Legal environment of business

Prepared By
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Manu Melwin Joy
Assistant Professor
Ilahia School of Management Studies
Kerala, India.
Phone – 9744551114
Mail – manu_melwinjoy@yahoo.com

Unit I
• Introduction.
• Sources of law and interpretation of law.
• Classification of Law.
• Principles of natural justice.
• History of Indian judicial system.

Unit II
• Law of contract,
• Essential features of contract, offer, acceptance
and consideration.
• Different types contract.
• Performance of contract.
• Discharge of contract.
• Breach of contract.
• Damages-Indemnity and Guarantee.

Unit III
• Negotiable Instruments Act- 1881.
• Cheques – Bills of Exchange – Promissory Notes .
• Definitions and Characteristics of Negotiable
Instruments.
• Dishonor and Discharge of Negotiable
Instruments.
• Latest laws relating to Negotiable Instruments.
• Sale of goods Act-1930.
• Conditions , Warranty, Agreement to sell.

Unit IV
• Company Law.
• Types of companies.
• Incorporation.
• Memorandum and Articles of Association.
• Prospectus.
• Winding up of companies and Types.

Unit V
• Consumer Protection Act 1986.
• Consumer Redressal Mechanisms.
• Foreign Exchange Management Act -1999.
• Objectives and Features of Cyber laws.
• Intellectual Property Rights.
• Patents, Trademarks, Designs - implications on
business.

What is business?
• Development
• Provide things to enjoy life
• Productive utilization of wealth
producing resources.
• Leads to innovation and
improvements in production
process- enriches the life.
• Today Business Enterprises
dominate our lives.

Power of business
• The wealth of a country is, to
great extent, is created and
controlled by BUSINESS.
• This gives business and
executives thereof the
‘enormous power’ to affect the
lives of different segments of
society, such as customers,
employees, shareholders , etc.

Business environment
Business environment means
the sum of all external forces
and conditions that influence
business and potentially affects
its performance which includes
economic factors, socio-cultural
factors, politico-legal factors,
technical factors and
international factors .

Relationship b/w Business and its Environment
• Various interest groups:
Consumers , Employees,
Owners, Creditors, Suppliers,
Distributors, Competitors,
the Governments, etc.
• Survival and Growth of
business will depend upon
its relations with all these
interest groups.
• Law and business are closely
related disciplines
(complementary)

Importance of law
People living in an organized
society have to follow certain
common rules and the state
has to enforce these rules. Law
is the sum of these rules which
regulate the life of people.
Otherwise, peaceful living is
impossible.

Definition of law
According to Holland,
“Law is a rule of external
human action enforced
by a sovereign political
authority”.

Elements/Characteristics of law
This definition states that,
following elements should be
available in a law
– A body of rules.
– External acts of human being
governed by rules.
– A sovereign political authority
enforcing rules.

Sources of Law
Legal Environment of Business

Sources of Law
English Law Judicial
Decisions
Customs
and usage
Indian
Statute
English
common Law
Equity Law Merchant Statute law

English Law
• Indian business law is
modeled on the lines of
English Mercantile Law, as
India was under British rule
before its independence.
• The difference in the laws
of India and England are
primarily on account of
their different business
environment, customs and
trade practices.

English Law
• The sources of business
law in India are generally
the English laws which
have roots in the
following.
– English common law.
– Equity.
– Law Merchant.
– Statute Law.

English Common Law
• It refers to a system of law
based upon English
customs, usages and
traditions which were
developed over centuries
by the English courts.
• It is unwritten or the non –
statutory laws. These are
found in the reported
decisions of the court of
law.

Equity
• It refers to that branch of
the English Law which
developed separately
from the common law.
• It is based on principle of
fairness and concepts of
justice developed by the
judges whose decisions
became precedents.

Law Merchants
• It refers to the usages or
customs of merchants and
traders that have been ratified
by the courts of law.
• The object is to protect the
interest of trade. The courts in
these cases assume that the
parties have dealt with each
other on the footing of
customs or usages prevailing
generally.

Statute Law
• The statute law refers to
the law laid down in the
Acts of the parliament.
• It is superior to and
overrides any rules of the
common law, equity or law
merchant.
• The court of law interprets
the meaning of such
enactments and apply
them.

Judicial Decisions
Judicial decisions are
usually referred to as
precedent and are
binding on all courts
having jurisdiction lower
to that of the court
which gave the
judgment. This is also
called judge made laws.

Customs and Usages
• Customs or usage of a
particular trade also guide
the courts in deciding
disputes arising out of
mercantile transactions.
• Such a custom or usage
must be widely known,
certain and reasonable,
and must not be opposed
to any legislative
enactment.

Customs and Usages
But where a statute
specifically provides that
the rule of law contained
therein are subject to
any well – recognized
custom or usages of
trade, the latter may
over – ride the statute
law.

Indian Statute
The constitution of India
confer power to enact
law on its parliament and
legislatures of states
when a bill is passed by
the parliament / state
legislatures and assented
to the president or
governor of a state. It
becomes an act or
statute.

Indian Statute
The bulk of Indian
Mercantile Law is statute
law. The Indian contract
act, 1872, The company
Act, 1955, The
Negotiable Instruments
Act, 1881 are instances
of the statute law.

Discussion
• Identify 10 reasons why human trafficking is
thriving?
• Suggest 10 ways by which human trafficking
can be stopped?
• Formulate 10 laws that has to be enforced to
curb human trafficking?

Interpretation of law

Interpretation of law
The process by which the courts
of law try to ascertain or
understand the meaning of the
legislation through the wording
of enactment is technically
called interpretation. The aim of
interpretation of a statute is to
find out the legislative
intention.

Rules of interpretation
• Literal rule of interpretation.
• Golden rule of interpretation.
• Mischief rule of interpretation.
• Rule of “Ejusdem Generis”.

Literal rule of interpretation
• All rules of interpretations have
one aim in view ie., to ascertain
the legislative intention of the
statue.
• The literal rule of interpretation
gives much importance to the
words and phrases used in the
statute.

Literal rule of interpretation
• According to this rule, words, phrases
and sentences are to be given their
ordinary natural meaning.
• If the language used in the statute is
clear, unambiguous and admits only
meaning, the judges should accept it
and enforce it.
• The judge has to give respect to the
letter of the law. This is the basic rule
of construction.

Golden rule of interpretation
• The golden rule of
interpretation propounded by
Wensleydale states that, while
interpreting statutes, the
court has to adopt literal or
grammatical interpretations.
• If the words in the statute
lead to absurdity, repugnancy
or inconsistency, the court can
modify the words for the
purpose of avoiding such
absurdity, repugnancy or
inconsistency but no further.

• For example, imagine there may be a sign
saying "Do not use lifts in case of fire." Under
the literal interpretation of this sign, people
must never use the lifts, in case there is a fire.
However, this would be an absurd result, as
the intention of the person who made the sign
is obviously to prevent people from using the
lifts only if there is currently a fire nearby.

Mischief rule of interpretation
• The mischief rule of
interpretation insists
that the court should
adopt that construction,
which would suppress
the mischief and
advance the remedy.
This is also known as
“Rule in Hydon’s case.”

Mischief rule of interpretation
For the interpretation of
all statutes, four things
are to be considered by
the judge
– The law existing before the
present act was passed.
– The mischief and defect for
which there was no law.
– The remedy provided by
the legislature for avoiding
the mischief.
– The true reason of
mischief.

• Under the Street Offences Act [1959], it was a
crime for prostitutes to "loiter or solicit in the
street for the purposes of prostitution". The
defendants were calling to men in the street
from balconies and tapping on windows. They
claimed they were not guilty as they were not
in the "street." The judge applied the mischief
rule to come to the conclusion that they were
guilty as the intention of the Act was to cover
the mischief of harassment from prostitutes.

Rule of “Ejusdem Generis”
The rule of “Ejusdem
Generis” literally means “ of
the same kind or species”.
The rule says that when
there is a general word
following particular and
specific words, the general
word must be confined to
the things of the same kind.

According to Maxwell, the
general word which follows
particular and specific
words takes its meaning
from them and is presumed
to be restricted to the same
genus of those word.

In order to apply this rule, the
following conditions are to be
satisfied
– The section should contain an
enumeration of specific words
– Should constitute a class.
– The class should not be exhausted
by the enumeration and
– A general term should follow that
enumeration.

• Example: if a law refers to automobiles, trucks,
tractors, motorcycles and other motor-
powered vehicles, "vehicles" would not
include airplanes, since the list was of land-
based transportation.

Classification of Law

Classification of Laws
1. Pubic and Private Law.
2. Civil and Criminal Law.
3. National and International Law.
4. Statute and Common Law.
5. General and Special Law.
6. Natural and physical Law.

Public Law
Public Law is concerned
with the legal relation
between the state and
the individuals. All laws
relating to the
distribution and exercise
of power by the state are
the part of public law.

Public Law
The aim of public law is
promotion of social
objectives and the
protection of collective
interest of individuals.
The criminal law,
constitutional law and
administrative law are
examples of public law.

Private Law
Private Law is that part of
the law which determines
relationship between
individuals in their ordinary
private capabilities. The
primary purpose of private
laws is the protection of
individual interests. The
law of contracts, the law of
property, torts etc are
various forms of private
law.

Criminal Law
Criminal Law means law
relating to crime. It deals with
offences and their
punishments. One of the major
objectives of the Criminal Law
is to punish the wrong doer for
action which is deemed to be
contrary to the interests of the
state and its citizens.

Civil Law
Civil Law provides remedies
to individual victims, which
are recognized by statutes or
decided cases. The Civil Law
creates a framework which
delivers the rights and
obligations of individuals in
their dealings with one
another.

National Law
National Laws refer to
internal legal rules of the
country.

International Law
International Law is a
body of rules which are
regarded as legally
binding on their
relationship with other
nations.

Statute Law
Law laid down in the Acts
of Parliament or
Assemblies are known as
Statute Laws. Bill proposed
in the parliament becomes
acts.

Common Law
Common Law consists of those
principles, usages and rules of
action applicable to the
Government, Security of
persons and of property.
Common Law of Hindus
regarding marriage, succession
of property etc are made
statutory law by bringing
necessary changes.

General Law
General Laws are those
laws applicable to all
persons and things in a
country. They have
general applications.

Special Laws
Special Laws are
applicable only to certain
special circumstances.
Local Law, Marital Law,
Conventional Law etc are
some special Laws.

Natural law
By natural Law is meant
the principles of natural
right and wrong. Natural
Law is considered to be the
highest reason implanted
by nature which
commands what ought to
be done and forbids the
opposite.

Physical Law
Physical Laws are those
laws which describe the
general nature and
principles according to
which the physical
phenomenon acts
under given conditions.

Principles of Natural Justice
Legal environment of business

Introduction
• PNJ were derived from the
Romans who believed that
some legal principles were
“natural” or self evident
and did not require a
statutory basis.
• PNJ is embedded in Article
311 of the Constitution of
India.

Principles of Natural Justice
1. Rule against Bias
2. Rules for the fair
hearing.
3. Reasoned decision.

Rule against Bias
This means that the
administrative authority,
who exercises quasi judicial
function should be impartial.
He should be free from bias.

Rule against Bias
• The administrative authority,
exercising, quasi judicial function,
is said to be biased if
– He has pecuniary interest in the
subject matter of the dispute.
(Pecuniary bias)
– He is a relative or a friend or enemy
of disputing parties. (Personal bias)
– He has general interest in the
subject matter. (Official bias).

Rule against Bias
• Rules against bias are based on
three maxims.
– No man shall be a judge in his
own cause.
– Justice should not only be done
but manifestly and undoubtedly
seem to be done.
– Judges should be above
suspicion.

Rules for the fair hearing
The second important
condition of natural justice
is that the person whom an
action is proposed to be
taken, should be given a
reasonable opportunity to
defend himself. Before
passing an order against
any person, he must be
heard.

Rules for the fair hearing
For a fair hearing, the
following two are
necessary
–Notice.
–Opportunity of hearing.

Reasoned Decision (Speaking Order)
Speaking order means on
order which contains
reasons for the decision.
The administrative
authority exercising quasi
judicial function should
give reasoned decision.

Reasoned Decision (Speaking Order)
A party to the dispute has a
right to know the result of the
enquiry and the reason in
support of the decision. The
reasoned decision safe guards
against possible injustice and
arbitrary exercise of powers by
quasi judicial authority.

History of Indian Judicial System

History
Maharajas - Hindu Laws
Mughal Emperors - Islam Laws + HL
British Empire – English Common Law + HL + IL
Present - Constitution

Indian Judicial System
• Supreme Courts
• High Courts
• Subordinate courts

Supreme Courts
• Supreme court of India
stands at the apex of the
entire judicial system. It
consists of a Chief Justice
and not more than
twenty five judges. Every
judge of supreme court
shall be appointed by the
president.

Supreme Courts
Supreme court has four
kinds of jurisdiction.
– Original.
– Appellate.
– Advisory.
– Special.

High Courts
• High court is the head of
the judicial administration
of the state. Each high
court consist of a chief
justice, appointed by the
president.

High Courts
• Jurisdiction of High Court
– Court of record.
– Power of issue writs.
– Power of superintendence.

Subordinate Courts
• The power and functions of
these courts have been
principally derived from the
two important codes.
– Code of Civil Procedure.
– Code of Criminal Procedure.

Subordinate Courts
• Each state is divided into
Judicial districts presided
over the District and
sessions judge. He is the
highest judicial authority
in a district.

Fundamental Rights
• Rights are claims that are
essential for the existence
and development of
individuals. In that sense
there will a long list of rights.
Whereas all these are
recognized by the society,
some of the most important
rights are recognized by the
State and enshrined in the
constitution. Such rights are
called fundamental rights.

Fundamental Rights
• The Constitution guarantees
six fundamental rights to
Indian citizens as follows:
– right to equality
– right to freedom
– right against exploitation
– right to freedom of religion
– Right to cultural and
educational rights and
– right to constitutional
remedies.

Law of Contract

Contract
The word contract is
derived from the Latin
word “Contractum”
which means “drawn
together”. To the layman,
the word “contract”
probably means “an
agreement’ which can be
enforced in the court of
law.

Definition
Section 2 (h) of the
Indian Contract Act
defines the term
contract as follows: “
An agreement which
is enforceable at law
is contract”.

Definition
• Contract = Agreement + Enforceability at Law

Example
Basil invites Hari to dinner and Hari accepts
the invitation. It is only a social agreement and
not enforceable in a court of law. So it is not a
contract. Basil agrees to sell his house to Hari
for Rs 50,000. This is a contract.

Definition
• According to
Section 2 © of the
contract act, the
person making the
proposal is called
the Promisor and
the person
accepting the
proposal is called
promise.

Elements of a contract
The essential elements
of a contract are
contained in the
definition of contract
given in section 10 of
contract Act.

1. Agreement.
2. Consensus of Idem.
3. Capacity of parties.
4. Free consent.
5. Consideration.
6. Lawful Object.
7. Not declared to be void.
8. Certainty and possibility of
performance.
9. An intention to create legal
relationship.

• Agreement - There
must be an agreement
between the parties of
a contract. An
agreement involves a
valid offer by one party
and a valid acceptance
by the other party.

Example
Sanitha sends a proposal to Julie to purchase
her house for Rs 5 Lakhs and Julie accepts the
proposal, then this results into an agreement.

• Consensus of Idem –
The parties to contract
must agree upon the
subject matter of the
contract if the same
manner and in the
same sense.

Example
Adarsh has two houses, one at Trivandrum
and another at Kochi. Adarsh expresses his
willingness to sell on of his houses to Shanu.
Adarsh had in his mind house at Trivandrum
where Shanu had house at Kochi in mind. So
there is not Consensus Ad Idem.

• Capacity of parties – There
must be at least two parties
to every contract. These
parties must have legal
capacity to enter into a
contract. Every person who is
a major and possesses sound
mind is competent to enter
into a contract. (Minors,
Lunatics, drunken persons
not competent).

• Free consent – For the
formation of a contract,
one person must give his
consent to another person.
The consent thus obtained
must be a free consent. A
consent is said to be free if
it is not caused by
coercion, undue influence,
fraud, misrepresentation
or mistake.

Example
Arun asks Ajas to sign an agreement. Ajas
refuses to do it. So Arun threaten Ajas of
severe consequences if Ajas is not signing the
document. So Ajas finally agrees, fearing
consequences. The consent thus shown by
Ajas is not free.

• Consideration –
Consideration means
something in return. In every
contract, each agreement
must be supported by
consideration, when one
party agrees to give
something (or give up
something) he must be
benefited by the other party.

Example
Amal offers to sell his house to Jasir for Rs 4
Lakhs. Jasir accepts the proposal. Here, the
consideration for the sale of his house is Rs. 4
Lakhs and the consideration of Jasir’s payment
of 4 Lakhs is the house.

• Lawful Object – The object
of an agreement must be
lawful. It must not be
illegal or immoral or
opposed to public policy.
When an object of a
contract is not lawful, the
contract is void.

Example
Eldhose promises to pay Aiju Rs 5 Lakhs for
murdering Davood Ibrahim. Here the object of
the contract is to commit murder. It is
unlawful and therefore the contract becomes
void.

• Not declared to be void – The agreement might
not have been expressly declared void by any law in
force in the country. In such cases, the agreement
cannot be enforced.

Example
A agrees to supply liquor to B, subsequently
prohibition Act comes into force. Thus all
agreement to supply liquor become void,
thereafter. Therefore B cannot enforce the
agreement which is made before the act comes
into force. The agreement has already become
void from the date of prohibition order come into
effect.

• Certainty and possibility of
performance – The term of
contract should be certain
and precise. They should
not be vague and they
should not create any
confusion in the minds of
the parties.

Example
Sanitha agrees to sell one of her houses. She
has four houses. Here the terms of agreement
is uncertain.
A agrees to pay Rs 1 Lakh to B if B brings his
son (who died last year). This is an impossible
act .In both these examples, the agreement
void.

• An intention to create
legal relationship – The
agreement should create a
legal obligation. Mere
informal promise is not to
be enforced. Social
agreements are not to be
enforced as they do not
create any legal obligation.

Agreement
• All contracts are
agreements but all
agreements are not
contracts.
• Every promise and every
set of promises forming
consideration for each
other is an agreement.
• Agreement = Offer +
Acceptance.
• An agreement not
enforceable by law is said
to be void.

Types of Contract

Classification of contracts
Legal Effects Performance Formation
1. Valid Contract
2. Void Contract
3. Voidable contract
4. Unenforceable
contract
5. Illegal contract
1. Unilateral Contract
2. Bilateral contract
3. Executed contract
4. Executory contract
1. Express Contract
2. Implied contract
3. Quasi contract

Classification based on legal effects
Valid Contract – An
agreement enforced by
law is a valid contract.
An agreement becomes
a valid contract when it
fulfills all the essentials
of a contract as laid
down in section 10.

Example
• Sophi offers Arun to sell his house for Rs 3
Lakhs. B agrees to buy the house for this price.
It is a valid contract.

Void Contract – A
contract coming out
from a void agreement
is a void contract. A
contract becomes void
when it ceases to be
enforceable by law.

Voidable contract – An
agreement which is
enforceable by law at the
opinion of one or more of
the parties there to but
not at the opinion of the
other or the others is a
voidable contract. A
voidable contract remains
to be good till it is
avoided by the party
entitled to do so.

Example
• If the consent of the party was caused by
coercion, the contract is enforceable at the
option of the party whose consent was not
free.

Unenforceable contract
– An unenforceable
contract is one which
cannot be enforced in a
court of law because of
some technical defects
such as absence of
writing, time barred,
want of stamps etc.

Example
• When the promissory not is under – stamped,
the agreement therein becomes
unenforceable because of that technical
defect.

Illegal Contract – An
illegal agreement is one
which criminal in nature
or which is immoral or
which is against public
policy.

Example
• A contract to commit dacoity is an illegal
contract.

Classification based on Performance
Unilateral contract – A
unilateral contract is one
in which only one party
has to fulfill his obligation
at the time of the
formation of the contract
and the other party
having fulfilled his
obligation at the time of
the contract or before
contract comes into
existence.

Example
• Amina permits a coolie to put his luggage to a
carriage. The contract comes into existence as
soon as the coolie puts the luggage. So Amina
has only to fulfill his part.

Bilateral Contract – A
bilateral contract is one
in which the obligation
on the part of both the
parties to the contract
are outstanding at the
time of the contract.

Example
• Athulya promises to paint a picture in return
for which Saranya promises to Rs 1000.

Executed Contract – If
both parties of a
contract have
performed their
respective obligation,
contract is known as an
executed contract.

Example
• Amal contracts with Bessy to buy a house for
Rs 1,00,000. Amal paid Rs. 1,00,000 to Bessy.
Bessy executed the sale deed and delivered its
possession.

Executory contract – An
executory contract is
one in which both
parties have not yet
performed their
obligations either
wholly or in which there
remains something to
be done on both sides.

Example
• Rahul agrees to paint a picture for Rejith for
Rs. 500. Rahul has not painted the picture and
Rejith has not paid the price also.

Classification based on Formation
Express contract – If the
terms of a contract are
expressly agreed upon
(whether orally or in
writing) at the time of
the formation of the
contract, the contract is
said to be an express
contract.

Example
• Collin writes to Aby “ I am willing to sell my
car to you for Rs 50,000”. Aby accepts Collin’s
offer by another letter.

Implied contract – An
implied contract is one
which is inferred from
the act or conduct of
the parties or course of
dealings between them.

Example
• Diljith gets into a public bus. Then he enters
into an implied contract with the authorities
of the bus that he wishes to travel in the bus.

Quasi Contract – Under
certain circumstances,
law itself creates legal
rights and obligations
against the parties. These
obligations are known as
quasi contracts. It is
created by law and it only
resembles a contract.
.

Example
• Aiju , a tradesman leaves goods at Sajid’s
house by mistake. Suppose Sajid treats the
goods as his own, then Sajid is bound to pay
to Aiju a reasonable price for the goods.

Offer

Definition
• As per Section 2 (a) of the
contract Act, “When one
person signifies to
another his willingness to
do or abstain from doing
anything, with a view to
obtaining the assent of
that other to such act or
abstinence, he is said to
make an offer”.

Example
• When A expresses his willingness to sell motor
care for Rs 10,000 with a view to get B’s
acceptance, A is said to make an offer.

Definition
• The word offer of the English
law is synonymous to the word
proposal of the Indian Contract
Act.
• The person making the offer is
called the offeror and the
person accepting the proposal
is called the offeree.
• Offer is made either by words
spoken or by words written.
This is expressed offer. An offer
is made by conduct or
behavior. This is implied offer.

Essential Characteristics of a valid offer
• The terms of an offer must
be clear and certain or at
least capable of being made
certain.
• Offer must be communicated
to the offeree.
• An offer must be made with
an intention of creating legal
obligations.
• Invitation to an offer is not an
offer.

• Special terms attached to an
offer must be communicated.
• An offer may be to an individual
or to the public at large.
• Offer may be expressed or
implied.
• Offer must be made with a view
to obtaining the assent of the
other party
• Offer may be conditional.
• Offer should not contain a term,
the non compliance of which
would amount to acceptance.

• The terms of an offer must
be clear and certain or at
least capable of being
made certain.
– Example – A agrees B a
hundred tons of oil. There is
nothing whatsoever to show
what kind of oil was
intended to be sold. Hence
the agreement is void for
uncertainty and vagueness.

• Offer must be communicated
to the offeree.
– Example – In Fitch Vs Snedakar,
a person gave information
without knowing that an
award was offered for it and
claimed the award
subsequently. It was held that
he was not entitled to the
award since he was not aware
of the same.

• An offer must be made
with an intention of
creating legal obligations.
– Example – A invited B for a
dinner and when B came,
dinner was not ready. B
could not enforce it since it
is just a social agreement.

• Invitation to an offer is not
an offer.
– Example – When a merchant
sends his quotation, it is not
an offer but is only an
invitation on his part of his
readiness to transact
business on those terms.

• Special terms attached to
an offer must be
communicated.

• An offer may be to an
individual or to the public at
large.
– Example – In Carlil Vs Carbolic
Smoke ball company, the
company has offered by
advertisement a reward of $
100 to anybody contracting
influenza after using their
smoke ball. Mrs Carlil did and
she was entitled for $ 100
since it was a general offer and
she accepted it.

• Offer may be expressed or
implied.
– Example – A writes to B that
he is prepared to sell his
house for Rs. 2 Lakhs. This is
an express offer. If a person
hires a taxi, it is implied that
he has to pay the fare.

• Offer must be made with a
view to obtaining the
assent of the other party
• Offer may be conditional.
• Offer should not contain a
term, the non compliance
of which would amount to
acceptance.

Kinds of offers
• General offer – If an offer is
addressed to an
unascertained body of
individuals, it is called
general offer.
• Special offer – If an offer is
addressed to a definite
individual or body of
individuals, it is called a
specific offer.

Example
• A issues a public advertisement that he would
give Rs 100 to anyone who brings back his
missing dog, it is a general offer.
• A promises to give Rs 100 to B if he brings
back his missing dog, it is a special offer.

Kinds of offers
• Standing offer – An offer
for a continuous supply of a
certain article at a certain
rate over a definite period is
called a standing order.
– Example – A, by means of an
offer agrees to supply coal to
B at a particular price for a
period of two years. It is a
standing offer.

Kinds of offers
• Counter offer– A counter
order is rejecting the
original offer and making a
new offer.
– Example – A offers to sell his
house for Rs 2 lakhs to B. B
accepts to purchase it for Rs
One lakh. This is a counter
offer.

Kinds of offers
• Cross offer – When two
parties make identical offer
to each other in ignorance
of each other’s, such offer is
called cross offer.
– Example – A by letter offers
to sell his car to B for Rs
50,000. B by letter offers A to
buy the same car for Rs.
50,000. It is a cross offer.

Lapses of offer
• Revocation by communication
of notice.
• By lapse of prescribed time.
• Death of the offeror.
• Insanity of the offeror.
• Non- Fulfillment of conditions.
• Offer not accepted according
to the mode prescribed.
• Rejection by a counter offer.

Consideration

Definition
The term consideration is
defined in Sec. 2 (d) of the
Indian contract Act as “When
at the desire of the promisor,
the promise or any other
person has done or
abstained from doing, or
promises to do or to abstain
from doing something, such
act, abstinence or promise is
called a consideration for the
promise.”

Definition
• Consideration is the
backbone of all promises.
• Consideration means
something in return to
the promisor.

Essentials of consideration
• Consideration must move
at the desire of the
promisor.
• Consideration may move
from promisee or any other
person.
• Consideration may be past,
present or future.
• Consideration need not be
adequate.

• Consideration must be real
and not illusory.
• Consideration must be
lawful.
something which the
promisor is not already
bound to.

• Consideration must move
at the desire of the
promisor.
– Example – X’s son is missing
and Y voluntarily goes in
search for him. Y cannot
claim any remuneration or
reward for finding out X’s
son because he has not
done it at X’s request.

• Consideration may move
from promisee or any other
person.
– Example – In Chinnayya Vs
Rammayya, it was held that
consideration moving from
third party is also good
consideration.

present or future.
– Example – X’s son was
rescued from drowning by Y
on 15th August at the
request of X. Subsequently
on 17th, X promised to pay
Rs 500 for the service
rendered in the past. Y’s
consideration in this case is
past consideration.

present or future.
– Example – X agrees to look
after the child of Y and he
further agrees to receive all
expenses incurred by him
from Y at the end of the
year. In this case,
consideration is a future one
for X.

• Consideration need not be
adequate.
– Example – A agrees to sell
his horse worth Rs 25,000 to
B for Rs. 1000. The contract
is valid provided A’s consent
was freely obtained.

• Consideration must be real
and not illusory.
– Example – A promises to
shift a mountain from one
place to another if B paid Rs
10,000. A’s promise is
physically impossible of
performance.

lawful.
– Example – Where A
promises to obtain an
employment for B in the
public service and B, in
return promises to pay Rs.
1000 to A, the agreement is
void as the consideration is
unlawful.

something which the
promisor is not already
bound to.
– Example – A is paid salary
for doing a job. So he is
bound to do the job. But a
promise to pay another sum
of money for doing the job is
without consideration.

Different Kinds of consideration
• Present consideration –
When consideration is given
simultaneously with
promise, ie at the time of
promise, it is said to be
present consideration.
– Example – Cash sales.

• Future consideration – A
consideration is said to be
future consideration when it
is done in future or yet to be
complied with.

• Past consideration – When
consideration for a present
promise was given by party
in the past, ie before the
date of promise, such a
consideration is a past
consideration.
– Example – A has already
rendered some service to B
and B now makes a promise.

Acceptance

Definition
Section 2 (b) of the
contract Act defines
‘Acceptance’ as follows:
“When the person to
whom the offer is made
signifies his assent
thereto, the offer is said
to be accepted.”

Definition
• The offeree, when he
accepts the offer, is called
the acceptor.
• Acceptance can be made
by words, spoken or
written.
• An offer can be accepted
only by the person to
whom it is made.

Essentials of a valid acceptance
• Acceptance must be
absolute and unqualified.
– Example – A says to B, “ I
offer to sell my house for Rs.
2 Lakhs.” B replies “ I will
purchase it only for Rs 1
Lakh”. It is only a partial
acceptance.

communicated to the offeror.
• Acceptance must be made
within a reasonable time.
communicated in some usual
and reasonable manner.
• Acceptance may be
expressed or implied.

• Acceptance must be made by
the offeree.
• Acceptor must be aware of
the proposal at the time of
the offer.
• Acceptance must be made
only after the offer is made.’
• Acceptance must be given
before the offer lapses or is
revoked.
• Acceptance concludes the
contract.

Performance of contract

Definition
Performance of a contract
consists in doing or causing
to be done what the
promisor has promised to
do. A contract creates legal
obligations. Performance of
a contract means the
carrying out of these
obligations.

Definition
When the terms of a
contract are fulfilled by the
respective parties to the
contract, performance of
contract takes place.

Example
A promises to deliver 100
bags of wheat to B and B
promises to pay Rs. One lakh
on delivery. The contract is
said to be performed when A
delivers 100 bags wheat to B
and B pays Rs. One Lakh to
him.

Who may perform the contract?
• The contract may be
performed by three
categories.
– Promisor
– Agent
– Legal representative

Promisor – If a contract
involves the exercise of
personal skill and
qualifications of the
promisor, then it must be
performed by the promisor
himself.

Agent – When the personal
skill of the promisor is not
necessary and the work could
be done by anyone, the
promisor or his representative
may employ a competent
person to perform it. He acts as
the agent of the promisor.

Legal representative – If the
promisor dies before the
performance of the contract,
his legal representatives like
sons and daughters who inherit
the property of the deceased
promisor are bound to perform
it.

Who can demand performance?
• Naturally, it is only the promisor
who can demand performance
of the promise. It makes no
difference whether the promise
is for the benefit of the promise
or for any other person.
• In certain cases, a third party
can also enforce a promise
under a contract even though
he is not a party to contract.
• In the case of death of promisor,
his legal representatives can
demand performance.

Example
• A promises to B to pay C a
sum of Rs. 500. A does not
pay the sum to C. C cannot
take any against A. It is
only B or his
representatives who can
enforce this promise
against A since B is the
promisee.

Time and Place of performance
• It is for the parties of the
contract to determine the
time and place of
performance of contract.
• The following rules
regarding time and place
of performance of a
contract are discussed in
the Contract Act.

• Where the time is not fixed
– According to section 46,
where the contract is to be
performed without any
demand by the promise and
where no time for
performance is fixed, then
the contract must be
performed within a
reasonable time.

Example
• A borrowed certain sum of
money from B and B
directed to pay the said sum
to C, a third party. A also
agreed to repay to C but A
did not fulfill his promise for
three years. It was held that
the failure to pay the
amount to C by A amounted
to a breach of contract since
a period of three years
considered a reasonable
time for performance.

– Where the time is fixed –
According to section 46,
when a promise is to be
performed on a certain day
and the promisor has
undertaken to perform it
without application by the
promise, the promisor may
perform it at any time
during the usual hours of
business on such a day and
at the place at which the
promise ought to be
performed.

Example
• X promises to deliver goods
at Y’s godown on the lst of
January. On that day, X
brings the goods to Y’s
godown, but after the usual
hour for closing it. Hence
the goods are not received.
In this case, X has not
performed his contract in
time.

– Place of performance – If
the contract mentions a
place, the contract must be
performed at the place
mentioned in the contract.
If the place is not
mentioned, the promisor
must ask the promise to fix
a reasonable place to
perform the contract.

Discharge of Contract

Definition
Discharge of contract means
termination of the
contractual relationship
between the parties. A
contract is said to be
discharged when the parties
thereto are freed from the
task of performing their
respective obligations as
arising from the contract.

Definition
When a contract is
discharged, all the rights
and liabilities of the
contracting parties are
extinguished and their
relationship comes to an
end.

Various modes of discharge
1. By performance of contract.
– Actual Performance.
– Attempted performance.
2. By agreement.
– By Novation.
– By alteration.
– By recession.
– By remission.
– By waver.
– By merger.

Various modes of discharge
3. By lapse of time.
4. By operation of law.
– By death.
– By insolvency.
5. By impossibility of performance.
– At the time of contract.
– Subsequent to contract.
6. By breach of contract.

By performance of contract
When persons who
have undertaken the
obligations perform it
within the time and in
the manner prescribed,
the contract will be
properly discharged.

Performance is classified into
two.
• Actual performance – Section
37 states that in order to claim
performance, the parties to a
contract must have actually
performed their part of the
contract.
• Example – If A agreed to supply
20 bags of rice to D, A must have
actually supplied the entire 20
bags of rice. Then only it can be
stated that the contract has
actually been performed.

Performance is classified
into two.
• Attempted performance – A
person who is bound to
perform a promise will be
ready to perform his
promise but sometimes the
other party refuses to
accept that performance.
This is known as attempted
performance or tender.

By agreement
As contract emerges
from an agreement of
both parties, it may
also be terminated by
another agreement or
consent of both
parties.

By agreement
Contract may be
discharged by agreement
in the following ways.
– By Novation.
– By alteration.
– By recession.
– By remission.
– By waver.
– By merger.

By agreement
By Novation (substitution
of a new contract) –
Sometimes, the contracting
parties may agree to
substitute a new contract in
the place of the original
contract between
themselves and different
parties. The substitution of
new contract is called
“Novation”.

Example
A owes Rs 5000 to B. It is
agreed between A, B and
C that henceforth, C will
repay the amount of Rs.
5000 to B. Old contract
disappears and new one
is formed.

By agreement
By alteration – Alteration
means a change in one or
more of the terms of the
contract. By mutual
agreement, parties to
contract can alter one or
more terms of the
contract. By such
alteration, the contract is
discharged.

Example
X enters into a contract with Y
for supply of 100 bags of Sugar
by the first of the next month.
Subsequently, X and Y want to
alter the terms of the contract
and thereby X and Y agree that
X should supply 50 bags of sugar
instead of 100 bags on the 10th
of the next month. In this case,
the old contract is discharged.

By agreement
By recession – Recession
means cancellation of
contract. In that case, the
original contract need not
be performed. Both the
contracting parties may
agree, by mutual
agreement, to rescind the
contract by cancelling
some or all the terms of
the contract.

Example
X agrees to supply Y certain
luxurious good within six
months. By the time, the
said goods go out of
fashion. Both X and Y agree
to cancel the contract. By
such cancellation, the
contract between X and Y is
discharged.

By agreement
By remission – Remission
means acceptance of a
lesser performance than
what was actually due
under the contract. It is a
unilateral act of promise
discharging at his will and
pleasure the obligation of
another.

Example
X owes Rs. 500 to Y. Y
agrees to accept a lesser
sum namely, Rs 400 instead
of Rs. 500. As soon as Rs.
400 is paid by X, the whole
debt of Rs. 500 is
discharged.

By agreement
By waver – When both
parties by mutual
consent, agree of
abandon their respective
rights, the contract need
not be performed and
the same is discharged. It
is called waiver.

Example
A agrees to supply B 10 bags
of rice. B, in return agrees to
supply A, 10 bags of wheat.
Subsequently, both A and B
agree to abandon their
respective rights. Accordingly
A need not supply rice to B.
Likewise B need not supply
wheat to A. Now contract is
discharged.

By agreement
By merger – Sometimes,
both parties, who have
already entered into a
contract within inferior
rights, may enter
subsequently new contract
and the new contract
creates superior rights.
Now the previous contract
with lesser right is said to
be merged with
subsequent contract with
superior rights.

Example
Y is the owner of the house
in which X is residing as a
tenant. Subsequently X
buys the property from Y. In
such case, X’s lesser rights
as leasee will be merged
into his superior rights as
an owner.

By lapse of time
Every contract must be
performed within specified
period and it is called the
period of limitation. If the
contract is not performed
and the promise fails to
take any action within the
period of limitation, then
the contact is terminated or
discharged by lapse of
time.

Example
X borrows Rs. 500 from Y through
a promissory note. If X does not
pay any amount, Y must file a suit
to recover the amount in a court
of law within three years from
the date of execution of the
promissory note. If no action is
taken by Y within three years, the
promissory note is completely
barred by limitation and Y can’t
recover the amount from X.

By operation of law
• A contract may be discharged
by operation of law. In other
words, law itself discharges
the contract in the following
circumstances.
– By death – An contract which is
based upon personal skill and
qualification of the promisor is
terminated on the death of the
promisor. In other contracts,
the rights and liabilities of
deceased person pass of his
legal representatives.

Example
X agrees to paint a picture
for Y. Subsequent to the
agreement X dies. Now the
contract of X with Y
discharged because of the
death of the promisor.

By operation of law
– By insolvency – If a person
is adjudicated insolvent by
a competent court, all his
rights and liabilities are
vested with the official
receiver and the insolvent
is discharged from all his
rights and liabilities arising
from all his earlier
contracts.

By impossibility of performance
Contract will be
discharged when the
performance of contract
becomes impossible.
Impossibility of
performance of a
contract may exist either

At the time of contract –
when both the contracting
parties are aware of
impossibility of
performance of the
contract even at the time of
formation of the contract
itself, then the agreement
becomes void. If they are
not aware, contract
becomes void when such
impossibility is discovered.

Example
X agrees to pay Y Rs. 10,000
and Y, in return promises to
bring the moon from heaven
for X. In such a case, the
impossibility is known for
the parties.

Subsequent to contract – As a
general rule, the impossibility
of performance will not
excuse the promisor and in
case of non performance, the
promisor is liable to pay
damages to the promise. But
there may be some cases in
which non – performance of
the contract may be due to
some even beyond the control
of the parties. In such cases,
performance of contract will
be discharged. This is called
“Doctrine of Supervening
impossibility’.

Example
A and B contracts to marry
each other. Before the time
fixed for marriage, A goes
mad. This supervening factor
renders the contract
impossible. So the contract
becomes void.

By breach of contract
Breach means failure of a
party to perform his
obligation under a
contract. When a
promisor has failed to
perform his part of
contract, he has
committed a breach of
contract. Breach of
contract is of two kinds.

Actual breach of contract
– Actual breach of
contract may take place
at the time when the
performance becomes
due and in such cases,
one party, fails or refuses
to perform his obligation.

Example
X agrees to supply Y, 10 bags
of sugar on the 1st of March.
In this case, performance is
due on 1st March. On the 1st
march, he fails to supply
sugar. This is actual breach
of contract at the time when
the performance is due.

Anticipatory breach of
contract – When a party
to a contract refuses to
perform his obligation
before the due date of
performance, it is called
anticipatory breach of
contract.

Example
X agrees to supply Y, 10 bags
of sugar on the 1st of March.
But before this date, say in
the second week of
February, he informs B that
he is not going to supply the
sugar. This is anticipatory
breach of contract by
express repudiation.

Breach of Contract

Definition
• Parties to a lawful contract
are bound to perform their
respective obligations. But
when one of the parties of
a contract fails to perform
his part of contract, he is
said to have committed
breach of contract.

Definition
• Breach of contract confers
a right of action upon the
party injured. This right of
action is the remedy
available for the injured
against the party
committing breach of
contract.

Remedies for breach of contract
• Rescission of contract
(Cancellation).
• Restitution.
• Suit for specific
performance.
• Suit for Injunction.
• Suit from ‘Quantum
Meruit’.
• Suit for damages.

• Rescission of contract
(Cancellation) - Rescission
of contract means
annulment of it. It is the
revocation of the
contract. When all or
some of the terms of
contract are cancelled,
rescission of a contract
takes place.

Example
• A promises to supply
certain goods to B for
price. A does not supply
the goods. B is discharged
from his liability to pay
the price.

• Restitution – Restitution means
return of the benefit received
by one party from the other
party in a void contract. When
an agreement is, later
discovered to be void or when
the contract becomes void, any
person who received any
advantage under such
agreement or contract is bound
to restore it or make
compensation for it to the
person from whom he received
it.

Example
• A pays B Rs. 1,00,000 in
consideration of B’s promising
to marry C, daughter of A. But
C is dead at the time of
promise. The agreement is
void at the time when the
death is known. So B must
repay the amount of Rs.
1,00,000.

• Suit for specific performance –
Specific performance means
actual performance of the
particular contract as per
agreement. Specific
performance will be granted in
those cases where
compensation will not be an
adequate remedy or actual
damage cannot accurately be
assessed and it will usually be
granted in contracts connected
with purchase of land or house.

Example
A agrees to sell his land to B. If
A subsequently refuses to sell
the land, B can file a suit for
special performance and the
court can compel A to sell and
to execute the sale deed in
favor of B in respect of the
land agreed to be sold.

• Suit for Injunction – Another
remedy for breach of
contract is an injunction
which is an order of the
court restraining or
preventing a person from
doing a particular act. It is
another mode of securing
the specific performance by
the negative terms of a
contract.

Example
A contracts with B to sing for
12 months at B’s theatre and in
no other place. Later A entered
into a contract with C to sing in
C’s theatre and refuse to sing
in B’s theatre. Now B can file a
suit and obtain an order of
injunction restraining A from
singing in C’s theatre.

• Suit from ‘Quantum Meruit’ –
The phrase ‘Quantum Meruit’
literally means ‘ as much as
earned’. When a person has
done some work under a
contract and the other party
repudiates the contract or
some even happens which
makes further performance of
the contract impossible, then
the party who has performed
the work can claim
remuneration for the work he
has already done.

Example
Under a contract, A agrees to do
a certain piece of work for a lump
sum of Rs 1000 which is payable
on its completion. When A has
done 50 % of work, B repudiates
the contract. In such a case, A
can claim “ Quantum Meruit” ie
Rs 500 being the reasonable
remuneration of 50 % of the
work done.

• Suit for damages – Damage
means monitory
compensation payable by
the defaulting party to the
injured party in the event of
breach of contract. The
object of awarding damages
is to put the aggrieved party
in the same financial
position, had the contract
been performed.

Different types of damages
• General damages
• Special damages
• Vindictive damages
• Nominal damages
• Liquidated damages
• Penalty

• General damages –
Damages that arise
naturally in the usual
course of things from the
breach itself are called
general damages. These
damages are awarded
only for consequences
which arise out of breach
of contract.

• Special damages – Special
damages are those which
arise from the breach of
contract under special
circumstances.

• Vindictive damages –
These damages are
awarded with a view to
punish the defaulting
party who injured the
feelings of the others and
not solely with the idea of
awarding compensation
to the injured party.

• Nominal damages –
Nominal damages are
awarded in cases where
the injured party is able
to prove a breach of
contract but he has not
suffered any real and
substantial loss.

• Liquidated damages –
This represent a sum fixed
or ascertained by the
parties of the contract. It
is a fair and genuine pre –
estimate of the probable
loss that might ensure as
a result of the breach.

• Penalty – It is a sum fixed
in the contract at the time
of its formation which is
disproportionate to the
damages likely to accrue
as a result of the breach.
It is used for forcing the
other party to perform
the contract.

Contract of indemnity

Contract of indemnity - Definition
• To indemnify means to
compensate or make good
the loss. According to
Section 124 of the contract
Act, “A contract of
indemnity a contract by
which one party promises
to save the other from loss
caused to him by the
conduct of the promisor
himself or by the conduct
of any other person.”

Example
• A takes court proceedings against B to recover
a sum of Rs 1000. At this juncture, C enters
into an agreement with B and promises to
compensate B from the loss or consequences
of such court proceedings which A takes
against B. This is a contract of indemnity.

Definition
• The person who promises
to save the other from the
loss is called indemnifier.
The person, to whom the
promise is made, is called
indemnified.

Definition
• To constitute a valid
contract of indemnity, the
following three ingredients
are necessary.
– One party promises to save
the other from loss caused
to the latter.
– The loss caused to him by
the conduct of the promisor.
– The loss is caused by the
conduct of any other third
person.

Object of contract of indemnity
• The object of contract of
indemnity is essentially to protect
the indemnified form the
anticipated loss.
• A contract of Indemnity may be
expressed or implied.
– Expressed contract of Indemnity –
Where the terms of the contract or
Indemnity are either in oral or in
written form.
– Implied contract of Indemnity –
where the contract of Indemnity
can be inferred from the
circumstances of the case or from
the relationship of the parties.

Rights of indemnity holder
• Section 125 enumerates
the rights of an indemnity
holder in a contract of
indemnity. An indemnity
holder can recover from
the indemnifier the
following.

Rights of indemnity holder
• Damages – All damages which he may
be compelled to pay in any suit of any
matter to which the promise to
indemnify applies.
• Costs – All costs he may be compelled
to pay in any such suit.
• All sums – All sums which he may have
paid under the terms of any
compromise of any such suit, provided
such compromise is not contrary to the
orders of the promisor and was one
which it would have been prudent for
the indemnity holder to make.
• Suit for special performance – An
indemnity holder is entitled to sue the
indemnifier even before he has suffered
any damage provided an absolute
liability has been incurred by him.

Contract of Guarantee

Definition
• According to Section 126,
“a contract of Guarantee
is a contract to perform
the promise or to
discharge the liability of a
third person in case of his
default.”

Example
• A lends Rs 500 to B on C’s promise to pay the
same if B fails to pay within a year. This is
contract of Guarantee.

Definition
• A contract of Guarantee
involves three parties, the
creditor, the surety and the
principal debtor. The person
who gives the guarantee is
called the surety, the
person in respect of whose
default the guarantee is
given is called the principal
debtor and the person to
whom the guarantee is give
is called the ‘creditor’.

Essential features of a Contact of
Guarantee
• A contract of Guarantee
involves three parties, the
creditor, the surety and the
principal debtor. The person
who gives the guarantee is
called the surety, the
person in respect of whose
default the guarantee is
given is called the principal
debtor and the person to
whom the guarantee is give
is called the ‘creditor’.

Guarantee
• Three parties.
• Indemnity of mind.
• Liability of existence.
• Primary and secondary
liability.
• Writing or Oral.
• No misrepresentation or
concealment.

Guarantee
Three parties – There must be
three parties in a contract of
guarantee namely, the
principal debtor, the creditor
and the surety. In a Contract of
Guarantee, there are three
contracts (1) Contract between
principal debtor and creditor
(2) Contract between principal
debtor and surety and (3)
Contract between creditor and
surety.

Guarantee
Indemnity of mind – The
Contract of Guarantee
requires the identify of
mind (Concurrence) of all
the said three persons in
respect of the subject
matter of the contract.

Guarantee
• Liability of existence – There
must be a primary liability in
some person other than the
surety.
• Primary and secondary liability
– The primary liability lies with
the principal debtor. The
liability of the surety is only
secondary in the sense that his
liability arises only when the
principal debtor fails to pay his
debt.

Guarantee
• Writing or Oral – Contract of
Guarantee may be oral or in
writing. But under the English
law, a contract of guarantee
must always be in writing.
• Essential elements of a
contract – A Contract of
Guarantee must have all the
essential elements of a valid
contract.

Guarantee
No misrepresentation or
concealment – Any
guarantee which has been
obtained by means of
misrepresentation made
by the creditor or with his
knowledge and assent
concerning a material
part of the transaction is
invalid.

Kinds of Guarantee
• Absolute or conditional.
• Retrospective or prospective
• General or specific
• Limited or unlimited

Kinds of Guarantee
Absolute or conditional – An
absolute guarantee is one by
which the guarantee
unconditionally promises
payment or performance of
the contract on default of the
principal debtor. A conditional
guarantee is one which is not
enforceable immediately on
the default of the principal
debtor but some other
contingency.

Kinds of Guarantee
• Retrospective or
prospective – When a
guarantee is given for an
existing debt, it is called
retrospective guarantee.
When a guarantee is
given for a future debt, it
is called prospective
guarantee.

Kinds of Guarantee
• General or specific – A
general guarantee is one
for acceptance by the
public generally. It is a
general promise to any
one accepting it to be
answerable for a debt in
case of the failure of
another person.

Example
• A gives guarantee to B for the payment of
the price of five sacks of flour to be
delivered by B to C and to be paid in a
month. B delivers 5 sacks to C. C in return
pays for them. Afterwards, B delivers flour
to C to which C does not Pay. In this
example, the guarantee given by A was a
specific guarantee so C is not liable for the
sacks delivered subsequently.

Kinds of Guarantee
• Limited or unlimited – A
limited guarantee is one,
restricted to a single
transaction. An unlimited
guarantee is one which is
unlimited either as to
time or amount.

Negotiable Instruments Act

Definition
The word ‘negotiable’
means transferable by
delivery and instrument
means a written document
by which a right is created in
favorable of some person.
The term negotiable
instrument therefore
literally means a document
transferable by delivery.

Definition
Section 13 (1) of the
Act states that “ A
means a promissory note,
bill of exchange or cheque
payable either to order or
to bearer.”

Definition
• Negotiable instruments
recognized by statute are
only of three kinds:
– Promissory Notes.
– Bills of exchanges.
– Cheques.

Characteristics of negotiable instrument
• Property.
• Freely transferable.
• Title of holder free from all defects .
• Recovery.
• Presumption.
• Prompt payment.
• As good as cash.
• Transferability.

• Property – The possessor of
the negotiable instrument
is presumed to be the
owner of the property
contained therein.

• Freely transferable – The
property in a negotiable
instrument can be
transferred without any
formality.

• Title of holder free from all
defects – A bonafide
transferee for value is not
affected by any defect of title
on the part of the transferor
or any of the previous holders
of instrument.

• Recovery – The transferee of
the Negotiable Instrument can
sue in his own name, in case of
dishonor for the recovery of the
amount.

• Presumption – Certain
presumptions apply to all
negotiable instruments. Ex : A
presumption is that
consideration has been paid.

• Prompt payment – A negotiable
instrument enables the holder
of the instrument to expect
prompt payment.

• As good as cash – A negotiable
instrument is a document but it
is as cash since cash can be
obtained. It is a contract to pay
money.

• Transferability – A negotiable
instrument can be transferred
any number of times till it is at
maturity and holder of the
instrument need not give any
notice of transfer to the debtor.

Kinds of negotiable instruments
1. Inland instrument.
2. Foreign instrument.
3. Ambiguous Instrument.
4. Inchoate instrument.
5. Accommodation bills.
6. Fictitious bill.
7. Bearer instrument.
8. Order instrument.
9. Instrument payable on demand.
10.Instrument payable at a future time

Inland instrument – A
promissory note, bill of
exchange or a cheque
drawn or made in India
and made payable, in or
drawn upon any person
resident in India, shall
be deemed to be an
inland instrument.

• Foreign instrument – A
Foreign instrument is
one which is not an
inland instrument.
Example: A bill drawn in
India and made payable
in London.

• Ambiguous Instrument
– When an instrument
owing to its faulty
drafting may be
interpreted as a
promissory note or a
bill, then it is called an
ambiguous instrument.

• Inchoate instrument – It
is one which is an
incomplete instrument,
for example, not
mentioning the amount
payable or leaving blank
the name of the payee.

Accommodation bills –
When a bill is drawn,
accepted or indorsed
without any
consideration, it is
called an
accommodation bill.

• Fictitious bill – When
the name of the
drawer or the payee or
both is fictitious in a
bill, the bill is called a
fictitious bill.

• Bearer instrument –
When in a negotiable
instrument, it is
expressed that the
amount is payable to the
bearer or when the only
or last endorsement is
an endorsement in
blank, the instrument is
a bearer instrument.

• Order instrument – When
in a negotiable instrument,
it is expressed that the
money be payable to order
or when it is expressed to
be payable to a particular
person and does not
contain words prohibiting
or restricting its transfer,
the instrument is called
order instrument.

• Instrument payable on
demand – When no time
is specified on a
promissory note or bill,
then it is treated as
payable on demand.
Cheque is always
payable on demand.

• Instrument payable at a
future time – A bill or a
note is payable at a
future time if it is stated
to be payable at a fixed
period after its date or
after sight or after an
event which is certain to
happen.

Bill of exchange

Definition
• “A bill of Exchange is an
instrument in writing
containing the
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”.

Definition
• Thus bill of exchange is an
order from the creditor to
the debtor to pay a
specified amount to a
person mentioned
therein.

Parties of Bill
• The maker of bill of
exchange is called the
Drawer.
• The person who is
directed to pay is called
Drawee.
• The person who will
receive the money is
called the Payee.

Essential elements of bill of exchange
• The instrument must be in
writing.
• The instrument must contain
an order to pay, which is
expressed and unconditional.
• There must be three parties,
drawer, drawee and payee
and they must be certain and
definite individuals.
• The instrument must be
signed by the drawer.

Essential elements of bill of exchange
• The amount of money to be
paid must be certain.
• The payment must be in the
legal tender money of India.
• The money must be payable
to a definite person or
according to the order.
• It must comply with the
formalities as regards date,
consideration, stamps etc.

Difference between promissory note and bill of
exchange
• There are two parties,
promisor and promise in a
promissory note while
there are three parties,
payee, drawee and drawer
in a bill of exchange.
• A promissory note is an
unconditional promise to
pay while a bill of exchange
is an unconditional order to
pay.

exchange
• In promissory note, liability of
the maker is primary and
absolute while liability of the
drawer of bill of exchange is
secondary and conditional.
• A promissory note cannot be
made payable to the maker
himself while the drawer and
the payee must be the same
in bill of exchange.

exchange
• A promissory note requires
not acceptance since it is
signed by the person who is
liable to pay while the bill of
exchange requires acceptance
by the drawee before it is
presented for payment.
• A promissory note cannot be
drawn payable to a bearer
while a bill of exchange can
be so drawn provided it is not
payable to bearer on
demand.

exchange
• Maker of a promissory note
stands in immediate
relation with the payee.
Drawer of a bill stands in
immediate relation with
acceptor and not the payee.
• Promissory note cannot be
drawn in sets. A bill can be
drawn in sets.

Promissory Notes

Definition
• 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 to the
order of a certain person
or to the bearer of the
instrument.

Definition
• The person who makes
the promissory note and
promises to pay is called
the maker. The person to
whom the payment is to
be made is called payee.

Example
• I acknowledge myself to
be indebted to A in Rs 500
to be paid on demand for
values received.

Essentials of a promissory note
1. In writing.
2. Promise to pay must be express.
3. Definite and unconditional.
4. To be signed by the maker.
5. Certain in the case of parties.
6. Certainty in the case of sum of
money.
7. Promise to pay money only.
8. Formalities are not necessary.

• In writing – Promissory note
must be writing. Writing
may include print, type
writing, writing in pencil or
writing in ink. Writing
includes photographing and
lithographing.

• Promise to pay must be
express – It must contain an
express undertaking or
promise to pay. A mere
acknowledgement is not
enough.

• Definite and unconditional –
The promise to may must be
definite and unconditional. A
promise to pay in
unconditional if it depends on
an event which is certain to
happen or if it is to pay at a
particular place or at a
specified time.
– Example – A promise to pay a
sum of Rs 1000 two days after
the death of C.

• To be signed by the maker –
The promissory note must
be signed by the maker
otherwise it is incomplete.

• Certain in the case of
parties – The instrument
must point out with
certainty as to who is the
maker and who is the payer.

• Certainty in the case of sum
of money – The sum
expressed to be payable by
the promissory note must
be certain and must be
capable of contingent
additions or subtractions.
– Example – “I promise to pay
A Rs 500 and all other sum
payable” – Sum of money is
not certain.

• Promise to pay money only
– The payment must be in
the legal tender money of
India.
– Example – “I promise to pay
A Rs 500 and a quintal of
rice” – Only money is
acceptable.

• Formalities are not
necessary – Formalities like
number, date, place,
consideration etc are
usually found in an
instrument even though
they are not essential in
law.

Cheques

Definition
• A cheque is a bill of
exchange drawn upon a
specified banker and not
expressed to be payable
otherwise than on demand
and it includes the
electronic image of a
truncated cheque and a
cheque in the electronic
form.

Definition
• All cheques are bills of
exchange but all bills of
exchange are not cheques.

Types of cheques
• Open cheques – A cheque
which can be presented by
the payee for payment at
the counter of the bank of
which they are drawn, are
called open cheques.

Types of cheques
• Crossed cheques –
Crossing a cheque means
putting two parallel lines
across the face of the
cheque. The payment of
such a cheque cannot be
obtained at the counter of
the bank. Such cheques
must be collected through
a banker.

Modes of crossing a cheque
• General crossing.
• Special crossing.
• Restrictive crossing.
• Not negotiable crossing.

General crossing
• When a cheque bears across
its face an addition of (i) the
words “And company” or (ii)
any abbreviation between
two parallel traverse lines
simply either with or without
the word negotiable or (iii)
two parallel traverse lines
simply either with or without
the words not negotiable
that addition shall be
deemed a crossing, it is a
general crossing.

General crossing
• The two traverse parallel
lines across the face of the
cheque are essential for
general crossing. Effect of
such crossing is that the
holder or payee cannot get
the payment over the
counter of the bank but
through bank only.

Special crossing
• When a cheque bears across its
face an addition of name of a
bank either with or without the
words ‘ not negotiable’, the
cheque is deemed to be crossed
specially. A cheque cannot be
crossed more than once
specially. A special crossing
makes the cheque more safer
than a general crossing because
the payee or holder cannot
receive payment except through
the banker named in the cheque.

Restrictive crossing
• It includes words like A/C
payee, Account Payee only,
A/c Ashok only etc between
traverse parallel lines. The
effect of the restrictive
crossing is that it directs the
collecting banker that the
proceeds of the cheques are
to be credited only to the
account of the payee named
in the cheque or between
the traverse lines.

Not negotiable crossing
• A cheque may be crossed
with the words ‘not
negotiable’ on it. The effect
of the words ‘ not
negotiable’ on a crossed
cheque is that cheque
cannot be negotiable.

Difference between bill of exchange and
cheque
• A bill of exchange may be
drawn on any person
including a banker. But a
cheque is always drawn on
a bank or banker.
• A bill must be accepted
before the drawee can be
called upon to make
payment upon it. A cheque
does not require
acceptance.

Difference between bill of exchange and
cheque
• A bill is entitled to 3 days of
grace. A cheque is not
entitled to any days of
grace.
• A cheque may be crossed.
But there is no such
provision for a bill of
exchange.
• A bill requires stamp except
in certain cases. A cheque
requires no stamp.

Discharge of Negotiable Instrument

Definition
• An instrument is said to be
discharged when all rights
of action under it are
completely extinguished
and when it ceases to be
negotiated. This would
happen when the party
who is ultimately liable on
the instrument is
discharged from liability.

Definition
• The term discharge in
relation to negotiable
instrument is used in two
senses (1) discharge of the
instrument and (2)
discharge of one or more
of the parties from liability
thereon.

Different modes of discharge of an
instrument
• By payment in due course.
• Any party primarily liable
becoming holder.
• By express waiver.
• By cancellation.
• By discharge as a simple
contract.
• By material alteration.

instrument
• By payment in due course –
The instrument is
discharged by payment
made in due course by the
party which is primarily
liable to pay. The payment
amount due on the
instrument must be made at
or after the maturity of the
instrument if the maker or
acceptor is to be discharged.

instrument
• Any party primarily liable
becoming holder – If the
maker of a note or acceptor
of a bill becomes its holder
at or after its maturity, in his
own right, the instrument is
discharged.

instrument
• By express waiver –When
the holder of an
instrument at or after its
maturity absolutely and
unconditionally renounces
in writing or gives up his
right against all the parties
to the instrument, the
instrument is discharged.

instrument
• By cancellation – When an
instrument is intentionally
cancelled by the holder or
his agent and the
cancellation is apparent
thereon, the instrument is
discharged.

instrument
• By discharge as a simple contract
– A negotiable instrument may be
discharged in the same way as
any other contract for the
payment of money. This includes,
for example, discharge of an
instrument by novation or
recission or by lapse of period of
limitation

instrument
• By material alteration – An
instrument is discharged
when the party primarily
liable is discharged by
material alteration in the
instrument

Discharge of a party or parties
• The maker, acceptor or endorser of a
negotiable instrument maybe
discharged from liability in the
following way.
– If the holder of a negotiable
instrument or his agent cancels the
name of any party on the instrument,
with an intention to discharge him,
such party is discharged from liability
to the holder.
– If the holder of a negotiable
instrument releases any party to the
instrument by any method other than
cancellation, the party so released is
discharged from liability.

• Payment to the person in
possession of the bearer
instrument discharges the
party.
• If a cheque is not presented for
payment within a reasonable
time of its issue and the
drawer suffers actual damage
through the delay, he is
discharged to the extent of
such damage.
• If holder of a bill takes a
qualified or limited
acceptance, he does so at his
own risk and discharges all the
parties prior to himself unless
he contains their consent.

• Discharge can take place on
account of an order of the
insolvency court, by the lapse of
time or merger.
• When a negotiable instrument has
been materially altered but does
not appear to have been so
altered, payment on such an
instrument discharges the party
liable provided he makes payment
according to the apparent tenor of
the instrument and in due course.
• When a negotiable instrument is
materially altered without the
assent of all the parties on the
instrument, the instrument is
avoided.

Material alteration
• An alteration which in any
way alters the operation of
the instrument and the
liabilities of the parties
thereto or which alters the
business effect of the
instrument is a material
alteration.
• For example, (1) alteration
of date (2) alternation of
name (3) alteration of
amount etc.

Acceptor for honor
• Normally a stranger cannot
accept the bill. But when a
Bill of exchange has been
noted and protested for non
– acceptance or for better
security, any person who is
not already liable on the
negotiable instrument
under reference can accept.
He is called acceptor for
Honor.

Forged instrument
• Forgery is the fraudulent making
or alteration of a writing to the
prejudice of another man’s right.
• It may include fraudulently
writing the name of an existing
person, signing the name of a
fictitious person etc. A forged
document confers not title to
the holder.
• For example: On a note for Rs
2000, A forges B’s signature to it
as a maker. X, the holder, who
takes it bonafide and for value
acquires no title to the note. He
can’t sue upon the note.

Sales of goods act - Agreement to sell

Contents
1. Sales and types of sales.
2. Contract of sales and agreement of sales.
3. Essential elements of a contract of sale.
4. Good and types of goods.
5. Perishing of goods.
6. Price and fixation of price.

Sales
• Where the right of
ownership in the goods
is transferred from the
seller to the buyer, the
contract is called a sale.

Example
• On 1st August, X sells 5
bags of cement to Y for a
sum of Rs 1500. This
transaction is called sale
since the ownership of 5
bags of cement is
transferred from X to Y.

Types of sales
Absolute
sales
Conditional
sales

Absolute sale
• The property in the
goods passes from the
seller to the buyer
immediately and noting
remains to be done by
the seller. A sale on a
counter in a shop is an
absolute sales.

Conditional sale
• The property in the
goods do not pass to the
buyer absolutely until a
certain condition is
fulfilled.

Contract of sale
• A contract of sale of
goods is a contract
whereby the seller
transfers or agrees to
transfer the property of
goods to the buyer for a
price. Property means
the right of ownership.

Agreement to sale
• Where the transfer of
ownership in the goods
is to take place at a
future time or subject to
some conditions
thereafter to be fulfilled,
the contract is called
agreement to sell.

Example
• On 1st May, A and B agree
that A should sell 5 bags
of cement to B on 15th
June for a sum of Rs.
1500. It is an agreement
to sell since A agrees to
transfer ownership in the
future. Date of agreement
is 1st May but actual sale
would take place only on
15th June.

Essential elements of a contract of
sale
1. Contract.
2. Existence of two parties namely buyer and
seller.
3. Transfer of ownership.
4. Subject matter of sale of goods.
5. Price.

Essential elements of sale
• Contract – All the
essential elements of a
contract must be
present in a contract
sale.

• Existence of two parties
namely buyer and seller
– The seller is the person
who sells and the buyer
is the person who buys.
Both buyer and seller
should be competent to
enter into a contract. A
person cannot buy his
own goods or cannot
sell his goods to himself.

Example
• C M Transport company Vs.
ITO (1966) – In this case, a
company resolved to transfer
some buses to a partnership
firm consisting of certain
persons who were also the
members of the company.
Income tax officer considered
it as transfer as sale because
the company has a legal
entity and can be a seller.
This decision was upheld by
the court.

• Transfer of ownership -
Transfer of ownership
from seller to buyer is the
most important
ingredient in a contract of
sale.

Example
• A borrows a sum of Rs
10000 from B and pledges
his property against this
loan to B. In this case, A
transfers a special property
to B, by handing over
possession, but retains his
ownership. Thus it is not a
contract of sales.

• Subject matter of sale of
goods – The subject
matter of sale must be
the goods, the property in
which, is transferred.
• Price – The consideration
for sales of goods must be
money called price. The
price has been defined as
money consideration for
sales of goods.

Goods
• The goods include every
kind of movable
property other than
actionable claim or
money.

Types of Goods
• Existing goods.
– Special goods.
– Ascertained goods.
– Unascertained goods.
• Future goods.
• Contingent goods.

Existing good
• Goods owned and
possessed by the seller
at the time of making of
the contract of sales are
called existing goods.

Example
• If A sells his horse to B,
believing it to be in
existence but in fact the
horse is dead, no
contract will arise.

Specific goods
• These are goods
identified and agreed
upon at the time a
contract of sales is
made.

Example
• A has two horses, one black
and one white. He agrees to sell
white horse to B. In this case,
the subject matter is specific.
But if A has two white horse,
unless that particular horse is
identified and individualized
from the remaining horses, it
will not become specific one.

Ascertained goods
• it means goods
identified in accordance
with the agreement
after the contract of sale
is made.

Example
• If A had 30 chairs of the
same kind and offers to
sell 15, the goods are
ascertained only when
15 particular chairs be
appropriated towards
the contract.

Difference
• The only point of difference
is that specific goods are
ascertained before or at the
time of making a contract,
but ascertained goods are
identified and individualized
after the formation of a
contract of sales.

Unascertained goods
• It means generic goods,
good defined by
description or even
samples.

Example
• Where a dealer has only
one car and he makes a
sale of it, the sale is
complete because there
is no uncertainty about
the subject matter of
sales.

Future goods
• It means goods to be
manufactured or
produced or acquired by
the seller after making
of the contract of sale.

Example
• A contract to sell oil not
yet pressed from seeds,
in his possession, is a
contract for the sale of
future goods.

Contingent goods
• These are types of
future goods, the
acquisition of which by
the seller depends upon
a contingency which
may or may not happen.

Example
• Future crops, eggs etc. A
agrees to sell 100 bags
of cement provided the
lorry carrying the
cement reaches safely.

Perishing of goods
• Perishing of specific
goods before making of
the contract – Where
there is a contract for the
sale of specific goods and
if they perish without the
knowledge of the seller,
even before the contract
is made, the contract
becomes void.

Example
• X agrees to sell a cow to Y.
The cow is ill at the time
of the agreement and
subsequently dies. Both X
and Y are ignorant of this
fact. The agreement is
void.

Perishing of goods
• Goods perishing before
sales but after agreement
to sell – Where contract is
only an agreement to sell
and goods without any
fault of either the seller or
the buyer perish
subsequent to the
contract, then also the
agreement becomes void.

Example
• Example: In one case, A had
agreed to erect machinery on
B’s premises. The price was to
be paid on completion. During
the course of the work , the
premises and machinery were
completely destroyed by fire. It
was held that both parties
were excused from further
performance and A was not
entitled to the price of
machinery as the specific sum
was payable only on the
completion of the entire work.

Perishing of goods
• Perishing of
unascertained goods:
Where the contract is for
unascertained goods, the
perishing of the good will
not avoids the contract
and the seller will be
liable for damages for the
breach of contract.

Example
• Example: X agrees to sell to
Y 10 bags of grain from 50
bags stored in his godown.
The godown had been
destroyed by fire at the
time of the contract. X is
unaware of this fact. But in
this case, the contract is not
void as the sale is not of
specific goods but of a
certain quantity of
unascertained goods.
Hence X must supply 10
bags of rice or pay damages
for the breach of contract.

Price
• Price is the money
consideration of the sales
of goods. It is a
fundamental principle
that no sales can take
place without a price.

Fixation of price
 The price must be fixed by
both parties at the time of
contract itself.
 Both the parties may enter
into an agreement
regarding the manner in
which the price may be
fixed.

Fixation of price
 Where the price is not fixed,
it can be determined in the
course of dealings between
the parties or as it is called
market price of goods.
 Where the price has not
been fixed by the parties, the
buyer should pay a
reasonable price.

Mode of payment
 In the absence of agreement
to the contrary, the seller is
not bound to accept any kind
of payment other than the
currency of the country. By
common consent, the seller
may accept payment by a
cheque or a draft, bank
guarantee, a letter of credit
or by any other mode.

Legal environment of business

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