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by :
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
mobile : 91+9414430763

My words....
Ours is a great country with immense entrepreneurial potential.
However, our legal system and taxation system is so cumbersome
that our creativity and talent is wasted / unnecessarily diverted in
these sectors. I wish that these are simplified so that an ordinary
entrepreneur can understand these without help from any expert. I
wish that more people should become entrepreneurs, rather than
becoming an expert in avoiding taxation. Let us wish that some
likeminded person is able to reach policy making level and is able to
change these. I have tried to simplify Indian legal system and
taxation system for Indian entrepreneurs – but it is so complicated
that even if you simplify it, it will remain complicated. An ordinary
Indian entrepreneur wishes to remain an honest entrepreneur and
contribute to the development of nation, but our systems and
processes force him to adopt unfair means ...
Download links for basic
Download links...

Which of these is/are contracts ?

When you invite B to your home for dinner and B

accepts your invitation. = NO
When you board a public bus. = yes
When you call a taxi on the telephone = yes.
When you put a one rupee coin in the slot of a
weighing machine. = no
When you eat a meal at a restaurant. = yes

Situation of a minor

A, a minor, enters, into the following contracts. Is

he and the other party bound by any of them?
A contracts to marry B, aged 19 years.
A boards a bus. = yes
A lends Rs. 500 to B, aged 25 years. = yes
A becomes an apprentice in an industrial concern. =
A buys a TV set on credit.= no

Minor can make other person binding on his

interest – but no person can make minor
responsible for something. In the case the
minor picks up a bus or gives loan, the minor
can make other person to fulfill the
commitment. But minor cannot be forced.

Distinguish between innocent
misrepresentation and fraud and

In case of mistake the contract is Void. In the

case of misrepresentation, and fraud, the
contract is voidable. Misrepresentation is
covered in sec. 18, fraud in sec. 17, mistake in
sec. 21 and 22. Damages can be claimed in
fraud. Fraud has following components : false
representation of facts so that the other person
acts upon it.
A procured B a second wife on B’s
promise to pay him Rs. 500. can the
contract be enforced

No – as it is not a legal contract

Enumerate the different modes of
discharge of a contract.

Lapse of time
refusal to perform by both the parties
by operation of law
(when it becomes impossible) '
breach of contract
mutual consent
5 DECEMBER 09 10
Liquidated and unliquidated damages;
-- - differentiate these

When the amount of damages can be

ascertained in advance, the parties may fix this
amount in advance and therefore it is called
liquidated damage. But when the amount of
damage cannot be ascertained in advance, it is
called unliquidated damage.
Liquidated damanges are decided in advance.
5 DECEMBER 09 11
Indemnity and Guarantee; Differentiate

There are two parties in idemnity, but 3 parties

in guarantee. In indemnity, there is a promise
to indemnify in case of loss by a person. Let us
X and Y make a contract, X makes a mistake
and he indemnifies to Y as per contract. This is
indemnity. But instead of X, if Z indemnifies,
it is guarantee by third party.
5 DECEMBER 09 12
How will you enforce these
contracts :

B has promised to pay A Rs. 1,000 for his

horse which had died before the contract
- it is a void contract – as it is a mistake
relating to fact of contract. (sec. 21,22)
B, a minor, promised to pay A Rs. 10,000 for
his car. = (contract with minor is void as it
cannot be enforced against minor).
5 DECEMBER 09 13
Reciprocal promises. - are they

No – they are not contracts

Suppose Goti promises to give Pankaj rs 500
for his bike and Pankaj also promises to sell his
bike to Goti for Rs. 500, still it is not a
contract, it is only reciprocal promise.

5 DECEMBER 09 14
Surety enjoys a right of subrogation. Do
you agree
Surety has the right to collect damages from
the party in default. Suborgation means the
surety gets the right to claims, once it has
performed its role. For example, A and B has
made a contract and C is surety for B. Due to a
mistake by D, B fails to perform his part. C
pays the damages (being surety). Now C can
sue D for damages and collect the money to
recover the damages paid. If C receives excess
amount, it will go to B.
5 DECEMBER 09 15
Failure to sue the principal debtor within
time, discharges the surety. - do you

Yes – law of limitation applies here. Suppose

A promised to pay Rs 100 to B and C is surety
for A. B didnt ask A to pay and now the
amount is time barred. Thus C is free from his

5 DECEMBER 09 16
Money deposited in fixed deposit with a
bank is bailment. - do you agree

No – bailment is used with regards to goods

or things which are delivered by one person
to another for a specific purpose. It is defined
as : Bailment is a voluntary delivery of goods
for a temporary purpose on the understanding
that they are to be returned in specie in the
same or altered form. The ownership of the
goods remains with the bailor,

5 DECEMBER 09 17
What is gratuitous bailment?

It is not for charge. Suppose I put my Car with

Ravi for 2 days – and Ravi provides this
facility to me not for charge – it is gratuitous
Similarly : where you lend your book to a
friend of yours for a week. (not for charge).

5 DECEMBER 09 18
What is meant by ratification?

It means approval. When a party approves the

act of another party, it is ratification
Ratification is not possible for ultra vires acts.
Ratification is required when a person does
something, which he / she was not allowed to
do. For example A sells B's bike to C. now B
has to ratify it then only this contract can be
5 DECEMBER 09 19
Distinguish between particular lien and
general lien?

General lien is towards all the property, but

particular lien is towards only a specific
property. Suppose Sachin buys a charter plane
on credit with specific lien, then the creditor
can only sell the plane if Sachin doesnt pay his
liability. However, if it is general lien, the
creditor can recover from any property of
5 DECEMBER 09 20
A on board an English ship on the high
seas, causes B to enter into an agreement
by an act amounting to criminal intimidation
under the Indian Penal Code. A afterwards
sues B for breach of contract at Calcutta.
Has A employed any coercion?


5 DECEMBER 09 21
A agrees to buy from B a certain horse.
It turns out that the horse was dead at
the time of the bargain, though neither
party was aware of the fact. Is the
agreement valid?

The agreement is VOID – as it is a contract

based on mistake of fact. (sec. 21,22)

5 DECEMBER 09 22
X having advanced money to his son
Y, during the minority, upon Y’s
becoming major obtains by misuse of
parental influence a bond from Y for a
greater amount than the sum due in
respect of the advances. Has X
employed undue influence?


5 DECEMBER 09 23
A sells by auction, to B a horse which A
knows to be unsound. A says nothing
to B about the horses unsoundness. Is
A guilty of fraud.

No – it is the duty of B to inquire about the


5 DECEMBER 09 24
A and B are traders and enter into some
contract. A has private information of a
change in price which would effect B’s
willingness to proceed with the
contract. Is A bound to inform B.


5 DECEMBER 09 25
A intending to deceive B falsely
represents that five hundred paunds of
indigo are made annually at A’s factory
and thereby induces B to buy the
factory. What is the remedy available
to B.

It is a contract based on fraud. So B can sue A

for damages and rescind the contract.
(sec. 17)

5 DECEMBER 09 26
A’s son has forged B’s name to a
promissory note. B, under threat of
prosecuting A’s son obtains a bond
from A for the amount of the forged
note. Can B sue on this bond.

No – as it is also based on coersion (Sec. 15)

A's son has committed a crime. Reply to a
crime should not be a crime.

5 DECEMBER 09 27
“Mere silence may amount to fraud”.

This is applicable in the case of contract of

uberrmae fedei. Uberrmae Fedei means
contract of utmost faith. Following are
contracts of uberrmae fedei :
1. prospectus by company, 2. sale of land 3.
family arrangement 4. insurance contracts.
Thus in these cases mere silence may amount
to fraud. In other cases, mere silence is not a
5 DECEMBER 09 28
“The legal effect of a contract is confined to
the contracting parties”. Comment

The legal effect of contract is binding on both

the parties to the contract, but sometimes, it
may be related to third parties also. Quasi
contracts are such examples where a party
which has not signed the contract is also bound
by the contract. Quasi contract is an obligation
created by law (not by agreement). For
example finder of lost goods has the
responsibility to return the goods.
5 DECEMBER 09 29
“The essence of every agreement is that there
ought be free consent on both the sides”.

As per section 10 free consent is essential for a

contract. Further, consent based on coercion,
misrepresentation (sec. \18) , fraud (sec. 17)
,are not allowed. All these contracs will be
voidable. Contracts based on mistakes (sec.
20,21) will be void

5 DECEMBER 09 30
X entrusts Y with a negotiable
instrument endorsed in blank. Y makes
over the instrument to C in violation of
the private orders of X. Is it a valid act?

Yes – it is a negotiable instrument, and a

holder in due course gets good right to the
instrument and also the rifht to endorse it to

5 DECEMBER 09 31
A enters into a contract with
B to sell him 100 bales of
cotton and afterwards
discovers that B was acting
as agent for C. Whom can A
A can sue either of B or C.

5 DECEMBER 09 32
A employs B to beat C and agrees to
indemnify him against all
consequences. B beats C and had to
pay damages to C. Is A bound to
indemnify B?

No – it is an illegal contract and has no validity

5 DECEMBER 09 33
X directs Y his agent to buy a certain
house for him. Y tells X that it cannot
be bought but buys the house himself
later. Can X on discovering this compel
Y to sell it to him?

Yes – as Y was working as the agent of X and

has misused his position.

5 DECEMBER 09 34
A has authority from his principal B to
sell goods on credit. A sells goods on
credit to C without making the proper
and usual enquiries as to C’s solvency.
C at the time of such sale was
insolvent. Should A compensate B?

Yes as per sec. 212, agent is bound to act


5 DECEMBER 09 35
A authorises B to let A’s
house. Afterwards A lets it
himself. Is the authority of B

Yes – here the principal has revoked the

authority of B (sec. 207)

5 DECEMBER 09 36
X gives authority to Y to sell
X’s land, to pay himself out of
the proceeds the debts due
to him. Can X revoke this
No – as X has liability to Y and the authority is
given in relation to that liability : Sec. 202 (it is
not simple agency, but it is agency with

5 DECEMBER 09 37
A holds a lease from B terminable on 3
months notice. C an unauthorised
person gives notice of termination to A.
Can the notice be ratified by B?

Here lease is given by B so notice should also

be given by B. Therefore the answer is NO
(sec. 200)

5 DECEMBER 09 38
A without authority buys goods for B.
Afterwards B sell them to C on his own
account. Does he ratify the act of A?

now B has ratified the act of A.
Sec. 197 .

5 DECEMBER 09 39
A has an agent at Calcutta namely B to
whom he sends certain goods with
directions to send them immediately to
Lucknow. But B finds that the goods may not
stand the journey to Lucknow and sells them
at Calcutta itself. Is he justified in doing so?

in order to protect the interest of principal, the
agent can take such measures. Sec. 189 : an
agent may do all things which may be
necessary to protect the principal

5 DECEMBER 09 40
A delivers his two wrist
watches for repair to B. B
keeps both the watches duly
repaired. A is prepared to
take back one of the watches
on payment of the charge for
repairing it but B refuses ans
wants to deliver both the
watches. Is B justified?
5 DECEMBER 09 41

No B is not justified
B has lien on the other watch, and can keep it
till he receives the payment
sec. : 170 : particularlien

5 DECEMBER 09 42
A leaves a cow in the custody
of B to be taken care of. The
cow begets a calf. Is B bound
to redeliver the calf also.

Yes – B has to deliver calf also.

Sec. : 163 : it is a case of bailment

5 DECEMBER 09 43
A lends his car to B on the express
understanding that only B should drive
it. But B’s son drives the car. In spite of
all his diligence the car meets with an
accident and is severely damaged? Is
B liable for damage?


5 DECEMBER 09 44
A lends a cycle which he
knows is defective to B. B is
injured while driving. Is A liable
for injuries sustained?

A should have told B about it earlier
Sec. 150 :

5 DECEMBER 09 45
A, B and C as sureties for D enter into
several bonds each in a different penalty
namely, A in the penalty of Rs. 10,000, B
in that of Rs. 20,000 and C in that of Rs.
40,000 conditioned for D’s duty
accounting to E. D makes a default to the
extent of Rs. 30,000. How much A, B and
C are liable to pay?

5 DECEMBER 09 46

Rs. 10000 each as per sec. 147

5 DECEMBER 09 47
X guarantees to Z payment for iron to be
supplied by him to Y to the extent of 20,000
tonnes. Y and Z have privately agreed that Y
should pay five rupees per ton beyond the
market price, such excess to be applied in
liquidation of old debt. This agreement is
concealed from X. Is X liable.

No - the surety is not responsible if there is a

private secret agreement (sec. 143)

5 DECEMBER 09 48
A owes money to B which has been
guaranteed by C. The debt becomes due,
but B does not sue A for a year
thereafter. Is C discharged from liability?

No : the surety is not discharged unless there is

some agreement to the contrary Sec. 137

5 DECEMBER 09 49
A agrees to appoint B as salesman in his office
at a monthly salary of Rs. 300 upon C
becoming a surety for B’s duty accounting of
the monies received by him. Afterwards without
C’s knowledge or consent, A agreed to pay B
commission on the collections instead of
monthly salary. Is C liable for any subsequent
misconduct of B?

No (sec. 133, the terms cant be changed

without the consent of surety)

5 DECEMBER 09 50
A guarantees to B to the extent
of Rs. 1,000 that C shall pay all
the bills that B shall draw upon
him. B draws upon C. C
accepts the bill. A gives a
notice of revocation. Is A liable
if C dishonours the bill at

5 DECEMBER 09 51

Yes – sec. 130 revocation was done after the

deal. `this revocation will apply on future
transactions only

5 DECEMBER 09 52
A guarantees to B the payment
of a bill of exchange by C, the
acceptor. The bill is
dishonoured by C. Is A liable
for the interest on the amount
of the bill due.

5 DECEMBER 09 53

Sec. 128 : the liability of surety is equal to that

of principal debtor, so the surety is liable for
interest also

5 DECEMBER 09 54
What is the difference between a
bailment and pledge?

Bailment (sec. 148), here goods / any assets are

transferred for some purpose. It may be against
payment / without payment.
Pledge ( Sec. 172 ) : here goods / articles are
given by the debtor as security for performance
of loan taken by the debtor. This is kept by the
creditor / lender till the repayment of loan. It is
also called pawn.
5 DECEMBER 09 55
What are the various bodies in
contracts of pledge, bills and
In pledge the parties are : Pawner : the person
who gives the article. Pawnee – the person who
keeps the security
in bailment : bailor and bailee just like pawner
and pawnee.
In bills we have : 1. drawer, drawee, and
holder. Drawer prepares bill and gives to
holder to collect payment on due date from
5 DECEMBER 09 56
Pawan delivered some jewellery to Amir for his
approval. Amir pledged the same with Pankaj,
Pawan wants to get back the jewellary from
Pankaj. Would he succeed?

The jewellery was given by Amir to Pankaj, so

only Amir can collect it back from Pankaj.
Since the jewellery was given by Amir to
Pankaj, it is assumed that Amir has accepted
the jewellery and thus there is a sale between
Pawan and Amir, thus Pawan should collect
payment from Amir. So answer : NO
5 DECEMBER 09 57
A contracts to sell and deliver
25,000 tonnes of certain raw
material to B on a fixed day. A
knows nothing of B’s mode of
conducting his business. A
breaks his promise and B
having no raw material is
obliged to close his factory. Is
B entitled to recover the loss
caused by such closure?
5 DECEMBER 09 58
Solution ..

No – the buyer should have clarified the terms

and made a provision for such compensation
(sec. 73)

5 DECEMBER 09 59
A contracts to buy B’s scooter
for Rs. 7,800, but breaks his
promise. B could obtain
another scooter immediately
after the breach for Rs. 8,500.
Can B recover the excess of
Rs. 700.

5 DECEMBER 09 60

Yes sec. 72

5 DECEMBER 09 61
X and Y jointly owe Rs. 1,000
to Z. X of his own pays the
whole amount to Z and Y not
knowing this also pays the
amount to Z. Can Y
subsequently recover the
amount from Z.

5 DECEMBER 09 62

Sec. 72

5 DECEMBER 09 63
X, a trader leaves goods at Y’s
house by mistake. Y treats the
goods as his own. What is
remedy available to X.

X can recover damages or goods (if they are

intact) sec. 70

5 DECEMBER 09 64
X owes money to Y under a
contract. It is agreed between
X, Y and Z that Y will accept Z
as his debtor instead of X. Is
the old debt extinguished?

Yes : as per sec. 62

5 DECEMBER 09 65
P contracts with Q to execute some
construction work for a fixed price, Q
supplying the scaffolding and timber
necessary for the work. Q fails to supply
the necessary scaffolding and timber.
Can P refuse to execute the construction
work? Can P claim damages for loss
arising for Qs non-performance.

5 DECEMBER 09 66

Yes sec. 53

5 DECEMBER 09 67
X promises to build a stable for Y’s horse
and Y promises to pay X on completion of
the work. Half-way during construction X
demands money from Y. Can Y refuses
to pay?

Yes – he will pay after complete construction

as per contract
sec. 52

5 DECEMBER 09 68
X undertakes to deliver 100
bags of wheat to Y on an
appointed day. Is X bound to
fix the place of delivery?

Sec. 49

5 DECEMBER 09 69
A promises to deliver 50 rice bags at B’s
warehouse on 1st January. A brings the
goods as promised but after the usual
business hours. Has A performed his

Sec. 47

5 DECEMBER 09 70
A, B and C jointly promise to pay D a
sum of Rs. 1,500. C is compelled to pay
the whole amount. A is insolvent but his
assets are sufficient to pay one half of his
debts. How much C is entitled to recover
from A and B’s estates.

250 from A and 625 from B. (sec. 43 )

5 DECEMBER 09 71
A, a singer enters into a contract with B,
the manager of a theatre, to sing at this
theatre two nights in every week during
the next two months and is engaged to
pay her Rs. 100 for each night’s
performance. On the sixth night, A wilfully
absents herself from the theatre. Can B
put an end the contract.
Yes : Sec. 39

5 DECEMBER 09 72
A promises to paint a picture
for B within a month for a price.
A dies shortly thereafter. Can
B enforce the contract against
the legal representatives of A.
sec. 37

5 DECEMBER 09 73
A agrees to pay B a sum of money if B
marries C. C married D. What is the

The contract is now void

Sec. 36

5 DECEMBER 09 74
A makes a contract with B to buy B’s car
if A survives C. Can contract be enforced
before C dies?

Sec. 32

5 DECEMBER 09 75
C contracts to pay A Rs.
10,000 if his car is destroyed.
What is the nature of his

Contingency contract
Sec. 31

5 DECEMBER 09 76
A agrees to sell B all the rice in his
godown. Is it a valid agreement?

there is certainity

5 DECEMBER 09 77
A is dealer in different kinds of
oil. He agrees to sell B “a
hundred tonnes of oil. “Is there
any agreement”?

Sec. 29
it is a mistake

5 DECEMBER 09 78
A owes to B Rs. 1,000 but the
debt is barred by the Limitation
Act. A orally promises to pay
the debt. Can B recover the
money from A.
it requires written consent now

5 DECEMBER 09 79
X promises to superintend on behalf of
Y a legal manufacturer of indigo and
illegal traffic in cosmetic. Y promises to
pay to X Rs. 20,000 a year for this. Is
the agreement valid?

it is invalid
Sec. 24

5 DECEMBER 09 80
A’s estate is sold for arrears of revenue
under the provisions of an Act of
legislature by which the defaulter is
prohibited from purchasing the estate. B,
upon an understanding with A, becomes
the purchaser and agrees to convey the
estate to A upon receiving from him the
price which B has paid. Is the agreement

5 DECEMBER 09 81
Solution ...

This agreement will defeat the purpose of law.

If it is noticed later, it will be invalid.

5 DECEMBER 09 82
A promises to obtain for B an
employment in the public
service and B promises to pay
Rs. 1,000 to A. Is this valid

No Sec. 23

5 DECEMBER 09 83
A agrees to buy from B a certain horse. It
turns out that the horse was dead at the
time of the bargain, though neither party
was aware of the fact. Is the agreement

Sec. 20 (mistake of facts)

5 DECEMBER 09 84
distinguish between a condition and a

Condition is essential, if it is broken, the

contract of sale is broken. Warranty is
collateral to the main purpose of ( second part
of a) contract, if it is broken damages can be
claimed. Read sec. 10 to 17 of Sale of goods
act for detail. Condition is more important and
binding than warranty.
5 DECEMBER 09 85
Purchase Agreement

There is immediate transfer of property in case of sale. In hire

purchase, the property transfers at the end of the period (when all the
instalments are paid). If you buy a car from a showroom on hire
purchase, you will be its true owner only when you payback all the
instalments and thus hire purchase doesnt give the buyer complete
powers. The hire purchase agreement only gives an option to buy the
goods to the buyer, but there is a clear agreement in the case of sale.

5 DECEMBER 09 86
Can you sell future goods?

Yes – as per sec. 2(6) : these goods must be

specific, identifiable and certain. If they are not
certain, you cannot sell them.
Example : In your factory you make bisxuits.
You make a contract to supply 1000 kg of
biscuits to a buyer on certain price and the
goods will be manufactured in next 1 month.
5 DECEMBER 09 87
What is the Doctrine of ‘Nemo dat quod
non habet’.

It is related to transfer of ownership. It means : no

one can pass a better title than he himself has.
You cant sell a property, which doesnt belong to you.
If you are owner of something then only you can sell
it. If you are not owner, how can you sell something?

5 DECEMBER 09 88
Discuss the rights of an unpaid seller.

The unpaid seller can take possession of the

goods, he can stop the goods in transit (which
are going to the buyer) or can sell these goods
to some other person. (sec.,50,52, 54 of sale of
goods act) He has right to lien on the goods
He can withhold delivery of goods (if the
goods are with him). (sec. 55 of sale of goods
5 DECEMBER 09 89
WHAT IS THE Doctrine of
Caveat Emptor

Sec 16 : the buyer should satisfy himself about

the goods before buying. Thus buyer should be
alert and careful while buying the goods.

5 DECEMBER 09 90
A and B are co-owners of a T.V. while
the T.V. is in possession of B. A's
secretary takes it away and sells it to
C, a bonafide purchaser for value.

As per sec. 14(a) and rule of Nemo Dat Quod

Non-Habet the secretary of A cant sell the TV
to C. C will have to return the TV back to A &
B. However, C can recover his money from
secretary of A.

5 DECEMBER 09 91
X by way of undue influence
buys a car from Y at a very low
price and sells it to Z, an
innocent purchaser.
Here this is a case of voidable contract between X
and Y. However, Z purchased from X without any
knowledge of this. As per sec. 27 of Sale of Goods
act, the buyer gets a good title, if he buys innocently
and after fulfilling regular checkups. Thus Z cant be
forced to return car. X can recover his remaining
money from Y.

5 DECEMBER 09 92
Why it is important to know the time of
passing of property?

If the goods are damaged after that time, the

responsibility is that of buyer, if the goods are
destroyed before that time, the responsibility
will be that of the seller.
The time is important, as if there is some
special circumstances, it may lead the contract
to a null / void contract.
5 DECEMBER 09 93
What are implied conditions and
These conditions are assumed to be there in every sale contract.
1. condition to the title of the goods : it is assumed that the seller has
title to the goods.
2. quite possession / freedom from encumbrances (nobody should
disturb the enjoyment of the goods).
3. in case of sale by description, the goods must be similar to
description, and in case of sale by sample, the goods should be
similar to the sample
4. quality / fitness : the goods must be fit for use for the purpose for
which they have been bought.
5. the seller has to disclose dangerous nature of goods.
6. as per business practices. ... ..
5 DECEMBER 09 94
Define negotiable instrument.
Negotiable instrument is one instrument which
can be transferred by one person. Thus
ownership is transferable in the case of
negotiable instrument. It is of two types : 1.
bearer 2. order
bearer instrument doesnt require any
endorsement – transfer is by only delivery. In
case of order instrument, the owner has to
endorse it in favour of transferee.
5 DECEMBER 09 95

Sec. 13(1) : negotiable instrument means – a

promissory note – a bill of exchange – a
cheque payable to order or bearer
promissory note is a promise to pay certain
amount to the bearer of the instrument or to
order on specified date

5 DECEMBER 09 96
What is the difference between a
bill and promissory note?
Promissory note is a promise to pay, it is
prepared by the debtor himself and it is given
to creditor.
A bill is an order to a party to pay some
amount. Thus it is prepared by creditor on a
A bill has to be accepted by the debtor (that the
debtor will pay on specified date / on demand).
5 DECEMBER 09 97
What is dishonour of a bill ?

When the debtor (drawee) is not able to pay a

bill on due date, it is called dishonour of a bill.
It is the inability of the debtor to pay the bill on
due date. When there is dishonour of bill, the
holder of the bill will give a notice to the
drawee. This notice must be noted with notary.
Read sec. 91 to 99 of negotiable instrument act.

5 DECEMBER 09 98
Do you think : Forgery of drawers’
signatures protects the paying bank.

Forgery is a crime. The bank has to recover the
amount from the person who is doing forgery.

5 DECEMBER 09 99
What is the difference between
holder and holder in due course ?

Holder means the bearer of an instrument.

Holder in due course means a person who has
acquired instrument properly through proper
legal procedure and therefore that person has
proper legal right on the instrument. A holder
in due course is a person, who gets full right to
the instrument.
5 DECEMBER 09 100
Some furniture was delivered by X to A
on hire purchase basis so that he could
become owner after the payment of the
last instalment. A sold the furniture to B
even before such payment. A failed to
make the last payment. X wanted to
recover the furniture from B. Would he

A is not the owner of the property, so he cant sell the property, so the
property belongs to X. If B is able to proove that he had some criteria
to believe that A was owner, then he may be able to retain the
property. In that case X should get damages from A.

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In a contact through sea, where the seller has
to put the goods on board ship at his own
expenses, the contract is known as :

There is are three popular types :

this is the case of FOB – free on board – because here the seller is
responsible to put the goods on board.
In the case of CIF, the seller bears carriage, insurance and freight (all
the three expenses).
In ex-factor or ex-godown, the seller gives the delivery of goods at
factory and is not responsible thereafter.

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What is Stale cheque.

A cheque which is out of date is called stale

A chaque has life of 6 months from the date
which it bears. In some cases, the life of
cheque is only 3 months. (for example in the
cae of banker's cheque)

5 DECEMBER 09 103

What is banker's cheque?

A cheque drawn by one bank on another bank.

It is used for transfer of money to another
person within the same city. It is similar to
bank draft.

5 DECEMBER 09 104

What is hundi?
It is a traditional financial instrument, which
has been in use for hundreds of years. It was
used by Marwari traders to undertake financial
transactions. Suppose Y is your debtor (you
have sold him some goods on credit) by Rs.
3000 and you have to pay Rs. 3000 to Z. You
can draw a hundi on Y payable to Z. Thus on
due date, Z will collect Rs. 3000 from Y on
your behalf and thus your account will be
settled. It is like bill of exchange.
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What is an Accommodation Bill
It is a means of financing. Example : I need Rs.
9 Lakh urgently urgently. I draw a bill on you
for 6 months and get the bill accepted by you
for Rs. 9 lakhs. I go to the bank and get the bill
discounted. The bank gives me some 8.9 lakhs.
On due date (after 6 months), the bank will
collect Rs. 9 lakhs from you. (by that time I
will also give you Rs. 9 lakhs, so that you may
pay to the bank).
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Who is a Holder-in-due course
As per sec. 9 of Negotiable Instrument : A
holder in due course is a person who obtains
possession of a negotiable instrument for
consideration and without any cause to believe
that any defect exists in the title of the person
from whom he derives his title. The
instrument must be obtained before the date of
expiry of the instrument and with proper
endorsement (in case of to order instrument).
Sometimes, holder in due course gets better
5 DECEMBER 09 title than a holder. 107
A draws a bill payable three
months after sight on B. It
passes several hands before X
becomes its holder. On
presentation by X, B refuses to
accept the bill. Discuss the
rights of X.

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Solution ...

X has right to collect payment from B or from

the person who gave this instrument to X. The
concerned person will than collect throug the
chain, ultimately, A will be responsible, who
will finally collect payment from B. X will
have to give a notice of dishonour to B and
then he will be able to recover money from the
person who passed him this bill.
5 DECEMBER 09 109
What is Endorsement.
If I have some bill / cheque / promisory note (a
negotiable instrument – of any type), and I
want to give it to someone else, I can give it by
delivery (in case of bearer instrument) or by
endorsement (in case the instrument is to
order). Thus endorsement is required when the
instrument is to order. It enables a person to
transfer ownership of the negotiable
instrument. Here the endorser rights at the back
of the instrument the name of the endorsee, and
5 DECEMBER 09 the details. 110
Example of endorsement

I T.K. Jain give the right of this cheque to Mr

M. K. Jain for money and consideration


5 DECEMBER 09 111

What is a valid endorsement

It must be made before the instrument expires

it must be made by a holder in due course
it must be made by a person who has clear title
to the instrument.
It must be against consideration.
(read Sec. 15 and 16 of Negotiable instrument
act for detail) Sec. 52 : endorser may exclude
his own ultimate liability in some cases.
5 DECEMBER 09 112
Describe legal presumption in
case of negotiable instruments.
Negotiable instruments are transferable by the
holder in due course. It is assumed that the
negotiable instrument was prepared for
consideration. It was transferred before its
maturity date. It was duely signed / stamped as
per legal requirements. The holder of the
instrument is assumed to be the holder in due
course. (read sec. 118 and 119 of N.I. Act
5 DECEMBER 09 113
Discuss the penal provisions in case of
dishonour of cheque?

Dishonour means payment is not made by the banker

against the cheque. The banker may refuse payment when
– 1. there is insufficient balance 2. there is signature
mismatch 3. when there is stop payment instruction by the
drawer 4. other reasons approved by law.
138-142 say : Imprisonment upto 2 years / fine upto twice
the amount of cheque (or both) penaly if there is
dishonour due to lack of funds. (proper procedure
regarding notice must be followed). (case: G.M. Mittal
Stainless Steel v/s Nagarjun Investments 1997)
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