Module - II

THE NEGOTIABLE INSTRUMENTS ACT, 1881

INTRODUCTION
Money can very easily and safely be transferred from one place to another with the help of negotiable
instruments. The law relating to Negotiable Instruments is laid down in Negotiable Instruments Act, 1881.
It extends to the whole of India

DEFINITION
According to Section 13 of the Act, "Negotiable instrument means a promissory note, bill of exchange or
cheque payable either to order or to bearer, whether the word "order" or " bearer" appear on the instrument
or not."
In the words of Justice, Willis, "A negotiable instrument is one, the property in which is acquired by
anyone who takes it bona fide and for value notwithstanding any defects of the title in the person from
whom he took it".
Thus, the term, negotiable instrument means a written document which creates a right in favour of some
person and which is freely transferable. Although the Act mentions only these three instruments (such as a
promissory note, a bill of exchange and cheque), it does not exclude the possibility of adding any other
instrument which satisfies the following two conditions of negotiability:
(1) the instrument should be freely transferable (by delivery or by endorsement. and delivery) by the
custom of the trade; and
(2) the person who obtains it in good faith and for value should get it free from all defects, and be entitled
to recover the money of the instrument in his own name.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENTS

1. Easy transferability
The property (ownership) in a negotiable instrument is transferred by mere delivery, if the instrument is
payable to bearer, by delivery and indorsement if payable to order.
2. Transferee’s title free from all defects
The transferee who takes it bona fide and for value and before maturity ( called holder in due course) gets a
good even if the title of transferor was defective.
3. Transferee can sue in his own name: The transferee of the negotiable instrument can sue in his own
name, in case of dishonor.
4. Prompt payment
A negotiable instrument enables the holder to expect prompt payment because a dishonour means the ruin
of the credit of all persons who are parties to the instrument.
5. Notice of transfer not necessary: The transferee is not required to give a notice of transfer to the person
liable to pay the instrument.
Presumptions
Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which the court
presumes in regard to negotiable instruments:
1. Consideration: It is presumed that every negotiable instrument was made drawn, accepted or endorsed
for consideration.
2. Date: Every negotiable instrument is presumed to have been made or drawn on the date which it bears.
3. Time of acceptance: It is presumed that every accepted bill was accepted within a reasonable time after
its issue and before its maturity.
4. Time of transfer: It is presumed that every transfer was made before its maturity.
5. Order of endorsement: The endorsements are presumed to have been made in the order in which they
appear thereon.
6. Stamp: In case an instrument is lost, it is presumed that it was duly stamped.
7. Every holder is a holder in due course: Every holder is presumed to be a holder in due course.
8. Proof of protest: In case a suit is filed for dishonor of instrument, the court shall on proof of the protest,
presume the fact of dishonour, unless and until such fact is disproved.

TYPES OF NEGOTIABLE INSTRUMENT

(a) Negotiable instruments recognised by (ii) Share warrants

statute (By the Negotiable Instruments Act): (iii) Dividend warrants
(i) Promissory notes (iv) Bankers draft
(ii) Bills of exchange (v) Circular notes
(vi) Bearer debentures
(iii) Cheques (vii) Debentures of Bombay Port Trust
(b) Negotiable instruments recognised by usage or (viii) Railway receipts
custom are: (ix) Delivery orders.
(i) Hundis

PROMISSORY NOTE
Section 4 of the Act defines, "A promissory note is an instrument in writing (not being a bank-note or a
currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of
money to or to the order of a certain person, or to the bearer of the instruments."

Parties to a Promissory Note:

1. Maker – The person who makes the note and promises to pay.
2. Payee- The person to whom the amount is payable.
Essential elements
An instrument to be a promissory note must possess the following elements:
(1) It must be in writing: A mere verbal promise to pay is not a promissory note.
(2) It must contain an express promise to pay: There must be an express undertaking to pay. A mere
acknowledgment of debt is not enough.
(3) Promise to pay must be unconditional: A conditional undertaking destroys the negotiable character
of an otherwise negotiable instrument.
 (4) It should be signed by the maker: The person who promise to pay must sign the instrument even
though it might have been written by the promisor himself.
(5) The maker must be certain: The note itself must show clearly who is the person agreeing to undertake
the liability to pay the amount.
(6) The payee must be certain: The instrument must point out with certainty the person to whom the
promise has been made.
(7) The promise should be to pay money and money only: Money means legal tender money and not old
and rare coins.
(8) The amount should be certain: the amount payable must be certain.
(9) Other formalities: The other formalities regarding number, place, date, consideration etc. though
usually found given in the promissory notes but are not essential in law.

Specimen of Promissory Notes

BILLS OF EXCHANGE
Section 5 of the Act defines, "A bill of exchange is an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order
of a certain person or to the bearer of the instrument".
Parties to Bill of Exchange
1. Drawer : The maker of a bill of exchange
2. Drawee : The person directed to pay the money by the drawer
*Acceptor: After a drawee of a bill has signed his assent upon the bill, he is called the acceptor.
3. Payee : The person to whom the money is to be paid.
Essential conditions of a bill of exchange
(1) It must be in writing.
(2) It must be signed by the drawer.
(3) The drawer, drawee and payee must be certain.
(4) The sum payable must also be certain.
(5) It should be properly stamped.
(6) It must contain an express order to pay money and money alone.
(7) The order must be unconditional.
 CHEQUE
Section 6 of the Act defines "A cheque is a bill of exchange drawn on a specified banker, and not expressed
to be payable otherwise than on demand".
A cheque is bill of exchange with two more qualifications, namely,
(i) it is always drawn on a specified banker, and
(ii) it is always payable on demand.
Consequently, all cheque are bill of exchange, but all bills are not cheque.
Parties to a Cheque
1. Drawer. the person who draws the cheque.
2. Drawee. It is the drawer's banker on whom the cheque has been drawn.
3. Payee. He is the person who is entitled to receive the payment of the cheque.
Types of Cheques
(a) Open Cheque – When the cheque is payable at the counter of the bank on whom it is drawn, it is
called an open cheque. It may be of two types .
o Bearer Cheque - When a cheque is payable to the bearer i.e. to the person who presents the
cheque to the bank for encashment, is called bearer cheque. It can be transferred by mere
delivery. Hence there is a great risk. Eg. Pay ‘A’ or bearer.
o Order Cheque - When a cheque is payable to person named in the cheque or to his order, is
called Order Cheque. It can be transferred only by endorsement and delivery. Eg. Pay ‘A’ or
order.
(b) Crossed Cheque – To reduce the risk involved in open cheque, a cheque may be crossed. It is the
cheque on which two parallel transverse lines are drawn across the top left , with or without the word :
(i) ' & Co.'
(ii) Not Negotiable
(iii) A/c Payee
It can not be encashed at the counter of the bank , can be received through a collecting banker.
MODES OF CROSSING
(1) General Crossing – In general crossing, simply two parallel transverse lines at the left hand side of
its top corner with or without words such as 'and company' or 'not negotiable' may be drawn.
Effect - Payment can be made through bank account only, and not at the counter.

(2) Special Crossing - When a cheque bears the name of the bank in between the two parallel lines,
with or without the words 'not negotiable' is called Special Crossing.
Effect - The bank will pay to the banker whose name is written in between the crossed lines.

(3) Restrictive Crossing - In this, crossing of cheques is done by writing Account Payee or
Account Payee only in between the crossing lines.

Effect - Payment will be credited to the account of payee named in the cheque.
 (4) Not negotiable Crossing - A person taking a cheque crossed generally or specially, bearing in either
case the words 'not negotiable' shall not be able to give a better title to the holder than that of the
transferor.
Effect - The cheque can be transferred but the transferee will not acquire a better title to the cheque. Thus a
cheque is deprived of its essential feature of negotiability.
Specimen of Not Negotiable Crossing

Comparison between Cheque and Bill of Exchange

S. BASIS CHEQUE BILL OF EXCHANGE

N.
1. Meaning A document used to make A written document that shows
easy the
payments on demand and can indebtness of the debtor towards
be transferred through hand the creditor
delivery
2. Defined in Section 6 of Negotiable Section 5 of Negotiable
Instrument Instrument
Act, 1881. Act, 1881.
3. Drawee Always a specific bank May be any person or bank
4. Payable to Always Cannot be made payable to
bearer on bearer on demand.
demand
5. Acceptance Does not require acceptance A bill needs to be accepted.
6. Validity period 3 months Not applicable
7. Days of grace No grace period is allowed 3 days of grace allowed
8. Can it be crossed Yes No
9. Stamping No such requirement Must be stamped

Comparison between Bill of Exchange and Promissory Note

S. BASIS BILL OF EXCHANGE PROMISSORY NOTE

N.
1. Meaning Bill of Exchange is an It is an instrument in writing
instrument in writing showing containing an unconditional
the indebtedness of a buyer undertaking signed by maker to
towards the seller of goods. pay a certain sum of money to a
certain
person or to the bearer.
2. Defined in Section 5 of Negotiable Section 4 of Negotiable
Instrument Instrument
Act, 1881. Act, 1881.
3. Nature of There is an unconditional There is an unconditional
Payment order to promise to
pay pay
4. Number of Three parties, i.e. drawer, Two parties, i.e. drawer and
 Parties drawee payee.
and payee.
5. Drawn by Creditor Debtor
6. Liability of Secondary and conditional Primary and absolute
Maker
7. Notice of Notice must be given to all Notice of dishonor to maker is
dishonour persons not
liable to pay necessary
8. Noting and Required in case of dishonor Not required in case of dishonor
protesting of a of a
bill. note.
9. Payable to maker The drawer and payee may be Maker cannot pay to himself
one
person
10 Copies Bill can be drawn in copies. Promissory Note cannot be
. drawn in
copies.
NEGOTIATION
According to section 14 of the Act, ‘when a promissory note, bill of exchange or cheque is transferred to
any person so as to constitute that person the holder thereof, the instrument is said to be negotiated.’
Negotiation thus requires two conditions to be fulfilled, namely:
1. There must be a transfer of the instrument to another person; and
2. The transfer must be made in such a manner as to constitute the transferee the holder of the
instrument.

Modes of Negotiation
Negotiation may be effected in the following two ways :

1. Negotiation by delivery (Sec. 47) : Where a promissory note or a bill of exchange or a cheque is
payable to a bearer, it may be negotiated by delivery thereof.
Example : A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to
keep it for B. The instrument has been negotiated.
2. Negotiation by endorsement and delivery (Sec. 48) : A promissory note, a cheque or a bill of
exchange payable to order can be negotiated only be endorsement and delivery. Unless the holder signs
his endorsement on the instrument and delivers it, the transferee does not become a holder. If there are
more payees than one, all must endorse it.

HOLDER
According to Section 9 of the Act ‘holder’ of a promissory note, bill of exchange or a cheque means any
person entitled in his own name to the possession thereof and to receive or recover the amount thereon
from the parties thereto.
A holder in case of an instrument payable to order is payee or indorsee. In case the instrument is payable
to bearer, holder means the possessor of the instrument.

HOLDER IN DUE COURSE

Section 9 of the Act defines 'holder in due course' as “any person who acquires a promissory note, bill or
cheque bona fide, for value and before maturity”.A holder in due course must satisfy the following
conditions:
1. He must be a holder for valuable consideration.
2. He must have become a holder (possessor) before the date of maturity of the negotiable instrument.
3. He must have become holder bona fide.
4. He should not have notice of defects whether actual or constructive.
4. A holder in due course must take the negotiable instrument complete and regular on the face of it.

Example
(i) A bill made out by pasting together pieces of a tom bill taken without enquiry will not make the
holder, a holder in due course. It was sufficient to show the intention to cancel the bill.

Privileges of a Holder In Due Course:

1. Instrument purged of all defects: A holder in due course who gets the instrument in good faith in
the course of its currency is not only himself protected against all defects of title of the person from
whom he has received it, but also serves, as a channel to protect all subsequent holders.
Example: A obtains Bs acceptance to a bill by fraud. A indorses it to C who takes it as a holder in due
course. The instrument is purged of its defects and C gets a good title to it. In case C indorses it to some
other person he will also get a good title to it except when he is also a party to the fraud played by A.

2. Rights not affected in case of an inchoate instrument : Right of a holder in due course to recover
money is not at all affected even though the instrument was originally an inchoate stamped instrument
and the transferor completed the instrument for a sum greater than what was intended by the maker.
(Sec. 20)

3. All prior parties liable: All prior parties to the instrument (the maker or drawer, acceptor and
intervening indorers) continue to remain liable to the holder in due course until the instrument is duty
satisfied. The holder in due course can file a suit against the parties liable to pay, in his own name (Sec.
36)

4. Can enforce payment of a fictitious bill : Where both drawer and payee of a bill are fictitious
persons, the acceptor is liable on the bill to a holder in due course. If the latter can show that the
signature of the supposed drawer and the first indorser are in the same hand, for the bill being payable to
the drawer's order the fictitious drawer must indorse the bill before he can negotiate it. (Sec. 42).

5. No effect of conditional delivery: Where negotiable instrument is delivered conditionally or for a

special purpose and is negotiated to a holder in due course, a valid delivery of it is conclusively
presumed and he acquired good title to it. (Sec.46).
Example: A, the holder of a bill indorses it "B or order" for the express purpose that B may get it
discounted. B does not do so and negotiates it to C, a holder in due course. D acquires a good title to the
bill and can sue all the parties on it.
6. No effect of absence of consideration or presence of an unlawful consideration: The plea of
absence of or unlawful consideration is not available against the holder in due course. The party
responsible will have to make payment (Sec. 58).

7. Estoppel against denying original validity of instrument: The plea of original invalidity of the
instrument cannot be put forth, against the holder in due course by the drawer of a bill of exchange or
cheque or by an acceptor for the honour of the drawer. But where the instrument is void on the face of it
e.g. promissory note made payable to "bearer", even the holder in due course cannot recover the money.
Similarly, a minor cannot be prevented from taking the defence of minority. Also, there is no liability if
the signatures are forged. (Sec. 120).

8. Estoppel against denying capacity of the payee to indorsee: No maker of promissory note and no
acceptor of a bill of exchange payable to order shall, in a suit therein by a holder in due course, be
permitted to resist the claim of the holder in due course on the plea that the payee had not the capacity to
indorse the instrument on the date of the note as he was a minor or insane or that he had no legal
existence (Sec 121)
9. Estoppel against indorser to deny capacity of parties: An indorser of the bill by his endorsement
guarantees that all previous endorsements are genuine and that all prior parties had capacity to enter into
valid contracts. Therefore, he on a suit thereon by the subsequent holder, cannot deny the signature or
capacity to contract of any prior party to the instrument.

DISCHARGE OF NEGOTIABLE INSTRUMENTS

The term 'discharge' in relation to negotiable instruments has two meanings:
(1) the discharge of the instrument, and
(2) discharge of one or more parties from liability on the instrument.

(a) Discharge of the instrument

An instrument is said to be discharged when all rights under it are extinguished so that instrument ceases
to be negotiable. This happens when the party who is primarily and ultimately liable on the instrument is
discharged from liability. A negotiable instrument may be discharged by any of the following ways :
1. By payment in due course.
2. By cancellation.
3. Where the principal debtor becomes the holder.
4. Where it discharges as simple contract

(b) Discharge of one or more parties from liability on the instrument

When any particular party or parties are discharged, the instrument continues to be negotiable and the
undischarged parties remain liable on it. For example, the non presentation of a bill on the due date
discharges the indorsers from their liability, but the acceptor remains liable on it.
A party or parties may be discharged from liability in the following ways:
1. By cancellation
2. By release of the person liable
3. By Payment
4. By allowing drawee more than 48 hours to accept the bill.
5. By delay in presenting cheque.
6. By qualified acceptance
7. By material alternation
8. Discharge by debtor becoming its holder
9. By operation of law
Sale of Goods Act, 1930
This act came into force on July 1, 1930 and applies to whole of India except Jammu and
Kashmir.
Meaning of Contract of Sale: According to section 4(1) “ a contract of sale is a contract
whereby the seller transfers or agrees to transfer the property in the goods to the buyer for a
price”.
Explanation:
1) Contract of sale must have two parties a seller and a buyer . A person cannot enter
into a contract of sale with himself.

2) Goods: Under this act goods mean only movable goods. Immovable property doesn’t fall
within the scope of this act. Shares, stocks, debentures fall within the meaning of goods
within this act. Standing crops which are to be separated from the land before the contract
of sale is completed also fall within the meaning of goods under this act. Goodwill,
trademarks, patents also fall within the meaning of goods under this act. However money,
and actionable claims do not fall within the meaning of goods. Money means, money
which is currently in circulation, while old coins and currency will be considered as
 goods.
3) Transfer of Ownership: The purpose of contract of sale is the transfer of ownership pf
goods from seller to the buyer. If the goods are handed by one party to another for some
other purpose and not with an object of transferring the ownership, then it is not a
contract of sale of goods.
4) Price: For a contract of sale of goods it is also essential that the transfer of ownership of
the goods is made for a price. If the ownership of goods is transferred without any
consideration, then it is a contract of gift and not a contract of sale of goods. Not only
this the price must be paid in money in circulation. If the goods are exchanged for goods it is a
barter contract and not a contract for sale of goods. However where the goods are exchanged
partly for goods and partly for money, then it is a contract of sale of goods.

5) Contract of sale can be either in the form of Sale or Agreement to sell.

At the time when the contract is entered into if the ownership is transferred
immediately by the seller to the buyer it is sale. If the seller at the time of contract
only promises to transfer the ownership of the goods later on, it is an agreement to
sell.

Goods can be of the following kinds:

1) Existing Goods
2) Future Goods
3) Contingent Goods
1) Existing Goods: Goods which physically exist and are under the ownership of the seller at the
time when the contract of sale is made are called existing goods. Existing goods can further be
of following types:
I. Specific Goods: The goods which are specifically identified at the time of formation of the
contract for sale of goods are called specific goods. In case of specific goods the contract of
sale is in respect of only those goods and the same goods are to be delivered by the seller to
the buyer and not the similar one.
II. Ascertained goods: The goods which are identified and agreed upon after the formation of
contract of sale of goods are called ascertained goods.
III. Unascertained goods: The goods which are not identified and agreed upon at the time when
the contract of sale is made are called unascertained goods.
2) Future Goods: The goods which are to be produced, manufactured or acquired by the seller
after the contract of sale is made are called future goods.
3) Contingent Goods: The acquisition of which is dependent upon happening or non-happening
of some future event are called contingent goods. Example: The agreement by the seller to sell
the goods if the goods reach safely at his destination is a contract of sale of contingent goods.

Basis Future Goods Contingent Goods

1. Meaning Goods that are yet to be manufactured or Goods, the acquisition of which by
produced or acquired by the Seller after the Seller depends upon a
making contract of sale. contingency, which may or may not
happen.
2. Element Acquisition of Future Goods does not The procurement of
of depend upon any uncertainty. Contingent
uncertai Goods is dependent upon
nty an
 uncertain event.

3. Scope Future Goods do not include contingent They are wider in scope, it includes
Goods because of the element of future Goods.
certainty.

Effect of Where by a Contract of Sale, the Seller There may be a “Contract for Sale”
Contract purports to effect a present sale of future of Goods, the acquisition of which by
Goods, the contract operates as the
an Seller depends upon a contingency
“agreement to sell” the Goods [Sec. 6(3) which may or may not happen [Sec.
6(2)

5. B agrees to buy the entire crop of wheat A agrees to sell to B a certain

Example that would yield in S’s farm, at the rate painting only if C, its present owner,
of Rs. 1000 per quintal. sells it to him. The sale is contingent
upon the sale by C.

Effect of Perishing of goods on contract of sale:

1) Specific Goods perishing before contract of sale: If the contract of sale is in respect
of specific goods and they have already perished or damaged before the contract but
the seller had no knowledge of this, the contract of sale is void.
2) Specific Goods perishing after agreement to sale but before contract of sale: If the
specific goods perish or are damaged without the fault of either the seller or the buyer
after the agreement to sell ut before the contract of sale, the contract becomes void.

Fixation of Price: For the fixation of price following rules apply:

1) Price is fixed by the mutual consent of buyer and seller.
2) Price maybe fixed by the course of dealings between the buyer and the seller.
Course of dealings means the old history of transactions between the buyer and the
seller. Therefore, if it is agreed between the buyer or the seller that the goods will be
sold at a discount of 5% from the list price, then the price will be determined accordingly.
3) Price maybe fixed according to the manner provided in the contract. For example, if
it is agreed that the price will be charged as prevailing on the date of delivery then
the price on that date will be the price at which the goods will be sold.
4) If the price is not fixed under any of the three above, then the buyer will have to pay
to the seller a reasonable price.
5) Fixation of price by the third party. If according to the terms and conditions of
contract of sale, the price is to be fixed by the third party then whatever price the third
party fixes will be the price. If the third party refuses to fix the price, the contract
becomes void. However, if the third party refuses to fix the price because of fault of
any party then the party not in fault can file a suit for damages against the other party,
If the price is not fixed by the third party and the goods are already delivered or
consumed by the buyer then the buyer will have to pay a reasonable price.

Stipulation of Time in a contract of sale of Goods

1) Stipulation relating to time of delivery of goods: Stipulation relating to time of
delivery of goods is considered essential for the contract and therefore if the goods
are not delivered by the seller to the buyer in time, the buyer can later on refuse to
 accept the goods.
2) Stipulation regarding time of payment of price: In a contract of sale, stipulation
regarding time of payment of price is important but not essential. Therefore if the
buyer fails to pay the price, the contract of sale will remain valid though the seller
can claim damages for delayed payment of price.
● ESSENTIAL ELEMENTS OF A VALID CONTRACT OF SALE
Following are the essential elements of a valid contract of sale:
1. All the requirements of a valid contract must be fulfilled:
A contract of sale must fulfil all the requirements of a valid contract, e.g., free
consent, consideration, competency of the parties, lawful object
andconsideration. If any of the essential elements of a valid contract is missing
then the contract of sale will not be valid.
2. There must be two parties to the contract of sale:
There must be two parties, one seller and the other buyer. The reason for the
same is that in a contract of sale, the ownership of the goods has to pass from
one person to another.
3. There must be some goods as a subject-matter:
The ‘goods’ as defined in Section 2 (7) of the Sale of Goods Act.
4. The property in the goods must be transferred to the buyer:
The term ‘property’ in the goods means the ownership of the goods. In every
contract of sale, the ownership of the goods must be transferred by the seller to
the buyer, or there should be an agreement by the seller to transfer the
ownership to the buyer. The term ‘property’ here means the general property,
i.e., all ownership rights of the goods, and not merely a special property, i.e.,
limited rights such as right of a Pawnee.
5. There must be some price for the goods:
The goods must be sold for some price. The term ‘price’ is defined in Section
2 (10)
6. A contract of sale can be absolute or conditional [Section 4(2)].

DIFFERENCE BETWEEN “SALE” AND “AGREEMENT TO SELL”

Particulars Sale Agreement to Sell

1. Meaning Where under a contract of sale, the Where under a contract of sale, the
property (ownership) in the Goods transfer of the property
is transferred from the Seller to the (ownership) in the Goods is to
Buyer, it is called a Sale. take place at a future time or
subject to some condition
thereafter to be fulfilled, it is
called an “agreement to sell.”
[Sec. 4(3)]
2. Example Ram sells 20 bags of rice to Hari Mani agrees to buy 1000 kgs of
for a sum of rs. 10,000. It is a sale cement to arrive by a certain ship
since the ownership in 20 bags of on a future date. The property in
rice has been transferred from Goods (cement) will pass to the
Ram to Hari for a consideration of Buyer only when Goods arrive.
Rs. 10,000/-. Also the agreement is subject to
condition that the ship arrives in
the port with
Goods.
3. Transfer of Buyer becomes the owner of Seller continues to be the owner
 Risk Goods as soon as the contract is till the agreement to sell becomes
made. Hence the Buyer bears the sale and hence the risk lies with
risk. him
only.
4. Rights created Creates a right in rem (right against Creates a right in personam (right
property) against a person).
5. Type of Goods A Sale can be made only in respect An agreement to sell may be made
of specific and ascertained Goods. for future and Contingent Goods.
6. Type of Generally, executed contract. Executory contract.
Contract
7. Remedies Buyer’s breach: Seller can (i) sue Buyer’s Breach: The Seller can sue
available for for price of Goods even if Goods only for damages and not for price.
breach of are in his own possession. (ii) Seller’s breach: The Buyer can sue
contract. Resell the Goods, (iii) exercise the Seller for damages.
right of lien and
(iv) exercise right of stoppage of
Goods in transit, if necessary.
Seller’s breach: Buyer has double
remedy, (i) suit for damages
against the Seller and (ii)
recovering of Goods from
third parties who
bought them.
8. Right to Re-sell Once an effective sale is made, Where Seller makes a re- sale, the
Seller cannot resell the Goods, as subsequent Buyer, who takes the
the property in goods transferred goods for consideration and
to original Buyer. without notice of the prior
agreement, gets a good title. The
remedy available to the original
buyer is that he can sue
for damages.
9. Rights of The Buyer can sue the Seller for The aggrieved party can sue for
Buyer non- delivery of Goods, when he damages only and not for the price,
has paid unless the price was payable at a
the price for it.
stated with buyer.
10. Risk of loss of Risk being associated with Since risk associated with
goods ownership lies with the buyer and ownership is not transferred, loss
hence any loss shall be borne by shall be borne by Seller, even
the buyer only, even though the though the Goods lies with Buyer.
Goods
lie with Seller.
11. Insolvency In the absence of any lien over Seller need not part with the
of Buyer Goods, Seller shall hand then over Goods, until he is paid for such
before to the official receiver or assignee. Goods. He can refuse to hand over
paying for The seller can only claim a retable the Goods to the official receiver,
Goods dividend (Proportionate amount) unless the full price is paid.
from the buyer’s estate, as an
Unsecured Creditor.
12. Insolvency of Buyer can claim the goods from the Buyer can claim only a ratable
seller after official receiver or assignee. dividend for price paid and cannot
 buyer has claim the Goods, since the
paid property
the price has not passed to him.
13. Sales tax A sale is liable to Sales Tax. An agreement to sell is not liable to
sales tax, unless it becomes a
“Sale”.

SALE VS. HIRE PURCHASE AGREEMENT

Particulars Sale Hire Purchase Agreement

1. Meaning Sale is one in which property Hire purchase is a contract in
(ownership) in the Goods is which the owner of Goods allows
transferred from Seller to Buyer. their use by another person called
hire purchaser. The owner of
Goods gets hire charges in
installments upon an agreement
that the hire purchaser will
become the owner after payment
of last installment. Thus it is a
bailment
with an option to buy.
2. Mode of Price can be paid full or in Hire Charges or installments are
Payme installments in such case, recurring payments made by the
nt amounts already paid would be hirer for the use of Goods and are
reduced from total amount not treated as payments by the
payable by Buyer. hirer, unless the exercise the
option to purchase.

3. Transfer of Immediate, as soon as Delayed, as per agreement

ownership the contract of sale between owner and hire purchases
is entered into. upon payment of specified
number of installments or upon
payment of last installment when
the hirer
exercises his option to purchase.
4. Transfer to Buyer becomes owner of the Hire purchaser is only a bailee of
buyer Goods. Goods taken as hire purchase
CONDITION V/S WARRANTY :-

Basis Condition Warranty

1. Definition A condition is stipulation which is A warranty is stipulation which is
essential to the main purpose of the only collateral or subsidiary to the
contract. main
purpose of the contract.
2. Effect of Breach of Condition gives the Breach of warranty gives only the
breach aggrieved party (i) a right to right to sue for damages. The
repudiate the contract and (ii) right contract cannot be repudiated and
to the Goods
sue for damages. cannot be rejected.
 3. Inter- Breach of condition may be treated Breach of Warranty cannot be
changeability as a breach of warranty in certain treated as a breach of condition.
situations.
4. Example Car for ‘’touring purpose’’. Car purchase agreement & milege
20 km per liter but the could run
only 15
kms.

● WHEN A CONDITION CAN BE TREATED AS A WARRANTY :

1. Voluntary waiver of condition:

Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive
the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground
for treating the contract as repudiated.

2. Where the buyer elects to treat the breach of the conditions, as one of a warranty. That
is tosay, he may claim only damages instead of repudiating the contract

3. Compulsory waiver of a condition:

Where a contract of a sale is not severable and the buyer has accepted the goods or part thereof, the
breach of any condition to be fulfilled by the seller
can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the
contract as repudiated, unless there is a terms of the contract, express or implied, to that effect
Example:
B agrees to buy from A 20 bales of cotton by sample. The cotton is delivered to B who makes
payment of its price. B upon examination of cotton finds them not equal to sample but uses 2 bales
and sells 3. At this point he cannot rescind the contract and recover the price. But A is bound to
compensate for the loss caused to B by breach of warranty.

4. Impossibility:
Nothing in this section shall affect the case of any condition or warranty, fulfilment of which is
excused by reason of impossibility or otherwise.

● CONDITIONS :

EXPRESS CONDITIONS IMPLIED CONDITIONS

Express conditions: Express conditions are those, which are agreed upon between the parties at the
time of contract and are expressly provided in the contract.

Implied Conditions:
✔ It is a condition, which the law implies into the contract of sale. The law presumes that the
parties have incorporated it into their contract.
✔ The implied conditions are read into every contract of sale unless they are expressly excluded
by the parties.
✔ In case of conflict between the express and implied conditions, the express term shall prevail
 and the implied terms shall not be considered.
✔ Following are the implied conditions which are contained in the Sale of Goods Act :
1. Conditions as to title:
❖ According to this condition, it is presumed that the seller has a
valid title to the goods, i.e., he has the right to sell the goods. If later on, the
buyer comes to know that the seller had no valid right to sell the goods, then he
may reject the goods and claim the refund of the price, if already paid.
❖ This implied condition may be analysed as under:
(i) In case of sale, the implied condition is that the seller has the right to
sell the goods, and
(ii) In case of an agreement to sell, the implied condition is that the seller
will have the right to sell the goods at the time when the ownership is
to pass from the seller to the buyer.
2. Condition as to description:
❖ Sometimes, the goods are sold by description. In such cases, the
implied condition is that the goods shall correspond with the
description.
❖ The term ‘correspondence with description’ means that the
goods purchased by the buyer must be the same which were
described by the seller.
❖ If subsequently, it is discovered that the goods do not correspond
with the description, the buyer may reject the goods and claim
the refund of the price, if already paid.
3. Condition as to sample:
❖ In case of sale of goods by showing the sample to the buyer,
there are following three implied conditions,
(i) That the goods delivered shall correspond with the quality
of the sample
(ii) That the buyer shall have a reasonable opportunity of
comparing the bulk with the sample.
(iii) That the goods shall be free from latent defects (i.e., the
defects which are not discoverable on reasonable
examination of sample)

4. Condition as to sample as well as description:

❖ Sometimes, the seller shows sample of the goods to the buyer and
also gives him their description. In such cases, the implied
condition is that the goods shall correspond with both, the sample
as well as description.

5. Condition as to quality or fitness for buyer’s purpose:

❖ Ordinarily, there is no implied condition that the goods shall be
fit for the particular purpose of the buyer.
❖ Buyer is not responsible
(i) To know the particular purpose of buyer.
 (ii) If buyer chooses the goods negligently.
❖ However in following exceptions, there is an implied condition
that the goods shall be fit for the buyer’s specific purpose.
In following cases seller is responsible to the buyer:
(i) If the buyer makes his purpose clear to the seller.
(ii) If the buyer buys the goods ‘relying upon his skill and
judgment’.
6. Condition as to merchantability:
The term ‘merchantability’ has not been defined in the Sale of Goods
Act. However, it has been interpreted by the courts, and basically it
means the two things, namely: If goods are purchased for

7. Condition as to wholesomeness:
This condition is a part of the condition as to merchantability. It is
applicable in cases of eatables, i.e., foodstuffs and other goods which
are used for human consumption. As per this condition, goods sold
must be fit for human consumption.

● WARRANTIES :
EXPRESS WARRANTIES IMPLIED WARRANTIES

Implied Warranties:
✔ It is a warranty, which the law implies into the contract of sale. The law
presumes that the parties have incorporated it into their contract.
✔ The implied warranties are read into every contract of sale unless they are expressly
excluded by the parties.
✔ In case of conflict between the express and implied warranties, the express term shall
prevail and the implied terms shall not be considered.
✔ Following are the implied warranties which are contained in the Sale of Goods Act :
1. Warranty as to quiet possession:
❖ Where the buyer has obtained the possession of the goods, he has a
right to enjoy them in a way he likes, i.e., no one should interfere with
the quiet enjoyment of the buyer.
❖ If buyer’s right of possession and enjoyment is disturbed by anyone,
then the buyer can recover damages from the seller.
2. Warranty as to free from encumbrance:
❖ In every contract of sale there is an implied warranty that the goods sold
shall be free from any charge.
❖ If the possession of the buyer is disturbed due to such charge in favour
of third party, he can claim damages from the seller.
3. Disclosure of dangerous nature of goods:
 ❖ There is another implied warranty on the part of the seller that in case
the goods are inherently dangerous or they are likely to be dangerous to
the buyer and the buyer is ignorant of the danger, the seller must warn
the buyer of the probable danger.
❖ If there is breach of this warranty, the seller will be liable in damages.

4. Warranties implied by customs:

❖ Like implied conditions, implied warranties are also attached by custom
or usage of trade. This is so because the parties enter into an agreement
subject to the known customs or usages of trade.

● THE DOCTRINE OF CAVEAT

EMPTOR (BUYER BEWARE) :
❖ ‘Caveat Emptor’ is a Latin expression which means “let the buyer beware”.
❖ The Doctrine states generally seller is not responsible for bad goods.
❖ This Doctrine takes the side of the seller.
❖ As per the ruler, seller is not responsible in following cases:-
(i) To know the particular purpose of buyer.
(ii) If buyer chooses the goods negligently
(iii) If the goods are defective and the defect is patent (i.e. defect which can be
discovered by mere inspection)

❖ Exceptions: The exceptions to the doctrine of Caveat Emptor; which are mentioned
below (i.e in the following seller is responsible) :
1. Where the buyer specifies the particular purpose for which the goods are
required to the seller.
2. Where buyer relies on the seller’s skill or judgment.
3. Where there is contract of sale by sample, the rule of caveat emptor will not
apply if the goods do not correspond with sample
4. Where goods are bought by description, the goods shall correspond with the
description.
5. If the goods are bought both by sample as well as by description this rule will
not apply if goods do not correspond with both sample and description.
6. There is an implied condition that the goods shall be of merchantable quality
7. When the seller actively conceals some defect in the goods so that the same
could not be discovered by the buyer on a reasonable examination, then the
rule of Caveat Emptor will not apply.
8. When the goods are purchased under some brand name.

● UNPAID SELLER:
A seller will be called ‘unpaid’ if the following conditions are fulfilled:
(1) The whole or part of the price has not been paid or tendered and that the seller
has immediate right of action for the price.
(2) A bill of exchange or other negotiable instrument has been received but the
same has been dishonoured.
● RIGHTS OF UNPAID SELLER

Against Goods Against Buyer

Suit for recovery

When property in When property in goods of price
is transferred goods is not transferred
Rescind the contract

Right of Lien Suit for damages

Right of
Right of Suit for interest
withholdi
stoppage
ng
in transit
delivery
Right of resale
Any
other
right
(A) Rights against the Goods:
1. Where the ownership of the goods has transferred to the buyer: In this case,
the unpaid seller has the following rights:
(a) Right of lien
❖ The right of lien is the right to retain possession of the goods.

❖ This right can be exercised only when the possession of goods is with
the seller.
❖ The unpaid seller of goods can retain his possession of goods until
payment of the price in following cases:
a) Where the goods are not sold on credit.
b) Where the goods have been sold on credit, but the term of credit has
expired
c) Where the buyer becomes insolvent.
❖ The unpaid seller can retain the goods only for the payment of the price
of the goods: He cannot retain the goods for any other charges, e.g.,
maintenance, charges for storage of goods during the exercise of lien etc.
❖ The right of lien is indivisible in nature.

❖ Termination of Lien:
a) By delivery of goods to the carrier
b) By delivery of goods to the buyer
c) By waiver of the lien
d) By payment of price by the buyer

(b) Right of stoppage in transit

❖ The right of stoppage in transit is the right to regain possession
 of the goods.
❖ This right can be exercised only when,
(i) Seller should have parted with the possession
(ii) Possession should be with a carrier, &
(iii) Buyer has not acquired the possession.
❖ The right of stoppage in transit can be exercised only if the buyer
has become insolvent.
❖ The unpaid seller can stop the goods in transit only for the
payment of the price of the goods.
❖ Distinction between Right of Lien and Right of Stoppage in
transit

Right of Lien Right of stoppage in transit

1. The essence of a right of lien is 1. The essence of stoppage in
to retain possession transit is to regain possession
2. Seller should be in possession 2. In stoppage in transit,
of goods under lien (i) seller should have parted with
the possession
(ii) possession should be with a
carrier, & (iii) buyer has not
acquired the possession.
3. Right of lien can be exercised 3. Right of stoppage in transit can
even when the buyer is not be exercised only when buyer
insolvent. becomes insolvent
4. Right of lien precedes right of 4. Right of stoppage in transit
stoppage in transit. begins when the right of lien ends

(c) Right of Resale

 The unpaid seller has the direct In any other case, the unpaid seller has
right to resell the goods in the theright to resell the goods by following the
following circumstances: procedure:

Where the goods are of Unpaid seller should give a notice to the
perishable nature buyer of his intention to resell the goods
Where the unpaid seller has (+)
expressly reserved his right of Additional time for payment
resale. If the buyer does not pay the price within
a reasonable time, the seller may resell the
goods
If the notice of resale is given then in case
of loss on resale, it can be recovered and in
case of profit on resale, it can be retained.
However the notice of resale is not
given, the seller cannot recover the loss
suffered on resale. Moreover, if there is
any profit on resale he must return it to
the original buyer

2. Where the ownership of the goods has not been transferred to the buyer:
(a) Right of Withholding Delivery
When the ownership of the goods sold is not transferred to the buyer, if the buyer fails to pay the price,
the unpaid seller may refuse to deliver the goods to the buyer. Such right is known as right of
withholding the delivery of the goods.
(b) Any other right
Since ownership and possession of goods is with the seller, seller can use, gift, resell the
goods, etc.
(c) Rights against the Buyer
3. Suit for recovery of price
Where the buyer takes the ownership as well as possession of goods and the
buyer fails to pay the price of the goods, the seller can file a suit against the
buyer for recovery of the price.
4. Suit for damages for repudiation of the contract before the due date of
delivery of goods :
Where the buyer repudiates (i.e., puts an end to) the contract before the due
date of delivery of the goods, the seller has the following options:
(i) He may not immediately take any action against the buyer, and treat the
contract as subsisting and wait till the date of delivery of goods.
(ii) He may immediately treat the contract as repudiated and bring a legal
action against the buyer for the recovery of damages. Thus, the option
of bringing the action lies with the seller. He may either wait till
 the date of delivery of goods arrives, or bring an immediate action for
damages.
5. Suit for damages
Where the seller is ready and willing to deliver the goods to the buyer, but the
buyer wrongfully neglects or refuses to accept the goods and pay for them,
then the seller may bring a legal action against the buyer for the recovery of
damages suffered due to non-acceptance of the goods.
6. Suit for interest
The court may award the interest from the date of tender of the goods or from
the date when the price is payable. The rate of interest to be awarded is at the
discretion of the court.

References :
1) Avtar Singh , Company law, Lucknow, Eastern
2) Khergamwala J.S. The Negotaible Instrument Acts. Bombay, N.M. Tripathi.
3)Ramaiya, A.Guide to the Companies Act. Nagpur, Wadhwa.
4) Shah, S.M. Lectures on , Company Law. Bombay, N.M. Tripathi.
5) Tuteja S.K. business Law for Managers, New Delhi, Sultan Chand.