Unit - I Mercantile and Commercial Law

Unit I
MERCANTILE AND COMMERCIAL LAW
THE INDIAN CONTRACT ACT 1872

1)Offer and acceptance
2)Intention to create legal relationship
There must be an intention among the parties that the agreement should be attached by
legal consequences and create legal obligations .
3) Lawful consideration
Consideration has been defined as the price paid by one party for the promise of the
other. The something given or obtained is the price for the promise and is called
‘consideration’
4)Capacities of parties
The parties to an agreement must be competent to contract , otherwise it cannot be
enforced by a court of law
In other words the following persons are not competent to contract
•A minor
•A person of unsound mind
•A person disqualified from contracting by any law to which he is subject .
5) Free consent
‘Consen’t means that the parties agreed upon the same thing in the same sense
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There is absence of ‘free consent’ , if the agreement is induced by
•Coercion (Section 15 )
•Undue influence (Section 16)
•Fraud (Section 17)
•Misrepresentation (Section 18) and
•Mistake (Section 20,21 and 22).
6) Lawful Object
The object for which the agreement has been entered into must not be fraudlent or
illegal or immoral or opposed to public policy or must not imply injury to the person or
property of another(Section23)
If the object is unlawful for one or the other reasons mentioned above the agreement is
void .
7)Writing and Registration

According to Indian Contract Act , a contract may be oral or in writing
In certain cases it lays down that the agreement will be valid if it is in writing and
Registered (Section 25)
8) Certainty:
Agreements , “The meaning of which is not certain or capable of being made certain ,
are void”
9)Possibility of performance
An Agreement to do an act impossible in itself is void.
For example, Mr. A agrees with B to discover treasure by magic. Such Agreements is
not enforceable.
10)Lawful Agreement
Basis of distinction Agreement Contract
Constituent An offer when accepted becomes A contract is entered into by an
agreement agreement and hence valid contracts are
enforceable
Creation of obligation An agreement may or may not create a A contract necessarily creates a legal
legal obligation contract
One in other Every agreement need not necessarily All contracts are necessarily
be a contract agreements
Binding Agreements are not concluded and Contract is concluded and binding on
binding contract the concerned parties
Enforceability The enforceability depends on the It is enforceable under the provision of

nature of the agreement law of the country
Scope The scope of the agreement is more The scope is limited as the legal
comprehensive than contract , as
agreement can be social agreement , agreements only can become contracts
legal agreement , unlawful agreement
etc
Nature Agreements can be lawful or unlawful Only lawful agreements becomes
contracts
CLASSIFICATION OF CONTRACT
1)On the basis of Enforceability
•Valid contract
•Void agreement
•Void able agreement
•Illegal contract
2) On the basis of Formalities

•Express Contract
•Implied Contract
•Quasi Contract
1)On the basis of Enforceability
•Valid contract
An agreement is a valid contract if it fullfills all the essential requirements given under
section sec10
•Void contract
A void contract, also known as a void agreement, is not actually a contract. A void
contract cannot be enforced by law.
An agreement to carry out an illegal act is an example of a void contract or void
agreement
•Void able Contract

A contract that has legal effect and force when it is made, but is liable to
be subsequently annulled or set aside by the courts through the process of rescission.
3) On the basis of performance

•Executed Contract
•Executory Contract
4)On the Basis of obligation

•Unilateral Contract
•Bilateral contract
On the basis of Formalities
•Express Contract
Express contract is one which is made by words spoken or written
• Implied Contract
An implied-in-fact contract is a contract agreed by non-verbal conduct, rather than by
explicit words
Eg (Doctor and patient non verbal contract)
•Quasi Contract
It is defined as an arrangement created and enforced by a court to prevent one party
from being unjustly enriched by another, in the absence of a valid contract between the
parties
Eg (A-patient , B-Stranger , C-Doctor)
Refer - http://www.buzzle.com/articles/quasi-contract.html
On the basis of performance

•Executed Contract
Where both parties have done their respective work
• Executory Contract
An executory contract is a contract which has not yet been fully performed
On the Basis of obligation

•Unilateral Contract
A contract in which only one party makes an express promise, or undertakes a
performance without first securing a reciprocal agreement from the other party.
• Bilateral contract
An agreement formed by an exchange of a promise in which the promise of one party is
consideration supporting the promise of the other party.
BREACH OF CONTRACT
Breach of contract is a legal cause of action in which a binding agreement or
bargained-for exchange is not honoured by one or more of the parties to the contract by
non-performance or interference with the other party's performance .
If the party does not fulfill his contractual promise, or has given information to the
other party that he will not perform his duty as mentioned in the contract or if by his
action and conduct he seems to be unable to perform the contract, he is said to breach
the contract
TYPES OF BREACH CONTRACT

1.Anticipatory Breach
(i) Expressly by words spoken or written

(ii) Implied by the conduct of the parties
2.Actual Breach
(i) On due date of performance

(ii) During the course of performance
2.Actual Breach
Actual breach of contract may take place in any of the following
(i) On due date of performance
If any party to a contract refuses or fails to perform his part of the contract at the time
fixed or performance , it is called an actual breach of contract on due date
performance.
(E.g.) X agreed to sell Y 10 tones of wheat at 8k per ton to be delivered in two equal
installments on 20th October and on 21st October . On 20th October , X refused to
deliver the goods .it is an actual breach of contract on due date of performance
(ii) During the course of performance
If any party performed a part of the contract then resfuses or fails to perform the
remaining part of the contract , it is called an actual breach of the contract on due
course of time
(E.g.) X agree to sell Y 10 tones of wheat at 8k in two equal installments on 20th
October and on 21st October . On 20th October , X delivered 5 tones and refused to
deliver remaining 5 tonnes .
REMEDIES
A remedy is an course of action available to an aggrieved
party for the enforcement of right under a contract
MODES OF REMEDIES
•Rescission of contract
•Suit upon Quantum Meruit
•Suit for specific performance
•Suit for injunction
•Suit for damages
RESCISSION OF CONTRACT
When a contract is broken by one party , the other party may treat the contract as
rescinded. In such a case , the other party absolve of all his obligation under the contract
, and is entitled to compensation for any damages that he might have suffered .
(E.g.) A promises B to supply 10 bags of cement on a certain day. B agrees to pay the
price after the receipt of the goods . A does not supply the goods .B is discharged from
liability to pay the price .
Suit upon ‘Quantum Meruit’

Quantum meruit is a Latin phrase meaning "what one has earned". In
the context of contract law, it means something along the lines of
"reasonable value of services".
SUIT FOR SPECIFIC PERFORMANCE
In certain cases of breach of a contract , damages are not an adequate remedy. The court
may , in such cases , direct the party in breach to carry out his promise according to the
terms of the contract
Some of the cases in which specific performance of a contract may , in the discretion of
the court , be enforced are as follows :
•When the act agreed to be done is such that compensation in money for its non-
performance is not an adequate relief .
•When there exist no standard for ascertain the actual damage caused by the non-
performance of the act agreed to be done
•When it is probable that the compensation in money cannot be got for the non-
performance of the act agreed to be done
SUIT FOR INJUNCTION

Suit for injunction means demanding courts stay order . Injunction means an order of
the court which prohibits the person to do a particular act . Where a party to a contract
does something which he promised not to do , the court may issue an order prohibiting
him from doing so.
(E.g.)- W agreed to sing at L’s theatre only during the contract period . In the contract
period ,W made contract with Z to sing at another theatre and refused to perform the
contract with L. It has held that W could be restrained by injunction from singing for Z.
SUIT FOR DAMAGES

Damages are the monetary compensation allowed to the injured party for the loss or
injury suffered by him as a result of breach of contract.
The damages is of various kinds
1.Ordinary damage
2.Special damage
3.Exemplary damage
4.Nominal damage
1.Ordinary damage
These are damages which actually arise in the usual course of things from the breach of
contract
(E.g.) A contracts to sell 50 quintals of farm wheat to B at Rs100per quintal , the price
to be paid at the time of delivery . The price of wheat rises to Rs200per quintal and A
refuses to sell the wheat . B can claim damages at the rate of Rs100 per quintal.
2.Special damage
Damages which may reasonably be supposed to have been in the contemplation of both
the parties at the time when they made the contract as the probable result of the breach
of it.
(E.g.)- A, a builder contracts to erect a house for B by the 1st of January, in order that
B may give possession of it at the time to C to whom B has contracted to let it. A is
informed about the contract between B and C . A builds the house so badly that before
1st January , it falls down and has to be rebuilt by B , who is in consequences, loses the
rent which he is suppose to receive from C and is obliged to make compensation to C
for the breach of contract. A must make compensation to B for the cost of rebuilding
the house , for the rent lost and for the compensation made to C .
The Sale of Goods Act, 1930
Contract of sale
Sec 4 (1) of the sale of goods act 1930 implies that, it is a contract whereby the seller transfer or agrees to
transfer the property in goods to the buyer for price.
Essentials of a contract of Sale
1. Two parties (Buyer and Seller)
2. Goods (only movable property is included in this act)
3. Price (consideration is money)
4. Transfer of general property (Own goods)
5. Essentials elements of a valid contract
Example for Sale:
A sells his Yamaha Motor Bicycle to B for Rs.10, 000 Ownership has been transferred from A to B.
What is called as goods?
Goods-Every kind of moveable property other than actionable claims & money
• Money itself (legal tender) cannot be the subject for sale

• Foreign Currency may however be bought or sold
• Actionable Claim:
Things which a person cannot make use of, but which can be claimed by him by means of legal action of a debt.
Classification / Kinds of Goods
1. Existing Goods
Owned or possessed by the seller at the time of sale.
(a) Specific goods (identified and agreed upon at the time of contract, dog, horse, or watch)
(b) Unascertained goods (not identified and agreed upon at the time of contract of sale)
(c) Ascertained goods (these goods become ascertained subsequent to the formation of the contract)
2. Future Goods
 not possessed by the seller at the time of sale.
 which are to be manufactured or produced by the seller after making the contract of sale.
 This is because the ownership of a thing cannot be transferred before that thing comes into existence.
3. Contingent Goods
Acquisition of which by the seller depends on an uncertain contingency is called as contingent goods.
Differences between sale and

agreement to sell
sale agreement to sell
Executed Contract Executory Contract
Existing and specific Future and contingent
goods goods
If the goods are the loss falls on the
destroyed, the loss falls Seller
on the buyer
In breach of contract – seller can sue only for
the seller can sue for the the damages and not
price the price
agreement to sell
In case of Re-Sell, the seller The seller can re-sell the
cannot re-sell the goods goods
Insolvency of buyer – Insolvency of buyer –

If the buyer has not paid for The seller is not bound
the goods, and if the seller to part with the goods
has no lien over the goods,
the seller must return the
until he is paid for it.
goods to the Official receiver
or Assignee and the seller
can claim a rate able
dividend for the price of the
goods.

agreement to sell

Insolvency of seller – Insolvency of seller –
The buyer is entitled The buyer can claim a
to receive the goods rate able dividend for the
price of the goods from
from the Official receiver
the seller, and not the
or Assignee.
goods, because the
property has not yet
passed to him.
Differences between sale and Hire
Purchase
S.No Sale Hire purchase
1. Executed Contract Executory Contract
2. Ownership is Ownership is
transferred from the transferred from the
seller to the buyer seller to the Hire
as soon as the purchaser
contract is entered
into.
3. The position of the The position of the hire
buyer that of a purchaser is that of a
owner. bailee.
S.No Sale Hire purchase

4. Governed by the Governed by the Hire -
Sale of Goods Act, Purchase Act, 1972
1930
5. The buyer cannot The Hire –Purchaser
terminate the can terminate the
contract and he is contract at any stage
bound to pay the and cannot be forced to
price of the goods. pay further installments.
6. If the payment is The installments paid by
made through the Hire –Purchaser are
installments, the regarded as hire
amount is reduced charges and not as
to the price of the payment towards the
goods. price of the goods.
Document of title of Goods
 A Document of title of Goods is one which enables its possessor to deal with the goods described in it as if he were
the owner.
 It is used in the ordinary course of business as proof of the possession or control of goods.
1. Bill of lading-
 It is the document which acknowledges receipt of goods on board a ship

 and is signed by the captain of the ship or his duly authorized representative.
2. Dock warrant
 It is a document issued by a dock owner, giving details of the goods and certifying that the goods are
held to the order of the person named in it or endorsee.
 It authorizes the person holding it to receive possession of the goods.
.
3. Warehouse keeper’s Certificate/ Wharfinger’s certificate
 It is a document issued by a warehouse-keeper or a wharfinger stating that the goods specified in the
document are in his warehouse or in his wharf
4. Railway or lorry receipt
 It is a document issued by a railway for acknowledging the receipt of goods.

 It is to be presented by the holder or consignee at the destination to take delivery of the goods.
5. Warrant/Order for the delivery of goods
 It is a document containing an order by the owner of the goods to the holder of the goods on his behalf,
 And asking him to deliver the goods to the person named in the document
Transfer of property
 Transfer of property in goods from the seller to the buyer is the main object of a contract of sale.
 The term property in goods must be distinguished from possession of goods.
 Property in goods means the ownership of goods, whereas possession of goods refers to the custody or control of
goods.
 An article may belong to A, although it may not be in his possession. B may be in possession of that article though he is
not its owner
 It is important to know the precise moment of time at which the property in goods passes from the seller to the buyer
for the following reasons:
i) Risk follows ownership- Unless otherwise agreed, risk follows ownership whether delivery has been made or
not and whether price has been made or not.
ii) Action against third parties- When the goods are in any way damaged or destroyed by the action of third
parties, it is only the owner of the goods who can take action against them.
iii) Insolvency of the seller or the buyer- In the event of insolvency of either the seller or the buyer, the question
whether the official receiver or assignee can take over the goods or not depends on whether the property in the goods has
passed from the seller to the buyer.
iv) Suit for price- The seller can sue for the price, unless otherwise agreed only if the goods have become the
property of the buyer.
Passing of property
Passing of property
Passing of property
Where the
Intention of the Intention of the
Goods must be
parties Parties cannot be
ascertained
ascertained
• Passing of property
The primary rules for ascertaining when the property in goods passes to the buyer are as follows,
1. Goods must be ascertained

No property in goods is transferred to the buyer unless and until the goods are ascertained.
2. Intention of the parties
The property in goods is transferred to the buyer at the time the parties intent it to pass.
These rules are as follows, When …
Where the
Intention of the
Parties cannot be
ascertained
Specific Unascertained Goods sent on

goods Goods approval or
‘on sale or return’
Passing of property
1. Specific Goods –The rules relating to transfer of property in specific goods are as follows:
i) Passing of property at the time of contract- Where there is an unconditional contract for the sale of specific goods in a
deliverable state, the property in the goods for the sale of specific goods in a deliverable state, the property in the goods passes
to the buyer when the contract is made.
ii) Passing of property delayed beyond the date of the contract-
a) Goods not in a deliverable state. - Where there is a contract for the sale of specific goods not in a deliverable
state. (Timber from Oak trees)
b) When the price of goods is to be ascertained by weighing. -Where there is a contract for the sale of specific
goods in a deliverable state, but the seller is bound to weigh, measure, test or do some other act or thing with reference to the
goods for the purpose of ascertaining the price, the property does not pass until such act or thing is done and the buyer has
notice thereof.
2. Unascertained Goods
 the goods does not pass to the buyer until the goods are ascertained.
 There are two pre conditions for the transfer of property from the seller to the buyer in case of
Unascertained Goods,
i. ascertainment of goods – identified and set apart
ii. Appropriation to the contract – involves selection of goods with the intention of using them in performance of
the contract and with the mutual consent of the seller and the buyer.
3. Goods sent on approval or ‘on sale or return’
when the goods are delivered to the buyer on approval or ‘on sale or return’ or other similar terms, the property
therein passes to the buyer,
i. when he signifies his approval or acceptance to the seller
ii. When he does any other act adopting the transaction
iii. If he does not signify his approval or acceptance to the seller but retain the goods without giving notice of
rejection
Contracts involving sea routes
There are certain special clauses and conditions for the transfer of property through the sea and these are
follows;
1. F.A.S. contracts- ‘Free alongside ship’.
The property in goods sold under an F.A.S. contract passes from the seller to the buyer when the goods are delivered alongside
the ship.
- The sold goods will be named by the buyer under a contract of carriage.
Seller’s duties under F.A.S are as follows:
i) To deliver the goods by alongside the ship
ii) To notify the buyer immediately that the goods have been delivered alongside the ship
Buyer’s duties
iii) To pay all charges and to bear all risks from the goods delivered alongside the ship.
2. F.O.B. contracts- ‘Free on board’. Seller sends the goods on a ship at his selling point at his own expense
under a contract by sea, to be made by or on behalf of the buyer, for the purpose of transmission to the buyer.
• Seller’s duties under F.O.B are

i) To deliver the goods on board the ship, the name of the buyer will be documented. When once the goods are put on
board the ship, they are at the risk of the buyer.
ii) To give notice of the shipment to the buyer so as to enable him to protest himself by insurance against loss during the sea
transit.
• Buyer’s duties under F.O.B-
i) To arrange for the contract of affreightment
ii) To name the ship to which the goods are to be delivered or to authorize the seller to select the ship
3. C.I.F. contracts
It is a contract performed by the delivery of documents representing the goods to the buyer, through a bank.
The seller continues to be the owner of the goods until the buyer pays for the goods and gets the document.
Buyer’s duty
i. To make out an invoice of the goods sold
Seller’s duty
i. To pay all customs and import duties
4. Ex-Ship contracts
Here, the property in the goods does not pass to the buyer until the goods are actually delivered to him.
Conditions and Warranties
*A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a
warranty
Condition:
*A condition is a stipulation which is essential to the main purpose of the contract. It goes to the root of the
contract.
*Its non fulfillment upsets the very basis of the contract.
*If there is a breach the aggrieved can treat the contract as repudiated.
• Warranty:
*A warranty is a stipulation which is collateral to the main purpose of the contract.
*It is not of such vital importance as a condition.
*If there is a breach of contract the aggrieved party can only claim damages and it has no right to treat contract
as repudiated.
Difference between a condition and

warranty
SL. CONDITION WARRANTY
NO.
1 A condition is a A warranty is a stipulation

stipulation (in a contract) which is only collateral or
which is essential to the subsidiary to the main
main purpose of the purpose of the contract
contract
2 A breach of condition A breach of warranty

gives the aggrieved party gives only the right to sue
a right to sue for for damages. The
damages as well as the contract cannot be
right to repudiate the repudiated
contract
Difference between a condition and

warranty
SL. CONDITION WARRANTY
NO.
3. A breach of condition A breach of warranty

may be treated as a a cannot be treated as a a
breach of warranty. This breach of Condition.
would happen where the
aggrieved party is
contented with damages
only.
Contract of guarantee
A contract to perform the promise or discharge the liability of a third person in case of his default.
• The person who gives the guarantee is called the ‘Surety’
• The person for whom the guarantee is given is called as ‘principal debtor’
• The person to whom the guarantee is given is called the as “creditor”

• Two contacts –
• Principal contract between the principal debtor and creditor
• Secondary contract between the creditor and the surety.
• Example:
When A requests B to lend Rs.10, 000 to C, that C will repay the amount within the agreed time and that a C failing to do so, A
himself will pay to B, in this case there is a contract of guarantee.
Express and implied conditions and warranties
• In a contract of sale of goods, conditions and warranties may be express or implied.

• Express conditions and warranties are those, which are expressly provided in the contract.
• Implied conditions and warranties are those, which the law implies into the contract unless the parties stipulate to the
contrary.
Implied conditions
1. Condition as to title
In a contract of sale, unless the circumstances of the contract are such as to show a different intention, there is
an implied condition on the seller that:
a) In the case of a sale, he has a right to sell the goods, and
b) in the case of an agreement to sell, he will have a right to sell the goods at the time when the property is to pass
• Example; R bought a car from D and used it for four months. D had no title to the car and consequently R had to hand it
over to the true owner.
• Held: R could recover the price paid. [Rowland v. Divail, (1923) 2 K.B. 500]
2. Sale by description
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.
• Example; A ship was contracted to be sold as a “copper fastened vessel” to be taken with all faults, without any
allowance for any defects whatsoever. The ship turned out to be “partially copper-fastened”.
• Held: The buyer was entitled to reject [Sheperd v. Kain, (1821) 5 B & add.240
3. In certain cases, conditions as to fitness or quality
Normally, in a contract of sale there is no implied condition as to quality or fitness of the goods for a particular
purpose.
The buyer must examine the goods thoroughly before he buys them in order to satisfy himself that the goods
will be suitable for the purpose for which he is buying them.
4. Goods to be of merchantable quality
Where goods are bought by description from a seller who deals in goods of that description, there is an implied
condition that the goods are of merchantable quality.
This means goods should be such as are commercially saleable under the description by which they are known in
the market at their full value.
• Example: A manufacturer supplied 600 horns under a contract. The horns were found to be dented, scratched and
otherwise and therefore the seller’s suit for price was dismissed {Jackson v. Rotax Motor & Cycle Co. (1910) @ k.B.397}
5. Condition implied by custom
An implied condition as to quality or fitness for a particular purpose may be annexed by the usage of trade.
• Example: A bought a set of false teeth from a dentist. The set did not fit into A’s mouth.
• Held- He could reject the set as the purpose for which anybody would buy it was implicitly known to the seller, i.e.,
dentist {Dr.Baretto v.T.R.Price, A.I.R. (1939) Nag. 19}
6. In case of sale by sample
(a) Bulk to correspond with sample
(b) Buyer to have reasonable opportunity to compare the bulk with sample
(c) Goods to be of merchantable quality
(The goods should be free from any defect)
7. Conditions as to Wholesomeness
The goods shall be Wholesome.
Example: F bought milk from A. The milk contained some germs of typhoid fever. F’s wife took the milk and got infection as a
result of which she died.
Held : F could recover damages.
Implied warranties
• The implied warranties in a contract of sale are as follows:
1. Warranty of quite possession

In a contract of sale; unless there is a contrary intention, there is an implied warranty that the buyer shall have
and enjoy quiet possession of the goods.
If the buyer is in any way disturbed in the enjoyment of the goods in consequence of the seller’s defective title
to sell, he can claim damages from the seller.
2. Warranty of freedom from encumbrances
The goods should not be subject to any charge or right in favor of any third party. He shall have right to claim
damages for breach of this warranty.
3. Warranty as to quality or fitness by usage of trade
4. Warranty to disclose dangerous nature of goods , the seller must warn the buyer of the probable danger, otherwise he will
be liable for damages.
CAVEAT EMPTOR
• It means ‘let the buyer beware’.

- The buyer must examine the goods thoroughly
- He cannot blame anybody excepting himself.
• Exceptions
i. Fitness for buyer’s purpose
ii. Sale under a patent or trade name
iii. Merchantable Quality (When the goods are bought by description)
iv. Usage of Trade
v. Consent by fraud
Performance of (sales) contracts
• A contract of sale always involves reciprocal promises, the seller promising to deliver the goods and the buyer promising
to accept and pay for them.
• In the absence of a contract to the contrary they are to be performed simultaneously and each party should be ready
and willing to perform his promise before he can call upon the other to perform his promise.
Delivery of Goods
• Delivery means voluntary transfer of possession of goods from one person to another.
• Delivery of goods sold may be made by doing anything, which one of the parties agrees shall be treated as delivery or
which has the effect of putting the goods in the possession of the buyer.
• Delivery of the goods may be

Actual,
Symbolic,
or constructive. This is explained as follows:
1. Actual delivery
Where the goods are handed over by the seller to the buyer or his duly authorized agent, the delivery is said to
be actual.
Delivery of goods may also be made by doing anything which has the effect of putting the goods in the
possession of the buyer.
2. Symbolic delivery
Where the goods are ponderous or bulky and incapable of actual delivery, i.e., haystack in a meadow, the
delivery may be symbolic. Handing over of the key of a warehouse to the buyer is symbolic delivery of the goods to the
buyer and is as effective as actual delivery, even though there is no change in the possession of the goods.
3. Constructive delivery
Where a third person who is in possession of the goods of the seller at the time of the sale acknowledges to the
buyer that he holds the goods on his behalf, there take place a delivery by attainment or constructive delivery.
Rules as to delivery of goods
a) Mode of delivery
(may be actual, constructive or symbolic)
b) Delivery and payment – Concurrent conditions (according to the terms of the contract or simultaneous)
c) Effect of part delivery
(has the same effect of the delivery of the whole)
d) Buyer to apply for delivery
(apart from express contract, the buyer has to apply for delivery)
e) Place of delivery
(in case of special agreement where the goods are to be delivered at that place, it must be on any working day
during business hours)
f) Time of delivery
(the seller is bound to send them within a reasonable time, but if the contract uses any words like “directly” or
“without loss of time” quick and immediate delivery is contemplated)
i) Delivery of wrong quantity

 Delivery of goods less than contracted for
(where the seller delivers to the buyer less than the goods contracted for, the buyer may reject the goods, if he
accepts it, he has to pay for them at a contract rate.)
 Delivery of goods in excess of the quantity contracted for
 Delivery of goods contracted for mixed with other goods

(goods with different description)
 Installment deliveries
(unless it is agreed upon, the seller is not entitled to deliver the goods in installment)
j) Delivery to a carrier or wharfinger
Acceptance of delivery
• Receipt of goods by the buyer does not necessarily result in acceptance of goods by him under, and in performance of
the contract of sale.
• Acceptance is something mere receipt or taking possession of the goods by the buyer. It means the final assent by the
buyer that he has received the goods under, and in performance of, the contract of sale.
• If he wrongfully refuses to accept the goods under the contract, he is liable for damages.
The buyer is deemed to have accepted the goods-
a) When he intimates to the seller that he has accepted the goods
b) When the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership
of the seller.
 Re-sells the goods

 Uses the goods in a manner proper only for the owner
 Makes some alteration in the goods
c. When after the lapse of a reasonable time, he retains the goods without intimation to the seller that he has rejected
them
Rights of the Buyer
• Rights of the buyer- are as follows-
a) Right to have delivery as per contract
b) Right to reject the goods
c) Right to repudiate
d) Right to notice of insurance
e) Right to examine
f) Rights against the seller for breach of contract
 Suit for damages

 Suit for price
 Suit for specific performance
 Suit for breach of warranty
 Repudiation of contract before due date
 Suit for interest
Duties of the Buyer
a)Duty to accept the goods and pay for them in exchange for possession
b) Duty to apply for delivery
c) Duty to demand delivery at a reasonable hour

d) Duty to accept installment delivery and pay for it
e) Duty to take risk of deterioration in the course of transit
f) Duty to intimate the seller where he rejects the goods
g) Duty to take delivery
h) Duty to pay price
i) Duty to pay damages for non-acceptance
Who is an unpaid seller?
A seller of goods is deemed to be an unpaid seller when:
1. The whole of the price has not been paid or tendered
2. A bill of exchange or other negotiable instrument has been received as a conditional payment and the
condition on which it was received has not been fulfilled by the reason of dishonor of the instrument or other wise.
The following conditions must be fulfilled before a seller of goods can be deemed to be an unpaid seller:
1. He must be unpaid and the price is due.
2. He must have an immediate right of action for the price
3. A bill of exchange or other negotiable instrument was received but the same has been dishonored.
Rights of an unpaid seller
Rights of an unpaid seller
Against the goods Against the buyer personally
Where the property Where the property

in the goods in the goods 1. Suit for Price
has passed has not passed 2. Suit for damages
3. Repudiation of
1. Lien 1. Withholding Contract
2. Stoppage in transit Delivery 4. Suit for interest
3. Re-Sale 2. Stoppage
in transit
Rights of an unpaid seller against the goods
• Where the property in the goods has passed to the buyer, an unpaid seller has the following rights against the goods.
1. Right to lien
A lien is a right to retain possession of goods until payment of the price. I
it is available to the unpaid seller of the goods, who is in possession of them where-
a) The goods have been sold without any stipulation as to credit
b) The goods have been sold on credit, but the term of credit has expired
c) The buyer becomes insolvent
2. Right of stoppage in transit
The right of stoppage in transit is a right of stopping the goods in transit after the unpaid seller has parted with
the possession of the goods.
He has the further right of resuming possession of the goods as long as they are in the course of transit, and
retaining possession until payments or tender of the price.
It is available to the unpaid seller-
• a) When the buyer becomes insolvent

• b) When the goods are in transit
3. Right of resale
The unpaid seller can resell the goods
a) Where the goods are of a perishable nature
a) Where he gives notice to the buyer of his intention to re-sell the goods and the buyer does not within a reasonable time
pay or tender the price.
Remedies for breach of contract of sale
1. Buyer suits:
a) Suit for damages for non-delivery of the goods
b) Suit for breach of warranty
C) Suit for damages for repudiation of contract by the seller before due date
d) Suit for specific performance
e) Suit for interest
2. Seller’s suits
a) Suit for price
b) Suit for damages for non-acceptance of the goods
C) Suit for damages for repudiation of contract by the buyer before due date
d) Suit for interest
Auction Sales
1. It is a public sale where, different intending buyers try to outbid each other.
2. The goods are sold to the highest bidder.
3. The auctioneer who conducts the auction is an agent of the seller.
Rules of Auction Sales
1. Goods put up for sale in lots

When the goods are put up for sale in lots, each lot is a prima facie deemed to be subject of a separate contract
of sale
2. Completion of sale
the sale is complete when the auctioneer announces its completion by the fall of the hammer or in some other
customary manner like “one, two, three” or “going, going, going”.
Until such announcement any bidder may retract his bid.
3. Right of Seller to bid
A right to bid may be expressed by or on behalf of the seller.
Where such right is expressly reserved the seller or any one person on his behalf may bid at the auction.
Secret employment of even one puffer is fraudulent unless a right to bid is expressly reserved.
4. Sale not notify subject to a right to bid
Where a sale is not notify to be the subject to a right to bid on behalf of the seller, it is not lawful,
i. for the seller to bid himself or to employ any person to bid at sale
ii. For the auctioneer knowingly to take any bid from the seller or any such person
Any sale contravening this rule may be treated as fraudulent by the buyer.
5. Reserve price
The sale may be notified to be subject to a reserve or upset price.
It is a price below which the auctioneer will not sell
6. Use of pretended bidding
If the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer.
7. Knock out or agreement not to bid against each other
Where a group of person form a combination to prevent competition between themselves at an auction and
arrange that only one of them will bid and that they will dispose of anything so obtained privately among themselves,
such a combination is called a knockout and is not illegal.
Damping
• It is an illicit act dissuading the intending purchaser from bidding

i. By pointing out defects in the goods or
ii. By doing some other act so that the intending purchaser is not in a position to have proper estimate of the
price of the goods or
iii. By scaring the intending purchasers away by some other device.
Implied warranties in an auction scale
• When an auctioneer sells goods ,he impliedly undertakes the following obligations:
i. He warrants that he has authority to sell
ii. He also warrants that he does not know of any defect in the title of his principle.
iii. He undertakes to give possession of the goods against the price paid to him
iv. He guarantees the quite possession of the goods by the purchaser.
Indemnity and Guarantee
1. Contract of Indemnity
A Contract by which one party promises to save the other from loss caused to him by the conduct of the
promisor himself or by the conduct of any other person, is called a contract of indemnity.
 The person who promises to make good the loss is called the indemnifier (promisor)
 The person whose loss is to be made good is called the Indemnified or indemnity-holder (promisee)
 Example: A and B claim certain goods from a railway company as rival owners. A takes delivery of the goods by
agreeing to compensate the railway company against loss in case B turns out to be the true owner.
 This is a contract of indemnity between the A and the railway company.
Contract of guarantee
A contract to perform the promise or discharge the liability of a third person in case of his default.
• The person who gives the guarantee is called the ‘Surety’

• The person for whom the guarantee is given is called as ‘principal debtor’
• The person to whom the guarantee is given is called the as “creditor”
• Example:
when A requests B to lend Rs.10, 000 to C, that C will repay the amount within the agreed time and that a C failing to do so, A
himself will pay to B, in this case there is a contract of guarantee.
Distinction between a contract of indemnity and a contract of guarantee
contract of indemnity contract of guarantee
1. There are two parties to the There are three parties to the contract
contract, i.e., the indemnifier i.e., the creditor, the principal debtor and
(promisor) and the indemnified the surety
(promisee)
2 The liability of the indemnifier to The liability of the surety to the creditor
the indemnified is primary and is collateral or secondary, the primary
independent liability being that of the principal debtor
3 There is only one contract in the In a contract of guarantee there are

case of a contract of indemnity i.e., three contracts : one between the
between the indemnifier and the principal debtor and the creditor , the
indemnified. second between the creditor and the
surety and the third between the surety
and the principal debtor
4 It is not necessary for the It is necessary that the surety should give
indemnifier to act at the request of the guarantee at the request of the
the indemnified debtor
5 The liability of the indemnifier There is usually an existing debt or duty,

arises only on the happening of a the performance of which is guaranteed
contingency. by the surety.
6 An indemnifier cannot sue a third A Surety, on discharging the debt due by

party for loss in his own name. He the principal debtor, steps into the shoes
can do so only if there is an of the creditor. He can proceed against
assignment in his favor the principal debtor in his own right
• Discharge of Surety
Discharge of Surety
By By the Conduct By invalidation

Revocation Of the Creditor of the contract
1.Guarantee obtained by
1. Variance in terms Misrepresentation
of contract 2. Guarantee obtained
1. Revocation by
2. Release of discharge By Concealment (cover up)
Surety
Of principal debtor 3.Failure of co-surety
2. Death of Surety
3. Compounding by creditor to join a surety
3. Novation
4. Creditor’s act or omission 4.Failure of consideration
impairing surety’s eventual between the creditor and
Remedy with principal the principal debtor
debtor
5. Loss of security
Contract of Bailment
• The delivery of goods by one to another person for same purpose, upon a contract that they shall, when the purpose is
accomplished, be returned of otherwise disposed of according to the directions of the persons delivering then.
• Person who delivers the goods is called as bailor,
• person to whom the goods are delivered is called as bailee.
• Example
• A lends a book to B to be returned after the examination.
• There is a contract of bailment between A and B.
Duties of Bailor:
• To disclose faults in the goods

• To bear extraordinary expenses of bailment
• To indemnify bailee for loss in case of premature termination of gratuitous bailment
• To receive back the goods
Duties of Bailee:
• To take care of the goods bailed

• Not to make unauthorized use of goods
• To return any accretion to the goods bailed
Termination of Bailment:
• On expiry of stipulated period

• On accomplishment of the specified purpose
• Where bailee does any act inconsistent with the conditions of bailment
• A gratuitous bailment may be terminated by any time
Finder of Goods
A person who finds goods belonging to another and takes them into his custody is subject to the same
responsibility as a Bailee.
Rights of Finder of Lost Goods:
1. Right of Lien
2. Right to sue for Reward
3. Right of Sale
– If the owner cannot with reasonable diligence be found or
– if he refuses upon demand to pay the lawful charges of the finder, the finder can sell it
– When the thing is in danger of perishing
Obligations of finder of goods
1. He must take reasonable care of the goods

2. He must not use the goods for his own purpose
3. He must not mix the goods with his own goods
4. He must try to find the true owner
Negotiable Instruments Act, 1881
• Negotiable
Means transferable from one person to another in return for consideration
• Instrument
Means Any written document by which a right is created in favor of some person
1. Negotiable Instruments
It is a document which entitles a person to a some of money and which is transferable from one
person to another by mere delivery or by indorsement and delivery.
• The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881,
• Which deals with promissory notes, bill of exchange and cheques and also hundis (bill of exchange in
vernacular language)
2. Types of Negotiable Instrument
• An instrument may be negotiable either by (1) Instruments by Statute or
• (2) Instruments by custom or usage
• By Statute - Promissory note, bill of exchange, Cheque
• By Usage - Bank notes, Bank drafts, share warrants, bearer debentures, dividend warrants, scripts and treasury
bills
3. Features of Negotiable instruments

(1) Freely transferable
The property in the negotiable instruments passes from one person to another by delivery.
2. Title of holder free from all debts
Holder in due course acquires a goods title not withstanding any defect in a previous holder title.
A holder in due course is one who receives the instrument for value and without any notice as to the
defect in the titles of the transferor.
3. Recovery
The holder in due course can sue upon a negotiable instrument in his own name for the recovery of the
amount.
Further he not give notice of transfer to the party liable on the instrument to pay.
4. Presumptions (assumptions)
(i) Consideration (every negotiable instrument bearing a date is presumed to have been made for
consideration)
(ii) Date (every negotiable instrument was made or drawn on the date it bears)
(iii) Time of Acceptance (When the bill of exchange has been accepted, it is presumed that it was accepted
within a reasonable time of its date and before its maturity)
(iv) Time of Transfer (every transfer of a negotiable instrument is presumed to have been mace before its
maturity)
(v) Order of Indorsements

(The indorsements appearing upon a negotiable instrument are presumed to have been made in the
order in which they appear upon)
(vi) Stamp
(When an instrument has been lost, it is presumed that it was duly stamped)
(vii) Holder presumed to be a holder in due course
(every holder of a negotiable instrument is presumed to be a holder in due course)
(viii) Proof of Protest

( in a suit upon an instrument which has been dishonored, thee court, on proof of the protest,
presumes the fact of dishonor, until such fact is disproved)
4. Promissory Notes
# An instrument in writing (not being a bank note of 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.
• Example of Promissory Notes
A signs an instrument in the following terms,
(a) I promise to pay “B” or order Rs. 500
(b) I acknowledge myself to be indebted to B for Rs. 1000 to be paid on demand for value received.
The person who makes the promissory note and promises to pay is called the maker.
The person to whom the payment is to be made is called the payee.
• Specimen of promissory note
Rs. 1,000 Delhi, February 25, 2010
Three months after date I promise to pay Arun or order the sum of
one thousand rupees, for value received
To, Stamp
Arun
25, Ashok Vihar Sd/- Ram
Delhi-110 052
5. Essential Characteristics of a Promissory Note

(1) Writing:
Should be in writing
Mere verbal engagement to pay is not enough
(2) Promise to pay:
The receipt should be coupled with a promise to pay to become a promissory note
Example:
“We have received a sum of Rs. 9000 from Shri R.R. Sharma. This amount will be repaid on demand. We have
received the amount in cash.”
3) Definite and Unconditional:
if it is uncertain or conditional, the instrument is invalid
Thus a promise to pay is not conditional, if
i. it depends upon an event which is certain to happen though the time of its happening may be uncertain
ii. The promise is to pay at a particular place or after a specified time
(4) Signed by the maker
otherwise it is incomplete and of no effect
(5) Certain parties
The instrument must point out with certainty as to who the maker is and who the payee is.
(6) Certain sum of money
The sum payable is certain,
i. When it is payable with interest, but if the rate of interest is not stated in the instrument, it is not a
promissory note.
ii. When it is payable at an indicated rate of exchange
iii. When it is payable by installments, with provisions that on default being made in payment, the
balance unpaid shall become due
(7) Promise to pay money only
If the instrument contains a promise to pay something other than money or something in addition to
money, it cannot be a promissory note.
(8) Bank note or currency note is not a promissory note
This is because a bank note or a currency is money itself
(9) Formalities like number, date, place, consideration, etc.,
These are usually found in an instrument although they are not essential in law.
(10) It may be payable on demand or after a definite period of time

The expression ‘on demand’ means payable immediately or forthwith.
(11) It cannot be made payable to bearer on demand
The Reserve Bank of India Act, 1934 prohibits issue of such promissory notes except by the Reserve
Bank of India itself or the Central Government.
6. Bill of Exchange
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.
Parties to a bill of exchange

There are three parties,
i. the person who gives the order to pay or who makes a bill is called the drawer.
ii. The person who is directed to pay is called the drawee.
When the drawee accepts the bill, he is called the acceptor.
iii. The person to whom the payment is to be made is called the payee.
The drawer or the payee who is in possession of the bill is called the holder. The holder must present
the bill of to the drawee for his acceptance.
When the holder indorses the bill, note or cheque, he is called the indorser.
Specimen of bill of exchange
Rs 1000 Chennai – 600 025
10th Sept 2009 Six months after date pay (PAYEE) to A

or order the sum of rupees Ten thousand only for value
received.
To
X (Drawee)Address: Stamp
______________
_____________ Sd
7. Essential Elements
1. It must be in writing
2. It must contain on order to pay
3. The order must be unconditional
4. It requires three parties, i.e., the drawer, the drawee and the payee.
5. The parties must be certain.
6. It must be signed by the drawer.
7. The sum payable must be certain.
8. It must contain an order to pay money.
9. The formalities relating to the number , date, place and consideration, though usually found in bills, are not
essential in law. But a bill must be affixed with the necessary stamp.
Distinguish between a bill of exchange and a
promissory note
Bill of exchange Promissory note
1. In a bill there are three In a note there are two
parties-the drawer, the parties-the maker and the
drawee and the payee payee
2. A bill contains an A note contains an

unconditional order to pay unconditional promise to
pay
3.The drawer of the bill is The maker of a note is the
the creditor who directs debtor and he himself
the drawee (his debtor) to undertakes to pay.
pay.

4. The acceptor may The maker of the note
accept the bill corresponds in general to
conditionally because the acceptor of a bill. But
he is not the originator the maker of the note
of the bill. cannot undertake to pay
unconditionally.
5. The liability of the The liability of the maker
drawer of a bill is of the note is primary and
secondary and absolute .
conditional.
6.In a bill the drawer and A note cannot be made
the payee may be one and payable to the maker
the same person. himself
7. A bill payable after sight A note requires no
or after a certain period acceptance as it is
must be accepted by signed by the person
the drawee before it is who is liable to pay.
presented for payment.
8. A bill can be drawn. But A note cannot be
in no case a bill or note be drawn payable to
drawn payable to bearer bearer.
on demand.
9. The drawer of a bill The maker of note
stands in immediate stands in immediate
relation with the acceptor relation with the
and not the payee. payee.

10. Provisions like It is not
(a) presentment for acceptance applicable to
(b) acceptance notes
(c) acceptance for honour
(d) Bill in set. Applies to bill
11. In case of dishonour of a bill In case of
either by non acceptance or by dishonour of a
non payment, due notice of note no such
dishonour must be given to all note is required.
the persons who are to be liable
to pay. this includes the drawer
and the prior indorsers.
12. Foreign bills must be No such protest is

protested for dishonour required in the case of a
when such protest is note
required by the law of
the place where they are
drawn .
8. CHEQUE
A cheque is a species of a bill of exchange; but it has the following two additional qualifications,
(i) It is always drawn on a specified banker, and
(ii) it is always payable on demand.
Specimen of a CHEQUE
No……….. Date………….2010
PUNJAB NATIONAL BANK

Subzi Mandi, Delhi - 110007
Pay …………………………… or bearer the sum of Rs………

……………………………………………………………………........
Rs……………….
Cheque no. xxxxxxxxxxx Branch Code xxxxxxxxxxxx
Crossing of Cheques
There are two types of Cheques,
i. Open Cheques
ii. Crossed Cheques
Open Cheques
A Cheque which is payable in cash across the counter of a bank is called an Open Cheque.
Crossed Cheques
A Crossed Cheque is one on which two parallel transverse lines with or without words ‘& Co’
are drawn.
The payment of such a cheque can be obtained only through a banker.
Crossing is a direction to the drawee banker to pay the amount of money on a crossed cheque
generally to a banker or a particular banker so that the party who obtains the payment of the cheque can be easily
traced.
Types of Crossing
There are two types of Crossing,
i. General Crossing
ii. Special Crossing
i. General Crossing
# When a cheque is crossed generally, the drawee banker shall not pay it unless it is presented
by a banker.
# A Cheque is to be crossed generally where it bears across its face an addition of,
i. General Crossing
4 5
2 3
1
Not Negotiable & Co.

Not Negotiable
and company
& Co.
# The payment of a specially crossed cheque can be obtained only through the particular banker whose
name appears across the face of the cheque or betweens the transverse lines.
1 2 3
Not Negotiable
Bank of India
Canara Bank
Bank of India
& Co.
iii. Restrictive Crossing

# this has been adopted by commercial and banking usage.
# here, the words ‘A/C payee’ are added to the general crossing or special crossing.
Not Negotiable Crossing
The object of crossing a cheque ‘not negotiable’
is to afford protection to the drawer or holder of the cheque against miscarriage or dishonesty
in the course of transit by making it difficult to get the cheque so crossed cashed, until it reaches its destination.
Who may cross a cheque?
i. The Drawer
# He may cross the cheque generally or specially
ii. The Holder
# When the cheque is uncrossed, the holder may cross it generally or specially.
# Where it is crossed generally, he may cross it specially
# Where it is crossed generally or specially, he may add the words ‘Not Negotiable’.
iii. The banker
Where a cheque is crossed specially, the banker to whom it is crossed, may again cross it specially to
another banker (his agent) for collection
Transfer of negotiable instruments and liability of parties

One of the essential characteristics of a negotiable instrument is that it is freely transferable from one person
to another person. This transfer may take place either:
1. by negotiation
2, by assignment
1. Transfer by negotiation
When a promissory note, bill of exchange or cheque is transferred by one party to another, so
as to constitute the transferee the holder thereof, the instrument is said to be negotiated.
There are two methods of transfer by negotiation, namely,
a) Negotiation by delivery
An instrument payable to bearer is negotiable by delivery thereof.
Example: A is the holder of negotiable instruments payable to bearer. He delivers it to B’s agent to
keep it for B. The instrument has been negotiated.
b) Negotiation by endorsement and delivery
An instrument payable to order is negotiable by the holder by indorsement and delivery thereof.
Example: A owes B Rs.1, 000. He makes a promissory note for the amount payable to B. He dies and
the note is afterwards found among his papers and delivered to B. B cannot sue upon the note if delivered to him.
2. Transfer by assignment
When a person transfers his right to receive the payment of a debt, ‘assignment of the debt’ takes
place. Thus where the holder of an instrument transfers it to another, so as to confer a right on the transferee to
receive the payment of the instrument, transfer by assignment takes place.
• Liability of parties
The liability of the parties is mentioned below:
a) Liability of drawer
The drawer of a bill of exchange or cheque is bound, in case of dishonor by the drawee or acceptor
thereof, to compensate the holder, provided due notice of dishonor has been given to, or received by the drawer.
b) Liability of drawee of cheque

The drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to the
payment of such cheque, must pay the cheque when duly required to do so. In default of such payment, the drawee,
i.e., the banker must compensate the drawer for any loss or damage caused by such default.
c) Liability of maker of note and acceptor of bill
The maker of a promissory note and the acceptor of a bill of exchange are the persons who are
primarily note and the acceptor of a bill of exchange are the persons who are primarily liable to pay the amount to
the holder on demand.
d) Liability of endorser
The endorser of a negotiable instrument before maturity is liable to all subsequent holders in case of
dishonor
e) Liability of prior parties to a holder in due course
Every prior party to a negotiable instrument is liable thereon to a holder in due course until the
instrument is duly satisfied.
f) Acceptor’s liability on a forged endorsement

An acceptor of a bill of exchange already endorsed is not relieved from liability by reason that such
endorsement is forged, if he knew or had reason to believe the endorsement to be when he accepted the bill.
g) Acceptor’s liability for a bill in a fictitious (untrue or made up)

Name and payable to the drawer’s order is note, by reason that such name is fictitious, relieved from
liability to any holder in due course claiming under endorsement by the same hand as the drawer’s signature and
purporting to be made by the drawer
.
Enforcement of secondary liability
Secondary liability – the principle of suretyship
a) Maker, drawer and acceptor principals
In the absence of a contract to a contrary, the maker of a promissory note or cheque, the drawer of a
bill of exchange until acceptance, and the acceptor are respectively the parties primarily liable
b) Prior party a principal debtor in respect of each subsequent party

As between the parties liable as sureties, each prior party is in the absence of a contract to the
contrary, a principal debtor in respect of each subsequent party.
c) Suretyship
When the holder of an accepted bill of exchange enters into any contract with the acceptor which,
under sec 134 or 135 of the Indian Contract Act, 1872 would discharge the other parties, the holder may expressly
reserve his rights to charge the other parties, and in such a case they are not discharged.
d) Discharge of endorser’s liability

When the holder of a negotiable instruments, without the consent of the indorser, destroys or impairs
the endorser’s remedy against a prior party, the indorser is discharged from liability to the holder to the same extent
as if the instrument had been paid at maturity.
Holder in due course

Holder
He is either the original payee or any other person to whom the payee has endorsed the
instrument.
Holder in due course

Any person who for consideration becomes the possessor of the instrument payable to the
bearer for valuable consideration before maturity of instrument in good faith without knowledge
about its bad title
Privileges of a holder in due course
1. Inchoate (unclear) stamped instrument
A person, who has signed and delivered to another person, a stamped
but otherwise inchoate instrument, is precluded (prohibited) from asserting (
declaring), as against a holder in due course, that the instrument has not been filled in
accordance with the authority given by him, the stamp being sufficient to cover the
amount.
2. Liability of prior parties

Every prior party to a negotiable instrument is liable thereon to a
holder in due course until the instrument is duly satisfied.
3. Fictitious payee
where a bill is drawn payable to the drawer’s order in a fictitious name
and is indorsed in the same hand as the drawer’s signature, the acceptor of the bill
cannot say, as against the holder in due course, that the other parties to the bill were
fictitious.
4. Negotiable instrument without consideration

When a negotiable instrument is made, drawn, accepted or transferred
without consideration, it creates no obligation of payment between the parties to the
transaction. An agreement made without consideration is void. But if the negotiable
instrument gets into the hands of a holder in due course, he can recover the amount on
it from any of the prior parties thereto.
5. Conditional delivery
If a bill or note is negotiated to a holder in due course, the other parties
to the instrument cannot avoid liability on the ground that the delivery of the
instrument was conditional or for a special purpose only.
6. Instrument cleaned of all defects

Once a negotiable instrument passes through the hands of a holder in due
course, it gets cleared of its defects provided the holder was himself not a party to the
fraud or illegally which affected the instrument in some stage of its journey.
Thus any affected in the title of the transferor will not affect the rights
of the holder on due course even if he had knowledge of the prior defect provided as he
himself is not a party to the fraud.
7. Instrument obtained by unlawful means or for unlawful consideration
The person liable to pay on a negotiable instrument cannot, as against a
holder in due course, contend that he had lost it, or that it was obtained from him by
means of an offence or fraud or for an unlawful consideration.
8. Estoppels against denying original validity of instrument. The maker of a promissory
note, the drawer of a bill of exchange or cheque and the acceptor of a bill of exchange
for the honor of the drawer cannot, in a suit thereon by a holder in due course, deny the
validity of the instrument as originally made or drawn.
9. Every holder is a holder in due course
The law presumes that every holder is a holder in due course, although the
presumption is reputable.
10. Estoppels against denying capacity of payee to payee to indorse

The maker of a promissory note and acceptor of a bill of exchange payable to
order cannot, in a suit thereon by a holder in due course, deny the payee’s capacity at
the date of the note or bill, to indorse the same.
11. Endorser not permitted to deny the capacity of prior parties
The endorser of a negotiable instrument cannot in a suit thereon by a
subsequent holder, deny the signature or capacity to contract of any prior party to the
instrument.
Discharge of negotiable instruments

The term discharge in relation to a negotiable instrument is used in two senses like:
• Discharge of the instrument

• Discharge of one or more of the parties from liability thereon
• An instrument is said to be discharged when all rights of action under it are
completely extinguished and when it ceases to be negotiable.
• This would happen when the party who is ultimately liable on the instrument is
discharged from liability.
• In such a case, even a holder in due course does not acquire any rights under the
instruments.
If, on the other hand, one or more of the parties is /are discharged from
liability, the instrument continues to be negotiable on it. The discharge of one or more
of the parties continues to be liable on it
Discharge of negotiable instruments
By Discharge of party or parties

1.By payment
Discharge of
2. By cancellation
an Instrument
3. By release
1. By payment in due
4. By allowing drawee
Course
more than forty eight hours
2. By party primarily liable
5. By non presentment of cheque
Becoming holder
6. Cheque payable to order
3. B express waiver
7. Draft drawn by one branch on another
4. By cancellation
8. Parties not consenting discharged by
5. By discharge as a
qualified acceptance
simple contract
9. By operation of law
10. By lapse of tome
11. Discharge by payment
of altered instrument
1. Discharge of an Instrument
• The different modes of discharge of an instrument are as follows:
a) By payment in due course
This is the most obvious and the usual mode of discharge of an instrument is
discharged by payment made in due course by the party who is primarily liable to pay, or by a person
who is accommodated in case the instrument was made or accepted for his accommodation.
The payment of the amount due on the instrument must be made at or after the
maturity to the holder of the instrument if the maker or acceptor is to be discharged.
A payment by a party who is secondarily liable does not discharge the instrument.
Again, any person liable to pay is entitled to have the instrument shown to him before payment. On
payment he is entitled to have the instrument delivered up to him.
b) By party primarily liable becoming holder

If the maker of a note or the acceptor of a bill becomes its holder at or after its
maturity in his own right, the instrument is discharged.
c) By express waiver
when the holder of a negotiable instrument at or after its maturity absolutely and
unconditionally renounces ( give up or reject) in writing or gives up his rights against the instrument,
the instrument is discharged. The renunciation (rejection) must be in writing unless the instrument
is delivered up to the party primarily liable.
d) By cancellation
where an instrument is intentionally cancelled by the holder or his agents and the
cancellation is apparent thereon, the instrument is discharged.
Cancellation may take place by crossing out signatures on the instrument, or by
physical destruction of the instrument with intention of putting an end to the liability of the parties
to the instrument.
e) By discharge as a simple contract

A negotiable instrument may be discharged in the same way as any other contract
for the payment of money. This includes, for example discharged of an instrument by novation or
rescission or by expiry of period of limitation.
2. Discharge of party or parties

• A party or parties to a negotiable instrument is/are discharged in any one of the following
ways:
• a) By payment- When payment on an instrument is made in due course, both the instrument
and the parties to it are discharged.
b) By cancellation
When the holder of a negotiable instrument or his agent cancels the name of a party on
the instrument with intent to discharge him, such party and all subsequent parties, who have a right
of recourse against the party whose name is cancelled, are discharged from liability to the holder.
The subsequent parties are in the position of sureties to the prior party whose name is
cancelled and discharge of the principal debtor automatically discharges the sureties.
c) By release
Where the holder of a negotiable instrument releases any party to the instrument
by any method other than cancellation, the party so released is discharged from liability.
d) By allowing drawee more than forty- eight hours

If the holder of a bill of exchange allows the drawee more than forty-eight hours
exclusive of public holidays, to consider whether he will accept the same, all previous parties not
consenting to such allowance are thereby discharged from liability to such holder.
e) By non-presentment of cheque
where a cheque is not presented by the holder for payment within the reasonable time
of its issue and the drawer suffers actual damage through the delay because of the failure of the
bank, he is discharged from liability to the extent of such damage. In determining what
reasonable time is, regard shall be had to the nature of the instrument, the usage of trade and of
bankers.
f) Cheque payable to order
Where a cheque payable to order purports be indorsed by the payee, the banker is
discharged by payments in due course. Where a cheque is originally expressed to be payable to
bearer the drawer is discharged by payment in due course to the bearer thereof.
It makes no difference even if any endorsement whether in full or in blank appears on
the cheque and even if any such endorsement purports to restrict or exclude further negotiation.
g) Draft drawn by one branch on another
Where any draft (that is an order to pay money) drawn by one office of a bank
upon another office of the same bank for a sum of money payable to order on demand purports to
be indorsed by or on behalf of the payee, the bank is discharged by payment in due course.
h) Parties not consenting discharged by qualified acceptance

If the holder of a bill of exchange acquiesces (assents) in a qualified acceptance, all the
previous parties whose consent is not obtained to such acceptance are discharged from liability, they
will however, be liable if on a notice being given to them they give their assent to such acceptance.
• By operation of law
This includes discharge,
1. By an order of insolvency court, discharging the insolvent

2. By merger- When a judgment is obtained against the acceptor, maker or indorser, the debt
under the bill is merged into judgment debt
3. By lapse of time i.e., when the remedy becomes time barred.
J) By material alteration
A material alteration of a negotiable instrument renders the same void against
persons who were parties thereto before such alteration unless they have consented to the
alteration.
k) Discharge by payment of altered instrument
When a promissory note, bill of exchange or cheque had been materially altered but
does not appear to have been so altered,
or where a cheque is presented for payment which does not at the time of presentation
appear to be crossed, payment on such an instrument discharges the party liable if he pays according
to the apparent tenor of the instrument (as altered) at the time of payment and otherwise in due
course.
• Such a payment cannot be questioned even if it is proved that the instrument has been altered
or that the cheque was originally crossed.
CONTRACT OF 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.
i. The person for whom such act is done, or who is so represented, is called the Principal.
ii. The function of an agent is to bring his principal into contractual relations with third person.
Example
• A approves B a broker to sell his car on his behalf then,
- A is the Principal, and B is the Agent
- Relationship between A and B is Agency
- Act of an agent is the act of the principal
Essentials of relationship of Agency
There are two essentials of the relationship of Agency,
1. Agreement between the principal and the agent

# Agency depends on agreement but not necessarily contract
# even a minor or a person of unsound mind may be an agent, the principal is however liable for the acts
of such an agent
2. Intention of the agent to act on behalf of the principal

Rules of an Agency
1. Whatever a person can do personally, he can do through an agent

Exceptions
when the act has to be performed personal in character, like marriage or annexed to public office like
that of a magistrate.
2. He who does an act through another does it by himself

Who can employ an Agent?
Any person who is of,
• The Age of majority

• Of sound mind
Who may be an Agent
Any person who is authorized to act as such may be an agent,
Even a minor can be an agent
(If the agent happens to be a person incapable of contracting, then the principal cannot hold the agent liable, in
case he misconducts or has been negligent in performance of his duties)
Creation of Agency
The relationship of principal and agent may arise,
By express agreement
By implied agreement
By ratification
By operation of law
1. By express agreement
The authority of an agent may be expressed by the following forms:
• Word of Mouth (Oral) or

• By an agreement in writing
(the usual form of written contract of agency is the Power of Attorney, by which one person empowers
another to represent him on a stamped paper)
2. By implied agreement
Implied agency arises from the
- conduct,
- situation or
- relationship of parties.
The implied agency arises when the principal conducts himself towards the person alleged to be the
agent or the third parties in such a manner, as if the principal had concerned to the appointment of that person as agent. It
includes:
a) Agency by Estoppels
When a person has by his conduct or statements induced others to believe that a certain person is his agent; he
is estoppels from subsequently denying it. Estoppels arise when you are precluded from denying the truth of anything which you
have represented as a fact, although it is not a fact.
b) Agency by holding out
P allows his servant A to buy goods for him as credit from C and pays for them regularly. On the occasion, P pays
his servant cash to purchase the goods. The servant purchases the goods on credit, pocketing the money. C can recover the price
from P since through previous dealings P has held out his servants A as his agent.
c) Agency of Necessity- When somebody is forced to act on behalf of a particular person.
e.g., two master of a ship which is in distress or requires heavy and urgent repairs can pledge the ship or cargo
(without express or implied authority) and raise money in order to execute the voyage. He will be considered at the agent of the
owner by necessity.
3. Agency by ratification
When an agent does an act for his principal but without knowledge or authority or while he exceeds the given
authority, the principal is not held bound by the transaction. Principal if he so desires can ratify (approve or sanction) the act of
the agent.
Requisites of a valid ratification
1. Agent must contract as agent

2. Principal must have been in existence at the time the agent originally acted
3. Principal must also be competent of contracting at the time of contract as well as at the time of ratification
4. Ratification must be done within a reasonable time
5. The act to be ratified must be a lawful one
6. Principal should have full knowledge of facts

7. Ratification must be of a contract as a whole
8. Principal must have authority to ratify
9. Ratification cannot be made so as to subject a third party to damage or terminate any night or interest or a third person.
4. Agency by operation of law
Sometimes an agency arises by operation of law,
# When a company is formed, its promoters are its agents by operation of law.
# A partner is the agent of the firm for the purposes of the business of the firm.
Classification or Types of Agents
Classification of Agents
From the point of view of the nature

of work performed by them
From the point of
view of extent of
their authority
Commercial or
1. Special Agent Mercantile Agents Non Mercantile
2. General Agent Agents
3. Universal Agent • Factor
• Broker 1. Attorneys
• Commission Agent 2. Solicitors
• Del credere Agent 3. Insurance Agents
5. Banker 4. Clearing Agents
5. Forwarding Agents
1. Special Agent
A special agent is one who is appointed to perform a particular act or to represent his principal in some
particular transactions.
Example: an agent employed to sell a house
2. General Agent
A general agent is one who has authority to do all acts connected with a particular trade, business or
employment.
3. Universal Agent
A universal agent is one whose authority to act for the principal is unlimited.
Commercial or Mercantile Agents
1. Broker- Agent engaged to buy and / or to sell property or to make bargains and contracts between the engager and a third
party for a commission called brokerage.
2. Factor – Agent who is entrusted with possession of goods with an authority to sell them. He can sell the goods on credit on in
his own name. He is also authorized to raise money on their security.
3. Commission Agent- Agent who is employed to buy or sell goods or transact business.
4. Del credere Agent
Agent who’s consideration of an extra remuneration called a del credere commission guarantor the
performance of the contract by the other parties.
5. Auctioneer
Agent appointed to sell goods by auction.
6. Banker
Buying & selling of securities, Collection of charges, bills, interests, etc.
Relations of Principal and Agent
1. Duties of Agents 1. Duties of Principal

2. Rights of Agents 2. Rights of Principal
Duties of an Agent
1. To carry out the work Undertaken according

to the directions given by the principal
2. To carry out the work with reasonable care,
skill, and diligence
3. To render proper account to his principal
4. To Communicate with the principal in
case of difficulty
5. Not to deal on his own account
6. To pay sums received for the principal
7. To protect and preserve the interests of
the principal in case of his death
or insolvency
8. Not to use information obtained in the course of the agency against the principal
9. Not to make secret profit from agency
10. Not to set up an adverse title
11. Not to put himself in a position where interest and duty conflict
12. Not to delegate authority
Rights of Agents
1. Right of Retainer
2. Right to receive remuneration
3. Right of lien
4. Right of indemnification
5. Right of Compensation
6. Right of stoppage in transit
Right of Principal
1. To recover damages
2. To obtain an account of secret profits and recover them and resist a claim for remuneration
3. To resist agent’s claim for indemnify against liability incurred
Duties of Principal
1. To indemnify the agent against the consequences of all lawful acts

2. To indemnify the agent against the consequences of acts done in good faith
3. To indemnify agent for injury caused by principal’s neglect
4. To pay the agent the commission or other remuneration agreed
Termination of Agency
By Operation of Law
1. Performance of the contract
By Act of the parties
2. Expiry of time
1. Agreement
3. Death of either party
2. Revocation by the
4. Insanity of either party
principal
5. Destruction of the subject matter
3. Revocation by the
6. Principal becoming an alien enemy
Agent
7. Dissolution of a company
8. Termination of sub-agent’s authority
Position of principal and agent in relation
to third parties
• Where the principal’s 2. Where the principal’s 3. Where both the

Existence and name Existence is disclosed Existence and the
are disclosed by the But not his name name of the principal’s
agent, are not disclosed by
agent, i.e., where the agent,
i.e., where the principal is unnamed
the principal is named i.e., where
the principal is
undisclosed
Position of principal and agent in relation to

third parties
Named Principal
1. Acts of the agent are
the acts of the principal Unnamed Principal
2. When the agent exceeds 1. The position of
his authority principal
3. Notice given to agent as 2. The position of agent
Undisclosed 3. The position of
notice to principal
Principal third parties
4. Principal inducing belief that
agent’s unauthorized
acts were authorized
5. Misrepresentation or fraud
of agent

Unit - I Mercantile and Commercial Law

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Unit - I Mercantile and Commercial Law

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Unit I

MERCANTILE AND COMMERCIAL LAW

THE INDIAN CONTRACT ACT 1872

7)Writing and Registration

Enforceability The enforceability depends on the It is enforceable under the provision of

2) On the basis of Formalities

•Void able Contract

3) On the basis of performance

4)On the Basis of obligation

On the basis of performance

On the Basis of obligation

TYPES OF BREACH CONTRACT

(i) Expressly by words spoken or written

(i) On due date of performance

Suit upon ‘Quantum Meruit’

SUIT FOR INJUNCTION

SUIT FOR DAMAGES

Essentials of a contract of Sale

1. Two parties (Buyer and Seller)

2. Goods (only movable property is included in this act)

3. Price (consideration is money)

4. Transfer of general property (Own goods)

5. Essentials elements of a valid contract

Example for Sale:

What is called as goods?

• Money itself (legal tender) cannot be the subject for sale

Classification / Kinds of Goods

Differences between sale and

Insolvency of buyer – Insolvency of buyer –

Differences between sale and

sale agreement to sell

S.No Sale Hire purchase

Document of title of Goods

 It is the document which acknowledges receipt of goods on board a ship

3. Warehouse keeper’s Certificate/ Wharfinger’s certificate

 It is a document issued by a railway for acknowledging the receipt of goods.

5. Warrant/Order for the delivery of goods

1. Goods must be ascertained

2. Intention of the parties

Specific Unascertained Goods sent on

ii) Passing of property delayed beyond the date of the contract-

3. Goods sent on approval or ‘on sale or return’

i. when he signifies his approval or acceptance to the seller

ii. When he does any other act adopting the transaction

Contracts involving sea routes

1. F.A.S. contracts- ‘Free alongside ship’.

Seller’s duties under F.A.S are as follows:

i) To deliver the goods by alongside the ship

• Seller’s duties under F.O.B are

• Buyer’s duties under F.O.B-

i) To arrange for the contract of affreightment

i. To make out an invoice of the goods sold

i. To pay all customs and import duties

Conditions and Warranties

*Its non fulfillment upsets the very basis of the contract.

Difference between a condition and

1 A condition is a A warranty is a stipulation

2 A breach of condition A breach of warranty

Difference between a condition and

3. A breach of condition A breach of warranty

• The person to whom the guarantee is given is called the as “creditor”

• Secondary contract between the creditor and the surety.

Express and implied conditions and warranties