Discharge of a Contract or Performance of Contract

Meaning of Discharge of a Contract:

Discharge of a contract means termination of the contractual relations between the parties to
a contract. A contract is said to be discharged when the rights and obligations of the parties
under the contract come to an end.

Modes of Discharge of Contract:

1. Discharge of Contract by Performance

I. By Actual Performance
II. By Attempted Performance
2. Discharge by Mutual Agreement

I. Novation:
Novation means the substitution of a new contract for the original contract.

Example I A owes money to B under a contract. It is agreed between A, B and C that B

shall henceforth accept C as his debtor, instead of A. The old debt of A to B no longer
exists and a new debt from C to B has been contracted.

II. Rescission:
Rescission means cancellation of the contract by any party or all the parties to a contract.

Example X promises Y to sell and deliver 100 Bales of cotton on 1st October at his
godown and Y promises to pay for goods on 1st Nov. X does not supply the goods. Y may
rescind the contract.
III. Alteration
Alteration means a change in the terms of a contract with mutual consent of the parties.
Alteration discharges the original contract and creates a new contract.

Example X promises to sell and deliver 100 bales of cotton on 1st October and Y promises
to pay for goods on 1st November Afterwards, X and Y mutually decide that the goods on
1st November Afterwards, X and Y mutually decide that the goods on 1 st November
Afterwords, X and mutually decide that the goods shall be delivered in five equal
instalments at Z ‘s godown. Here, original contract has been discharged and a new contract
has come into effect.

IV. Remission

Example I A promises to paint a picture for B. B afterwards forbids him to do so. A is no

longer bound to perform the promise.
Example II A owes B ` 5,000. A pays to B, and B accepts, in satisfaction of the whole debt, `
2,000 paid at the time and place at which ` 5,000 were payable. The whole debt is
discharged.
4. Discharge of Contract by Operation of Law
A contract may be discharged by operation of law in the following cases:

I. By Death of the Promisor

II. By Insolvency
III. By Unauthorised Material Alteration

5. Discharge by Impossibility of Performance

The effects of impossibility of the performance of a contract may be discussed under the
following two heads:

IV. Effects of Initial Impossibility

Example X undertakes to put life into the dead wife of Y. This agreement is void.

II. Effects of Supervening Impossibility

Example X contracts to sing for Y at a concert for ` 1,000 which is paid in advance. X is too
ill to sing. X must refund` 1,000 to Y.
 Cases when a contract is discharged on the ground of supervening impossibility

I. Destruction of subject matter

Example I X agreed sell his crop of wheat. The entire was destroyed by fire though no fault
of the party. The contract was discharged.

II. Death or personal incapacity

Example X agreed to sing on specified day. X fell seriously ill and could not perform on
that day that day. The contract was discharged.

III. Declaration of war

Example X contracts to take in cargo for Y at a foreign port. X's government afterwards
declares war against the country in which the port is situated. The contract becomes void
when the war is declared.

IV. Change of law

Example X agreed to sell his land to Y. After the formation of the contract, the Government
issued a notification and acquired the land. The contract was discharged.
5. Discharge by lapse of time

Example on 1st July 20X1 X sold goods to Y for Rs. 1,00,000 and Y has made no payment
till August 20X4 The contract is discharged by lapse of time (i.e. 3 years) from 1st July
20X1 because the debt has become time barred and hence X cannot exercise his right to
recover this debt.

6. Discharge by breach of contract

A contract is said to be discharged by breach of contract if any party to the contract refuses
or fails to perform his part of the contract or by his act makes it impossible to perform his
obligation under the contract. A breach of contract may occur in the following two ways:
I. Anticipatory breach of contract
Anticipatory breach of contract occurs when the party declares his intention of not
performing the contract before the performance is due.
II. Actual breach of contract
a) On Due Date of Performance:
b) During the Course of Performance: If any party has performed a part of the contract and
then refuses or fails to perform the remaining part of the contract,
Consequences of breach of contract

The aggrieved party (i.e. the party not at fault)-

(a) is discharged from his obligation, and
(b) is entitled to proceed against the party at fault.
 Remedies for Breach of Contract

MEANING OF BREACH OF CONTRACT

A breach of contract occurs if any party refuses or fails to perform his part of the contract or
by his act makes it impossible to perform his obligation under the contract. In case of
breach, the aggrieved party (i.e. the party not at fault) is relieved from performing his
obligation and gets a right to proceed against the party at fault. A breach of contract may
arise in two ways, (a) anticipatory breach and (b) actual breach
Types of Breach
(a) anticipatory breach
Anticipatory breach occurs when the party declares his intention of not performing the
contract before the performance is due.
Example X, a farmer agrees to sell to Y his entire crop of 10 tons of wheat @ ` 8,000 per
ton to be delivered on 20th October. On 1st October, X informs Y that he is not going to
supply the goods. X has committed anticipatory breach of contract by express repudiation
(b) actual breach
Actual breach of contract may take place in any of the following two ways:
1. On due Date of Performance If any party to contract refuses or fails to perform his part
of contract on due date of performance.

Example X agreed to sell to Y 10 tons of wheat @ ` 8,000 per ton to be delivered in two
equal instalments 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.

2. During the Course of Performance If any party has performed a part of the contract and
then refuses or fails to perform the remaining part of the contract.

Example X agreed to sell to Y 10 tons of wheat @ ` 8,000 per ton to be delivered in two
equal instalments on 20th October and 21st October. On 20th October, X delivered 5 tons
and refused to deliver remaining 5 tons. It is an actual breach of contract during the course
of performance.
 REMEDIES FOR BREACH OF CONTRACT

The various remedies available to an aggrieved party are as follows:

1. Rescission of Contract:
Rescission means a right not to perform obligation.

Example X agrees to supply 10 tons of wheat to Y on 20th October. Y promises to pay for
the goods on its receipt. X does not supply the goods on the due date. Here, Y is discharged
from the liability of paying the price. Y is entitled to rescind the contract and to claim
compensation for the damage which he has sustained because of non-supply of goods on the
due date.

2. Suit for Damages:

Damages are monetary compensation allowed for loss suffered by the aggrieved party due to
breach of a contract. The object of awarding damages is not to punish the party but to make
good the financial loss suffered by aggrieved party.
In India, the rules relating to damages are based on the judgement in English case of Hadley
v. Baxendale.

Compensation for loss or damage caused by breach of contract [section 73]

The aggrieved party may claim the damages as follows:

(a) Such damages which naturally arose in the usual course of things from such breach. This
relates to ordinary damages arising in the usual course of things.
(b) Such damages which the parties knew, when they made the contract, to be likely to result
from the breach. This relates to special damages.
(c) The aforesaid compensation is not to be given for any remote or indirect loss or damage
sustained by reason of the breach, and
(d) Such compensation for damages arising from breach of quasi contract shall be same as in
any other contract.
Types of damages
(e) Ordinary Damages (b) Special Damages (c) Exemplary or Punitive or Vindictive
Damage (d) Nominal Damages (e) ) Damages for Inconvenience and Discomfort
(f) Liquidated Damages and Penalty
 Other Remedies
a. Suit for specific performance
b. Suit for injunction
 Quasi-Contracts (Section 68-72)

Meaning of quasi-contracts
 A Quasi-contract is not a contract at all because one or the other essentials for the
formation of a contract are absent.
 it is an obligation imposed by law upon a person for the benefit of another even in the
absence of contract.
 It is based on the principle of equity, which means no person shall be allowed to unjustly
enrich himself at the expense of another.
 Such obligations are called quasi-contracts or implied contracts because the outcome of
such obligations resemble those created by a contract.
Features of a quasi-contract
 It is imposed by law and does not arise from any agreement.
 The duty of a party and not the promise of any party is the basis of such contract.
 The right under it is always a right to money and generally, though not always, to a
liquidated sum of money.
 The right under it is available against specific person(s) not against world.
 A suit for breach may be filed in the same way as in case of complete contract.
 KINDS OF QUASI-CONTRACTS

1. Right to recover the price of necessaries supplied [section 68]

The person who has supplied the necessaries to a person who is incompetent to contract or
anyone who is dependent on such incompetent person, is entitled to claim their price from the
property of such incapable person.

Example I A supplies B, a lunatic, with necessaries suitable to his condition in life. A is

entitled to be reimbursed from B's property.

Example II A supplies the wife and children of B, a lunatic, with necessaries suitable to their
condition in life. A is entitled to be reimbursed from B's property.

2. Right to recover money paid for another person [Section 69]

A person who is interested in the payment of money for which another person is legally
bound to pay, and who therefore pays it, is entitled to recover payment made from the person
who was legally bound to pay.
Example B holds land in Bengal, on a lease granted by A, a Zamindar. The revenue payable
by A to the Government being in arrears, his land is advertised for sale by the Government.
Under the revenue law, the consequence of such sale will be the annulment of B's lease. B, to
prevent the sale and the consequent annulment of his own lease, pays the Government the
sum due from A. A is bound to make good to B the amount so paid.

3. Right to recover for non-gratuitous act [section 70]

Example I A, a tradesman, leaves goods at B 's house by mistake. B treats the goods as his
own. He is bound to pay A for them.

Example II A saves B’s property from fire. A is not entitled to compensation from B, if the
circumstances show that he intended to act gratuitously

4. Responsibility of finder of goods [section 71]

Example X a guest found a diamond ring at a birthday party of Y. X told Y and other guest
about it. He has performed his duty to find owner. If he is not find able to find owner he can
retain the ring as bailee.
5. Right to recover from a person to whom money is paid or thing is delivered, by mistake
or under coercion [section 72]
A person to whom money is paid, or anything delivered by mistake or under coercion, must
repay or return it.

Example I A and B jointly owe ` 100 to C. A alone pays the amount to C, and B, not knowing
this fact, pays ` 100 over again to C. C is bound to repay the amount to B.

Example II A railway company refuses to deliver up certain goods to the consignee, except
upon the payment of an illegal charge for carriage. The consignee pays the sum charged in
order to obtain the goods. He is entitled to recover so much of the charge as was illegally
excessive.

6. Compensation for failure to discharge obligation created by quasi-contracts [section

73] When an obligation created by a Quasi-contract is not discharged, the injured party is
entitled to receive the same compensation from the party default as if such person had
contracted to discharge it and had broken his contract.
 BAILMENT AND PLEDGES

Definition of Bailment [Section 148]

Bailment is the delivery of goods by one person to another for some purpose, upon a contract
that they shall, when the purpose is accomplished be returned or otherwise disposed of
according to the directions of the person delivering them.

Example
1. ‘P’ lends his book to ‘Q’
2. ‘P’ delivers a pen to ‘Q’ for repair.
3. ‘P’ gives ‘Q’ his watch as security for a loan.
In all these cases ‘P’ is the bailor and ‘Q’ is the bailee.
 Contract

Delivery
Ownership
of goods Requisites of a
valid contract of
Bailment

Movable
Possession
goods
kinds of Bailment: Bailment may by classified into

1. Voidable Bailment

Example: ‘A’ lends to ‘B’, on hire, a horse for his riding. ‘B’ drives the horse in his
carriage. This contract can be terminated at the option of ‘A’

2. Gratuitous Bailment
A gratuitous bailment is one when the goods are delivered to another without any charge or
consideration on the condition that they shall be returned to the bailor.

3. Bailment for Reward.

A bailment for reward is one where either the bailor or the bailee is entitled to remuneration.

Example: Motor car let out for hire; goods given to a carrier for carriage for a price;
articles given to a person for being repaired for a remuneration etc.
Duties and liabilities of the bailor
 Bailor’s Duty to Disclose Faults in Goods Bailed
 To repay expenses to the bailee
 To indemnify the bailee

Rights of the Bailor

 To get back the goods after expiry of the time for which they were bailed (or) after the
accomplishment of the purpose of bailment
 To get back the goods from the bailee at any time if it is a gratuitous bailment.
 To terminate the contract of bailment if the bailee is guilty of an act in respect of the bailed
goods that is inconsistent with the terms of bailment.
 The bailor may enforce the duties of the bailee.
Duties and liabilities of the bailee

 Not to Make Unauthorized Use of Goods

 To Return the Goods Bailed
 Indemnity
 To Take Reasonable Care of the Goods Bailed
 To deliver any Accretion to the Goods Bailed
 Not to Mix Bailor’s Goods With his Own Goods
 To Compensate for Setting up of Adverse Title

Rights of the Bailee

 The bailor is entitled to be rewarded if the goods were bailed to be worked upon by him
 The bailee has a right to be compensated if he has suffered any loss from the defect in the goods which the
bailed and which he did not disclose.
 The bailee has a right to be compensated if he as suffered any loss
 The bailee is entitled to recover reasonable expenses incurred by him in connection with the goods bailed.
 If the bailee is deprived of the goods bailed by a third person, he has a right to sue such a person to
recover goods from him as if the goods belonged to him.
 The bailee has a right to exercise lien.
 “If several joint-owners of goods bail them, the bailee may deliver them back to, or according to the
directions of, one joint-owner without the consent of all
Termination of bailment
 Expiry of time
 Fulfilment of purpose
 Act Inconsistent with the Terms
 Goods lent Gratuitously
 Death
 CONTRACT OF PLEDGE OR PAWN
Definition: The bailment of goods as security for payment of a debt or performance of a
promise is called pledge or pawn. The bailor in this case is called pledgor or pawnor. The
bailee is called the pledgee or the pawnee. [Sec. 172]

Essentials of a valid Pledge

1. There must be a debt or a promise to perform some act.
2. Goods are bailed by way of security for the repayment of the debt or the performance of
the promise.
3. Goods to be pledged must be delivered to the pledgee.
4. Only movable goods can be pledged.
5. Legal Possession is necessary in case of pledge and therefore, mere physical possession
cannot be considered to be a pledge, e.g., a sevant cannot pledge the goods belonging to
his master because legally he is not the owner of those goods
Rights of Pledgee or Pawnee
 Right of Retainer
 Rights to sell
 Rights to Sue the Pawnor

Rights of Pledgor or Pawnor

 Defaulting Pawnor’s Right to Redeem
 Preservation and Maintenance
 Protection of Debtors:

When Can a Non-owner make a Valid Pledge

 Mercantile Agent
 Person in possession of goods under voidable contract
 Pawnor with a Limited Interest
 Possession with Co-owner
 Seller in Possession of Goods after Sale
 The Sale of Goods Act, 1930
Introduction:
 Till 1930, transactions relating to sale and purchase of goods were regulated by the Indian Contract Act, 1872
 In 1930, Sections 76 to 123 of the Indian Contract Act, 1872 were repealed and a separate Act called 'The
Indian Sale of Goods Act, 1930 was passed.
 It came into force on 1st July 1930. With effect from 22nd September, 1963, the word 'Indian' was also
removed. Now, the present Act is called 'The Sale of Goods Act, 1930’.
 What is the territory to which this Act applies ?
This Act extends to the whole of India except the State of Jammu and Kashmir
 Do the provisions of the India Contract Act, 1872 still apply to contracts for Sale of Goods ? According
to Section 3, "the provisions of the Indian Contract Act, 1872 still continue to apply to contracts for the sale
of goods except where 'The Sale of Goods Act', 1930 provides for the contrary".

What is the Scope of the Act?

 The Sale of Goods Act deals with 'sale' but not with 'mortgage' (which is dealt with under the Transfer of
Property Act, 1882) or 'pledge' (which is dealt with under the Indian Contract Act, 1872).
 This Act deals with 'goods' but not with other movable property, e.g., actionable claims and money.
 In other words, this Act does not deal with movable property other than goods, and immovable property
What is the meaning of contract of sale ?
1. According to Section 4(1) of the Sale of Goods Act, 1930, “contract of sale of goods is a contract whereby
the seller transfers or agrees to transfer the property in goods to the buyer for a price.”
2. 'Contract of Sale' is a generic term which includes both a sale as well as an agreement to sell.

Seller and
Buyer

Transfer
Goods Essential of Goods
Element of
Contract
of Sale
Essential of
valid contract Price
u/s 10 of ICA
 Meaning of term Goods-Types of goods

Types of Goods

The goods which form the subject matter of contract of sale of goods may be categorized into following:

(1) Existing Goods (2) Future Goods (3) Contingent Goods

Specific Goods

Ascertain Goods

Unascertained
Goods
 Price of goods
There must be a price. Price here means the money consideration for a sale of goods [Section 2(10)]. When the
consideration is only goods, it amounts to a 'barter' and not sale. When there is no consideration, it amounts to
gift and not sale. However, the consideration may be partly in money and partly in goods because the law does
not prohibit as such. [Shelden v. Cox]

In a contract of sale, the consideration must be money only. If for instance, goods are offered as the
consideration for goods, it will not amount to sale. It will be called a ‘barter’. Similarly, in case there is no
consideration, it amounts to gift and not sale. Where goods are sold for a definite sum and the price is paid
partly in terms of valued up of goods and partly cash, that is sale. Example: Aldridge V. Johnson: In this case,
fifty-two bullocks, valued at £6 a piece, were exchanged for 100 quarters of barley at £2 per quarter, the
difference to be made up in cash, the contract was treated as one of sale.
Meaning of Price Price means the money consideration for a sale of goods. There are modes of determining price as
Modes of under: (a) it my be fixed by contract (b) it may be left to be fixed in an agreed manner (c) It may be
Determining determined by the course of dealing between the parties. Thus, the price need not nConsequences of
Price not Determining the Price nnecessarily to be fixed at the time of sale.

Consequences of Where the price is not determined in accordance with Section 9(1), the buyer must pay the seller a reasonable
not Determining price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case.
the Price It may be noted that a reasonable price need not be market price.

Consequences of The agreement to sell goods becomes void if the following two conditions are fulfilled.(a) if such agreement
not Fixing Price provides that the price is to be fixed by the valuation of a third party, and (b) If such third party cannot or
by Third Party does not make such valuation.
Duty of Buyer A buyer who has received and appropriated the goods, must pay a reasonable price therefor.

Right of Party not Where such a third party is prevented from making the valuation by fault of the seller or buyer, the party not
at Fault at fault may maintain a suit for damages against the party in fault.
Earnest v. Earnest means security for the due performance of the contract. Advance payment means the payment of the
Advance Payment price of the goods in advance which is to be adjusted against the ultimate total price of the goods. If the
contract is not or cannot be performed by the fault of the buyer, the seller may forfeit the earnest and not the
advance payment. The party not at fault may maintain a suit for damages against the party in fault.
Basis of distinction
Transfer of ownership
Executed Contract or Executory Contract
Conveyance of property
Transfer of Risk
Sale
Transfer of ownership of goods takes
place immediately
It is an executed contract because nothing
remains to be done.
Buyer gets a right to enjoy the goods
against the whole world including seller.
Therefore, a sale creates jus in rem (Right (Right against the person).
against property).
Transfer of risk of loss of goods takes
place immediately because ownership is
transferred. As a result, in case of
destruction of goods, the loss shall be
borne by the buyer even though the goods
are in the possession of the seller.
Agreement to sell
Transfer of ownership of goods is to take
place at a future time or subject to the
fulfillment of some condition.
It is an executory contract because
something remains to be done.
Buyer does not get such right to enjoy the
goods. It only creates jus in personam
Transfer of risk of loss of goods does not
take place because ownership is not
transferred. As a result, in case of
destruction of goods, the loss shall be
borne by the seller even though the goods
are in the possession of the buyer
 CONDITIONS AND WARRANTIES

It is usual for both seller and buyer to make representations to each other at the time of entering into a contract
of sale. Some of these representations are mere opinions which do not form a part of contract of sale. Whereas
some of them may become a part of contract of sale. Representations which become a part of contract of sale are
termed as stipulations which may rank as condition and warranty e.g. a mere commendation of his goods by the
seller doesn't become a stipulation and gives no right of action to the buyer against the seller as such
representations are mere opinion on the part of the seller. But where the seller assumes to assert a fact of which
the buyer is ignorant, it will amount to a stipulation forming an essential part of the contract of sale.
Meaning of A stipulation in a contract of sale of goods may be a condition or warranty [Section 12(1)].
Stipulation

Meaning of A condition is a stipulation- (a) which is essential to the main purpose of the contract, and (b) the
Condition breach of which gives the aggrieved party a right to terminate the contract. [Section 12(2)].
Example X asked a car dealer to suggest him a car suitable for touring purposes. The dealer
suggested a 'Buggati Car'. Accordingly, X purchased it but found it unsuitable for touring purpose.
In this case, suitability of car for touring purpose was a condition of contract. X was, therefore
entitled to reject the car and have refund of the price paid. [Baldry v. Marshall]

Meaning of A warranty is a stipulation- (a) which is collateral to the main purpose of the contract, and (b) the
Warranty breach of which gives the aggrieved party a right to claim damages but not a right to reject goods
and to terminate the contract. [Section 12(3)].
Example X asked a car dealer to suggest him a good car and while suggesting the car, the dealer
said that it could run for 20 km per litre of petrol. But the car could run only 15 kms per litre of
petrol. In this case, the statement made by the seller was a warranty. X was, therefore not entitled
to reject the car but he was entitled to claim the damages

How to Whether stipulation is a contract of sale is condition or a warranty depends in each case on the
Determine construction of the contract. Stipulation may be a condition though called a warranty in the
contract
 Distinction between condition and warranty
Basis of Distinction Condition Warranty

Essential vs. Collateral It is a stipulation which is essential to the It is a stipulation which is only
main purpose of the contract. collateral to the main purpose of
the contract.

Right in case of breach The aggrieved party can terminate the The aggrieved party can claim
contract. damages but cannot termi-nate
contract.

Treatment A breach of condition can be treated as a A breach of warranty cannot be

breach of warranty. For example, a buyer may treated as a breach of condition.
like to retain the goods and claim only
damages.
 When Condition to be Treated as Warranty ? [Section 13]

In the following three cases, a breach of condition is treated as a breach of warranty:

(a) where the buyer waives a condition; once the buyer waives a condition, he cannot insist on its fulfilment.g.,
accepting defective goods or beyond stipulated time amounts to waiving condition.
(b) Where the buyer elect to treat breach of condition as a breach of warranty: e.g., where he claims damages
instead of repudiating contract.
(c) where the contract is not severable and the buyer has accepted the goods or part thereof, the breach of any
condition by the seller can only be treated as a breach of warranty. It can not be treated as a ground for rejecting
the goods unless otherwise specified in the contract. Thus, where the buyer after purchasing the goods find that
some condition is not fulfilled, he can not reject the goods. He has to retain the goods entitling to him to claim
damages.
amounts to waiving a condition.
 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: These are expressly provided in the contract. For example, a buyer
desires to buy a SONY TV Model no.2062. Here, model no. is an express condition in an advertisement for
Khaitan fans, guarantee for 5 years is an express warranty.

Implied conditions and warranties: These are implied by law in every contract of sale of goods unless a
contrary intention appears from the terms of the contract. The various implied conditions and warranties have
been shown below.
 Implied condition and warranty

Implied condition Implied warranty

1. Conditions as to title ( s. 14 a)
2. Conditions as sale by description (s.15)
3. Conditions as sale by sample (s. 17)
1. Warranty as to quiet
4. Conditions as sale by description and sale possession( s.14(b)
(s.15)
2.Warranty from encumbrances(s.14(c)
5. Conditions as to quality and
fitness( s.16(1) 3. Warranty as to top quality or fitness
for particular purpose annexed by usage
6. conditions as to merchantable quality of trade. (s.16(3)
(s.16(2)
7. Conditions as wholesomeness
8. Conditions applies by customs(s.16(3)
 What is the meaning of an unpaid seller?

The seller of goods is deemed to be 'unpaid seller’-

(a) When the whole of the price has not been paid or tendered.
(b) When a bill of exchange or other negotiable instrument (such as cheque) has been received as conditional
payment, and it has been dishonoured [Section 45(1)].

The term 'seller' includes any person who is in the position of a seller (for instance, an agent of the seller to
whom the bill of lading has been endorsed, or a consignor or agent who has himself paid, or is directly
responsible for the price) [Section 45(2)].

Rights of an unpaid seller [sections 46-52, 54-56, 60-61]

The right of seller can broadly be classified under the following two categories.

I. Rights against the goods

II. Rights against the buyer personally
I. Rights against the goods

(a) Where the property in goods has passed to the buyer

 Right of Lien
 Right of stoppage in transit
 Right of Resale

(b) Where the property in goods has not passed to the buyer
 Lien
 Stoppage in transit
 Resale

II. Against the buyer personally

 Suit for Price
 Suit for damages
 Suit for Interest
 The Negotiable Instruments Act, 1881

A Negotiable Instrument is a document which entitles a person to a sum of money and is

transferable from one person to another by mere delivery or by endorsement and delivery. The
Negotiable Instruments Act 1881 deals with the laws regarding negotiable instruments such as
promissory notes, bills of exchange, cheques etc. This Act is based on the English law with
certain changes to suit the Indian conditions.
Negotiable Instrument
Definition:
The term ‘negotiable instrument’ is not defined in the Act. Section 13, of the Act states that “a
negotiable instrument means a promissory note, bill of exchange or cheque payable either to
order or to bearer”. As this definition gives only the meaning, any instrument of these types can
be included In the Act. According to Justice Willis, negotiable instrument can be defined as
“One the property in which is acquired by anyone who takes it bonafide and for value not
withstanding any defect of title in the person from whom he took it”.

It can. be seen from this definition that if one takes the instrument bona fide and he takes it for
a value, he acquires a .good title, even when the transfer may be defective.
Characteristics:

1. Freely Transferable
2. The Holder Gets a Perfect Title
3. Recovery of the Value
The holder in due course need not give notice of transfer to the prior parties who are liable to pay on the
instrument. A holder in due course has the right to sue the party liable on the instrument for payment in case he
fails to get payment on demand at the due date.
4. Some Presumptions

The following matters are presumed in the case of all negotiable instruments unless the contrary is proved. Hence
anyone challenging any of these presumptions will have to prove his allegations.
 Consideration
 Date
 Time of Acceptance
 Time of Transfer
 Holder is a Holder in Due Course
 Order of Endorsements
 Stamp
 Proof of Protest
Types of Negotiable Instrument

Negotiable instruments can be divided into the following two types:

1. Negotiable by statute, and 2. Negotiable by custom or usage

1. Negotiable by Statute: Section 13 of the Negotiable Instrument Act states only three kinds
of negotiable instruments viz. promissory notes, bills of exchange and cheques. These are
instruments by statute.

2. Negotiable of Custom of Usage: These are instruments which gained the character of
negotiability by the usage or custom of trade. In India, Government promissory notes,
banker’s drafts and pay orders, hundis, delivery orders and railway receipts for goods have
been held to be negotiable by usage or custom.
 A. PROMISSORY NOTE

According to Sec. 4 of the Act, a promissory note is an instrument in writing containing an unconditional
undertaking, signed by the maker, to pay a certain sum of money, only to or the bearer of the instrument. The
person who promises to pay in writing is called the maker of the instrument. The person to whom it is payable is
called the payee.

Characteristics:

1. In Writing: The instrument must be in writing. In this context, writing includes writing with pen, pencil,
typewriting or print.

2. Promise to Pay:There should be an undertaking or promise to pay. A mere acknowledgment of indebtedness

is not sufficient to constitute a promissory note. For example, a writes “I am liable to B a sum of
Rs.10,000/-“. As there is no promise to pay, this is not a promissory note.
3. Unconditional: The undertaking or promise to pay must be unconditional. Any condition in promise will
make it invalid. For example, if an instrument contains “I promise to pay Rs.5000 within two days after my
marriage with X”. as this promise is conditional, it is not valid.
However if the condition is certain to take place and the promise has to pay after a specified time, it is not taken
as conditional. For example, if ‘X’ promises to pay ‘Y’ a sum of Rs. 5000/- after the death of ‘A’, it is not a
conditional promise because it is certain that ‘A’ shall die.
4.Signed by the Maker: If the instrument is not signed by the maker it is incomplete and is not valid. It is just
not sufficient to have the signature. It is essential that the mind of the person signing should accompany the
signature.

5. Certain Parties: The instrument must clearly show who the maker of the instrument is and who the payee
is. A promissory note made payable to the maker himself is a nullity. But if it is endorsed by the maker to some
other person or endorsed in blank it becomes a valid promissory note (Gay Vs Landal).

6.Certain Sum of Money: The amount payable on the promissory note should be certain and should be
specified in the promise. For example, a promissory note stating “I promise to pay ‘A’ Rs. 2000/- and any other
sums due to him” is not a promissory note because the sum payable is not certain.

7. Promise to Pay Money Only: An instrument containing a promise to pay something other than money or
something in addition to money, cannot be a promissory note. For example, an instrument containing a promise
that “I promise to pay ‘X’ Rs.3000 and a motor cycle” is not a promissory note.

8.Bank note or Currency Note is not a Promissory Note: Though there is a promise in the bank note or
currency note it is not considered as a promissory note because it is money itself.
9. Formalities: Certain formalities like number, date place etc. are found in all instruments though they are not
essential. But it is necessary that it should bear the stamp required under the Indian stamp Act 1899.

10. Payable on Demand or After a Definite Period of Time: The promissory note should state when it
becomes payable. The term “On demand’ means that it is payable immediately. The Reserve Bank Act 1934
prohibits the issue of promissory notes payable to bearer on demand by all, except the Reserve Bank of India or
the Central Government.

B. BILL OF EXCHANGE

According to Section 5 of the Act “A bill of exchange is 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: A bill of exchange has three parties viz. drawer, drawee and payee. A person who makes the bill is
called “Drawer”. It is he who gives the order to pay. The person who is directed to pay is called the, “drawee”.
when the drawee accepts the bill, he is called the “acceptor.” The person to whom the actual payment is to be
made is called the “payee”. If the drawer does not pass on the instrument to somebody, he himself will be the
payee. Whoever is in possession of the bill is called the holder. When the holder endorses the instrument to
another he is called the endorses. The person to whom the instrument is endorsed is called the endorses
Characteristics: The characteristics of a Bill of exchange are similar to those of a promissory note. The
important among them are as follows

I. The bill must be in writing.

II. It must contain an order to pay.
III. The order contained must be unconditional.
IV. The order must be to pay money.
V. The money payable must be certain.
VI. It requires three parties viz. drawer, drawee and payee.
VII. It must be signed by the drawer.
VIII.The formalities like number, date, consideration, signature, stamp etc. are similar like in the case of a
promissory note.
Bill of Exchange
`1. There are three parties viz. the drawer, the drawee and the
payee.
2. It contains an unconditional order to pay
3. The maker of a bill of exchange is a creditor.
4. The maker directs the drawer to pay
5. The maker of a bill of exchange should give an
unconditional order.
6. The liability of the maker is secondary and is conditional.
7.Normally the drawer and the payee are one and the same.
8.The bill must be accepted by the drawee before it is
presented for payment
9. A drawer of a bill stands in immediate relation with the
acceptor and not to the payee
Promissory note
1.There are only two parties viz. the maker and the payee.
2. It contains an unconditional promise to pay
3.The maker of a promissory note is a debtor.
4. The maker himself undertakes to pay,
5. The maker of a promissory note is in the position of an
acceptor. But as he originates the document, he can accept to
pay conditionally.
6. The liability of the maker is primary and absolute.
7. A promissory note cannot be made payable to the maker
himself.
8. There is no need for acceptance.
9. The maker is in immediate relation with the payee.
 OFFER (PROPOSAL) AND ACCEPTANCE
A contract is defined as a promise or agreement enforceable by law. So, two elements namely, agreement and
enforceability are essential for a valid contract. All contracts are made by the process of a lawful offer by one
party and the lawful acceptance of the offer by the other party.

Example: If ‘X’ says to ‘Y’ “will you buy my house for Rs. 5,00,000”? It is an offer. If ‘Y’ says “Yes”, the
offer is accepted and a contract is formed.

An ‘offer’ involves the making of a proposal. The term proposal is defined under Sec 2(a) in the Contract Act
as follows: “when one person signifies to another his willingness to do or to abstain from doing anything with
a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal”

A proposal is also called an offer. The promisor or the person making the offer is called the offeror. The
person to whom the offer is made is called the offeree.
Promise and Acceptance: Sec.2(b) of the Act defines promise as “when the person to whom the proposal is made
signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise”
Promisor and promise are defined under Sec 2(c) as “The person making the proposal is called the ‘promisor’ and
the person accepting the proposal is called the ‘promisee’ – Sec. 2(c).
A proposal or acceptance may be made in any of the following manners:
 By express words spoken,
 In writing.
 By conduct.
Examples: 1. When A says to B: “will you buy this building for Rs.20 lakhs”? It is an express oral offer. 2. When
A writes to B stating the above offer, then it is an express written offer. 3. When a transport company runs a bus
on a particular route, it is termed as an implied offer or an offer by conduct.
RULES REGARDING VALID OFFER
 An offer may be express or may be implied from the circumstances
 An offer may be made to a definite person; to some definite class of persons; or to the world at large
 Offer must be capable of creating legal relationship
 The terms of the offer must be definite and certain
 A mere statement of intention is not an offer
 An offer must be communicated to the offeree
 An offer may have certain conditions
 Offer must not thrust the burden of acceptance
 LEGAL RULES AS TO ACCEPTANCE
An offer unless accepted cannot become an agreement. Acceptance is essential to convert an offer into
an agreement. The acceptance of an offer to be legally effective must satisfy the following
requirements:

1. It must be absolute and unqualified: An acceptance to be effective must be absolute and

unqualified of all the terms of the offer. A conditional acceptance is not an acceptance at all. If
there is any variation, even of an unimportant point, there is no contract. An acceptance with a
variation is no acceptance but is a mere “counter offer” which is for the original offeror to accept
or not.

Example: Mr.’X’ informed ‘Y’ his willingness to buy ‘Y’s’car for Rs.75,000. On receipt of the offer
‘Y’ informed ‘X’ that he is willing to sell his car for Rs.1,00,000. In this example, ‘Y’s’ acceptance is
not unconditional or unqualified. This is not an acceptance. It is only a counter offer. If ‘X’ accepts for
Rs.1,00,000, then it will become a contract.
2. The mode of acceptance must be in some usual manner: Except where the offer prescribed a
particular mode of acceptance, the acceptance must be made in such manner that it may come to the
knowledge of the proposer. If the proposer prescribes a mode of acceptance, the acceptance must be
given accordingly
3. Acceptance must be by the party named in the offer
4. An acceptance must be communicated to the offeror
5. Acceptance must be within a reasonable time
6. Acceptance cannot be made in ignorance of the offer
7. Clarification
8. Mental acceptance or uncommunicated assent does not result in a contract

When acceptance is complete:Sec. 4 of the contract act lays down that the communication of an acceptance is
complete as against the proposer, when it is put in a course of transmission to him; so as to be out of the power
of the acceptor; and as against the acceptor, when it comes to the knowledge of the proposer.
Examples (i) ‘A’ proposes by letter to sell a house to ‘B’ at a certain prince. The communication of the proposal
is complete when ‘B’ receives the letter. (ii) ‘B’ accepts ‘A’s proposal by a letter sent by post. The
communication of the acceptance is complete as against ‘A’. When the letter is posted, as against ‘B’, when the
letter is received by ‘A’.

COMMUNICATION OF OFFER AND ACCEPTANCE

An offer may be communicated to the offeree or offerees by word of mouth, by writing or by conduct. A written
offer may be contained in a letter or a telegram. Sec. 4 states: “The communication of a proposal is complete
when it comes to the knowledge of the person to whom it is made.” The acceptance must be expressed in some
usual or reasonable manner. The offeree may express his acceptance by word of mouth, telephone, telegram or
by post.
Mr. G applied for shares in a company. A letter of allotment was posted but the letter did not reach ‘G’. held there
was a binding contract and ‘G’ was shareholder of the company (Household Fire Co. Vs. Grant)

Revocation of an offer: An offer comes to an end and is no longer open to acceptance under the following cases-
Sec.6
1. Lapse of time.
2. After expiry of reasonable time.
3. An offer lapses by the failure of the acceptor to fulfil a condition precedent to acceptance, where such a
condition has been prescribed.
4. An offer lapses by the death or insanity of the proposer, if the fact of his death or insanity comes to the
knowledge of the acceptor before acceptance.
5. When the counter-offer is given, the original offer lapses.
6. A proposal once refused is dead and cannot be revived by its subsequent acceptance.

Example: ‘A’ offers to sell his farm to ‘B’ for Rs.1,00,000.’B’ replies offering to pay Rs.90,000. ‘A’ refuses.
Subsequently ‘B’ writes accepting the original offer. There is no contract because the original offer has lapsed.
7. By notice: If the offeror gives notice of revocation to the other party, an offer may be revoked anytime before
acceptance but not afterwards. Once an offer is accepted there is a binding contract. The acceptance of an offer
becomes binding on the offeror as soon as the acceptance is put in course of communication to the offeror so as
to be out of the power of the acceptor. But anytime before this happens, the offer may be revoked.
Example: A proposal is sent by ‘X’ to ‘Y’ and accepted by ‘Y’ by letter. The proposal might have been revoked
anytime before the letter of acceptance was posted but it cannot be revoked after the letter is posted. The notice
of revocation does not take effect until it comes within the knowledge of the offeree

Revocation of Acceptance: An acceptance may be revoked at any time before the communication of the
acceptance is complete as against the acceptor but not afterwards.

Example: ‘A’ proposes by a letter sent by post to sell his house to ‘B’. ‘B’ accepts the proposal by letter sent by
post. ‘A’ may revoke his proposal at any time before or at the moment when ‘B’ posts his letter of acceptance
but not afterwards. ‘B’ may revoke his acceptance at any time before or at the moment when the letter
communicating it reaches ‘A’ but not afterwards
 CONSIDERATION
Consideration is an essential element in a contract. It is the sign and symbol of every bargain subject to certain
exceptions. An agreement made without consideration is void. Consideration is the necessary evidence required
by law of the intention of the parties to effect their legal relations. All contracts require consideration to support
them. Consideration means the valuable considerations (i.e) the price paid for the other party’s promise. Contract
results where one party promises to do in exchange for something in return. Consideration is otherwise known as
“something in return.” In a nutshell, consideration is the price paid by the promise for the obligation of the
promisor.
Example (i) ‘P’ agrees to sell his land for Rs.2,00,000 to ‘Q’. for ‘P’s promise, the consideration is Rs.2,00,000.
For ‘Q’s promise, the consideration is the house. (ii) ‘X’ promises not to file a suit against ‘Y’ if ‘Y’ pays him
Rs.10,000 on a particular date. ‘X’s act of not filing a case against ‘Y’ is the consideration for ‘Y’ and Rs.10,000
is the consideration for ‘X’. if there is no consideration there is no contract.
In an Allahabad case, a person subscribed Rs.500 to rebuild a mosque. It was held that the promise was without
consideration and the subscriber was not liable. (Abdul Aziz V. Masum Ali)
Definitions Sec. 2(d) of contract act defines consideration as follows: “when at the desire of the promisor, the
promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do
or to abstains from doing, such act or abstinence or promise is called a consideration for the promise.” In the
English case Currie V. Misa (1875) consideration was defined as, “some right, interest, profit or benefit accruing
to one party for some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.”
Example: ‘X’ engages ‘Y’ as a steno in his office for Rs.2000 per month. The monthly wage is the consideration
received by ‘Y’. the services of ‘Y’ is the consideration for ‘X’
TYPES OF CONSIDERATION
Consideration may be classified as
1. Past consideration
2. Present consideration, and
3. Future consideration.
Past consideration: When the consideration of one party was given before the date of the promise, it is said to be
past.
For Example, ‘X’ does some work for ‘Y’ in the month of January and ‘Y’ promised him to pay some money
during February.
The consideration of ‘X’ is past consideration. Under English law past consideration will make the contract
invalid.
But under Indian law a past consideration is good consideration because the definition of consideration in
Sec.2(d) includes the words “has done or abstained from doing.” Present consideration: Consideration which
moves simultaneously with the promise is called present consideration or executed consideration. Future
Consideration: When the consideration is to move at a future date it is called future consideration or executory
consideration.

ESSENTIALS OF VALID CONSIDERATION

1. Consideration Must Move at the Desire of the Promisor
2. It must be a real consideration
3. Public Duty
5.Consideration need not be adequate
6. The consideration must not be illegal, immoral or opposed to public policy
7. The consideration may be past, present and future
8. The consideration may move from the promise or from any other person:

“NO CONSIDERATION NO CONTRAACT” – EXCEPTIONS TO THIS RULE

Exceptions
1. Natural love and affection
2. Voluntary Compensation
3. Time-barrred debt: