial action.
2. Indeed, "the legislature can forge a sledgehammer capable of cracking open the
corporate shell." And, even without statutory assistance, the courts have often been
ready to draw aside the veil and impose legal liability on members and directors
where to apply the Salomon principle strictly would lead to injustice, inconvenience
or damage to government finances.
3. Similarly, it should be pointed out that, following Salomon's case, all Australian
jurisdictions, in a desire to ameliorate legal facilities for small commercial enterprises,
introduced provisions for private companies into their corporate law. Experience since
Salomon's case demonstrated that there was no reason why the benefit of limited
liability should apply only to groups of business entrepreneurs. The Corporations Act
takes this to its logical conclusion and sanctions the registration of one-person
companies. In 1995, the First Corporate Law Simplification Act amended the
Corporations Act to permit a proprietary company to be set up with one or more
shareholders. Under another amendment, the minimum number of directors needed to
be designated in a proprietary company was cut from two to one. Moreover, the
Corporations Act states that any sort of company, not just a proprietary company, may
be established with only one member and may continue to exist with only one
member (section 114). It would appear then that the overall balance is positive and
that the decision of the House of Lords in Salomon v Salomon & Co Ltd was a good
decision.

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