Hardik Khattar

1886
Semester 3
End Semester Exams

COMMERICAL TRANSACTIONS

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Q1.
A1.
In Sundaram Finance Ltd vs State of Kerala and Another, the court stated that a hire-
purchase agreement is normally one under which an owner hires goods to a party called the
hirer and further agrees that the hirer shall have an option to purchase the chattel when he has
paid a certain sum, or when the hire-rental payments have reached the hire-purchase price
stipulated in the agreement. Further, the court in K. L. Johar and Company vs Deputy
Commercial Tax Officer stated that a hire purchase agreement, as its very name implies, has
two aspects. There is first an aspect of bailment of the goods subjected to the hire purchase
agreement, and there is next an element of sale which fructifies when the option to purchase,
which is usually a term of hire purchase agreements is exercised by the intending purchaser.

Important fundamentals of an Hire Purchase agreement

Thus, hire purchase is nothing but a hiring agreement coupled with an option to purchase. An
option should be there to convert it into a sale, if the buying option is not exercised then it will
be a bailment and the goods will have to be returned. Additionally, the payment in a hire
purchase must always be by instalments and not be a one-time payment. The agreement must
also be in writing, however there are some cases where oral hire purchase transactions can also
be considered valid but the validity of the same must be proved. Lastly, the hire purchase should
be of movable goods only.

There are also various differences when it comes to a Sale and a Hire Purchase Transaction

1. In Sale, the property and the goods are transferred immediately and In Hire Purchase, it
passes upon the payment of the last instalment and the option to buy it exercised.
2. In sale, the position of buyer is the owner of the goods, in hire purchase, the position of the
buyer is as a bailee.
3. In sale, the buyer cannot terminate the contract and he have to pay the price, in latter the
hirer may terminate the contract by returning the goods without any liability to pay the
remaining instalment.
4. In sale the seller takes risk in any loss resulting from the insolvency of the buyer, this is not
so in hire purchase

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5. In Sale the buyer can pass good title to the Bonafede purchaser, in Hire Purchase, the hirer
cannot pass any title even to a Bonafede purchaser.

Law in India

The law commission had recommended in its eighth report of Sale of Goods Act that there
should be a separate enactment regulating hire-purchase transaction. As there were no proper
laws to regulate such transactions of hire purchase hence provisions were made by a separate
act called the Hire Purchase Act 1972. Hire Purchase Act of 1972 was enacted to govern the
laws on hire-purchase but the same was repealed in 2005 due to redundancy of the same.
The Hire Purchase (Repeal) Act 2005, stated that it was felt that the mathematical formula as
provided in the Act and the formula as recommended by the Commission for calculating hire-
purchase charges were too mathematical for a common man to understand, and that the hire-
purchase charges and rate of interest may better be left to the market conditions in the changed
economic scenario, because loans are available from banks and financial institutions on
borrower-friendly terms.
The rules relating to hire purchase agreements are therefore delineated by the decisions of
higher court as well as two Indian statutes, the same being, Indian Contract Act, 1872 and the
Sale of Goods Act, 1939.

Critical Analysis

Simonds, J., in Transport and General Credit Corporation Ltd. v. Morgan said: "It must be
remembered that hire-purchase agreements now play a very large part in the commercial and
social life of the community, and the financing of those hire-purchase agreements is an
enormous business, both in the city of London and elsewhere. It appears to me that the
financiers and the dealers co- operate in the common venture of making feasible the whole
business of hire-purchase agreements, which is now, for good or for evil, a necessary part of
our social life. To regard one party to that common venture, which is now a recognized
mercantile service, as carrying on the business of a money-lender is, as I have said before, an
abuse of language."
Indeed, the aforementioned is very true, hire purchase agreements have come to stay as part of
the social service in the commercial world. It enables those of limited means to purchase the
essentials of existence that contemporary technological progress provides. Under such

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arrangement, one may purchase a vehicle, a refrigerator, furniture, kitchen equipment, and, in
fact, any utility item. It allows the hirer to acquire the item of his choosing by paying in easy
instalments, and it allows the merchant to supply it for profit without risking himself. It has
become a common and familiar commercial social service tool in India.
Hire Purchase agreements were originally entered into between the dealer and the customer
and the dealer used to extend credit to the customer but with advent of time, the financiers have
come to play a big role in such transactions. In Surya Pal Singh v Siddha Vinayak Motors the
Supreme Court has reiterated that under a hire-purchase agreement, it is the financer who is the
owner of the vehicle and the person who takes the loan retains the vehicle only as a
bailee/trustee, therefore, taking possession of the vehicle on the ground of non-payment of
instalment has always been upheld to be a legal right of the financier.
Hire purchase transactions was a dual-party agreement where the only owner and the hirer were
the parties. But with time these agreements evolved to a tri-partite agreement where the
financier is added as a third party where it plays a vital role between the other two parties. The
Court in Sundaram Finance Ltd vs State of Kerala and Another classified the hire purchase
into two types, when a financier is involved – firstly, when the owner is unwilling to look to
the purchaser of goods to recover the balance of the price, and the financier who pays the
balance undertakes the recovery. In this form, goods are purchased by the financier from the
dealer, and the financier obtains a hire-purchase agreement from the customer under which the
latter becomes the owner of the goods on payment of all the instalments of the stipulated hire
and exercising his option to purchase the goods on payment of a nominal price. And secondly,
In the other form of transactions, goods are purchased by the customer, who in consideration
of executing a hire purchase agreement and allied documents remains in possession of the
goods, subject to liability to pay the amount paid by the financier on his behalf to the owner or
dealer, and the financier obtains a hire-purchase agreement which gives him a licence to seize
the goods in the event of failure by the customer to abide by the conditions of the hire-purchase
agreement.

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Q3. (a) “The object of bringing section 138 of the Negotiable Instruments Act, 1881 on
statute is to include faith in the efficacy of banking operations and credibility in
transacting business on negotiable instruments.” Elucidate.

A3. The given statement is the quotation from CJI K.G. Balakrishnan’s observation in the case
of Damodar S.Prabhu vs Sayed Babalal H. The case involved the dishonour of 5 cheques issued
by the appellant, however the court did not go into the facts and legal issues of the case given
that the parties arrived at a settlement vide Section 147 of the Negotiable Instruments Act, 1881
(NI Act). However, the court made this observation in light of some larger issues which can be
appropriately addressed in the context of the present case.

This amendment was introduced to improve the acceptability of cheques in the settlement of
liabilities by making the drawer liable for fines in the event of a cheque bouncing due to the
drawer's insufficient arrangements, with proper protections to prevent harassment of honest
drawers. If the cheque is not honoured due to a complete lack of funds in the drawer's account
or because it exceeds the amount arranged to be paid from that account, the drawer faces up to
two years in prison, a fine up to double the amount of the cheque, or both, as was also observed
in the case of SMS Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89.

It should be noted that when the offence was first introduced into the statute in 1988, it had a
penalty of up to one year in prison, which was later increased to two years after the Act was
amended in 2002.

The legislative intent was to conclusively offer a robust criminal sanction in order to dissuade
the alarmingly high rate of cheque dishonour. While the potential of up to two years in prison
provides a punitive remedy, the provision for imposing a fine of up to twice the amount of the
check serves a compensatory purpose.

What must be noted is that cheque dishonour is a regulatory infraction designed to protect the
public interest by maintaining the trustworthiness of financial instruments. Typically, the
consequences of this crime is limited to private persons engaging in commercial operations, as
was held in the case of C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555.

In criminal law, commission of offence is one thing and prosecution is quite another.
Commission of offence is governed by Section 138 of the Act. Prosecution is governed by
Section 142 of the Act, as held in the case of William Rosario Fernandes v. Cabral & Co., 2006

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SCC OnLine Bom 918. It is also noteworthy that Section 138 while making dishonour of a
cheque an offence punishable with imprisonment and fine, also provides for safeguards to
protect drawers of such instruments where dishonour may take place for reasons other than
those arising out of dishonest intentions, as was held in the case of Modi Cements Ltd. v. Kuchil
Kumar Nandi, (1998) 3 SCC 249.

It envisages service of a notice upon the drawer of the instrument calling upon him to make the
payment covered by the cheque and permits prosecution only after the expiry of the statutory
period and upon failure of the drawer to make the payment within the said period, as held in
the case of Laxmi Dyechem v. State of Gujarat, (2012) 13 SCC 375.

Objectives and Motives of section 138 of the Negotiable Instruments act, 1881

1. To bring a sense of responsibility among drawers who issued their cheque, for
honouring their commitments in term of civil transactions

2. To inculcate faith in the efficacy in banking transactions and operations and bringing
credibility on transacting business on the basis of negotiable instruments

3. To prevent dishonesty on the part of the drawer

4. To inculcate/encourage to use cheque as the medium of payments

These are the objects behind Sections 138-148 or Chapter 17 of the Act. In 2015, the NIA had
a total of 148, from 147 sections.

Constitutional validity of section 138 – Criminal punishment for a civil offence

The following cases discussed the constitutional validity of Section 138, in light of the novel
concept of criminal punishment for a seemingly civil offence. The points of discussion
revolved around the fact that it is difficult to ascertain mens rea in these cases, and also that a
stronger message to society is needed in order to stop the rampant instances of cheque
dishonour.

1. M. Mohan Krishna vs Union of India - 1996 AP High Court

2. Smt. Ramawati Sharma vs Union of India - 2004 - It was argued that there is iniquity
between the law on cheque and promissory note, as to why criminal liability for cheque exists

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but not promissory note. This was on ground of special privilege accorded to cheque dishonour,
the writ petition challenging the law on the basis of violations of Articles 14 and 21 of the
Constitution of India. The Hon’ble SC held said that due process of law, established by
legislature is there in Section 138 as well, and that there is no violation of Article 21. The law
does not attempt to have a discriminatory effect. Rather more, the aim of Promissory notes and
aim of cheques, the motives/objectives behind it, were cited by the SC, and they said that
constitutionally, Chapter 17 is valid.

3. Rajendar Steel vs Union of India - Criminal LJ 2000 - Citing section 138 and 140, the
appellant argued that by introducing this chapter, the legislature has taken away an important
defence to the accused and has therefore the entirety of Ch-17 is unconstitutional as violative
of Article 21, as the aspect of mens rea has not been considered to impose a criminal
punishment. There is no protection to someone who is taking a loan from bank/financial
institution, for even then we can put him in jail for 2 years and a fine can be imposed, even
when there is no guilty intention. However, the court disagreed with this challenge and held
that the Chapter is assigning a strict liability under this Chapter to ensure that the creditors are
not left chasing debtors indefinitely. These provisions are there to maintain vigilance to prevent
callous attitude of a drawers of cheque, in discharge of debt or cheque liability. Exclusion of
mens rea is meant for the larger public interest to curb instances of dishonour and to lend greater
credibility of commercial transactions.

The purpose and practicality of 4-time amendment in the Act is to be put under the magnifying
glass, since even then dishonour of cheques is rampant (both SC and parliament use this term).
The first and foremost aspect is the need of Chapter 17, for which we understand the scenario
before the insertion of such provisions.

Earlier, there was a combined understanding of civil remedy provisions and the cheating and
fraud provisions of IPC, it was almost impossible for drawer to prove the cheating element in
dishonour in the pre-chapter 17 era.

1. This led to long drawn cases

2. No provision for post-dated cheques

3. Fixation of liability was very less\

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b) On 30-10-2006, the respondent sent to the appellant a number of post-dated cheques,
two of which were dated 1-4-2007 and 7-6-2007, in discharge of a certain liability. On 7-
12-2006, the respondent wrote to the appellant denying his liability to pay the amounts
under the said cheques on the ground that cheques were issued under a mistaken belief
of liability and asked the appellant to treat the said cheques as invalid. Simultaneously,
the respondent instructed the drawee bank to stop payment of the said cheques. The
cheques when presented for payment, after the due date, dishonored. After the statutory
notice, the appellant filed a complaint against the respondent under Section 138 of the
Negotiable Instruments Act, 1881.

Now argue the case before the Judicial Magistrate of the First Class from both sides.
Also prepare a notice to be given by the appellant to the respondent.

Let us start by examining the Material Facts of the case

1. On 30-10-2006, the respondent had sent to the appellant a number of post-dated cheques,
two of which were dated 1-4-2007 and 7-6-2007, in discharge of a certain liability.

2. On 7 -12-2006,the respondent wrote to the appellant denying his liability to pay the amounts
under the said cheques on the ground that cheques were issued under a mistaken belief of
liability and asked the appellant to treat the said cheques as invalid.

3. The respondent, thereafter instructed the drawee bank to stop payment of the said cheques.

4. The cheques were presented for payment after the due date and were subsequently
dishonoured.

5. After providing a statutory notice, the appellant filed a complaint against the respondent
under Section 138 of the Negotiable Instruments Act before the Judicial Magistrate of the First
class.

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 Issue

There are primarily 3 issues which can be considered to be of primary importance here.

B. Whether the ingredients of Section 138 are satisfied to convict the respondent under
Section 138, provided that the answer to the above question is ‘Yes’.

A. Whether post-dated cheques are ‘cheques’ within the ambit of Section 138 of the
Negotiable Instrument Act, 1881.

C. Whether the respondent can avail the defence that he had issued the cheques under a
mistaken belief of liability?

APELLANT

i. The appellant humbly submits before the Court that the post-dated cheques are ‘cheques’
within the ambit of Section 138.
ii. The Appellant relies on the correct line of interpretation as provided by the Supreme Court
in the case of Anil Kumar Sawhney v Gulshan Rai.
iii. In this case, the Apex Court held that a Post-Dated cheque is only a bill of exchange when
it is written or drawn. But it becomes a cheque, when it becomes payable on demand.
iv. . The court held that the main ingredients of the offence under Section 138 of the Act is,
the return of the cheque by the bank unpaid. Till the time the cheque is returned by the bank
unpaid, no offence under Section 138 is made out.
v. 6. The net result of the discussion is that a post-dated cheque remains a bill of exchange till
the date written on it. With effect from the date shown on the face of the said cheque it
becomes a "cheque" under the Act and the provisions of Section 138(a) would squarely be
attracted.
vi. It is only when the post-dated cheque becomes a "cheque", with effect from the date shown
on the face of the said cheque, the provisions of Section 138 come into play.
vii. 7. The Second point of issue is whether the ingredients of Section 138 are satisfied in the
present case.
viii. 8. The appellant submits that all the ingredients are satisfied as:
ix. There was a cheque drawn by the respondent on a bank account maintained by him.
x. The cheque has been issued in discharge of liability.
xi. The cheque was duly presented before the bank for payment after due date.

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 xii. The statutory notice was sent in accordance with Section 138 (b)
xiii. e) The payment was not made by the respondent within a period of 15 days.
xiv. 9. Moreover, it is submitted that Section 139 of the NI Act, 1881 provides that there is a
presumption in favour of the holder that he received the cheque of the nature referred to in
Section 138 for the discharge in whole or in part, of any debt or liability.
xv. 10. The next important question to be addressed is whether the respondent can avail the
defence that he had issued the cheques under a mistaken belief of liability.
xvi. 11. This can be construed with the help of Section 120 of the Negotiable Instrument Act
which provides for Estoppel against denying original validity of the instrument.
xvii. 12. The section precludes the maker of a note, the drawer of a bill or cheque, and the
acceptor for honour of the drawer, from denying the validity of the instrument as originally
made or drawn. The maker and the drawer, by their respective agreements, are directly
responsible for bringing these documents into existence, and so they should not to be
allowed to plead that the instrument, as originally made or drawn by them, was not valid.
xviii. 13. Therefore, the defendant can’t thereby claim the defence.
xix. 14. On account of the abovementioned arguments, it is submitted that the respondent is
liable under Section 138 of the Negotiable Instrument Act, 1881.

RESPONDENT

i. From the side of respondent, it is humbly submitted before this learned Court that the
contention of the appellant that a post-dated cheque comes within the ambit of Section
138 of the Negotiable Instrument Act, 1881 is incorrect and unsound.
ii. The respondent relies on the judgement of the division bench of the Supreme Court in
M/S Indus Airways Pvt. Ltd and Ors vs M/S Magnum Aviation Pvt Ltd.
iii. The opinion of Justice R. M Lodha and Shiva Kirti Singh reflects the correct position
of law with respect to the post -dated cheques.
iv. In this case, the court held that the explanation appended to Section 138 explains the
meaning of the expression ‘debt or other liability’ for the purpose of Section 138. This
expression means a legally enforceable debt or other liability. Section 138 treats
dishonoured cheque as an offence, if the cheque has been issued in discharge of any
debt or other liability.
v. It held that the explanation leaves no manner of doubt that to attract an offence under
Section 138, there should be legally enforceable debt or other liability subsisting on the

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 date of drawal of the cheque. In other words, drawal of the cheque in discharge of
existing or past adjudicated liability is sine qua non for bringing an offence under
Section 138.
vi. If a cheque is issued as an advance payment for purchase of the goods and for any
reason purchase order is not carried to its logical conclusion either because of its
cancellation or otherwise, and material or goods for which purchase order was placed
is not supplied, in our considered view, the cheque cannot be held to have been drawn
for an existing debt or liability. The payment by cheque in the nature of advance
payment indicates that at the time of drawal of cheque, there was no existing liability.
vii. Therefore, the respondent submits that since there was no legal liability existing at the
time of drawal of cheque, it cannot be said that post-dated cheques in such case come
under the ambit of Section 138.
viii. The next question to be considered is whether all the ingredients of Section 138 are
satisfied to convict the respondent. The respondent denies as to constitute an offence
under Section 138 of the Act, the following ingredients are required to be fulfilled:
ix. The cheque should have been issued for the discharge, in whole or in part, of any debt
or other liability. In this case, there was no legal liability or legally enforceable debt
present.

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Therefore, it is submitted that the respondents should not be convicted under Section 138.

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Notice to be given by the Appellant to the respondent.
1. When the Cheque is issued by any person to clear his legal liability and that very cheque is
not honoured then as per Negotiable instrument Act, 1881, which is now amended in 2018 for
giving more relief to the complainant, whose amount is due to be paid, has to follow the
procedure mentioned in the Negotiable Instrument Act, 1881. It is provided in Section 138 (
C) and in chapter VIII, i.e. of Notice and Dishonour.

2. One legal Notice describing the Cheque No., Bank Memo No.(issued by the bank while
returning the dishonoured cheque) and legal liability of the addressee is to be issued within a
period of one month from the date of dishonour of Cheque.

3. Thereafter Fifteen days time is to be given to the person after issuing the legal Notice by
Registered post to clear the debt and in case debt is not cleared then a complaint under Section
138 in cases of individual person and under Section 141 in case of a Company is filed before
the Judicial Magistrate First Class, in whose jurisdiction cheque is dishonoured.

NOTICE
Ref.: Dated :-
Proforma of Legal Notice U/s 138 Negotiable Instrument Act.
To
(Name of the Person and Address)
Sub:- Legal Notice under section 138 of Negotiable Instrument Act read with section 420 IPC,
amended up-till date.
Sir, Under the instructions and authorization of my client (His name), (father’s name), (age),
(address), I do hereby serve upon you this legal notice which is as under:-
1. Description of the case how and why the money was given or why the accused person is
indebted to the complainant.
2. The time when the amount was given an assurance of return of the same.
3. When the Cheque was issued on request.
4. When the Cheque was Presented

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5. When the Cheque was dishonored?
6. Memo date of the Bank mentioning the reason for dishonor of Cheque?
7. Section 138 notice can be issued whether the Account is closed, funds are insufficient or
there is stop payment by the drawer of the Cheque.
Therefore, through this legal notice, as a last resorts, you are hereby called upon to make the
payment of Rs./- (Rs) taken by you as………. from my client and for the discharge of which
the cheque in question was issued which has ultimately been returned unpaid and
dishonoured by your bank.
So you are directed to clear your liability Within fifteen days from the 3 receipt of this notice
i.e. the amount of cheque failing which my client shall be compelled to take legal actions
under section 138/141 of Negotiable Instrument Act,1881 read with section 420 of Indian
Penal Code against you before the competent court of law which provides that the person
committing the offence shall be punished with imprisonment for a term which may extend to
two years or with fine which may extend to twice the amount of the cheque or with both and
also under section 420 of IPC which provides other punishment and at the arisen of such
eventuality, you shall be liable to pay all the costs of litigation incurred by my client for that
forced litigation, for which I have clear instructions from my client. A copy of this legal
notice is being sent to you under REGD AD Cover to ensure its service upon you and the
copy of the Legal Notice is retained in office for further proceedings and Action.

Advocate( SIGNATURE)

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Answer 4
A)
The term Holder is defined in Section 8 of the Negotiable Instruments Act, 1881. Section 8
says that a holder of a negotiable instrument i.e., a Promissory note, Bill of Exchange or Cheque
refers to a person who is entitled in his own name to the possession thereof and is entitled to
receive the amount due in the instrument from the parties thereto. Section 78 says that the
payment must be made to the holder of the Negotiable Instrument in order to discharge the
maker or the acceptor.

Ambiguities in the Definition

The definition laid down in the act has various ambiguities and there have been various
objections and court conflicts. According to the report of the Law Commission on the matter,
the phrase “persons entitled in his own name to the possession of the instrument and to receive
and recover the amount” is vague.
The phrase "entitled," which has a wide range of meanings, is another cause of uncertainty. In
Parsotam v BankeLal, the Allahabad High Court held that this section only applies to a maker,
drawer, payee, indorser, and bearer, and that a transferee or assignee is entitled to recover due
amount not because he is a holder under this section, but because he is an owner who can give
a valid discharge to debt.

Recommendations by the Law Commission to solve Ambiguities

The study and report by the Law Commission after deliberations proposed a new definition of
the holder and various other steps to be taken which are as follows-
1.The new definition proposed said that the "Holder refers to the payee or indorsee of an
instrument who is in possession of it or the bearer of it, but not to a beneficial owner claiming
through a benamidar”.
2.In a separate section explaining the holder's rights, the words "and to receive or recover the
amount payable thereon from the parties thereto" should be included.
3.To eliminate any dispute about a beneficial owner's authority to claim through a benamidar,
the word must specifically exclude him. The purpose of the Act was to prohibit the benamidar
from benefiting from it.
4.Only actual entitled persons, such as payee and indorsee, should be specified, and the term
"entitled" should be removed from the definition. This will clarify whether assignees or
transferees should be included in the definition of holder or not.

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B)
In commercial law, a holder in due course is someone who accepts a negotiable instrument in
a value-for-value exchange without reason to doubt its legitimacy. A holder first becomes a
holder in due course by acquiring the bill, note or cheque for a valid consideration and acquiring
the cheque without having sufficient cause to believe that any defect existed in the title of the
person from whom he derived his title. Thus, he must have acted in good faith and with
reasonable caution.
A holder in due course acquires the right to make a claim for the instrument's value against its
originator and intermediate holders. As per S.9, a person must fulfil the following requirements
in order to be the holder in due course:
1. He must be a holder as per S. 8 of Negotiable Instruments Act.
2. He must become a holder for consideration.
3. He must obtain the instrument before maturity.
4. He must obtain the instrument in good faith.
The key difference in Indian law and English law lies in the manner of ascertainment of good
faith. English Case Laws Miller v Race (1758): a banknote sent by general postage was taken
by a robber. The plaintiff took it in the usual course of business for valuable consideration. The
plaintiff was said to have acted in good faith as he honestly came by the NI
John Lawson v Weston (1801): Plaintiffs discounted a bill of 500 in the usual course of
business for an unknown person. While the defendants insisted on the standard of due care
required, Lord Kenyon rejected the argument and stated “to adopt the principle of the defence
would be at once to paralyze the circulation of all the paper in the country, and with it all its
commerce.”
For a brief period between 1824 to 1836, the doctrine of due care and caution prevailed over
the good faith doctrine in England ushered in by landmark judgments like Gill v Cubitt and
Goodman V Harvey. But post 1836, the English law clearly required only “good faith”
S.90 of the Act now clearly states that “A thing is deemed to be done in good faith, within the
meaning of this Act, where it is in fact done honestly, whether it is done negligently or not.
Indian Law
While the Indian Act requires good faith coupled with due care and caution, the English Act
simply requires good faith on the part of the holder in due course.
Good Faith may have 2 methods of ascertainment- SUBJECTIVE and OBJECTIVE.
In the subjective test- the court tries to ascertain the holder’s own mind. The only question
being- “did he take the instrument honestly”

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In the objective test- the court needs to go beyond the holder’s mind and check if he exercised
care as a reasonable person ought to have done. The question here is also- “did he take due care
and caution”
U Ponnappa Moothan Sons v. Catholic Syrian Bank Ltd (1991 SC)
Indian courts rely on the old English case law Gill v. Cubbit and check if the person had acted
with due care and caution. There is a stricter liability on the holder in due course than there is
under the present English position. However, it is important to note that mere failure to prove
absence of negligence on his part would not vitiate his claim. The court decides whether such
negligence is so gross and extraordinary to presume that he had sufficient cause to believe in
the defect of the title.
CONCLUSION- It was discussed in the case of U. Ponnappa Moothan Sons, Palghat v.
Catholic Syrian Bank Ltd. And Others- The Indian definition imposes a more stringent
condition on the holder in due course than does the English definition. Under English law, he
should not have notice of a defect in the transferor's title and he should have taken the
instrument in good faith. Under Indian law, there should be no cause to believe that any such
defect existed. Hence, it is not sufficient if the holder acts in good faith. He should also exercise
due care and caution in taking the instrument. Perhaps, the Indian definition is based on Gill v.
Cubbit
Indian definition imposes a more stringent condition on the holder in due course than the
English definition.
Under the Indian law, a holder, to be a holder in due course, must not only have acquired the
bill, note or cheque for valid consideration but should have acquired the cheque without having
sufficient cause to believe that any defect existed in the title of the person from whom he
derived his title. This condition requires that he should act in good faith and with reasonable
caution.

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C)
‘A holder’s failure to prove his bona fides or absence of negligence would not negate his claim
to be holder in due course.’
This statement concerns itself with the qualifications of Holder in order to qualify as a Holder
in due course and enjoy the privileges provided to him under the law. As per S. 9 of Negotiable
Instruments Act, in order to be a Holder in due course, one needs to satisfy the following
conditions:
1- He must be a Holder as per S. 8 of Negotiable Instruments Act.
2- He must become a holder for consideration.
3- He must obtain the instrument before maturity.
4- He must obtain the instrument in good faith.
The instrument must be obtained in good faith, according to the fourth qualifier. According to
the decision in U. Ponappa Moothan Sons v. Catholic Syrian Bank Ltd., which was based on
the historic English case of Gill v. Cubitt, good faith must be determined by considering
whether the holder exercised due care and . The instrument must be obtained "without having
sufficient cause to think that any defect in the title of the person from whom he got his title
exists," as stated in S.9. In the case of Durga Shah Mohan Lal Bankers v. Governor General in
Council & Others, the Court held that this phrase is more favorable to the person who claims
to be the Holder in due course than the phrase 'acting bona fide,' because in the former case,
the person's claim would be defeated only if it could be demonstrated that the person had
reasonable grounds to believe that the title being passed to him was defective. If he fails to
prove his innocence or the absence of negligence, his claim will be unaffected. In the case of
U. Ponappa Moothan Sons v. Catholic Syrian Bank Ltd., this position was slightly shifted.
Although the Court agreed that his claim cannot be affected by a failure to prove his bona fides
or the absence of negligence, it added a caveat that in the event of negligence, the Court has
the discretion to determine whether the negligence was so gross and extraordinary that the
holder in due course had sufficient cause to believe the title of the instrument so transferred
was defective.
As a result, "a holder's failure to prove his bona fides or absence of fault would not nullify his
claim to be holder in due course," it is correct. However, if the negligence was so egregious
that the holder had reasonable grounds to believe that the instrument being transferred to him
was defective, the court may, in its discretion, presume that the holder had reasonable grounds
to believe that the instrument being transferred to him was defective.

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D)

Just like a carrier, which carries luggage from the shipper to the consignee and serves as a
medium for connecting the shipper to the consignee, a negotiable instrument links the two
parties i.e., the maker/indorser and the payee/holder/indorsee but in case of negotiable
instrument, the actual luggage i.e., money does not move from place to place but it merely
makes the maker/indorser liable on the instrument once it is presented after the instrument falls
due. Therefore, negotiable instrument serves as a carrier without actually transferring money
but only transferring a liability to pay the amount. It is useful in trade as businessmen don’t
have to carry large amounts of money in order to transact. It also helps in maintaining liquidity
in the market as a person who is short on cash can still issue a negotiable instrument for a later
date. Once the instrument falls due, the amount can be claimed from the maker/indorser.

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Answer 5.

ARGUMENTS FROM THE SIDE OF THE BUYER

As per Section 38 of the Sale of Goods Act, 1930, in the case of any instalment delivery, each
of the instalments is to be seen as a separate contract. Also, in case of a fundamental breach,
there is a right for repudiation with the buyer. Also, if there is a recurrent breach then
repudiation can happen.

In the case of Union of India v. K.H. Rao, it was held that ―Where it can be shown that the
breach results in defeating the very soul of the contract, the breach would result in complete
repudiation, and not simply an action for damages. Whether the breach goes to the root of the
contract is a question to be decided on the facts and circumstances of the case. The non-
performance must amount to a fundamental breach of the contract. Bona fide grounds of
rejection include goods not matching description or sample, not matching quality or not fit for
purpose. Also, as per Section 17 of the Act, the bulk is under the implied condition to
correspond to the sample. In the present case, while the seller met the buyer, he had shown the
buyer samples and verbally pronounced his raw silk to be pure. However, the buyer had later
found the silk to be impure and unfit for his use. In the present case too, though on the face of
the goods, the silk matched the description, they were unfit for use by the buyer and hence the
buyer had the right to reject and also to repudiate the contract by cancelling the three further
instalments.

ARGUMENTS FROM THE SIDE OF THE SELLER

In any contract for instalment delivery, each instalment will amount to a separate contract.
Then default in one instalment cannot lead to repudiation of the entire contract. Also, though
under Section 41 the buyer has a right to examination and a right to reject then the buyer also
has to intimate the same to the seller. In case of rejection, the liability of the prospective buyer
is to inform the seller of the rejection, and asking him to lift the goods.

In the case of City and Industrial Development Corp. of Maharashtra Ltd. v. Nagpur Steel and
Alloys (P) Ltd it was held that, ―This unconditional acceptance of the material amounted to
waiver of the condition. Had the grievance been made in right time, the seller would have easily
replaced those goods. Even the intention to treat the breach of condition as breach of warranty
did not exist. In any case, no such intended was ever communicated either orally or in writing
to the seller and this amounted to waiver.

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In the case of Bohre Brij Kishore v. Firm Shripatram Chironji Lal, the Court held that, ―It was
incumbent upon the plaintiff to give a notice to the defendant in order to enable him to explain
whether or not the quality supplied by him was according to the sample. He should also have
been given an opportunity to take the goods back and repay the money which he had received
from the plaintiff, if he wanted to do so. This opportunity was also denied to him. It may be
further pointed out that the plaintiff has also failed to prove what was the actual loss in the
transaction.

In Head v. Tattar Sale, it was held that if the goods get damaged in the period in which they
are lying with the prospective buyer, the fault must be determined (defined under Section 2[5]
of the Act). The prospective buyer has the responsibility to take reasonable care of the goods
under the duties of the bailee (Sections 151, 159 of the Indian Contract Act, 1872).

Therefore, in the present case, the buyer was liable to inform the seller of the rejection and it
is his fault that the goods are now damaged, thus, he must pay the seller.

Also, the seller in pursuit of the contract, had already prepared to send the next three
installments and hence the buyer should pay him damages for the loss caused to him due to the
cancellation.

DECISION

The buyer was in fault to not intimate the rejection to the seller and thus he must pay the
damages to the seller. Also, the seller had taken substantial steps to deliver the next three
installments and thus the seller has now been bound by promissory estoppel. He should also
have been given an opportunity to take the goods back and repay the money which he had
received from the buyer, if he wanted to do so. This opportunity was also denied to him.
Therefore, the seller is entitled to damages from the buyer as he has suffered losses due to the
fault of the buyer.

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Q6. Write short notes on any two of the following :-

a. Discharge of Negotiable Instruments :-

In order to understand how negotiable instruments are discharged we first need to have a basic
understanding of negotiable instruments. What is a negotiable instrument ? A negotiable
instrument is one

A negotiable instrument is a document that guarantees payment of a specific

amount of money to a specified person (the payee). It requires payment either upon demand or
at a set time and is structured like a contract

A negotiable instrument is a document that guarantees the payment of a specific

amount of money to a specified person (the payee) and requires payment either on-
demand or at a set date. Negotiable instruments are distinct from non-negotiable instruments
in that they can be transferred to different people, and, in that case, the new holder obtains full
legal title to it.

Negotiable instruments contain key information such as principal amount, interest

rate, date, and, most importantly, the signature of the payor.

1. By payment in due course

Payment-in-due-course, is the payment made in good faith and in accordance with the apparent
tenor of the instrument to the rightful holder thereof. Accordingly, it is the payment made in
money only on maturity of the instrument and of the entire amount due on it and the person to
whom it is made should be in possession of the instrument. It may be noted that a payment of
a post-dated cheque before maturity is not according to the apparent tenor of the instrument
and hence, does not discharge the instrument unless the instrument is cancelled or the fact of
payment is duly recorded on the instrument to prevent its further negotiation.
The person making the payment is entitled to have the instrument delivered back to him upon
payment or if the instrument is lost or cannot be produced, to be indemnified against any further
claim thereon against him. Moreover, in order to discharge a negotiable instrument by

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payment-in-due-course, the payment should be made by the party who is primarily liable on
the instrument. So if a party, who is not primarily liable, makes payment, the instrument is not
discharged. The payment-in-due-course discharges not only the negotiable instrument in
question but also the parties who are primarily and ultimately liable on the instrument as well.

2. By the principal debtor becoming the holder

When the acceptor of a bill of exchange becomes its holder on or after maturity thereof, all
rights of actions thereon are extinguished. As a result, the instrument is discharged. An acceptor
may become the holder of a bill by the process of negotiation back. But in order to discharge
the bill it is essential that this happens after maturity because if he becomes holder of the bill
before maturity, he may again endorse the same. Thus, a negotiable instrument is discharged if
the acceptor has become the holder of the instrument at or after maturity in his own rights, i.e.,
not in any other capacity such as agent, executor, trustee, etc. For instance, A accepts a bill
drawn on him by B. B later on transfers the instrument to C, and C endorses it to D, who
endorses it to A. The instrument-in-question stands discharged by acceptor (A) becoming
holder of it. This rule is based on the principle that a present right and liability united in the
same person cancel each other.
3. By renunciation of the rights by the holder
If the holder of a negotiable instrument expressly gives up or renounces his rights against all
the parties, the instrument is discharged. The renunciation can be made by surrendering or
delivering the instrument to the party who is primarily liable thereon or declaring in writing
the fact of renunciation. Such renunciation discharges the instrument as well as all the parties
thereto.
4. By cancellation of the instrument
If the holder intentionally cancels the name of the drawer or acceptor of a promissory note or
bill of exchange, the instrument is automatically discharged. It is important to note that the
cancellation should be made with an intention to release the party primarily liable on it, which
in turn would discharge the other parties thereto. Cancellation of the instrument can be executed
either by physical destruction or by crossing out signatures of drawer, acceptor, etc., on the
instrument.
5. By an act that would discharge an ordinary contract
A negotiable instrument may also be discharged by an act that would discharge a simple
contract for payment of money. This is technically called discharge of negotiable instrument
by operation of law. Such a discharge may occur due to expiry of period prescribed for recovery

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of sum of money due on the instrument, or by substitution of another negotiable instrument for
the original instrument or by an agreement between the parties in the form of novation. It may
also take place by way of merger of one or more debt into another or by the debtor being
adjudicated insolvent.

b. Bill of Lading

A bill of lading in shipping is a record of the traded goods which have been received on board.
It is a document that establishes an agreement between a shipper and a transportation company
for the transportation of goods. Transportation Company (carrier) issues these records to the
shipper.
A bill of lading indicates a particular carrier through which the goods have been placed to their
final destination and the conditions for transporting the shipment to its final destination. Land,
ocean and air are the means used for bills of lading. It incorporates some of the effects of
Charter Party Contract so that it is effective against the consignee or indorsee of the bill.
Bill of Lading in a legal document, used between a shipper and a carrier that specifies the type,
quantity and destination of the goods that is being carried. The bill is also used as a shipment
receipt when the carrier delivers goods at the predetermined destination. This document
accompanies the shipped goods, not taking into consideration the mode of transportation. An
authorized representative from the carriers, shipper and receiver are necessitated to sign it.
The Bill of Lading also indicates the carrier through which the goods have been placed to reach
their destination and the condition required to transport the shipment. Land, ocean and air are
the means that are used to transport the bills of lading.
There is a ship owner who gives a part of the ship or whole ship on lease. The second party is
called charterer (who is the seller of those goods) whereas the third party is the consignee
(cargo owner).
In Charter party, the whole ship is hired for the purpose of navigation. Sometimes a situation
arises when there is a space is left on the ship so that more goods can be loaded. So he invites
through brokers. With the help of these brokers, a Charter Party Bill of Lading is prepared and
the rules of Charter party contract will be applicable except to the fact that extent of
incorporation of the clauses of Charter Party will be used in Bill of Lading. However, some
concerns with Charter Party Bill of Lading are the extent to which the incorporation of Charter

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Party clauses are successful in Bill of Lading, and secondly regarding the extent of damages,
as supposing that the goods of cargo owners are damaged then would he file a suit against the
charterer or the ship owner or would it be the other way round would be the question.

TYPES OF BILL OF LADING

1. Negotiable bill of lading: In this type of bill, clear instruction is provided to make the
delivery of the goods to anyone having the possession of the original copy of the bill, which
itself signifies the title and control of the freight. In this type of bill, the buyer/ receiver or
his/her agent has to acquire and present an original copy of the bill of lading at the discharge
port. In the absence of original bill copy, the freight will not be released.
2. Non-negotiable bill: This type of bill of lading fixes a specific consignee/name of the
receiver to whom the freights will be shipped and delivered. It, however, does not itself serve
the ownership of the goods. Under this type of bill, the assigned receiver/ buyers can claim the
cargo by confirming their identity.
3. Shipped Bill: This bill of lading is Issued when cargo is loaded on board. It binds the
shipowner and the shipper directly. The goods have been taken over by the carrier and it is an
acknowledgement of what kind of goods and navigation started.
4. Order bill of lading: This is the bill uses express words to make the bill negotiable. This
means that delivery is to be made to the further order of the consignee using words such as
“delivery to A Ltd. or to order or assigns. The cargo is only delivered to the bonafide holder of
the bill of lading, and it has to be verified by an agent who issues delivery order and the verified
bill of lading. The order bill of lading is the most modern type bill which is widely used all
over the world as it ensures the safety of delivery of cargo to a bonafide holder of B/L.
5. Seaway BOL: A seaway bill is a receipt of goods issued by the ocean carrier to the
customer (also called the consignor or shipper). It is a contract by which the ocean carrier
undertakes to transport the customer’s cargo in its vessel or vessels, from one point to the other.
It is a non-negotiable contract between the ocean carrier and the customer to deliver the goods
booked by the customer to a specific consignee. It is this non-negotiable nature of the bill that
sets it apart from the regular bill of lading. The seaway bill is usually preferred by companies
that deal directly with each other on a regular basis. There is no involvement of a third party in
such dealings in which instruments such as bank letter of credit, etc. are not used. A seaway
bill will show a consignor and a single consignee who can receive the goods at the port of
discharge.

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6. Clean Bill of Lading: Clean Bill of Lading is issued by the Shipping Company or by its
agents without any declaration on the defective Constitution of the goods/ packages taken on
Board/ stuffed in containers.
7. Received for Shipment Bill of Lading: Received Bill of Lading is a document that is
issued by a carrier as evidence of receipt of goods for shipment. It is issued prior to the vessel
loading and is therefore not an onboard bill of lading, as the navigation has yet not started.
8. Through Bill of Lading: Through Bills of Lading are complex than most BOLS. The
document permits the shipping carrier to pass the cargo through several modes of transportation
or through several distribution centers. This bill includes an Inland Bill of Lading and an Ocean
Bill of Lading depending on the destination.
9. Claused Bill of Lading: Claused Bill of Lading is issued when the cargo is damaged or
when the quantity goes missing.
10. Container Bill of Lading: Container Bill of Lading is a document that gives information
about goods that are delivered in a safe container or containers from one port to another.
11. House Bill of Lading/ Forwarders Bill of Lading: House Bill of Lading is a document
generated by an Ocean Transport Intermediary freight forwarder or non-vessel operating
company. The document is an acknowledgement of the receipt of goods that are shipped, issued
to the suppliers when the cargo is received.
12. Master Bill of Lading: Master Bill of Lading is a document that is created for shipping
companies by their carriers as a receipt of transfer. The document specifies the terms that are
required for transporting the freight, details of the consignor or the shipper, the consignee and
the respective person who possess the goods.
13. Charter Party Bill of Lading: Charter Party Bill of Lading is an agreement between a
charterer and a vessel owner. The document is issued by the charterer of the vessel to the
shipper for the goods that are shipped on board the vessel.
14. Multi modal Transport Document/ Combined Transport Document: Multi Modal
Transport Document or Combined Transport Document is a type of Through Bill of Lading the
involves a minimum of two different modes of transport, land or ocean. However, the modes
of transportation can be anything from freight boat to air.
15. Stale Bill of Lading: Stale Bill of Lading is presented for negotiation after 21 days from
the date of shipment or any other date/ number of days stipulated in the documentary credit.

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16. Short-term/ Blank Back Bill of Lading: Short term or Blank Back Bill of Lading is
issued when the detailed terms and conditions of the carriage contract are not given on the body
of the Bill of Lading or on the back of the Bill of Lading.
17. Straight Bill of Lading: Straight Bill of Lading indicates that the goods are consigned
to a particular person and it is not negotiable free from the existing equities. This means that
an endorsee acquires no better rights other than those that are held by the endorser. This bill is
also called as a non-negotiable bill of lading. Whereas, from a banker’s perspective, this type
of lading is not safe.
18. Bearer Bill of Lading: Bearer Bill of Lading is a bill that states that the delivery shall
be made to whosoever holds the bill. These bills are specially created or it is an order bill that
does not nominate the consignee in its original form or through an endorsement in blank. A
bearer bill can be negotiated by physically delivering it.
19. Surrender Bill of Lading: Surrender Bill of Lading works under the term ‘import
documentary credit’, where the bank releases documents on receipt from the negotiating bank.
The importer does not make the payment to the bank until the maturity of the draft under the
relative credit.
20. E-Bill of Lading: With the modernisation of the shipping industry as a whole, the bill
of lading is also modernised to the electronic bill of lading to solve the issues occurring while
using a paper bill of lading. The electronic bill of lading can be transmitted instantaneously
around the word in the presence of an internet connection, enabling a quick trade and ease of
multiple transfers of ownership during the carriage of the cargo. Implementation of electronic
bill system across the industry needs consent from all the stakeholder, which will take time.

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