Indian Sale of Goods Act 1930 is a Mercantile Law.

The Sale of Goods Act is a kind of

Indian Contract Act. It came into existence on 1 July 1930. It is a contract whereby the seller
transfers or agrees to transfer the property in the goods to the buyer for price. It is applicable
all over India, except Jammu and Kashmir.
Sales of Goods Act :It is defined in these words, "A contract where by the seller transfers or agrees to transfer the property
or the goods to the buyer for price."
A contract to transfer the ownership of goods from seller to the buyer is known as contract of sale.
Main Features or Essentials
1. Buyer and Seller :One person cannot become buyer and also the seller, there are always two parties to a contract of
sale, buyer and seller.
Example :- Mr. Kashif sells the shop to Mr. Zahir. Mr. Kashif is a seller and Mr. Zahir is a buyer in this
case.
2. Goods :Every kind of movable property except actionable claims (which can be enforced by legal action) and
money is regarded as goods.
Example :- Mr. Yuva sells his car to Mr. Larson for Rs. 7 lac. In this case car is a moveable property,
so it is a contract of sale.
3. Price :Price must be the consideration in the contract of sale. If goods are exchanged with goods it is barter
and not a contract of sale.
Example :- "X" sells a book to "Y" for Rs. 300. It is a contract of sale.
4. Transfer of Ownership :To constitute the sale contract the seller must transfer or agree to transfer the property ownership to
the buyers. So possession and ownership both will be transferred to buyer.
Example :- "X" sells the car to "Y" for 6 lac. The possession and ownership both will transfer to "Y".
5. Sale :When ownership and possession of the good is immediately transferred from seller to buyer it is called
contract of sale.
Example :- "X" buys a pen from the "Y" and pays the whole price on his hand. It is a sale.
6. Agreement to Sell :When the transfer of ownership in the goods is to take place at a future date the contract is called
agreement to sell.
Example :- Mr. Bazooka agrees to purchase Mr. Titoo bus for Rs. 25 lac. But the transfer of bus will
take place after one year. It is agreement to sell.

FORMATION OF THE CONTRACT OF THE SALE OF GOODS

A contract for the Sale of Goods is formed according to the ordinary principles of
the Common Law that is to say by offer and acceptance.
3.
(2)
(3)
(4)

(5)

Section 3. Of the Sale of Goods Act

(1)
A 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 money consideration,
called the price.
There may be a contract of sale between one part owner and another.
A contract of Sale may be absolute or conditional.
Where under a contract of sale the property in the goods is transferred from the
seller to the buyer, the contract is called a sale; but where the transfer of the
property in the goods is to take place at a future time or subject to some
condition thereafter to be fulfilled, the contract is called an agreement to sell.
An agreement to sell becomes a sale when the time elapses or the conditions
are fulfilled subject to which the property in the goods is to be transferred.
Section 4.
(1)
Capacity to buy and sell is regulated by the general law
concerning capacity to contract, and to transfer and acquire property;
Provided that, where necessaries are sold and delivered to an infant or minor, or
to a person who by reason of mental incapacity or drunkenness is incompetent to
contract, he must pay a reasonable price therefore.

SUBJECT MATTER OF THE CONTRACT:

The term goods is defined by The Sale of Goods Act to include all chattels
personal other than things in action and money, and all emblements, industrial
growing crops and things attached to or forming part of the land, which are
agreed to be severed before sale or under the contract of sale.
The definition is extensive but there are nevertheless things, which do not or may
not fall within this definition. The definition excludes non-physical items, such as
company shares, which are technically things in action or incorporeal movables
and so are excluded by the plain words of the definition. Similarly, items of
intellectual property such as copyrights, patents and trademarks are not
personal chattels or corporeal movables and so fall outside the definition,
although of course goods may exist which embody these intellectual property
rights.
NUMBER OF PARTIES IN A SALE OF GOODS CONTRACT

For a transfer of property in the goods to occur there must be at least 2 distinct
parties. The transfer implies necessity for more than 1 distinct person. There
must be a seller and a buyer.
A person cannot buy ones own property or goods. If one by mistake buys his
own goods, he can recover the price paid on the grounds of total failure of
consideration. The seller and buyer must be two different legal entities.
Although the Act contemplates two distinct parties to the contract, namely a
buyer and a seller, it does not follow that the buyer cannot already be the owner
of the goods, for the seller may be a person having legal authority to sell them,
for example a sheriff acting in execution of a writ of execution. However, if a
person contracts to buy his own goods from someone else under the mistaken
impression that the goods belong to the seller, it seems clear that he can recover
any price paid on the ground of total failure of consideration.

Transfer of Property in Goods

The property in the goods is said, to be transferred from the seller to the buyer when the latter
acquires the proprietary rights over the goods and the obligations linked thereto. 'Property in
Goods' which means the ownership of goods, is different from ' possession of goods' which
means the physical custody or control of the goods.
The transfer of property in the goods from the seller to the buyer is the essence of a contract of
sale. Therefore the moment when the property in goods passes from the seller to the buyer is
significant for following reasons:
a. Ownership -- The moment the property in goods passes, the seller ceases to be their
owner and the buyer acquires the ownership. The buyer can exercise the proprietary
rights over the goods. For example, the buyer may sue the seller for non-delivery of the
goods or when the seller has resold the goods, etc.
b. Risk follows ownership -- The general rule is that the risk follows the ownership,
irrespective of whether the delivery has been made or not. If the goods are damaged or
destroyed, the loss shall be borne by the person who was the owner of the goods at the
time of damage or destruction. Thus the risk of loss prima facie is in the person in whom
the property is.
c.

Action Against Third parties -- When the goods are in any way damaged or destroyed by
the action of third parties, it is only the owner of the goods who can take action against
them.

d. Suit for Price - The seller can sue the buyer for the price, unless otherwise agreed, only
after the gods have become the property of the buyer.

e. Insolvency - In the event of insolvency of either the seller or the buyer, the question
whether the goods can be taken over by the Official Receiver or Assignee, will depend on
whether the property in goods is with the party who has become insolvent.
Essentials for Transfer of Property -- The two essentials requirements for transfer of property in
the goods are:
1. Goods must be ascertained: Unless the goods are ascertained, they (or the property
therein) cannot pass from the seller to the buyer. Thus, where there is a contract for the
sale of unascertained goods, no property in the goods is transferred to the buyer unless
and until the goods are ascertained
2. Intention to PASS Property in Goods must be there: In a sale of specific or ascertained
goods the property in them is transferred to the buyer at such time as the parties to the
contract intend it to be regard shall be had to the terms of the contract, the conduct of the
parties and the circumstances of the case.

Characteristics of a Partnership
1.

Two or more members: At least two members are required to start a partnership business. But the
number of members should not exceed 10 in case of banking business and 20 in case of other
business.

2.

Lawful business: The partners should always carry on any kind of lawful business, they cannot
indulge in illegal business like smuggling, black marketing, etc..

3.

No separate legal existence: Partnership firms are no legal entities as opposed to companies,
who have their separate legal existence, partnerships are not recognized in law at their own, they
are recognized by their partners. The partnership firm is just a name for the business as a whole. If
someone wants to sue the firm, it has to sue the partners.

4.

Eligibility of partners: Since individuals join hands to become partners, it is necessary that they
must be competent to enter into a partnership. Thus, minors, lunatics and insolvent people are not
eligible to become partners. However, a minor can be admitted to the benefits of partnership i.e., he
can have a share in the profits only.

5.

Sharing of profits: The main objective of every partnership firm is to make and share the profits of
the business. In the absence of any agreement for profit sharing, it should be shared equally
among the partners. Suppose, there are two partners in the business and they earn a profit of
Rs.20,000. They may share the profits equally i.e., Rs.10,000 each or in any other agreed
proportion, say one forth and three fourth i.e. Rs.5,000/- and Rs.15,000/-

6.

Unlimited liability: The biggest disadvantage of partnership is that the liability of partners in a
partnership is unlimited. This means, if the assets of the firm are insufficient to meet the liabilities,
than the personal properties of the partners, if any, can be utilized to meet the business liabilities.
Suppose, the firm has to make payment of Rs.30,000/- to the creditors. The partners are able to

arrange for only Rs.20,000/- from the business. The balance amount, of Rs.10,000/- will have to be
arranged from the personal properties and assets of the partners.
7.

Voluntary registration: Though the Partnership Act provides for registration but had not made it
mandatory to register a partnership firm. However, if opts not to register your partnership firm than
you will be deprived of certain legal benefits, therefore it is always desirable to register the firm. The
various

effects

of

non-registration

are:

Your firm cannot take any action in a court of law against third parties for settlement of claims.
In case there is any dispute among partners, it is not possible to settle the disputes through a
court of law. Note: Registration is voluntary in most states. However it would be best to check up
the rules of your state to be sure. In states like Maharashtra, registration is almost compulsory.
8.

Restriction on transfer of interest: No partner can sell or transfer his share or part in the firm to
any one without the consent of the other partners. For example, A, B, and C are three partners .If
A wants to sell his share to D as his health problems prevent him from working, he cannot do so
until B and C both agree.

9.

Continuity of business: A partnership firm comes to an end at death, lunacy or bankruptcy of any
partner. Even otherwise, it can stop its business at the will of the partners. At any point of time, the
partners may decide to end their partnership.

Types of Partners
Depending on the reason behind which a particular partnership is made, partners may be of different types.
To understand this better, consider the following:
1.

Active Partners: The partners who actively participate in the day-to-day operations of the business
are known as active partners. They contribute the capital and are also entitled to share the profits &
losses of the business.

2.

Dormant Partners: Those partners who do not participate in the day-to-day activities of the
partnership firm are known as dormant or sleeping partners. They only contribute capital and
share the profits or bear the losses, if any.

3.

Nominal/Outside Partners: These partners are persons, who hold a particular goodwill as to their
character or work and to allows the firm to use this goodwill by showing them as the partner in their
firm. These partners neither have any real interest in the business of the firm nor they invest any
capital, or share profits or take part in the business of the firm. However, they do remain liable to
third parties for the acts of the firm.

4.

Minor as a Partner: Legally only a person who is or above the age of 18 can become a partner in
the firm but in special cases, a minor can also be admitted as partner with certain conditions. A
minor can only share the profit of the business. In case of loss his liability is limited to the extent of
his capital contribution for the business.

Benefits of Partnership

1.

Easy to form: It is very easy to form a partnership, as there are no mandatory registration
requirements. Partners are required to enter into a partnership deed between themselves and they
can start functioning straight away. It is not necessary to have any written partnership deed but it is
always recommended to have a written one.

2.

Availability of large resources: Since two or more partners join hands to start a partnership
business, it may be possible to pool together more resources as compared to a sole proprietorship.
The partners can contribute more capital, more effort and more time for the business.

3.

Better decisions: Partners are the owners of the business and each of them has equal right to
participate in the management of the business. All the business decision are taken by the partners
keeping in view the interest of the business as whole case of any conflict, they can sit together to
solve the problem. Since all partners participate in the decision-making process, there is less scope
for reckless and hasty decisions.

4.

Flexibility in operations: A partnership firm is a flexible organization. At any time, the partners can
decide to change the size or nature of the business or area of its operation. There is no need to
follow any legal procedure. Only the consent of all the partners is required.

5.

Sharing risks: In a partnership firm all the partners share the business risks. For example, if
there are three partners and the firm makes a loss of Rs.12,000 in a particular period, then all
partners may share it and the individual burden will be Rs.4000 only. Because of this, the partners
may be encouraged to take up more risk and hence expand their business more.

6.

Protection of interest of each partner: In a partnership firm, every partner has an equal say in
decision making and the management of the business. If any decision goes against the interest of
any partner, he can prevent the decision from being taken. In extreme cases an unsatisfied partner
may withdraw from the business and can dissolve it. In such extreme cases the partnership deed
is required. In absence of the partnership deed, no legal protection is given to the partners.

7.

Benefits of specialization: Since all the partners are owners of the business, they can actively
participate in every aspect of business as per their specialization, knowledge and experience. If you
want to start a firm to provide legal consultancy to people, then one partner may deal with civil
cases, one in criminal cases, and another in labor cases and so on as per the individual
specialization. Similarly, two or more doctors of different specialization may start a clinic in
partnership.

Drawback of Partnership
1.

Unlimited liability: The most important drawback of partnership is that the liability of all the
partners is unlimited and in case the assets of the partnership are not sufficient to pay off the debts,
that the additional funds shall be arranged out of the personal property of the partners.

2.

Liability for acts of other Partners: In partnership all the partners are agent of other partners and
are therefore full liable for acts done by them.

3.

No legal Identity: Partnership is not recognized in law as an identity separate from the partners
constituting it. A partnership is recognized by its partners and not by its own name. Since

partnership is not legal entity, therefore it cannot purchase property or cannot sue partner or third
party in its own name.
4.

Uncertain life: The partnership firm has no legal existence separate from its partners. It comes to
an end with death, insolvency, incapacity or the retirement of a partner. Further, any unsatisfied or
discontent partner can also give notice at any time for the dissolution of the partnership.

5.

Limited Number of Partners: A Partnership cannot have more than 20 persons as its partner and
therefore it cannot expand its business by including addition partners and it also act as hindrance
towards introducing funds and expertise in the business.

6.

Limited capital: The partnership is recognized by its partners and therefore goodwill and credibility
of partners plays an important role, for arranging funds for the business. Moreover, Partnership is
not regulated, there no requirement of any audit or financial disclosure. Due to aforesaid factors
partnership doesnt enjoys good credibility among investors and financial institutions and therefore
they hesitate to provide funds to the business.

7.

No transferability of share: If you are a partner in any firm, you cannot transfer your share or part
of the company to outsiders, without the consent of other partners. This creates inconvenience for
the partner who wants to leave the firm or sell part of his share to others. Moreover, the process of
transferring ownership interest is not easy.

8.

Lack of expertise: Due to limited number of partners and limited availability of funds , it is not
possible for the partnership to hire or engage expert knowledge for the business.

9.

Lack of harmony: In a partnership firm every partner has an equal right to participate in the
management. Also, every partner can place his or her opinion or viewpoint before the management
regarding any matter at any time. Because of this, sometimes there is a possibility of friction and
discontent among the partners. Difference of opinion may lead to the end of the partnership and the
business.

10. Not Recognized: Partnership is not recognized for the purpose of carrying business under various
regulations like partnership are not allowed to carry on the business of insurance.

What is a deed of partnership? A deed of partnership is a legally binding agreement

between partners who own the business. The agreement normally includes a
provision as to how the profits will be shared between the partners and what will
happen to the partnerships capital on its dissolution. It will also describe how new
partners can join the business, what happens when a partner retires and set out
provisions to terminate the partnership as well as the duties and rights of the
partners. - See more at: http://www.business-law.co.uk/setting-up-abusiness/partnership-agreement/deed-of-partnershi#sthash.WQuiuhEZ.dpuf

MainProvisionsofpartnershipDeedorPartnershipAgreement

Partnership

Agreement

or

Partnership

Deed

:-

In the Partnership agreement terms and conditions relating to partnership and the regulations
governing to its internal management are included. This agreement may be written or oral. But it is
necessary

that

it

should

be

in

writing.

In other words it is a document in which the relations of partners one another are clearly written.
Following

are

the important

provisions

1.

of

partnership

deed.

Date

Date

of

starting

the

:-

business

2.

should

be

written

on

it.

Name

Name

of

the

firm

under

:-

which

3.

the

business

is

going

started.

Location

:-

Location of the business should be also written that where it is going to start. Allotment of the
place

for

head

office

and

4.

branches

should

be

mentioned

it.

Duration

:-

Duration of partnership is for indefinite period or for definite period. It should be also written.
5.

Nature

Nature

of

of
the

the

business

6.

should

Business
be

clear

:in

it.

Capital

:-

Total amount of capital and share of each partner in capital is also an important point of deed.
7.
The

Salary
amounts

of

8.

any

salary

payable

Ratio

to

:-

partners,

of

should

be

mentioned

Profit

in

it.
:-

Each partner rate ratio of profit and loss sharing should be clear in the partnership agreement.
9.
There
10.

Rights
is

also
Entry

and
provision
and

of

rights

Duties
and
Exit

duties

of

:each

Method

partner.
:-

Procedure to be followed for withdrawal and methods of admitting of new partners.

11.

Dissolution

In

case

of

dissolution

12.
and

13.

firm

account

preparation

Settlement
the

dissolution

of

special

of

firm

provision

are

case
there

:to

be

followed.

Accounts

provisions

in

14.
In

the

Audit

Audit

At

of

Case

is

also

of
a

provision

:-

available

in

Dissolution
of

settlement

it.
:-

of accounts.

Arbitration
case

15.

of

disputes

provision

for

:arbitration

is

also

available.

Witness

:-

The witness of agreement provision is also found in it. By the mutual consent of the partners any
other clause may be included in it at any time.

Partnership Deed
Before starting a partnership business, all the partners have to draw up a legal document called a
Partnership Deed of Agreement. It usually contains the following information:
There are many parts that should be included in any articles of partnership. These are:

Names of included parties - includes all names of people participating in this contract

Commencement of partnership- includes when the partnership should begin. The date of
the contract is assumed as this date, if none is given.

Duration of partnership - includes how long the partnership should last. It is automatically
assumed that the death of one of the contracting parties breaks the contract, unless otherwise
stated.

Business to be done - includes exactly what will be done in this partnership. This section
should be very particular to avoid confusion and loopholes.

Name of firm - includes the name of the business entity.

Initial investments - includes how much each partner will invest immediately or by
installments.

Division of profits and losses - includes what percentages of profits and losses each
partner will receive. If it is not a limited partnership, then there is unlimited liability (each partner is
responsible for all partners' debts, including their own).

Ending of the business - includes what happens when the business winds down. Usually
this includes three parts: 1) All assets are turned into cash and divided among the members in a
certain proportion; 2) one partner may purchase the others' shares at their value; 3) all property is
divided among the members in their proper proportions.

Date of writing - includes simply the date that the contract was written.

PARTNERSHIP DEED
THIS DEED OF PARTNERSHIP IS MADE on this 12th day of January, 2008 by and
between
Mr. A S/o C R/o XYZ hereinafter referred to as Party of the FIRST PART (which
expression shall deem and include his heirs, executors, administrators, representatives,
assigns and agents), AND
Ms. B D/o D R/o XYZ, Party of the SECOND PART (which expression shall deem
and include his heirs, executors, administrators, representatives, assigns), AND
WHEREAS the above named partners have decided to start the partnership business of
Recruitment Services in the name and style of M/s SSS with effect from th day of
January, 20.. on the terms and conditions hereinafter mentioned and have desired to reduce
the terms and conditions into writing.
NOW THIS INDENTURE IS WITNESSETH AS FOLLOWS :

1. THAT the PARTIES referred above shall carry on the business of Recruitment Services
in the PARTNERSHIP FIRM under the name and style of M/s SSS hereinafter
referred to as the FIRM) XYZ, But by their mutual consent may start and carry on any
other business or businesses under any other name or names at any other place or
places.

2. THAT the business of the PARTNERSHIP pursuant to this DEED of PARTNERSHIP

shall be deemed to have commenced with effect from th day of January, 20...

3. That the capital required for the business of Partnership shall be contributed time to time
by the PARTIES in such manner in all respect as may be agreed to between them and
such capital may be paid interest as may be mutually agreed from time to time at the
rate of rates not exceeding 12% (Twelve Percent) per annum.

4. That all the PARTIES referred above shall be Working Partners and shall attend diligently
to the business of the Partnership and carry on the same for the greatest advantage of
the Firm.

5. That all the WORKING PARTNERS may be paid Salary w.e.f. day of Feb., 2008, for
the work of the FIRM as may be agreed mutually from time to time between the
PARTIES in accordance with the provisions of the Income Tax Laws as well as
business necessities and other factors, subject however, that the monthly Salary to each
such Partner shall not exceed as under:
NAME OF WORKING PARTNER MAXIMUM BASIC SALARY NOT TO
EXCEED
a. Mr. A
Rs. 12,000/- per month
b. Ms. B
Rs. 12,000/- per month

6. That all business expenses shall be borne by the FIRM.

7. That the Profits or Losses, as the case may be, of the Partnership business shall be
divided among the Partners as under :
NAME OF WORKING PARTNER
LOSS
a. Mr. A
b. Ms. B

SHARE OF PROFIT
50%
50%

SHARE OF
50%
50%

8. That the duration of the PARTNERSHIP shall be at WILL subject to Clause 9.

9. That any Partner may retire from Partnership after giving a notice to the other Partner (s)
of not less than one month in writing and at the expiry of such notice period he shall
be deemed to have retired.

10. Upon mutual understanding, each Partner or his duly authorised agent shall have free
access to the account books of the Partnership and shall be entitled to take copies or
extracts from any or all such books and records of the Partnership Business.

11. That no Partner shall have the right to sell, mortgage or transfer his share of interest in
the FIRM to any one else except to his heir or heirs or any one of the existing Partners
or to their heir (s). In the event of heir (s) selling his/her share to any one else, the
existing Partners shall have a right or pre-emotion in respect of such share (s) sold.

12. That the Partners shall keep or cause to be kept the books of account of the FIRM at
the principal places of its business and make all entries therein, and that all such books
of account kept shall be closed on 31st March every year or in the case of any necessity
on any other date as the Partners may mutually decide.
13. That no Partner shall do any act or thing whereby FIRM or the FIRM property may
prejudicially effected.

be

14. That the terms of the Partnership Deed may be altered, added to or cancelled by the
written consent of the Parties to this DEED.

15

That the partners can open the bank account of the firm, in any bank and bank account
shall be operated by the partners jointly or individually, as the case may be.

16. That the partners shall not take any loan from any person/Financing
Company, bank or any other Govt./Pvt. Department in any case, without the
written consent of each other.
17. That in the case of any dispute arising out of this DEED between the Parties of this
DEED, it shall be decided by Arbitration as provided for under the Indian Arbitration
Act.
IN WITNESS WHEREOF the Parties hereto have set and subscribed their respective
hands to these presents the day, month and year first written above.
WITNESSES :

1.
Mr. A
( Party of the First Part )

2.

Ms. B
( Party of the Second Part )

Negotiable Instrument
The term negotiable means transferable and the word document means in writing.
Therefore, negotiable means a written promise or order to pay money which may be
transferred from one person to another.
Section 13 of the Negotiable Instruments Act, 1881 states A negotiable instrument means
a promissory note, bill of exchange or cheque payable either to order or to bearer. A
negotiable instrument may be made payable to two or more payees jointly, or it may be
made payable in the alternative to one of two, or one or some of several payees. [Section
13(2)].

The characteristics of a Negotiable Instrument are:

1. Witting and Signature according to the rules A Negotiable Instrument must be in
writing and signed by the parties according to the rules relating to (a) promissory notes, (b)
Bills of Exchange and (c) Cheques.
2. Payable by Money Negotiable Instruments are payable by the legal tender money of
India. The
Liabilities of the parties are governed in terms of such money only.
3. Unconditional Promise If the instrument is a promissory note, it must contain an
unconditional promise to pay. If the instrument is a bill or cheque, it must be an
unconditional order to pay money.
4. Freely transferable A negotiable instrument is transferable from one person to
another by delivery or by endorsement and delivery.
5. Acquisition of Property Any person who possesses a negotiable instruments, becomes
its owner and entitled to the sum of money, mentioned on the face of the instrument. When
it is payable to bearer, the property in its passes from one holder to another by mere
delivery. If it is payable to order, the property passes by endorsement, i.e. by the signature
of its holder on its back and its delivery.
6. Acquisition of Good Title The holder in due course, i.e. the transferee of a negotiable
instrument in good faith and for value, acquires a good title to the instrument even if the
title of the transferor is defective. Further his title will not be affected, by any defect in the
title of the transferor.
7. No Need of Giving Notice There is no need of giving a notice of transfer of a negotiable
instrument to the party liable to pay the money.
8. Right of the Holder in Due Course The holder in the due course remains unaffected by
certain defences, which might be available against previous holders, as for example , fraud,
to which he is not a party.
9. Certain Presumptions Unless contrary proved certain presumptions are in the made
case of all negotiable instruments. Consideration, date, signature of holder in due course, for
example, is presumed

Examples of negotiable instruments

(a) Negotiable instruments recognized by statute :
i) Bills of exchange
ii) Promissory notes.
iii) Cheques.
(b) Negotiable instruments recognized by usage or custom :
i) Hundis.
ii) Share warrants.
iii) Dividend warrants.
iv) Bankers drafts.
v) Circular notes.
vi) Bearer debentures.
vii) Debentures of Bombay port trust.
viii) Railway receipts.
ix) Delivery orders.
The list of negotiable instruments is not a closed chapter. With the growth of commerce, new
kinds of securities may claim recognition as negotiable instruments.
Example of Non-negotiable instruments
i) Money orders.
ii) Deposit receipts.
iii) Share certificates
iv) Dock warrants.
v) Postal orders.

DISHONOUR AND DISCHARGE OF NEGOTIABLE INSTRUMENT

A NEGOTIABLE INSTRUMENT MAY BE DISHONOURED BY (I) NONACCEPTANCE (II) NON-PAYMENT
1 Dishonour by non-acceptance
A bill of exchange is said to be dishonoured, by non-acceptance in the following cases: 1. When the drawee or one of the several drawees (not being partners) makes
default in acceptance upon being required to accept the bill (48 hours required).
2. Where the presentment for acceptance is excused and the bill is not accepted.
3. Where the drawee is incompetent to contract.
4. Where the drawee makes the acceptance qualified.
5. If the drawee is fictitious person or after reasonable search cannot be found.
2 Dishonour by Non-payment
A promissory note, bill of exchange or cheque is said to be dishonoured by nonpayment when the maker, acceptor of the bill or drawee of the cheque makes default
in payment upon being duly required to pay the same . (Sec 92)
Also, a promissory note or bill of exchange is dishonoured by non-payment when
presentment for payment is excused expressly by the maker of the note or acceptor of the
bill and PN or BE remains unpaid.

Effect of Dishonour

As soon as a negotiable instrument is dishonoured (either by non-acceptance or by

non-payment) the holder becomes entitled to sue the parties liable to pay thereon.
The holder MUST, however, give notice of dishonour to all the parties against
whom he intends to proceed.

Notice of Dishonour

Notice of dishonour means formal communication of the fact of dishonour.

Such a notice also serves the purpose of enabling the person so notified to protest
himself against the prior parties.

Notice By Whom

Notice of dishonour must be given by the holder or by some party to the

instrument who remain liable thereon;
Any party receiving the notice of dishonour must also transmit the same to all
prior parties in order to make them liable to him.
No suit can be filed against the prior party if he has not transmitted the fact of
dishonour of instrument.
One person can give the notice only.
Duly authorised person can also give notice.

Notice to Whom

Notice of dishonour must be given to all parties (other than the maker of note,
acceptor of a bill or drawee of a cheque) to whom the holder seeks to make liable
or other duly authorised agents.
In case of death of a person, notice must be given to his legal representative and
were he has been declared insolvent to his Official Assignee.
In case after dispatch of notice and before it receipt the person dies, it will be
treated as if the notice has been served. (Not knowing the fact).

Mode of Giving Notice

It may be oral or in writing. If it is in writing it must be sent by post

It should be given in reasonable time.

What is Reasonable Time?

In determining what is reasonable time the consideration is to be given: 1.
2.
3.
4.
5.

Nature of the instrument

The usual course of dealing with respect to similar instruments
Distance between the parties
While calculating public holidays shall be excluded.
In case a party received the notice of dishonour is to transmit the same to his
prior parties, the transmission should be done in reasonable time.

When Notice of Dishonour is Unnecessary

1. Where the indorsee while signing in that capacity adds the words notice of
dishonour waived.
2. Where the drawer of a cheque countermanded payment.
3. Where the party charged could not suffer damage for want of notice such as bank
account closed or in case of accommodation bill.
4. Where the party to whom the notice is to be given not traceable or the party who
has to give notice is unable to giver notice like death, accident or serious illness.
5. When the drawer also happens to be acceptor.

6. In case the Promissory Note which is not negotiable

7. When the party entitled to receive notice promise to pay unconditionally the
amount as due after due date.
Consequences of not giving notice of dishonour
Any party to negotiable instrument (other than maker of a note, acceptor of a bill or
drawer of cheque) is discharged from his obligation under the instrument unless
circumstances are such where no notice is required to be sent.
Noting

In case a promissory note or bill of exchange has been dishonoured by nonacceptance or non-payment notice, the holder may cause such dishonour to be
noted by Notary Public.
Noting must be made within reasonable time after dishonour and must specify (i)
the date of dishonour (ii) the reason assigned for dishonour and (iii) the notarys
charges.

Protest
Protest is a formal certificate issued by the notary public to the holder of the bill or note
on his demand (noting is merely a record of dishonour on the instrument).
Contents of Protest
1. The instrument itself or a literal transcript of the instrument and of every thing
written or printed thereon,
2. The name of the person for whom and against whom the instrument has been
protested.
3. The fact and reason for dishonour
4. The place and time of dishonour
5. The signature of notary public
6. In case of acceptance for honour or payment for honour, the names of the persons
by whom and for whom it is accepted or paid.

Discharge of the Instrument

A negotiable instrument is said to be discharged when it becomes completely

useless.
In the following cases the instrument is deemed to be discharged: -

1. When the party liable to make payment on the instrument makes the in
due course to the holder.
2. When the acceptor in his own right at or after maturity, holds the bill of
exchange, which has been negotiated,, the instrument is discharged.
3. When the party primarily becomes insolvent.
4. When the holder cancels the instrument with an intention to release the
party primarily liable thereon from liability.

Discharge of One or More Parties.

A party is said to be discharged from his liability when his liability on the
instrument comes to an end.
Discharge of one or more party does not discharge the instrument and rights under
it can be enforced against those parties who continue to be liable thereon.

One or more parties to a negotiable instrument is/are discharged from liability in the
following ways:1. By cancellation-When the holder of a negotiable instrument deliberately cancels
the name of any of the party liable on the instrument with intent to discharge him
from liability.
2. By release If the holder of a negotiable instrument releases any party to the
instrument by any method other than cancellation of names.
3. By payment
4. By allowing drawee more than 48 hours to accept
5. By taking qualified acceptance
6. By not giving notice of dishonour
7. By non-presentment for acceptance of bill
8. By delay in presenting cheque
9. By material alternation like:
(i)
Any alteration of the date, the sum payable, the time of payment and
place of payment
(ii)
Alteration by the addition of anew party.
(iii)
Alteration of the rate of interest.
(iv)
Tearing off the material part of the instrument
Alteration not vitiating the instrument
1.
2.
3.
4.
5.

Alteration made for the purpose of correcting a mistake or

clerical error
Alteration made to carryout the common intention of the
original parties
Alteration made before the instrument is issued
Alteration made with the consent of the parties liable on the
instrument
Conversion of bearer cheque into order

6.
7.
8.
9.

Filling blanks in the case of inchoate or incomplete instrument

Conversion of blank endorsement into an endorsement in full.
Making qualified acceptance
Alteration which result of the accident.