Unit 3

SALE OFGOODS ACT 1930: FORMATION OFCONTRACT OFSALES;

CAPACITYTO BUYAND SELL; BAILAGREEMENT

INTRODUCTION

Most of economic activities involve buying and selling of movable goods. The
sale of goods may on cash or credit basis. The goods may be sold on the spot these may
be a promise to sell the some in future. The law relating to the sale of goods or movable
in India is contained in the Sale of Goods Act, 1930. Before the passing of the present
Act, the law relating to the sale of goods was contained in Chapter VII of the Indian
Contract act, 1872. The provisions of Chapter VII were found to be unsatisfactory and the
present Act was passed with the main object of making the provisions more clear. The
Act came into force on Ist July, 1930. It contains 66 Sections and extends to the whole of
the India except the State of Jammu and Kashmir. The sales of Goods Act, 1930, is based
on English Act.

CONTRACT OF SALES OF GOODS

A contract of sales of goods is a contract whereby the sellers transfers or agrees to

transfer the property in goods to the buyer for a price (Section 4).

The term ‗Contract of Sale‘ is a generic term and includes:

Sales; and

Agreement to sell

Where the seller transfer the property in the goods immediately to the buyer is a
sale. But where the transfer of the property in the goods is to take place in a future time a
subject to some conditions thereafter to be fulfilled, the contract is called an agreement to
sell. An agreement to sell becomes a sale when the time passed as the conditions are
fulfilled subject to which the property in the goods is to be transferred.
 ESSENTIALS OF A CONTRACT OF SALE

The general provisions of Indian Contract Act continue to be applicable to the

contract of sales of goods in so far as they are not inconsistent with the express provisions
of Sale of Goods Act (Section 3). Thus, for example, the provisions of Contract Act
relating to capacity of the parties, free consent, agreements in restraint

of trade, wagering agreements and measure of damages continue to be applicable to a

contract of sale of goods. But the definition of consideration stands modified to the extent
that in a contract of sale of goods consideration must be by way of ‗price‘ i.e., only
money consideration [Section 2(10) and 4]

The following are the essentials of the contract of sale:

Contract

The word contract means an agreement enforceable at law. It presumes free consent on
the part of the parties who should be competent to contract. Thus, a compulsory transfer
of goods under a Nationalisation Act is not a sale. The agreement must be made for a
lawful consideration and with a lawful object. In other words all the essential elements of
a valid contract must also be present in a contract of sale.

Two Parties

To constitute a contract there must be two parties, viz., a buyer and a seller, as

a person cannot buy his own goods. According to Section 4(1), there may be a contract of
sale between one part-owner and another, e.g. if A and B jointly own a typewriter, A may
sell his ownership in the typewriter to B, thereby making B sole owner of the goods.
Similarly, a partner may buy the goods from the firm in which he is a partner and vice-
versa. There is, however, one exceptional case when a person may buy his own goods.
Where a person‘s goods are sold in execution of a decree, he may himself buy them, so as
to save them from a transfer of ownership to someone else (Moore vs Singer
Manufacturing Co.).
 Example: A partnership firm was dissolved and the surplus assets; including the
stock in trade, were divided among the partners, in spite. Held, it was not a sale as the
partners themselves were the joint owners of the goods and they could not be both sellers
and buyers [State of Gujarat v Raman Lal S & Co, AIR (1965) Guj Co].

There are certain other exceptions to the rule that the same person cannot be both
a purchaser and a seller. These are:

A part owner can sell his share to the other part owner so as to make the other part
owner the sole owner of the goodsA partner may also buy the goods from the firm
in which he is a partner and vice versa.

Where a pawnee sells the goods pledged with him on non-payment of bill money,
the pawnor may himself buy such goods.

In case there is a sale by auction, the seller may reserve right of making a bid at
the auction and may thus purchase his own goods.

Transfer of Property

Property means ‗ownership‘. Transfer of property in the goods is another essential

of a contract of sale of goods. A mere transfer of possession of the goods cannot be
termed as sale. To constitute a contract of sale the seller must either transfer or agree to
transfer the property in the goods to the buyer. The term ‗property‘ as used in the Sale of
Goods Act, means ‗general property‘ in goods as distinguished from ‗ special property‘
[Section 2(11)]. If P who owns certain goods pledges from to R, he has general property
in the goods, whereas R (the Pawnee) has special property or interest in the goods to the
extent of the amount of balance he has made to the pawnor]. Similarly, in the case of
bailment of goods for the purpose of repair, the bailee has special interest in goods bailed
to the extent of his labour charges.

Goods

According to Section 2(7), ―goods means every kind of movable property other
than actionable claims and money; and includes stock and shares, growing crops, grass,
and things attached to or forming part of the land which are agreed to be severed before
sale or under the contract of sale‖. Thus every kind of movable property except actionable
claim and money is regarded as ‗goods‘ Goodwill, trade marks, patents right, copyrights,
electricity, water, gas, decree of a court of law are all regarded as goods - Shares and
stock are also included in goods. With regard to growing crops, grass and things attached
to or forming part of the land, such things are regarded as goods as soon as they are
agreed to be separated from the land. Thus where trees were sold so that they could be cut
out and separated from the land and then taken away by the buyer, it was held that there
was a contract for sale of movable property

or goods (Kursell vs Timber Operators & Contractors Ltd) But contracts for sale of things
‗forming part of the land itself‘ are not contracts for sale of goods. For example, a
contract for the sale of coal mine or building stone quarry is not a contract of sale of
goods.

Money is not regarded goods because it is the medium of exchange through which
goods can be bought. Old and rare coins, however, may be treated as goods and sold as
such.

Price

To constitute a valid contract of sale, consideration for transfer must be money

paid or promised. Where there is no money consideration the transaction is not a contract
of sale, as for instance goods given in exchange for goods or as remuneration for work or
labour. H owner, an existing debt due from the seller the buyer is sufficient. Further, there
is nothing to prevent the consideration from being partly in money and partly in goods or
some other articles of value. For example, when an old car is returned to the dealer for a
new one and the difference is paid in cash, that would be a sale.

The term ‗contract of sale‘ is a generic term and includes both a ‗sale‘ and an
‗agreement to sell‘ Sale: where under a contract of sale the property in the goods is
immediately transferred at the time of making the contract from the seller to the buyer,
the contract is called a ‗sale‘ [Sec 4(3)]. It refers to an ‗absolute sale‘, e.g., an outright
sale on a counter in a shop. There is immediate conveyance of the ownership and mostly
of the subject matter of the sale as well (delivery may also be given in future). It is an
executed contract.

13.4 ANAGREEMENT TO SELL

 Where under a contract of sale the transfer of property in the goods is to take
place at a future time or subject to same condition thereafter to be fulfilled, the contract is
called ‗an agreement to sell‘ [Section 7(3)]. It is an executory contract and refers to a
conditional sale.

Examples

On 1 January, X agrees with Y that he will sell Y his scooter on 15 January for a
sum of Rs 4,000. It is an agreement to sell, since X agrees to transfer the ownership of the
scooter to y at a future time.
X buys some furniture for Rs 5,000 and agrees to pay for that in the monthly
installments, the ownership to pass to him on the payment of second installment. There is
an agreement to sell for the furniture dealer.
The Sales of Goods Act does not prescribe any particular form to constitute a
valid contract of sale. A contract of sale of goods can be made by mere offer and
acceptance . The offer may be made either by the seller or the buyer and the same must be
accepted by the other . Neither payment nor delivery is necessary at the time of making
the contract of sale. Further, such a contract may be amide either orally or in writing or
partly orally and partly in writing or may be even implied from the contract of the parties.

13.5 DIFFERENCE BETWEEN SALE AND AGREEMENTTO SELL

A contract for sale of goods is a contract whereby the seller transfers or agrees to
transfer the property in the goods to the buyer for a price. Therefore, the effect of a
contract of sale is the transfer of property in the goods from the seller to the buyer. On the
sale of goods, the property in them is transferred from the seller to the buyer immediately,
but where an agreement of sale is entered into, the property in the goods passes only after
the seller has fulfilled certain conditions subsequently [Section 4(3)]. Thus, whether a
contract of sale of goods is an absolute sale or an agreement to sell, depends on the fact
whether it contemplates immediate transfer from the seller to the buyer or the transfer is
to take place in future date. The following are the points of difference between them.

Transfer of Property
 In a sale, the property in the goods passes from the seller to the buyer immediately
so that the seller is no more the owner of the goods sold. In an agreement to sell, the
transfer of property in the goods is to take place at a future time or subject

to certain conditions to be fulfilled. In this sense, a sale is an executed contract and an

agreement to sell is an executory contract.

Risk of Loss

In a sale, the buyer immediately becomes the owner of the goods and the risk as a
rule passes to the buyer; under an agreement to sell, the seller remains the owner and the
risk is with him. Thus under a sale, if the goods are destroyed the loss falls on the buyer,
even though the goods are in the possession of the seller. But, under an agreement to sell,
the loss will fall on the seller in the case of destruction of goods even though they are in
the possession of the buyer.

Consequences of Breach

In case of sale, if the buyer wrongfully neglects or refuses to pay the price of the
goods, the seller can sue for the price, even though the goods are still in his possession. In
case of an agreement to sell, if the buyer fails to accept and pay for the goods, the seller
can only sue for damages and not for the price, even though the goods are in the
possession of buyer.

Insolvency of the Buyer

In a sale, if the buyer is adjudged an insolvent, the seller in the absence of a lien
over the goods is bound to deliver the goods to the official Receiver or Assignee. The
seller, will, however, be entitled to a rateable dividend for the price of the goods. On the
other hand, in an agreement to sell, when the buyer becomes insolvent before he pays for
the goods, the seller may not part with the goods.

Insolvency of the Seller

In a sale, if the seller becomes insolvent, the buyer being the owner is entitled to
recover the goods from the Official Receiver or Assignee. In an agreement to sell, if the
buyer, who has paid the price, finds that the seller has become insolvent, he can only
claim a rateable dividend and not the goods because property in them has not yet passed
to him.

Right to Resale

In a sale, the property is with the buyer and as such the seller (in possession of
goods after sale) cannot resell the goods. If he does so, the subsequent buyer having
knowledge of the previous sale does not acquire a title to the gods. The original buyer can
sue and recover the goods from the third person on owner, and can also sue the seller for
the breach of contract as well as for the tort conversion. The right to recover the goods
from the third person is, however, lost if the subsequent buyer had bought them bonfire
without notice of the previous sale (Section 30).

On the other hand, in an agreement to sell, the property in the goods remains with
the seller and as such he can dispose of the goods as he likes and the original buyer can
sue him for the breach of contract only. In this case, the subsequent buyer gets a good title
to the goods, irrespective of his knowledge of previous sale. Further, goods forming the
subject matter of an agreement to sell can also be attached in execution of a decree of a
court of law against the seller.

DISTINCTIONBETWEENSALEANDHIRE-PURCHASE

The difference between a contract of sale and hire-purchase agreement are given
below:

Nature of Contract

A sale is an executed contract in which the ownership is transferred from the

seller to the buyer as soon as the contract entered into

In a hire-purchase agreement it becomes the property of the buyer only after a

certain agreed number of installments is paid till then the hire purchaser stands in the
position of the bailee an d not the owner of the goods.

Termination of the Contract

 In a sale the buyer cannot terminate the contract and as such is bound to pay the
price of the goods.

On the other hand, the hire-purchase has an option to terminate the contract at any
stage, and cannot be forced to pay the further installments.
3 Insolvency of the Buyer Risk of Loss

In a sale of seller takes the risk of any loss resulting from the insolvency of the
buyer. But in a hire-purchase the owner is not at any risk because if the hirer does not pay
any installments the seller has a right to take back the goods.

Implied Conditions and Warranties

A sale is subject to the implied condition and warranties provided under the sale
of Goods Act 1930

A hire-purchase agreement is not subject to such implied warranties and

conditions. It is however, subject to the implied conditions provided in the hire purchase
agreement.

Effect of Payments

In a sale even if the payment is made by the buyer in installments the amount
payable by the buyer to the seller is reduced, for the payment made by the buyer to the
seller is towards price of the goods.

The installments paid by the hire-purchase are regarded as payment towards the
price of the goods till the option to purchase the goods is exercised.

Resale

The buyer in a sale can resell the goods. But the hire-purchase cannot resell unless
he has paid all the installments of hire.

GOODS– SUBJECTMATTER OFCONTRACTOFSALE

Goods form the subject-matter of a contract of sale. According to Section 2(7),

―goods‖ means every kind of movable property other than actionable claims and money;
and includes stocks and shares, growing crops, grass and things attached to or forming
part of land which are agreed to be severed before sale or under the contract of sale.
Trade marks, copy rights, patent rights, goodwill, electricity, water, gas are all goods.
 Actionable claim and money are not goods. An actionable claim is something
which can only be enforced by action in a Court of law. A debt due from one person to
another is an actionable claim and cannot be bought or sold as goods. It can only be
assigned. Money here means current money and not old rare coins.

The definition of the term ‗goods‘ also suggests that it includes stocks and shares,
growing crops, grass and things attached to or forming part of land which are agreed to be
severed from land before sale. Growing crops and grass are included in the definition of
the term ‗goods‘ because they are to be severed from land. Trees which are agreed to be
severed before sale or under the contract of sale are goods [Badri Prasad v State of MP,
AIR (1970) SC 706]

Goods may be classified into various types as shown below:

Existing goods; or

Future goods; or

Contingent goods

Existing goods

Goods earned and possessed by the seller at the time of the making of the contact
of sale are called existing goods. Sometimes the seller may be in possession but may not
be the owner of the goods e.g. sale of goods by a mercantile agent. Existing goods may
again be either specific, or ascertained or unascertained.

Specific Goods

These are the goods which are identified and agreed upon at the time a contract of
sale is made. To be specific the goods must be actually identified; it is not sufficient that
they are capable of identification e.g. If X who owns a number of horses, promises to sell
one of them, the contract is for unspecified goods.

Ascertained Goods
 These are the goods which are identified in accordance with the agreement after
the contract of sale is made. Though commonly used as similar in meaning to specific
goods, these are not always the same.

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 Unascertained Goods

It means generic goods. These goods can be defined by description or even by

sample. The seller in the use of a contract for the sale of unascertained goods has the
option, rather the right to supply any goods of the kind or the quality contracted for. He is
not bound to deliver any particular goods and he

may furnish any goods answering their description in the contract.

Future Goods

Goods to be manufactured, produced or acquired by the seller after the making of

the contract of sale are called ‗future goods‘ [Sec 2(6)]. These goods may be either not
yet in existence or be in existence but not yet acquired by the seller. It is worth noting that
there can be no present sale of future goods because property cannot pass in what is not
owned by the seller at the time of the contract. So even if the parties purport to effect a
present sale of future goods, in law it operates only as an ‗agreement to sell [Sec 6(3)].

Examples

X agrees to sell to Y all the mangoes which will be produced in this garden next
year. It is contract to sale of future goods, amounting to ‗an agreement to sell‘.

P contracts on 1 January 1990, to sell to B ten bales of Egyptian cotton to be

delivered and paid for on 1 March, 1990. This is a valid contract of sale, amounting to ‗an
agreement to sell‘ even though P has no cotton bales with him at the time of making the
contract.

Contingent Goods

Goods, the acquisition of which by the seller depends upon an uncertain

contingency are called ‗contingent goods‘ [Sec. 6(2)]. Obviously they are a type of future
goods and therefore, a contract for the sale of contingent goods also operates as ‗an
agreement to sell‘ and not a ‗sale‘ so far as the question of passing of property to the
buyer is concerned. In other words, like the future goods, in the case of contingent goods
also the property does not pass to the buyer at the time of making the contract.

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It is important to not that a contract of sale of contingent goods is enforceable only if the
event on the happening of which the performance of the contract is dependent happens,
otherwise the contract becomes void.

ASCERTAINMENT OFPRICE (SECTIONS 9 & 10)

‗Price‘ means the monetary consideration for sale of goods‘ [Section 2(10)]. By
virtue of Section 9, the price may be (1) fixed by the contract, or (20 agreed to be fixed in
a manner provided by the contract, e.g. by a valuer, or (3) determined by the course of
dealings between the parties.

When it cannot be fixed in any of the above ways, the buyer is bound to pay to the
seller a reasonable price. What is a reasonable price is a question of fact in each case.

Section 10 provides for the determination of price by a third party. Where there is
an agreement to sell goods on the terms that price has to be fixed by the third party and he
either does not or cannot make such valuation, the agreement will do void. In case the
third party is prevented by the default of either party from fixing the price, the party at
fault will be liable to the damages to the others to the other part, who is not at fault.
However, a buyer who has received and appreciated the goods must pay a reasonable
price for them in any eventuality.

STIPULATIONSASTOTIME (SEC. 11)

Stipulations as to time in a contract of sale fall under the following two heads:

Stipulations related to time of payment

Stipulations not relating to time of payment, e.g. delivery of goods etc.

Stipulations relating to time of payment are not of the essence of a contract of

sale, unless a different intention appears from the contract. As regards other stipulations,
time may be of the essence of the contract but this essentially depends on the terms of the
contract. In a contract of sale, stipulations other than those relating to the time of payment
are regarded as of the essence of the contract. Thus if a time is fixed for the delivery of
goods, the delivery must be made at the fixed time, otherwise the other party is entitled to
put an end to the contract.

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CAPACITY TO BUYAND SELL

A sale of goods means transfer of ownership of the goods by the seller to the
buyer. ‗Buyer‘ means a person who buys or agrees to buy goods [Sub Section (1)];
‗seller‘ means a person who sells or agrees to sell goods [Sub Section (13)]. The two
terms ‗buyer‘ and ‗seller‘ are complementary and represent the two parties to a contract
of sale of goods.

In every contract of sale there is an implied condition on the part of the seller that
in the case of sale he has a right to sell the goods and in the case of an agreement to sell
he will have a right to sell the goods at the time when the property in them is to pass.

Usually the owner of the goods or his agent may sell the goods. If a person has no
title to the goods or otherwise does not have a right to dispose of certain goods, the buyer
of such goods has a right to reject them and to claim back the price if the same has
already been paid and refuse to pay if the price has not been paid till then. The leading
case on this point is Rowland v Divall (1923). In this case, C purchased a motor car for D,
and after using it for sometime he was compelled to return it to the true owner, it
becoming clear that D had obtained the car by theft. It has held that D had not fulfilled the
condition as to title and C was, therefore, entitled to recover the purchase money from D.

Similarly, if the buyer having bought the goods from a seller takes the delivery of
the same but is compelled to pay the price to his seller, who sold the goods without
having a right to sell the same [Dickenson v Naul, (1833) 4B & Ad 638)]

Lack of title to the goods is not the only factor because of which the seller may
not have a right to sell the goods. If a vendor can be stopped by process of law from
selling, he has not the right to sell the goods. Accordingly a sale which would be a breach
of patent, copyright, or trade mark may be repudiated by the buyer.

In Niblett v Confectioners‘ Materials Co Ltd (1921) the sellers sold to the buyers
tins of condensed milk c.i.f. from New York to London. Some of the tins were bearing
the labels marked ―Nissly Brand‖ which was the trade mark of a third person,
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Nestle Co. At the instance of the Nestle Co. the Commissioners of customs detained the
goods. The buyers had to remove those labels before taking delivery of those tins of
condensed milk. The buyers suffered a loss because they had to sell the tins of milk
without proper labels at a lower price. The buyers sued the sellers to claim compensation.
The court held that the sellers had made a breach of condition that they had a right to sell
the goods and as such they were bound to pay damages for the loss suffered by the
buyers. Further, Section 27 of the Act of the true owner states:

Subject to the provisions of this Act and of any other law for the time being a
force, whose goods are sold by a person who is not the owner thereof and who does not
sell them under the authority or with the consent of the owner, the buyer acquires no
better title to the goods than the seller had.

This rule is derived from the maxim ―nemo dat quad habet‖, which means that
nobody can give what he himself has not got, i.e., a seller cannot give a better title than
that of his own. If the title of the seller is defective the buyer‘s title will also be subject to
the same defect. It means that the buyer cannot acquire a superior title to that of the seller.

Transfer of Title by Non-Owners

The above stated general rule contained in Sec 27 is subject to the provisions of
this Act an of any other law for the time being in force. Various exceptions to this rule
have been mentioned in this Act and the Indian Contract Act and in those exceptional
situations the seller of the goods may not be having a good title to the goods, yet the
buyer of the goods gets a good title to them. The exceptions are:

Sale by a mercantile agent (Sec. 27)

A mercantile agent means an agent having in the customary course of business as

such agent authority either to sell goods, or to consign goods for the purposes of sale, or
to buy goods, or to raise money on the security of goods [Sec 2(9)]. Thus as
 rule of mercantile agent having an authority to sell goods conveys a good title to the
buyer. But by virtue of this provision (provision to Sec. 27) a mercantile agent can
convey a good title to the buyer even though he sells goods without having any authority

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from the principal To do so, provided the following conditions are satisfied.

he should be in possession of the goods or documents of title to the goods in his

capacity as mercantile agent and with the consent of the owner.

he should sell the goods while acting in the ordinary course of business.

The buyer should act in good faith without having any notice, at the time of the
contract, that the agent has no authority to sell.

Examples

F entrusted his car to a mercantile agent for sale at a stated price and not below
that. The agent sold it to S, a bonafide purchaser, below the reserve price and
misappropriated the proceeds. S resold the car to K, the defendant. Held, S obtained a
good title to the car from the mercantile agent and he conveyed a good title to K and
therefore, F was not entitled to recover the car from K (Folkes v s King).

In Pearson v Rose & Young Ltd, the plaintiff gave possession of his motor car to
Hunt, a mercantile agent, to know if the same could be sold. He did not actually authorise
Hunt to sell the same. Hunt took the registration book relating to the car from the plaintiff
by trick and then sold the car without the plaintiff‘s authority or knowledge. Hunt sold the
car to X, X sold it to Y and Y sold the same to the defendants. The plaintiff sued the
defendants to claim damages for conversion on the ground that Hunt had no authority to
sell and, therefore, no good title could be passed to any subsequent transferee.

It was observed that though Hunt got possession of the car as a mercantile agent
but not the registration book. The sale of a second hand car without the registration book
could not be considered to be in the ordinary course of business. It was held that for
passing a good title, Hunt should have obtained the possession of the car as well as
registration book with the consent of the owner, in the absence of which Hunt was not
able to pass a good title to his transferee or the subsequent buyers.
 It is also necessary that the mercantile agent must have obtained the possession of
the goods or the documents of title in his capacity as a mercantile agent and not in any
other capacity. If he is in possession in any other capacity he cannot convey a good title.

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 Transfer of title by Estoppel - Sec 27

Generally the owner of the goods can question the title of the transferee by
contending that the seller did not have a right to sell the goods. Sometimes the law of
estoppel may apply against the owner of the goods and he may not be allowed to deny
seller‘s authority to sell. The closing words of the rule contained in Sec. 27 are as under:

Unless the owner of the goods is by his conduct precluded from denying the
sellers authority to sell.

As noted above sometimes the law of estoppel may apply against the owner of the
goods and he may be estopped from denying seller‘s right to sell the goods. In other
words, because of application of rule of estoppel against him he may not be able to assert
that the seller of the goods did not have a right to sell and thus the buyer may have a good
title even though the seller of the goods did not actually have a right to sell them. When
the owner of the goods by his act or omission makes the buyer to believe that the seller of
those goods has a right to sell them, subsequently he cannot deny the existence of such a
right in the seller.

In reference to sale of goods, estoppel may arise in any of the following

ways:

The owner standing by, when the sale is effected, or

Still more, by his assisting the sale, or

by permitting goods to go into the possession of another with all the insignia of
possession thereof and apparent title, or

if he has otherwise acted or made representations so as to induce the buyer

to alter his position to his prejudice.

Example

M, the owner of a wagon allowed one of his employees K, to have his name
painted on it. M did so for the purpose of inducing the public to believe that the wagon
belonged to K. C purchased the wagon from K in good faith. C acquires a good title as M
is estopped from denying K‘s authority to sell (O‘Connor v Clark).

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 Sale by One of Joint Owners - Section 28

Sale by one of the joint owners constitutes another exception to the rule of nemo
dat quod non habet. According to Sec 28, if one of the several joint owners is in sole
possession of the goods with the permission of the other co-owners a sale by him will
convey a good title to the buyer who buys in good faith and at the time of buying has no
notice of the fact that such a joint owner has no authority to sell.

Sale by a Person in Possession of Goods under a Voidable Contract- Sec. 29

Section 29 deal with the case of a sale by a person who has obtained possession of
goods under a voidable contract. It provides that a person in possession of goods under a
voidable contract which has not been canceled can transfer a good title to the buyer who
buys the goods in good faith. This exception is limited to contracts of sale voidable under
Sections 19 and 19A of the Contract Act; i.e.) Voidable on the ground of coercion, fraud,
misrepresentation and undue influence. It does not extend to all voidable contracts.
Further, if the contract under which the seller obtains goods is void, then even an innocent
buyer of the gods from such a seller does not acquire title to the goods.

Sale by Seller in Possession after Sale [Sec. 30(1)]

Where a seller, after having sold the goods, continues to be in possession of the
goods or of the documents of title to them and again sells or pledges them either himself
or through a mercantile agent, he will convey a good title to the buyer or the pledgee
provided the buyer or the pledgee acts in good faith and without notice of the previous
sale. For the application of this exception it is essential that the possession of the seller
must be as seller and not as hirer or bailee.

Sale by the Buyer in Possession- Sec 30(2)

Section 30(2) deals with a case where the buyer is in possession of the goods but
the property in them has not passed to him. This section says that if a buyer has obtained
the possession of the goods or the documents of title to them with the consent of the seller
any sale, pledge or other disposition thereof to any person will
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convey a good title to the transferee provided the person receiving the goods was acting
in good faith and without any notice as regards any lien or other right of the original seller
in respect of those goods.

In Cahn v Pockett‘s Bristol Steam Channel Co, A sold certain copper to B and
forwarded to him the bill of exchange along with the bill of lading which was endorsed in
blank with a view to have the acceptance or the payment of the bill of exchange. B, who
was insolvent, did not accept the bill of exchange. Instead of returning the bill of lading
and the dishonored bill of exchange to A, he transferred the bill of lading to C, who took
the same in good faith and for consideration. It was held that since B had obtained the bill
of lading with the consent of a, the transfer by B could convey a good title to C, and the
right of A to stop the goods in transit was defeated.

Buyer means a person who buys or agrees to buy. Even if a person has agreed to
buy conditionally he can convey a good title.

A person who takes the goods on hire-purchase cannot be considered to be a

person who has ―agreed to buy‖ the goods and, therefore, a sale of goods by him does not
convey a good title to the buyer. In Belsize Motor supply co. v Cox, Belsize Motor
Supply Co, let out a taxi-cab to Allred Burgeess Ltd, under the hire-purchase agreement
and the latter were to pay an amount of £ 374 in twelve monthly installments. Before all
the installments were paid, Alfred Burgess Ltd pledged the vehicle with Cox. Cox was
held liable for conversion of the taxi-cab because Alfred Burgess Ltd was not a person
who had ―agreed to buy‖ and therefore, he could not convey a good title to Cox..

Resale by an Unpaid Seller [Sec 54(3)]

Where an unpaid seller who has right of lien or stoppage in transit

resells the goods, the buyer acquires a good title thereto as against the original buyer,
even though the resale may not be justified in the circumstances, i.e. no notice of the
resale has been given to the original buyer. Thus, a buyer at a resale acquires a good title.
18
 Sale by finder of Goods - Sec 169, Indian Contract Act

According to Sec 71, Indian Contract act, the finder of goods is subject to the
same responsibility as the bailee. He is to take due care of the goods while they are in his
possession and also to return them when their owner has been found. According to Sec
169 of the Contract Act, however, if the owner cannot with a reasonable diligence be
found or if the refuses upon demand, to pay the lawful changes of the finder, the finder
may sell the goods -

When the thing is in danger of perishing or of losing the greater part of its value,
or

When the lawful changes of the finder, in respect of the thing found, amount to
two-third of its value.

When the finder of goods sells them under the circumstances stated above, the
buyer of such good gets a good title to them.

Sale by Pawnee - Sec. 176, Indian Contract Act

Normally the pawnee of the goods is under a duty to return them if the debt
secured by such goods is paid back to him. He may retain such goods until the debt and
interest thereon and all necessary expenses incurred by him in respect of the possession or
for the preservation of the goods pledged are paid to him. According to Sec. 176, Indian
Contract Act, if the pawnor makes a default in the payment of the debt, the pawnee may
either sue him for the debt or may sell the goods pledged on giving the pawnor reasonable
notice of the sale. Upon such a sale being made by the pawnee the buyer of such gods
acquires a good title to them.

Sale by Authorised Officer

In some cases, a special power of sale is given to officers of court, liquidators of

companies, receivers insolvent‘s estate, custom officers for duties remaining unpaid, etc.
All these persons are not owners, yet they sell properties of others, and convey a better
title to the buyers than they themselves possess.
19
BAILMENT

Sections 148 to 181 contained in Chapter IX of the Contract Act deal with law
relating to bailment. Section 148 of the Contract Act defines bailment as ―the delivery of
goods by one person to another for some purpose, upon a contract that they shall, when
the purpose is accomplished, be returned or otherwise disposed of according to the
directions, of the person delivering them‖. The person who delivers the goods is called the
‗bailer‘ and the person to whom those goods are delivered is called ‗bailee‘.

Essential Features of Bailment

From the definition given by Section 148 it follows that a bailment has the
following characteristics:

It is a delivery of movable goods by one person to another person.

The goods are delivered for some purpose. If the goods are delivered by mistake,
without any purpose, there is no bailment.

The goods are delivered subject to the condition that when the purpose is
accomplished the goods are to be returned in specie or disposed of according to
the directions of the bailer.

It is to be noted that bailment is concerned with only movable goods. Money is

not included in the category of movable goods.

Sale and Bailment - Distinction

The following are the main points of difference between the sale and bailment:

Transfer of Property and Possession

In a sale the property in the goods is transferred from the seller to the buyer and
the buyer can therefore, deal with the goods in anyway he desires. On the other hand,
bailment involves only transfer of possession of goods from the bailer to the bailee for
any of the reasons like repair, safe custody etc. and the bailee can only deal with the
goods in accordance with the directions of the bailer.

20
 Return of Goods

Normally sale, goods cannot be returned unless there is a breach of some condition.
However, in bailment the bailee must return the goods to the bailer on the accomplishment
of the purpose for which the bailment was made.

Consideration

In a sale the consideration is the price in terms of money. In a bailment the

consideration is an undertaking to return the goods after the accomplishment of purpose.
 RIGHTS OF UNPAID SELLER

INTRODUCTION

The seller of goods is deemed to be an ‗unpaid seller‘:

When the whole of the price has not been paid or tendered.

When a bill of exchange or other negotiable instrument (such as cheque) has been
received as conditional payment, and it has been dishonoured [Section 45(1)].

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

The above definition of unpaid seller states the following :

The seller shall be called an unpaid seller even when only a small portion of the
price remains to be paid.
It is for the non-payment of the price and not for other expenses, that a seller is
termed as an unpaid seller.
Where the goods have been sold on credit, the seller cannot be called as an unpaid
seller during the credit period unless the buyer becomes insolvent. On the expiry of
credit period if the price remains unpaid, then only the seller will become an
unpaid seller.

Where the full price has been tendered by the buyer and the seller has refused to
accept it, the seller cannot be called as unpaid seller.

Example : State whether the seller is an unpaid seller or not in each of the following
alternative cases :

X sold some goods to Y for Rs. 10,000. Y paid Rs. 9000 but failed to pay the
balance.
X sold some goods to Y for Rs. 10,000 and received a cheque for the full price as
conditional payment. On presentment, the cheque was dishonoured by the Bank.

X sold some goods to Y for Rs. 10,000 on a credit of one month. One month has
not yet expired.
.

Solution :

: X is an unpaid seller because the full price has not been paid.

: X is an unpaid seller because the cheque received as conditional payment has been
dishonoured.
 : X is not an unpaid seller because the credit period has not yet expired and the buyer
has not yet become insolvent.

14.2 RIGHTS OFUNPAID SELLER

The rights of an unpaid seller may broadly classified under the following two

categories :

Rights against the goods

Rights against the buyer personally

The various rights of an unpaid seller have been shown in figure 1

Rights of an Unpaid Seller

Against goods Against the buyer pesonally

Where the property Where the property

in goods have
passed to the buyer in goods has not

passed to the buyer

Right of Withholdin
Lien Right of Right of g Lien Stoppage Resale
stoppage resale delivery in transit
in transit

Suit
Suit for Suit for for
price damages interest

3
14.2.1 Rights of an unpaid seller against the goods

Sometimes, after the sale of the goods, the seller still has the possession of the
sold goods. In such cases, an unpaid seller has certain rights against the goods. These
rights may be discussed under the following two heads:

Where the ownership of the goods is transferred to the buyer.

Where the ownership of the goods is not transferred to the buyer.

Rights of unpaid seller against the goods where the property in the goods
have passed to the buyer

An unpaid seller has the following rights against the goods not with standing the
fact that the property in the goods has passed to the buyer:

Right of lien ;

Right of stoppage of goods in transit;

Right of resale.

Right of Lien

―Lien‖ is the right to retain possession of goods until certain charges due in
respect of them are paid. The unpaid seller has the right to retain the goods until he
receives their price . By way of exercise of this right the seller can refuse to deliver the
goods to the buyer until the payment of the price even though the ownership in the goods
has already passed to the buyer. By a mere exercise of this right, the contract of sale of
goods is not automatically rescinded. According to Section 47 this right can be exercised
in the following situation :
 When the goods have been sold without any stipulation as to credit

i.e., the sale of the goods has been on cash basis. It has already been observed under

Section 32 that if there is no agreement to the contrary the payment of

4
the price and the delivery of the goods are concurrent condition. It means that if the goods
have not been sold on credit the seller expects that the buyer shall pay the price against
the goods. The seller can refuse to deliver them to the buyer or in other words he can
exercise the right of lien over thew goods, if the buyer is not ready and willing to pay
their price in exchange for the goods.

When the goods have been sold on credit the seller can exercise the right of lien
on the expiry of the period of credit. As soon as the period of credit expires the price
becomes due and the seller can exercise the right of lien thereafter. Even though
originally the seller had agreed to sell them on credit but now since the price has become
payable because of the expiry of the period of credit the seller can refuse to part with the
goods until he is paid for them. For example, on Ist January A sells a horse to B and it is
agreed that the buyer may take the delivery at any time he likes and the price is payable
on Ist Mach. If the buyer has not taken the delivery of the goods by Ist March and he
demands the delivery after this date, the seller can refuse to part with the horse until the
buyer pays for them.

The seller can also exercise this right of lien when, before the delivery of the
goods to him, the buyer becomes insolvent. Even though the seller had sold the goods on
credit and the period of credit has not yet expired but the buyer has become insolvent, the
seller‘s right of lien can be exercised. When the goods are sold on credit the presumption
is that the buyer shall maintain his solvency. If that condition can no more be satisfied, the
seller is entitled to the exercise of this right. For example, the goods are sold on Ist
January and the period of credit extends upto Ist March, if the buyer becomes insolvent on
15th January and he has not yet taken the delivery of the goods the seller may exercise his
right of lien if the buyer demands delivery at any time after 15th January although
originally he had agreed to deliver the goods to the buyer on

5
credit. By the insolvency of the buyer during the period of credit the right of lien which
may have been suspended earlier for the period of credit is revived and the credit granted
earlier comes to an end.

The term ‗insolvent‘ here does not mean a person who has been adjudged
insolvent under the Insolvency Law. In Sale of Goods Act ―a person is said to be
insolvent who has ceased to pay his debts in the ordinary course of business, or cannot
pay his debts as they become due, whether he has committed an act of insolvency or not‖.
[Section 2 (8)]

The right of lien is linked with possession and not with title. It is essentially a
right over the property of another person. The unpaid seller‘s lien can be exercised only
so long as the goods are in the actual possession of the seller or his agent. Once the
possession is lost, the lien is also lost. The right of lien cannot be exercised during the
currency of credit term. When the term expires, the unpaid seller may exercise the right of
lien. The lien of the unpaid seller is for the price only; so when the price has been paid or
tendered, he cannot retain possession of the goods any longer. Again the right of lien does
not extend to other charges which the seller may have to incur for storing the goods
during the exercise of the lien.

Example : A sold certain shares to B. The relative share certificates and transfer forms
duly signed were handed over by the seller to the buyer against payment of price by
cheque. The buyer became insolvent. It was held by the Privy Council that the seller had
no lien on shares because his lien ceased when he parted with the possession. Bharucha v.
Wadihah, 28 Bom. L.R. 777 (P.C.).

The right of lien is indivisible in nature, and so the buyer is not entitled to claim
delivery of a portion of the goods on payment of a proportionate price. Further this right
is available even after part delivery of the goods has been
6
made, unless such part delivery is made under such circumstances as to show an

agreement to waive the lien.

Example : A sells to B a certain quantity of sugar. It is agreed that three months credit
shall be given. B allows the sugar to remain in A‘s warehouse til the expiry of the three
months, and then does not pay for them. A may retain the goods for price.

Conditions for the Exercise of Right of Lien

The following are conditions precedent to the exercise of the right of lien:

The ownership must have passed to the buyer.

The goods must be in possession of the seller or under his control as bailee, etc.

( c) The possession of the goods by the seller must not expressly exclude the right of
lien.

The whole or part of the price must remain unpaid. It may be noted that the lien
can be exercised only for price. Thus the seller cannot claim lien for godown
charges, for storing of goods in exercise of his lien for price.

The lien of an unpaid seller is a particular one. It is the personal right which can

be exercised only by him and not by his assignee or his creditors.

Part Delivery : Where an unpaid seller has made part delivery of the goods, he may
exercise his right of lien on the remainder, unless such part delivery has been made under
such circumstances as to show an agreement to waive the lien.
 Thus in case of part delivery of the goods, the unpaid seller may exercise his right
of lien on the reminder, but where part delivery has been made under circumstances as to
show an agreement to waive the lien, the seller cannot exercise his lien. If for example,
out of 100 bags of weighed which were to be

7
supplied by the seller to the buyer, 20 have already been delivered to the buyer, the seller
may exercise his right of lien over the other 80 bags. If, however, the buyers gets the
whole of the goods weight but takes away only a part of them, the delivery of the part of
the goods in such a case would operate as delivery of the whole and the seller‘s right of
lien over the remaining goods would come to an end. Similarly if an essential part of the
machinery has been delivered by the seller to the buyer, the seller cannot exercise his
right of lien over the remaining parts.

Termination of lien : The unpaid seller‘s right of lien may be lost in any of the following

ways :

By payment of price : The right of lien comes to an end when the seller ceases to
be an unpaid seller, i.e., when the buyer pays or tenders the price to the seller. It has been
noted under Section 47(1) that the unpaid seller is entitled to exercise his right of lien
until payment or tender of the price in respect of certain goods, the payment or tender of
the price, therefore, terminates the seller‘s right to retain the goods. Merely obtaining the
decree does not mean the payment of the price and, therefore, Section 49(2) states that
unpaid seller, having a lien on the goods, does not lose his lien by reason only that he has
obtained a decree for the price of the goods.

By delivery to the carrier : Since the right of lien is a right to retain the
possession so long as the seller continues in possession the right would obviously come to
an end when the seller loses the possession. The seller loses such a possession when he
delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer
without reserving the right of disposal of the gods. Though the delivery of the goods to a
carrier or the bailee for the purpose of transmission to the buyer results in end of lien but
that results in
8
the beginning of the right of stoppage in transit. Of course, the right of stoppage in transit

cannot be exercised until the buyer has become insolvent.

For the termination of the lien the delivery to the carrier or some other bailee must
have been made without reserving the right of disposal i.e. , a right of not delivering the
goods to the buyer until he fulfils the required condition, generally that condition being
the payment of the price, the seller can exercise his right of lien.

By the buyer obtaining possession of the goods : When the buyer or his agent
lawfully obtains the possession of the goods the right of lien comes to an end. If the
buyer, at the time of the contract of sale, is already in possession of the goods, although
as a bailee for the seller, the seller cannot exercise a right of lien in respect of those
goods. If the buyer once obtains the possession the right of lien comes to an end, and such
a right cannot be exercised even if the seller again gets back the possession of those
goods. Thus, where a refrigerator after being sold was delivered to the buyer and since It
was not functioning properly, the buyer delivered two of its parts to the sellers for repairs,
it was held that the seller could not exercise his lien over those parts.

By waiver : Unpaid seller‘s right of lien is also lost by waiver thereof. According
to Section 46(1) (a) an unpaid seller gets his right of lien by implication of law. A party to
a contract may waive his rights, expressly or impliedly, according to Section 62. Section
49(1)(c) expressly provides that the right of lien comes to an end by waiver thereof. Such
a waiver may be presumed when the seller allows a period of credit to the buyer, or
delivers a part of the goods to the buyer or his agent under the circumstances which show
that he does not want to exercise his right of lien, or, when the seller assents to a sub-sale
which the buyer may have made.

9
 Disposition of the goods by the buyer : According to Section 53, the unpaid
seller‘s right of lien or stoppage in transit is not affected by any sale or other disposition
of the goods by the buyer. This general rule is subject to two exceptions :

When the seller himself assents to a sub-sale or other disposition of the goods by
the buyer.

When the buyer having lawfully obtained possession of document of title to the
goods transfers the same to a transferee is good faith and for consideration and the
transfer is by way of sale.

In the above-stated two exceptional cases the unpaid seller‘s right of lien comes to

an end.

Right of stoppage of Goods in Transit (Sections 50-52)

The second important right which is available to an unpaid seller is the right of
stoppage in transit. The right to stoppage means the right to stop further transit of the
goods, to resume possession thereof and to retain the same till the price is paid. The right
can be exercised under the following circumstances:

The seller must be unpaid.

The seller must have parted with the possession of the goods and the buyer must
not have acquired it.
The buyer must be insolvent.

The property must have passed from the seller to the buyer.

The right of stoppage in transit arises only after the seller has parted with
possession of the goods and the buyer has become insolvent. This right is only available
when the goods are neither in the possession of the seller nor that of the buyer, but are in
the possession of a middlemen for the purpose of transmission to the buyer.
10
Example : B, who had bought goods from M/s. Clark & Co. of Glasgow, instructed the
sellers to send the goods by a certain named ship to Melbourne. Goods were first railed to
London and then shipped to Melbourne, a mate‘s receipt being sent to buyers. On
becoming insolvent, the sellers gave notice to the Rail Company to stop delivery to
buyers, but it was too late. They then gave fresh notice to the shipowners claiming back
the goods before the ship arrived at Melbourne. On arrival there, the receiver in
bankruptcy of B demanded the bills of lading from the master. Held, the goods having
been effectively stopped in transit, the trustee could not claim them. [Bathell v. Clark 19
Q.B.D. 553]

Duration of transit

The right of stoppage in transit can be exercised so long as the goods are in transit.
It becomes important, therefore, to know as to what is the duration of transit, i.e., when
transit begins and when it comes to an end. Section 51 provides rules regarding the same.
According to sub section (1) the goods are deemed to be in the course of transit from the
time when they are delivered to a carrier or other bailee for the purpose of transmission to
the buyer. The transit continues until the buyer or his agent in that behalf takes delivery of
them from such carrier or other bailee. It means that so long as the goods are with a
carrier the transit continues.

In order that the right of stoppage in transit can be validly exercised the carrier
carrying the goods must be a middleman rather than either the buyer‘s agent or seller‘s
agent. If the carrier is the buyer‘s agent, delivery of the goods to him would defeat the
right of stoppage in transit. On the other hand, if he is the seller‘s agent, the possession of
the seller‘s agent is the possession of the seller and he can even exercise the right of lien
over those goods. It is only when the carrier has the capacity of a carrier that the goods
are deemed to be in transit for the purpose of the exercise of this right.
11
 Section 51, sub section (5) provides that when the goods are delivered to a ship
chartered by the buyer, it is a question depending on the circumstances of each case
whether they are in the possession of the master as a carrier or as agent of the buyer. In
Schotmans v. Lancashire & Yorkshire Ry. Co. there was delivery of the goods by the
seller on board a ship belonging to the buyer. The bill of lading was also taken in buyer‘s
order. It was held that in this case it amounted to the delivery of the goods to the buyer so
that the seller was precluded from exercising his right of stoppage in transit.

In Turner v. The Trustees of Liverpool Docks the cargo of cotton was put on the
board of the vessel belonging to the buyers, but the goods were made deliverable to the
sellers or their order. Patterson J. giving judgement of the court observed that ―there is no
doubt that the delivery of goods on board of the purchaser‘s own ship is a delivery to him,
unless the vendor protects himself by special terms, restraining the effect of such
delivery. In the present case the vendors by the terms of the bill of lading, made the
cotton deliverable at Liverpool, to their order or assigns, and there was not, therefore, a
delivery of the cotton to the purchasers as owners, although there was a delivery on board
their ship. The vendors still reserved to themselves, at the time of delivery to the captain,
the jus disponendi of the goods, which he by signing the bill of lading acknowledged.

The transit is deemed to be at an end and the seller cannot exercise his right of

stoppage in the following cases :

When the buyer or his agent takes delivery after the goods have reached
destination.

When the buyer or his agent obtains delivery of the goods before their arrival at
the appointed destination.

12
 When the goods have arrived at their destination and the carrier acknowledges to
the buyer or his agent that he holds the goods on his behalf.

When the goods have arrived at their destination but the buyer instead of taking
delivery requests the carrier to carry the goods to some further destination and the
carrier agrees to take them to the new destination.

When the carrier wrongfully refuses to delivery the goods to the buyer or his
agent.

When part delivery of the goods has been made to the buyer with an intention of
delivering the whole of the goods, transit will be at an end for the remainder of the
goods also which are yet in the course of the transit.

The unpaid seller may exercise his right of stoppage in either of the following

ways :

By actually taking possession of the goods, or

By giving notice of his claim to

the carrier, or

other bailee in whose possession the goods are.

Such notice can be given either to the person in actual possession of the goods or
to his principal. When the notice is given to the principal, the notice, to be effectual, must
be given at such time and in such circumstances that the principal, by the exercise of
reasonable diligence, may communicate it to the servant or agent in time to prevent a
delivery to the buyer.
 When notice of stoppage in transit is given by the seller to the carrier or other

bailee in possession of the goods, he shall deliver the goods to, or

13
according to the directions of the seller. It may be noted that the expenses of such

recovery shall be borne by the seller (Section 52).

Wrongful refusal by the Carrier

If, even after a proper notice by the seller to the carrier for stopping the goods in
transit, the carrier delivers them to the buyer, he shall be liable to the seller for
conversion, i.e., wrongful appropriation of the goods to another. If after the transit has
ended and the carrier wrongfully returns the goods to the seller, he is liable to the buyer
for conversion.

Lien and Stoppage in Transit Distinguished

The points of distinction between these rights of an unpaid seller are stated as

under :

The seller‘s lien attaches when the buyer is in default whether he be solvent or
insolvent, while the right of stoppage in transit arises only when the buyer is
insolvent.

Lien is exercisable only when the goods are in actual possession of the unpaid
seller, while stoppage in transit is available only after the seller has parted with the
possession of the goods but are still passing through channels of communication
for the purpose of reaching the hands of the vendee, i.e. they are in custody of an
independent carrier.

The right of lien consists in retaining the possession of the goods, while the right

of stoppage in transit consists in regaining the possession of the goods.

Lien ends where the right of stoppage commences. It means when the seller hands
over the possession of goods to the carrier, his lien ends and the right of stoppage
in transit commences.

14
Effect of Sub-Sale or Pledge By Buyer (Section 53)

The general rule is that the unpaid seller‘s right of lien or stoppage in transit is not
affected by any sale or other disposition of the goods which the buyer may have made.
However, there are two exceptions to this general rule. They are stated below :

When the seller has assented to the sale or other disposition with the buyer may

have made.

Example : A sold to B 80 maunds of grain out of a grainary. B then sold (out of these 80
maunds) 60 maunds to C. C after receiving from B the delivery order presented it to A. A
told C that the grains would be delivered in due course, B then became insolvent. A‘s
right against the 60 maunds is not lost since A recognised the title of C the sub-buyer
(Knigths v. Wiffen).

When a document of title to goods (e.g., a bill of lading or railway receipt) has
been issued or transferred to a buyer, and the buyer transfers the document to a person
who takes the document in good faith and for consideration, then

If such last mentioned transfer was by way of sale, the unpaid seller‘s right of lien
or stoppage in transit is defeated, and
If such last mentioned transfer was by way of pledgee, the unpaid seller‘s right of
lien or stoppage in transit can only be exercised, subject to the rights of the pledge.
But in this case the unpaid seller may require the pledgee to satisfy his claim
against the buyer first out of any other goods or securities of the buyer in the
hands of the pledge.

Right of Resale

An unpaid seller can resale the goods under the following three circumstances :
15
 Where the goods are of a perishable nature.

Where the seller expressly reserves right of resale if the buyer commits a default

in making the payment.

As a result of this resale, the original contract will be terminated but the seller will

have a right to claim damages [Section 54 (4)].

Where the unpaid seller who has exercised his right of lien or stoppage in transit
gives a notice to the buyer about his intention to resell and buyer does not pay or
tender within a reasonable time.

Effects of resale with or without Notice (Sections 54 (2) and (3)] : The effects of resale
with or without notice are summarized as under :

Rights In case of resale In case of resale

after notice without notice

I Unpaid seller‘s right to available not available

recover the loss on

the sale

II Original buyer‘s right not available available

to recover the profit

on resale

III New buyer‘s (who buys in available available

resale) right to acquire

a good title
 Rights against the Goods where the Property in the Goods has not passed to

the Buyer [Section 46(2)]

Where the property in goods has not passed to the buyer, the unpaid seller has, in
addition to his other remedies, a right of withholding delivery similar to and coextensive
with his rights of lien and stoppage in transit where the property has passed to the buyer
[Section 46(2)].

14.2.2 Rights against the buyer personally

The unpaid seller, in addition to the rights against the goods as discussed above,

has the following rights of action against the buyer personally.

Suit for Price (Section 55)

Where under a contract of sale, the property in the goods has passed to the buyer
and the goods have actually come into his possession, the unpaid seller‘s only remedy is a
suit for the price.

Where under a contract of sale, the price is payable on a day certain irrespective
of delivery and the buyer wrongfully neglects or refuses to pay the price, the seller may
institute a suit for the recovery of the same, although the property in the goods may not
have passed.

The right of the seller to recover the price, after the property has passed to the
buyer, can be exercised irrespective of the fact that no delivery of the goods has yet been
made to the buyer. In Dunlop v. Graot there was a contract for the sale of a certain
quantity of iron and the delivery was to be made, if the buyer so required, between 3rd
March and 30th April. The price was agreed to be paid by 30th April. By 30th April
delivery of only a portion of the iron was made, as the buyer did not require the delivery
of the remainder. It was held that the seller was entitled to recover the price of the whole
of the iron and he was not required to show that he had appropriated any specific quantity
of iron to the contract for completing the delivery of the remaining iron. When the buyer
has obtained the possession of the goods the seller‘s sole remedy is an action for price.
On the other hand, if the goods have not yet reached the actual possession of the buyer,
the seller has, in addition to the right of recovery of price under Section 55 certain rights
against the goods.

Suit for Damages for non-acceptance (Section 56)

Where the buyer wrongfully neglects or refuses to accept and pay for the goods,
the seller may sue him for damages (and not for full price) for non-acceptance. Now the
question arises as to what shall be the basis or principles of estimating the damages to the
claimed. The answer is provided by Section 73 of the Indian Contract Act. According to
Section 73, the measure of damages is the estimated loss arising directly and naturally
from the buyer‘s breach of contract.

The seller‘s remedy under the present section is a suit for damages rather than an
action for the price of the goods. In Bungo Steal furniture v. Union of India there was a
contract for the supply of steel bins to the Govt. of India by the appellants. The
Government wrongfully terminated the contract before the bins had been actually
manufactured. It was held that, in this case, since, the property in the goods had not yet
passed to the buyer (Govt.) the case was not covered by Section 55 and an action for the
recovery of the price could not lie but appellants were entitled to recover damages from
the Govt. for wrongfully refusing to accept the goods.

The calculation of damage in different situations is discussed below:

When the Goods have a Ready Market : We can discuss the question of

damages when they have a ready market under the following two headings :
 The Buyer resells the Goods : Where the goods have a ready market, the principle
application is that the buyer will have to pay the loss that the seller has sustained on
reselling of the goods on the day of the breach.

Example : If the difference between the contract price and the market price on the date of

breach is nil, the seller can get only nominal damages (Charter v. Sullivan). The seller

does not Resell : If the seller does not resell, the difference between the contract price and

market price on the day of breach is adopted as a measure of damages. This rule will

apply even if the seller has actually incurred no loss or earned a lot, after selling it on a

day other than the day of breach of contract (Bungo Steel Furniture v. Union of India).

Where Goods have no Ready Market : Where, however, the goods are of the type which
have no ready market, the measure of damages shall depend upon the facts of each case.

Example : T Ltd., a car dealer, contracted to supply a motor-car to R. R refused to accept

delivery. The market price in fact had fallen too much. Head that T Ltd. was entitled to
damages for the loss of their bargain, viz., the profit they would have earned by selling
that car (Thompson Ltd., v. Robinson).

Goods Deliverable in Instalments

Where the goods are deliverable in instalments, and the buyer refuses to accept
one or the other or all the instalments, the difference in prices is to be reckoned for
purposes of calculating damages on the day that a particular instalment was to be
delivered.

Suit for damages for Repudiation of the contract (Section 60)

Where buyer repudiates the contract before the due date of delivery, the seller
may either treat the contract as subsisting and wait till the due date of delivery or he may
treat the contract as rescinded and sue for damages for the breach.
 Suit for Interest (Section 61)

Where under a contact of sale, the seller tenders the goods to the buyer and the

buyer wrongfully refuses to accept and pay for them, the court may

award interest on the price from the date of the tender of the goods or from the date when
the price is payable. If the goods are sold on credit, interest will run from the expiry of the
credit. The rate of interest to be awarded is discretionary with the court. It may be noted
that the seller can only recover interest when he is in a position to recover the price.
When he only sue for damages, for breach of contract, he is not entitled to interest.
 CONDITIONSANDWARRANTIES,DOCTRINEOF

CAVEAT EMPTOR

INTRODUCTION

A contract of sale of goods is made by an offer by the seller and its acceptance by
the buyer. When forming a contract, a party may make a statement with a view to
inducing the other party to enter into the contract. Such statements when made before
entering into the contract are known as representations. Such representations are
generally about the nature, quality and fitness of goods. Such a representation may be a
mere expression of an opinion of the seller and may not form a part of the contract of
sale. For example, where a jewellery seller, while praising a particular diamond ring,
states that the diamond is very lucky and anyone who shall purchase it must become
wealthy, his statement, being commendatory in nature, does not form part of the contract
and its breach does not give rise to any legal consequences. On the other hand, when a
representation forms a part of the contract of sale and the other party relies upon it, such a
representation is called a stipulation within the meaning of Section 12 of the Sale of
Goods Act. However, all stipulations are not of equal importance. Some of these
stipulations may go to the very root of the contract and their breach may frustrate the very
purpose of the contract, while others are not so vital that their breach may seem to be a
breach of the contract as such.

CONDITION

The term ‗condition‘ is defined under Section 12(2) of the Sale of Goods Act,

which reads as under:

 ―A condition is a stipulation essential to the main purpose of the contract, the

breach of which gives the aggrieved party a right to treat the contract as repudiated‖.

Thus, a conditions is an important representation made by the seller the non-

fulfillment of which defeats the very purpose of the buyer and he/she has the right to
terminate the contract.

2
Example: A consulted B, a car dealer, and told him that he wanted to purchase a car
'suitable for touring purpose'. B, suggested that a 'Bugatti' car would be fit for the
purpose. Relying upon this statement, A bought a 'Bugatti' car. Later on, the car turned
out to be unfit for the touring purpose. A wanted to reject the car and demanded the
refund of the price. It was held that A was entitled to reject the car and to have the refund
of the price. In this case, the suitability of the car, for touring purpose, was a condition of
the contract. It was so important that its non-fulfillment defeated the very purpose for
which A bought the car.

WARRANTY

According to Section 12(3) of the Act, a warranty is a stipulation collateral to the

main purpose of the contract, the breach of which gives rise to a claim for damages but
not a right to reject the goods and treat the contract as repudiated or broken. Thus, a
warranty is not of that importance as a condition. It is not essential to the main purpose of
the contract of sale. It is only collateral to the main purpose of the contract. Even if it
turns out to be untrue, the buyer cannot put an end to the contract. The remedy available
is to claim damages from the seller.

In brief, where the fulfillment of the main purpose of the contract depends on the
fulfillment of the stipulation, the stipulation is condition and where it is not so, the
stipulation is only a warranty. There is no specific rule as to which stipulation is a
condition and which one is a warranty. Section 12(4) of the Act states ―whether a
stipulation in a contract of sale is a condition or a warranty depends in each case on the
construction of the contract as a whole. The court is not guided by the terminology used
by the parties to the contract. A stipulation may be a condition though called a warranty
in the contract‖. Thus the court has to look to the intention of the parties by referring to
the terms of the contract, its construction and surrounding circumstances to judge whether
a stipulation was a condition or a warranty.
3
Examples

(a): A person purchases a vehicle which is warranted quiet and smooth to drive. If
the vehicle turns out to be noisy and inconvenient to drive, the buyer‘s only remedy is to
claim damages. But if instead of buying a particular vehicle, a person asks a dealer to
supply him with a quiet and smooth vehicle and the dealer supplies the person with a
noisy one, the stipulation is a condition, and the buyer can return the vehicle. Besides, the
buyer can also claim damages for breach of the contract.

(b): A made a contract for the sale of cashew-nuts. According to the terms of sale,
the total bad nuts shall not exceed 20 per cent of the total. The purchaser entered into the
contract relying upon the description. The above term being a basic element of the
description of the goods agreed to be supplied, the purchaser was entitled to reject the
goods if the bad nuts exceeded the stipulated percentage. He could also claim back the
part of price paid to the seller. [Antony Thomas v Ayuppuni Mani; 1959 Kerala LT 1271]

From the above examples, it is clear that an exactly similar term may be a
condition in one contract and a warranty in another, depending upon the construction of
the contract as a whole.
 DISTINCTION BETWEEN A CONDITION AND WARRANTY

The points of distinction between a Condition and a Warranty may be summed up

as under :-

A condition is a stipulation which is essential to the main purpose of the contract.

A warranty is a stipulation which is collateral to the main purpose of the contract.

A breach of condition gives right to repudiate or rescind the contract and also a

right to claim damages. Breach of warranty provides right to claim damages only.

A breach of warranty does not entitle a buyer to reject the goods.

A breach of condition may be treated as a breach of warranty by the aggrieved

party and accordingly the aggrieved party may not repudiate the contract. But a

breach of warranty cannot be treated as a breach of condition.

CHANGE OF A CONDITION INTO A WARRANTY

Section 13 deals with cases where breach of condition would be treated as a

breach of warranty only and as a consequence, a contract is not avoided. The buyer has to
be contended with a claim for damages only. These cases are as follows :

Where the buyer elects to treat breach of condition as a breach of warranty. This is

to say, he only claims damages and does not elect to repudiate the contract.

Where the buyer altogether waives the performance of the condition. Once the
buyer has waived his right, he cannot afterwards insist on its fulfillment. Waiver
may be express or implied.

Where the contract of sale is non-severable/indivisible and the buyer has accepted
either the whole goods or any part thereof. In such a case, a breach of any
condition by seller can only be treated as a breach of warranty, unless there is a
term of the contract, express or implied, to the contrary. Indivisible contracts are
 those where price for a lot, comprising goods of different qualities, as such is
fixed and not fixed per unit or per bag or per ton, etc.

Taking possession or delivery of the goods does not amount to their acceptance.

According to Section 42, the buyer is deemed to have accepted the goods:

when the seller is intimated by him about the acceptance of goods; or

When he does any act in relation to goods which is inconsistent with the

ownership of the seller, e.g. the buyer puts his mark on goods; or

When he continues to retain the goods even after the lapse of reasonable time

without intimating the seller that he has rejected them.

Where the fulfillment of any condition or warranty is excused by law by reason of

impossibility or otherwise.

STIPULATION AS TO TIME

The stipulations as to time may be of two types :

As to time of payment;

Other stipulations as to time e.g., with regard to the performance of the contract.

Regarding the importance of various stipulations as to time Section 11 of the

Act provides as under :

Unless a different intention appears from the terms of the contract, stipulation as
to time of payment are not deemed to be of the essence of a contract of sale. Whether any
other stipulation as to time is of the essence of the contract or not depends on the terms of
the contract.
 It may be noted that the general rule stated in Section 11 is that the time of
payment of the price is not deemed to be of the essence of the contract. Therefore, in case
of delay in the payment of the price by the buyer, the seller cannot avoid the contract for
that reason but he can only claim compensation for the same. The parties are, however,
free to express a different intention in their contract. They may make the time of the
payment of the price as of the essence of the contract.

Stipulations as to time, except as regards time of payment are usually of the

essence of the contract. Where the parties to the contract stipulate that time as regards
delivery of goods, payment or any other factor shall form the essential terms of the
contract, time shall than be regarded as a condition in construction of a contract for sale
of the goods, breach of which shall provide right to the aggrieved party to cancel the
contract. Example (a) : A sold certain goods to B. The payment was to be made on
delivery of goods. B failed to pay after the goods had been in part delivered. A did not

send further deliveries. It was held that delivery was subject to the condition of payment
and the condition being broken, A had the right to bring an action for the recovery of
goods. [Bishop v Shillitoz Band A 329]

A contract was made for the sale of goods c.i.f. Antwerp. The delivery was
required to be given in October. However, due to a strike in the port of loading the goods
were not shipped until November. It was held that the buyer could refuse to take delivery
of goods. [J. Aron & Co. v Comptoir Wegimont. (1921) 3 K.B. 435]

EXPRESS AND IMPLIED CONDITIONS AND WARRANTIES

(SECTION 14-17)

In a contract of sale of goods, conditions and warranties may be either (1) express
or (2) implied. Parties may expressly provide any conditions or warranties in their
contract. Besides, certain conditions and warranties, as provided in Section 14 to 17, are
impliedly there in every contract of sale of goods unless the parties agree to the contrary.
Implied conditions and warranties are enforced on the ground that the law presumes that
the parties have incorporated them into their contract though they have not put them into
it in express words. The implied conditions and warranties provided in the Act are
binding in every contract of sale unless they are inconsistent with any express conditions
are warranties agreed to by the parties. The implied conditions and warranties recognized
by the Act are as follow :

Implied Conditions

Condition as to Title (Section 14 (a) )

In a contract of sale, unless the circumstances of the contract are such as to show a

different intention, there is an implied condition on the part of the seller that-

in the case of sale, he has a right to sell the goods, and

in the case of an agreement to sell, he will have a right to sell the goods at the time

when the property is to pass.

Example: R bought a car from D and used it for four months. D had no title to the
car and consequently R had to hand it over to the true owner. Held, R could recover the
purchase money (Rowland v Divall, (1923) 2 K.B.500).

Want of title to the goods is not the only factor because of which the seller may
not have a right to sell the goods. If a vendor can be stopped by process of law from
selling, he has not the right to sell. If the goods sold bear labels infringing the trade mark
of a third person, the seller has no right to sell them. In Niblett v Confectioners‘ materials
Co. the sellers sold to the buyers tins of condensed milk c.i.f from New York to London.
Some of the tins were bearing the labels marked ―Nissly Brand‖ which was the trade
mark of a third person, Nestle Co. At the instance of the Nestle Co. the Commissioners of
Customs detained the goods. The buyers had to remove those labels before taking
delivery of those tins of condensed milk. Having suffered a loss, by selling the tins of
condensed milk without proper labels at a lower price, the buyers sued the sellers to claim
compensation. The Court of Appeal held that the sellers had made a breach of condition
that they had a right to sell the goods and as such they were bound to pay damages for the
loss suffered by the buyers.

It may further be noted that where a seller having no title to the goods at the time
of the sale, subsequently acquires the title (e.g. by paying off the true owner) before the
buyer seeks to repudiate the contract, that title feeds the defective titles of both the
original and subsequent buyers and it will then be too late for the buyer to repudiate the
contract (Patten vs Thomas Motors).

2 Condition as to Description (Section 15)

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.

Example: A purchased from B a car, which he had never seen. B described the
car as a ‗brand new‘. However, on delivery, A found that the car was used and repainted.
And thus A returned the car to B. It was held that the sale was by description and the car
did not correspond with the description. In this case, A was entitled to reject the car.
(Based on Varley v whipp (1900) 1 Q.B.513)

It may, however, be noted that the buyer can reject the goods only if the sale is by
description, and the goods do not correspond with the description. The buyer is given the
right to reject the goods because a person cannot be compelled to buy a thing different
from the thing he contracted to buy. In Bower v Shand (1877) 2 AC 455, Lord Blackburn
emphasized this condition in the following words:
 ―If you contract to sell peas you cannot oblige a party to take beans. If the
description of articles tendered is different in any respect it is not the article, bargained,
and the other party is not bound to take it.‖

It will be interesting to know, that the term ‗sale by description‘ has not been
defined in the Sale of Goods Act. However, it generally means the sale when the goods
are described in the contract as of particular kind or class, e.g., Basmati Rice, Long staple
Cotton, Desi Wheat, etc. The sale will also be by description when the identity or quality
of the thing is describe, e.g., Brand New Car, Maruti 85 Model etc. The term ‗sale by
description‘ includes the following situations:

Sometimes, the buyer has never seen the goods but he buys on the basis of
description given by the seller. In such cases the goods must correspond with the
description given by the seller.

Example: A purchased a sewing machine which he had never seen. The seller

(B) described the machine as ―Brand New‖. But on delivery, A found that the machine
was extremely old. In this case, the sale is by description, and A is entitled to reject the

machine as it does not correspond with the description given by the seller.

Where the buyer has seen the goods but he relies not on what he has seen but what

was stated to him and the deviation of the goods from the description is not apparent.

Sale by Sample (Sec 17)

The sale is by sample where there is a term in the contract express or implied to
that effect. There are three implied conditions when the goods are supplied according to
the sample-

that the bulk shall correspond with the sample in quality;

 that the buyer shall have a reasonable opportunity of comparing the bulk with the

sample;

Example: A agreed to sell to B two parcels of wheat. The sample of wheat was
shown to B. The buyer (B) went to A‘s warehouse to examine the wheat. One parcel,
which was lying in the seller‘s (A‘s) warehouse, was shown to B. But A refused to show
the other parcel to B, which was not in the warehouse. It was held that the buyer could
put an end to the contract. [Lorymere v Smith (1822) 1 B & C 1].

Example: Some mixed worsted coatings were sold by sample. The goods when
supplied corresponded to the sample but it was found that owing to a latent defect in the
cloth, coats made out of it would not stand ordinary wear and were therefore, unsaleable.
The same defect existed in the sample also but could not be detected on a reasonable
examination. Held, the buyer was entitled to reject the cloth (Drummond & Sons v Van
Ingen).

Sale by Sample as well as Description (Section 15)

When the goods are sold by sample as well as description it is not sufficient that
the bulk of the goods corresponds with the sample if the goods do not also correspond
with the description. Sometimes there may be a difference between the sample and the
description of the goods. In such a case, the fact that the goods supplied conform to the
sample but do not agree with the description entitle the buyer to reject the goods because
the fundamental condition in every contract is that the goods should correspond to the
description.

In Wallis v Pratt there was a contract of sale by sample of seed described as

―English Sainfoin‖. but the ―seller giving no warranty express or implied as to growth,
description, or any other matters.‖ The seed was sown and when the crop was ready it
was discovered the seed supplied and the sample shown were not of ―English Sainfoin‖
seed but of ―giant sainfoin‖ seed. It was held that there was a breach of condition and the
buyer was entitled to recover damages.
 In Nichol v Godts there was sale of ―foreign refined rape oil, warranted only equal

to samples‖. The oil supplied though corresponded with the sample, was adulterated with

hemp oil. The jury found that the admixture was not commercially known as ―foreign

refined rape oil‖ and therefore, it was held that since the oil supplied was not in

accordance with the description, the buyer was entitled to reject the same.

Condition as to quality or fitness (Section 16)

Normally, in a contract of sale, there is no implied condition as to quality or

fitness of the goods for a particular purpose. The buyer must examine the goods
thoroughly before he buys them in order to satisfy himself that the goods will be suitable
for the purpose for which he is buying them.

The implied condition as to quality or fitness will operate if the following

conditions are satisfied.

The buyer requires the goods for a particular purpose.

The buyer makes known to the seller that particular purpose.

the seller‘s business is to sell such goods, whether the he is the actual producer or

not.

The particular purpose for which the goods, are required has to be made known to

the seller. This may be done either expressly or impliedly. A particular purpose is the

purpose expressly or impliedly communicated to the seller, for which the buyer buys the

goods. Where an article is fit for one particular purpose alone, and turns out to

12
be unsuitable for that purpose, when used, it is easy to see that the condition as to fitness
has been broken. But where an article is capable of being applied to a variety of
purposes,. the buyer must notify the specific purpose he has in mind, and if this is not

shown, the buyer will have no remedy because it was unfit for that purpose.

Example: (a) A who had no special knowledge of hot water bottles went to the
shop of a chemist and asked for a hot water bottle. He was shown a bottle which the
chemist said will not stand boiling water but was intended to hold hot water. A bought the
bottle. After a few days, while using it, it burst and injured his wife. It was found that the
bottle was not fir for use as a hot water bottle and therefore, the chemist was liable for
damages. [Priest v Last (1903) 2 KB 148]

Implied Condition of Merchantable Quality

Section 15 provides that when the goods are bought by description there is an
implied condition that the goods supplied shall answer that description. According to this
Sub Section, there is a further implied condition in such a case that the goods supplied
shall be of merchantable quality . Where;

the goods are bought by description

from a seller who deals in the goods of that description

(whether he is the manufacturer/producer or not)

There is an implied condition that the goods shall be of merchantable quality. The
term ‗merchantable quality‘ has not been defined in the Act. It means that the article is of
such quality and in such condition that a reasonable man acting reasonable would after a
full examination accept it under the circumstances of the case in performance of his offer
to buy that article, he buys for his own use or to sell again.
 The goods should be immediately saleable under the description by which they
are known in the market. Merchantability, however, does not mean that the goods should
be of first quality.

Goods may be unmerchantable not only because of some defect in their physical

condition, but also, because of some other circumstances as for example;

where they infringe a trade mark, or

the use of them is dangerous or injurious in a way not to be expected from goods
of the kind, or
they are unfit for use.

Examples: (a) P asked for a bottle of Stone‘s Ginger Wine at D‘s restaurant.
While P was drawing the cork, with a cork screw, the bottle broke at the neck and injured
him. It was held that the sale was by description and since the bottle was not of
merchantable quality. P was entitled to recover damages. [Morelli v Fitch and Gibbons
(1928), 2 KB 636]

A manufacturer supplied 600 horns under contract. The horns were found to
be dented, scratched and otherwise of faulty manufacturer. Held, they were not of
merchantable quality and therefore, the seller‘s suit for price was dismissed [Jackson v
Rotax Motor & Cycle Co. (1910) 2 k.b. 397).

A radio set was sold to a layman. The set was defective form the beginning
and it did not work in spite of repairs. Held, the purchaser could return the set and claim
refund [R.S.Thakur v H.G.E.Corp, AIR (1971) Bom. 971]

All such defects as make the goods unmerchantable are of two kinds, called patent
defects and latent defects. Patent defects are those which can be found on examination by
a person of ordinary intelligence with the exercise of due care. Latent defects are those
which cannot be discovered on such examination. There is an implied condition on the
seller‘s part that the goods are free from latent defects.
 In case of patent defects where an opportunity is afforded to the buyer to examine
the goods, but the buyer makes only a casual examination of the goods, this will amount
to an examination within the meaning of this section, and the seller would not be liable to

for the defects which such an examination ought to have revealed.

Example: B went to T‘s warehouse to buy some glue. The glue was stored in
barrels and every facility was given to B for its inspection. B did not have any of the
barrels opened, but only looked at the outside. He then purchased the glue. Held, as an
examination of the inside of the barrels would have revealed the nature of the glue, and as
B had an opportunity of making the examination, there was no condition as to
merchantable quality [thornett & Fehr v Beers & Sons, 1919 1 K.B. 486]. Comparison
between the condition as to the fitness of goods for buyer‘s purpose, and condition as to
merchantability. The following table gives the comparison between the two:

Sr Condition as to Fitness of Condition as to Merchantability No. Goods for

Buyer‘s Purpose

The buyer must rely on the The buyer is not required to rely
skill and judgement of the on the skill and judgement of the
seller seller.

When the goods are sold

When the goods are sold
under patent or trade name
then the condition as to
under patent or trade name, then the
fitness for buyer‘s purpose
condition as to merchantability is
is not applicable i.e., it is
applicable, i.e. it is not excluded
excluded.

There may be cases in which

the goods are not fit for
buyer‘s use but they may be
merchantable. There may not be such cases.
 Condition as to Wholesomeness

In the case of eatables and provisions, in addition to the implied condition as to

merchantability, there is another implied condition that the goods shall be wholesome.

Example: F bought milk from A. The milk contained germs of typhoid fever. F‘s
wife took the milk and got infection as a result of which she died. Held, F could recover
damages [Frost v Aylesbury Dairy Co Ltd., (1905) 1 K.B. 608]

Condition implied by Custom

An implied condition as to quality or fitness for a particular purpose may also be

annexed by the usage of trade in the locality concerned [Sec. 16 (3)].

Implied Warranties

It is a warranty which the law implies into the contract of sale. In other words it is
the stipulation which has not been included in the contract of sale in express words. But
the law presumes that the parties have incorporated it into their contract. It will be
interesting to know that implied warranties are read into every contract of sale unless they
are expressly excluded by the express agreement of the parties. These may also be
excluded by the course of dealings between the parties or by usage of trade [Section 62].
It may be noted that sometimes there is conflict between the express and implied
warranties. In such cases, the express terms shall prevail and the implied terms shall not
be considered.

Warranty of Quiet Possession: [Sec. 14(b)]

In every contract of sale the first implied warranty on the part of the seller is that
―the buyer shall have and enjoy quiet possession of the goods.‖ If the quiet possession of
the buyer is in any way disturbed by a person having a superior right than that of the
seller, the buyer can claim damages from the seller. Since disturbance of quiet possession
is likely to arise only where the seller‘s title to goods is defective, this warranty may be
regarded as an extension of the implied condition of the provided for by Section 14 (a).

In the case of Mason v Bhumingham, the plaintiff purchased a second hand

typewriter for pound 20 from the defendant. She thereafter spent a sum pound 11-

10sh., for getting it overhauled and putting in order. Unknown to the parties the
typewriter had been stolen and the plaintiff was compelled to return the same to its true
owner. In an action by the plaintiff against the defendant it was held that the defendant
had made a breach of warranty implied in a contract of sale of goods that the buyer shall
have and enjoy quiet possession of the goods. The plaintiff was entitled to recover not
only the sum of pound 11-10sh, the amount spent on overhauling, as the same was the
loss arising naturally in the usual course of things.

Implied Warranty of Freedom from Encumbrances

There is an implied warranty on the part of the seller that the goods are free from
any charge or encumbrance. A breach of this warranty will occur when the buyer
discharges the amount of encumbrance. This warranty will not apply where such
Encumberances are declared to the buyer when the contract is made or he has notice of
them. Where there is a breach of this implied warranty, the remedy of the buyer is to sue
for damages.

Example: A, the owner of the watch pledges it with B. After a week, A obtains

possession of the watch from B for some limited purpose and sells it to C. B approaches

C and tells him about the pledge affair. C has to make payment of the pledge amount to

B. There is breach of this warranty and C is entitled to claim compensation A.

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 a
breach of this warranty, the seller will be liable in damages.

In Clarke v Army and navy Co-operative Society Ltd. (1903) 1 K.B. 155, C

purchased a tin of disinfectant powder from A. A knew that the tin was to be opened with

special care otherwise it might prove dangerous. He also knew that C was ignorant

about it but did not warn C. C opened the tin whereupon the disinfectant powder flew into
her eyes causing injury. Held, A was liable in damages to C as he should have warned C
of the probable danger.

DOCTRINE OF CAVEAT EMPTOR (BUYER BEWARE)

Caveat Emptor means "let the buyer beware", i.e. the buyer must take care. As a

general rule, the buyer purchased goods after satisfying himself as to quality and fitness

and, therefore, the buyer purchases the goods at his own risk, relying upon his own skill

and judgement. In a contract for sale of goods there is no implied warranty or condition as

to quality or fitness for any particular purpose of goods and therefore, the buyer

purchased the goods at his risk relying on his own skill and judgement (Section 16)

Example : A purchase a horse from B. A needed the horse for riding but he did
not mention this fact to B. The horse is not suitable for riding but is suitable only for
being driven in the carriage. Caveat emptor being the rule. A can neither reject the horse
nor can he claim any compensation from B.

This rule applies to the purchase of specific goods, for example, a horse or a
picture where the buyer can exercise his own judgement it applies also whenever the
buyer voluntarily chooses what he buys. But it has no application in any case, in which
the seller has undertaken and the buyer has left it to the seller, to supply goods to be used
for a purpose known to both parties at the time of the same.

Exception to the 'Doctrine of Caveat Emptor'

 In certain circumstances however, the doctrine has no application. They are as

follows :

If the seller has made a false representation relating to the goods and the buyer has

relied upon it to his detriment.

when the seller has deliberately concealed a defect which is not apparent on the

reasonable examination of the goods.

Where the buyer, expressly or by implication, makes known to the seller the
particular purpose for which he requires the goods and relies on the seller's skill or
judgement and the goods are of a description which it is in the course of the seller's
business to supply, the seller must supply the goods which shall be fit for the buyer's
purpose [Sec. 16 (1)]

In the case of a contract for the sale of a specified article under its patent or other
trade name, there is no implied condition that the goods shall be reasonably fit for any
particular purpose (Proviso to Sec. 16 (1)]

Where the trade usage attaches an implied condition or warranty as to quality or

fitness and the seller deviates from that, the doctrine of caveat emptor does not apply and
the seller is liable in damages [Sec. 16 (3)]

Where goods are bought by description from a seller who deals in such goods,
there is an implied condition that the goods shall be of 'merchantable quality'. Where,
however, the buyer has examined the goods there is no such implied condition as regards
defects which such examination could have revealed.

In Jackson v Rotex Motor and Cycle Co. (1910-2 K.B.), where a person ordered
motor horns from a manufacturer of horns and the horns were damaged, it was held that
the buyer was entitled to reject the horns.
 It should be noted that goods are merchantable if they are fit for any one of the

several purposes for which the goods may ordinarily be used.

15.12 SUGGESTED READINGS

P.P.S. Gogna, Mercantile Law, S.Chand & Company, New Delhi.

N.D. Kapoor, Company Law, Sultan Chand & Sons, New Delhi.

S.C. Aggarwal, Company Law, Dhanpat Rai Publications, New Delhi.

S.K. Aggarwal, Business Law, Galgotia Publishing Company, New Delhi.

G.K. Varshney, Elements of Business Law, S Chand & Co., New Delhi.

K.R. Balchandari, Business Law for Management, Himalaya Publication House, New

Delhi.

Gulshan & G.K. Kapoor, Business Law, New Age International Publishers,

New Delhi.

S.C. Kuchhal, Mercantile Law, Vikas Publishing House, New Delhi.

Avtar Singh, The Priciples of Mercantile Law, Eastern Book Co., Lucknow.

M.C. Shukla, A Manual of Mercantile Law, S. Chand & Co., New Delhi.

R.S.N. Pillai and Bagavathi, Business Law, S. Chand & Co., New Delhi.
NEGOTIABLE INSTRUMENTS ACT, 1881

INTRODUCTION

The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its enactment, the
provision of the English Negotiable Instrument Act were applicable in India, and the present Act
is also based on the English Act with certain modifications. It extends to the whole of India
except the State of Jammu and Kashmir. The Act operates subject to the provisions of Sections
31 and 32 of the Reserve Bank of India Act, 1934. Section 31 of the Reserve Bank of India Act
provides that no person in India other than the Bank or as expressly authorised by this Act, the
Central Government shall draw, accept, make or issue any bill of exchange, hundi, promissory
note or engagement for the payment of 3 money payable to bearer on demand. This Section
further provides that no one except the RBI or the Central Government can make or issue a
promissory note expressed to be payable or demand or after a certain time. Section 32 of the
Reserve Bank of India Act makes issue of such bills or notes punishable with fine which may
extend to the amount of the instrument. The effect or the consequences of these provisions are:

1. A promissory note cannot be made payable to the bearer, no matter whether it is payable on
demand or after a certain time.

2. A bill of exchange cannot be made payable to the bearer on demand though it can be made
payable to the bearer after a certain time.

3. But a cheque {though a bill of exchange} payable to bearer or demand can be drawn on a
person‘s account with a banker.

MEANING OF NEGOTIABLE INSTRUMENTS

According to Section 13 (a) 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 bonafide 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 4 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.

As such, documents like share warrants payable to bearer, debentures payable to bearer and
dividend warrants are negotiable instruments. But the money orders and postal orders, deposit
receipts, share certificates, bill of lading, dock warrant, etc. are not negotiable instruments.
Although they are transferable by delivery and endorsements, yet they are not able to give better
title to the bonafide transferee for value than what the transferor has.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

A negotiable instrument has the following characteristics:

1. Property: The prossessor of the negotiable instrument is presumed to be the owner of the
property contained therein. A negotiable instrument does not merely give possession of
the instrument but right to property also. The property in a negotiable instrument can be
transferred without any formality. In the case of bearer instrument, the property passes by
mere delivery to the transferee. In the case of an order instrument, endorsement and
delivery are required for the transfer of property.

2. Title: The transferee of a negotiable instrument is known as ‗holder in due course.‘ A

bona fide transferee for value is not affected by 5 any defect of title on the part of the
transferor or of any of the previous holders of the instrument.

3. Rights: The transferee of the negotiable instrument can sue in his own name, in case of
dishonour. A negotiable instrument can be transferred any number of times till it is at
maturity. The holder of the instrument need not give notice of transfer to the party liable
on the instrument to pay.
 4. Presumptions: Certain presumptions apply to all negotiable instruments e.g., a
presumption that consideration has been paid under it. It is not necessary to write in a
promissory note the words ‗for value received‘ or similar expressions because the
payment of consideration is presumed. The words are usually included to create
additional evidence of consideration.

5. 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.

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT

Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which the
court presumes in regard to negotiable instruments. In other words these presumptions need not
be proved as they are presumed to exist in every negotiable instrument. Until the contrary is
proved the following presumptions shall be made in case of all negotiable instruments:

1. Consideration: It shall be presumed that every negotiable instrument was made drawn,
accepted or endorsed for consideration. It is presumed that, consideration is present in every
negotiable instrument until the contrary is presumed. The presumption of consideration, 6
however may be rebutted by proof that the instrument had been obtained from, its lawful
owner by means of fraud or undue influence.

2. Date: Where a negotiable instrument is dated, the presumption is that it has been made or
drawn on such date, unless the contrary is proved.

3. Time of acceptance: Unless the contrary is proved, every accepted bill of exchange is
presumed to have been accepted within a reasonable time after its issue and before its
maturity. This presumption only applies when the acceptance is not dated; if the acceptance
bears a date, it will prima facie be taken as evidence of the date on which it was made.

4. Time of transfer: Unless the contrary is presumed it shall be presumed that every transfer of
a negotiable instrument was made before its maturity.
5. Order of endorsement: Until the contrary is proved it shall be presumed that the
endorsements appearing upon a negotiable instrument were made in the order in which they
appear thereon.

6. Stamp: Unless the contrary is proved, it shall be presumed that a lost promissory note, bill
of exchange or cheque was duly stamped.

7. Holder in due course: Until the contrary is proved, it shall be presumed that the holder of a
negotiable instrument is the holder in due course. Every holder of a negotiable instrument is
presumed to have paid consideration for it and to have taken it in good faith. But if the
instrument was obtained from its lawful owner by means of an offence or fraud, the holder
has to prove that he is a holder in due course.

8. Proof of protest: Section 119 lays down that in a suit upon an instrument which has been
dishonoured, the court shall on proof of the protest, presume the fact of dishonour, unless
and until such fact is disproved.

TYPES OF NEGOTIABLE INSTRUMENT

Section 13 of the Negotiable Instruments Act states that a negotiable instrument is a promissory
note, bill of exchange or a cheque payable either to order or to bearer. Negotiable instruments
recognised by statute are: (i) Promissory notes (ii) Bills of exchange (iii) Cheques. Negotiable
instruments recognised by usage or custom are: (i) Hundis (ii) Share warrants (iii) Dividend
warrants (iv) Bankers draft (v) Circular notes (vi) Bearer debentures (vii) Debentures of Bombay
Port Trust (viii) Railway receipts (ix) Delivery orders. This list of negotiable instrument is not a
closed chapter. With the growth of commerce, new kinds of securities may claim recognition as
negotiable instruments. The courts in India usually follow the practice of English courts in
according the character of negotiability to other instruments.
Promissory notes

Section 4 of the Act defines, ―A promissory note is an instrument in writing (note 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.‖

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. The method
of writing (either in ink or pencil or printing, etc.) is unimportant, but it must be in any
form that cannot be altered easily.

2. It must certainly an express promise or clear understanding to pay: There must be an

express undertaking to pay. A mere acknowledgment is not enough. The following are
not promissory notes as there is no promise to pay.

If A writes:

(a) ―Mr. B, I.O.U. (I owe you) Rs. 500‖

(b) ―I am liable to pay you Rs. 500‖.

(c) ―I have taken from you Rs. 100, whenever you ask for it have to pay‖. The following will be
taken as promissory notes because there is an express promise to pay:

If A writes:

(a) ―I promise to pay B or order Rs. 500‖

(b) ―I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand, for the value
received‖.

(3) Promise to pay must be unconditional: A conditional undertaking destroys the negotiable
character of an otherwise negotiable instrument. Therefore, the promise to pay must not depend
upon the happening of some outside contingency or event. It must be payable absolutely.
(4) It should be signed by the maker: The person who promise to pay must sign the instrument
even though it might have 9 been written by the promisor himself. There are no restrictions
regarding the form or place of signatures in the instrument. It may be in any part of the
instrument. It may be in pencil or ink, a thumb mark or initials. The pronote can be signed by the
authorised agent of the maker, but the agent must expressly state as to on whose behalf he is
signing, otherwise he himself may be held liable as a maker. The only legal requirement is that it
should indicate with certainty the identity of the person and his intention to be bound by the
terms of the agreement.

(5) The maker must be certain: The note self must show clearly who is the person agreeing to
undertake the liability to pay the amount. In case a person signs in an assumed name, he is liable
as a maker because a maker is taken as certain if from his description sufficient indication
follows about his identity. In case two or more persons promise to pay, they may bind
themselves jointly or jointly and severally, but their liability cannot be in the alternative.

(6) The payee must be certain: The instrument must point out with certainty the person to whom
the promise has been made. The payee may be ascertained by name or by designation. A note
payable to the maker himself is not pronate unless it is indorsed by him. In case, there is a
mistake in the name of the payee or his designation; the note is valid, if the payee can be
ascertained by evidence. Even where the name of a dead person is entered as payee in ignorance
of his death, his legal representative can enforce payment.

(7) The promise should be to pay money and money only: Money means legal tender money and
not old and rare coins. 10 A promise to deliver paddy either in the alternative or in addition to
money does not constitute a promissory note.

(8) The amount should be certain: One of the important characteristics of a promissory note is
certainty—not only regarding the person to whom or by whom payment is to be made but also
regarding the amount.

However, paragraph 3 of Section 5 provides that the sum does not become indefinite merely
because

(a) there is a promise to pay amount with interest at a specified rate.

(b) the amount is to be paid at an indicated rate of exchange.

(c) the amount is payable by installments with a condition that the whole balance shall fall due
for payment on a default being committed in the payment of anyone installment.

(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. The date of
instrument is not material unless the amount is made payable at a certain time after date. Even in
such a case, omission of date does not invalidate the instrument and the date of execution can be
independently ascertained and proved. On demand (or six month after date) I promise to pay
Peter or order the sum of rupees one thousand with interest at 8 per cent per annum until
payment.

Bill of exchange

11 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‖. A bill of
exchange, therefore, is a written acknowledgement of the debt, written by the creditor and
accepted by the debtor. There are usually three parties to a bill of exchange drawer, acceptor or
drawee and payee. Drawer himself may be the payee.

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.

Distinction Between Bill of Exchange and Promissory Note

1. Number of parties: In a promissory note there are only two parties – the maker (debtor) and
the payee (creditor). In a bill of exchange, there are three parties; drawer, drawee and payee;
although any two out of the three may be filled by one and the same person,

2. Payment to the maker: A promissory note cannot be made payable the maker himself, while in
a bill of exchange to the drawer and payee or drawee and payee may be same person.

3. Unconditional promise: A promissory note contains an unconditional promise by the maker to

pay to the payee or his order, whereas in a bill of exchange, there is an unconditional order to the
drawee to pay according to the direction of the drawer.

4. Prior acceptance: A note is presented for payment without any prior acceptance by the maker.
A bill of exchange is payable after sight must be accepted by the drawee or someone else on his
behalf, before it can be presented for payment.

5. Primary or absolute liability: The liability of the maker of a promissory note is primary and
absolute, but the liability of the drawer of a bill of exchange is secondary and conditional.

6. Relation: The maker of the promissory note stands in immediate relation with the payee, while
the maker or drawer of an accepted bill stands in immediate relations with the acceptor and not
the payee.

7. Protest for dishonour: Foreign bill of exchange must be protested for dishonour when such
protest is required to be made by the law of the country where they are drawn, but no such
protest is needed in the case of a promissory note.

9. Notice of dishonour: When a bill is dishonoured, due notice of dishonour is to be given by

the holder to the drawer and the intermediate indorsers, but no such notice need be given in
the case of a note.
Classification of Bills

Bills can be classified as:

(1) Inland and foreign bills.

(2) Time and demand bills.

(3) Trade and accommodation bills.

(1) Inland and Foreign Bills

Inland bill: A bill is, named as an inland bill if:

(a) it is drawn in India on a person residing in India, whether payable in or outside India,
or

(b) it is drawn in India on a person residing outside India but payable in India.

The following are the Inland bills

(i) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is payable in

Bombay. The bill is an inland bill.
(ii) A bill is drawn by a Delhi merchant on a person in London, but is made payable in
India. This is an inland bill.
(iii) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is accepted for
payment in Japan. The bill is an inland bill.

Foreign Bill: A bill which is not an inland bill is a foreign bill. The following are the foreign
bills:

1. A bill drawn outside India and made payable in India.

2. A bill drawn outside India on any person residing outside India.

3. A bill drawn in India on a person residing outside India and made payable outside India.

4. A bill drawn outside India on a person residing in India.

5. A bill drawn outside India and made payable outside India.

Bills in sets (Secs. 132 and 133): The foreign bills are generally drawn in sets of three, and
each sets is termed as a ‗via‘.

As soon as anyone of the set is paid, the others becomes inoperative. These bills are drawn in
different parts. They are drawn in order to avoid their loss or miscarriage during transit. Each
part is despatched separately. To avoid delay, all the parts are sent on the same day; by
different mode of conveyance.

Rules: Sections 132 and 133 provide for the following rules:

(i) A bill of exchange may be drawn in parts, each part being numbered and containing a
provision that it shall continue payable only so long as the others remain unpaid. All
parts make one bill and the entire bill is extinguished, i.e. when payment is made on
one part- the other parts will become inoperative (Section 132).
(ii) The drawer should sign and deliver all the parts but the acceptance is to be conveyed
only on one of the parts. In case a person accepts or endorses different parts of the bill
in favour of different persons, he and the subsequent endorsers of each part are liable
on such part as if it were a separate bill (Sec. 132).
(iii) As between holders in due course of the different parts of the same bill, he who first
acquired title to anyone part is entitled to the other parts and is also entitled to claim the
money represented by bill (Sec. 133).

(2) Time and Demand Bill

Time bill: A bill payable after a fixed time is termed as a time bill. In other words, bill
payable ―after date‖ is a time bill.

Demand bill: A bill payable at sight or on demand is termed as a demand bill.

(3) Trade and Accommodation Bill

Trade bill: A bill drawn and accepted for a genuine trade transaction is termed as a ―trade
bill‖.
Accommodation bill: A bill drawn and accepted not for a genuine trade transaction but
only to provide financial help to some party is termed as an ―accommodation bill‖.
Example: A, is need of money for three months. He induces his friend B to accept a bill
of exchange drawn on him for Rs. 1,000 for three months. The bill is drawn and accepted.
The bill is an ―accommodation bill‖. A may get the bill discounted from his bankers
immediately, paying a small sum as discount. Thus, he can use the funds for three months
and then just before maturity he may remit the money to B, who will meet the bill on
maturity. In the above example A is the ―accommodated party‖ while B is the
―accommodating party‖. It is to be noted that an recommendation bill may be for
accommodation of both the drawer arid acceptor. In such a case, they share the proceeds
of the discounted bill. 16 Rules regarding accommodation bills are: (i) In case the patty
accommodated continues to hold the bill till maturity, the accommodating party shall not
be liable to him for payment of, the bill since the contract between them is not based on
any consideration (Section 43). (ii) But the accommodating party shall be liable to any
subsequent holder for value who may be knowing the exact position that the bill is an
accommodation bill and that the full consideration has not been received by the acceptor.
The accommodating party can, in turn, claim compensation from the accommodated
party for the amount it has been asked to pay the holder for value. (iii) An
accommodation bill may be negotiated after maturity. The holder or such a bill after
maturity is in the same position as a holder before maturity, provided he takes it in good
faith and for value (Sec. 59) In form and all other respects an accommodation bill is quite
similar to an ordinary bill of exchange. There is nothing on the face of the
accommodation bill to distinguish it from an ordinary trade bill. 1.5.3 Cheques 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. A cheque must satisfy all the requirements of a bill of exchange; that is, it
must be signed by the drawer, and must contain an 17 unconditional order on a specified
banker to pay a certain sum of money to or to the order of a certain person or to the
bearer of the cheque. It does not require acceptance. Distinction Between Bills of
Exchange and Cheque 1. A bill of exchange is usually drawn on some person or firm,
while a cheque is always drawn on a bank. 2. It is essential that a bill of exchange must
be accepted before its payment can be claimed A cheque does not require any such
acceptance. 3. A cheque can only be drawn payable on demand, a bill may be also drawn
payable on demand, or on the expiry of a certain period after date or sight. 4. A grace of
three days is allowed in the case of time bills while no grace is given in the case of a
cheque. 5. The drawer of the bill is discharged from his liability, if it is not presented for
payment, but the drawer of a cheque is discharged only if he suffers any damage by delay
in presenting the cheque for payment. 6. Notice of dishonour of a bill is necessary, but no
such notice is necessary in the case of cheque. 7. A cheque may be crossed, but not
needed in the case of bill. 8. A bill of exchange must be properly stamped, while a cheque
does not require any stamp. 9. A cheque drawn to bearer payable on demand shall be
valid but a bill payable on demand can never be drawn to bearer. 10. Unlike cheques, the
payment of a bill cannot be countermanded by the drawer. 1.5.4 Hundis 18 A ―Hundi‖ is
a negotiable instrument written in an oriental language. The term hundi includes all
indigenous negotiable instrument whether they be in the form of notes or bills. The word
‗hundi‘ is said to be derived from the Sanskrit word ‗hundi‘, which means ―to collect‖.
They are quite popular among the Indian merchants from very old days. They are used to
finance trade and commerce and provide a fascile and sound medium of currency and
credit. Hundis are governed by the custom and usage of the locality in which they are
intended to be used and not by the provision of the Negotiable Instruments Act. In case
there is no customary rule known as to a certain point, the court may apply the provisions
of the Negotiable Instruments Act. It is also open to the parties to expressly exclude the
applicability of any custom relating to hundis by agreement (lndur Chandra vs. Lachhmi
Bibi, 7 B.I.R. 682). 1.6 PARTIES TO NEGOTIABLE INSTRUMENTS 1.6.1 Parties to
Bill of Exchange 1. Drawer: The maker of a bill of exchange is called the ‗drawer‘. 2.
Drawee: The person directed to pay the money by the drawer is called the ‗drawee‘, 3.
Acceptor: After a drawee of a bill has signed his assent upon the bill, or if there are more
parts than one, upon one of such pares and delivered the same, or given notice of such
signing to the holder or to some person on his behalf, he is called the ‗ acceptor‘. 19 4.
Payee: The person named in the instrument, to whom or to whose order the money is
directed to be paid by the instrument is called the ‗payee‘. He is the real beneficiary
under the instrument. Where he signs his name and makes the instrument payable to
some other person, that other person does not become the payee. 5. Indorser: When the
holder transfers or indorses the instrument to anyone else, the holder becomes the
‗indorser‘. 6. Indorsee: The person to whom the bill is indorsed is called an ‗indorsee‘. 7.
Holder: A person who is legally entitled to the possession of the negotiable instrument in
his own name and to receive the amount thereof, is called a ‗holder‘. He is either the
original payee, or the indorsee. In case the bill is payable to the bearer, the person in
possession of the negotiable instrument is called the ‗holder‘. 8. Drawee in case of need:
When in the bill or in any endorsement, the name of any person is given, in addition to
the drawee, to be resorted to in case of need, such a person is called ‗drawee in case of
need‘. In such a case it is obligatory on the part of the holder to present the bill to such a
drawee in case the original drawee refuses to accept the bill. The bill is taken to be
dishonoured by non-acceptance or for nonpayment, only when such a drawee refuses to
accept or pay the bill. 9. Acceptor for honour: In case the original drawee refuses to
accept the bill or to furnish better security when demanded by the notary, any person who
is not liable on the bill, may accept it with the consent of the holder, for the honour of any
party liable on the bill. Such an acceptor is called ‗acceptor for honour‘. 20 1.6.2 Parties
to a Promissory Note 1. Maker. He is the person who promises to pay the amount stated
in the note. He is the debtor. 2. Payee. He is the person to whom the amount is payable
i.e. the creditor. 3. Holder. He is the payee or the person to whom the note might have
been indorsed. 4. The indorser and indorsee (the same as in the case of a bill). 1.6.3
Parties to a Cheque 1. Drawer. He is the person who draws the cheque, i.e., the depositor
of money in the bank. 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. 4.
The holder, indorser and indorsee (the same as in the case of a bill or note). 1.7
NEGOTIATION Negotiation may be defined as the process by which a third party is
constituted the holder of the instrument so as to entitle him to the possession of the same
and to receive the amount due thereon in his own name. 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.‘
The main purpose and essence of negotiation is to make the transferee of a promissory
note, a bill of exchange or a cheque the holder there of. Negotiation thus requires two
conditions to be fulfilled, namely: 21 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. Handing over a negotiable instrument to a servant
for safe custody is not negotiation; there must be a transfer with an intention to pass title.
1.7.1 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. 1.8 ASSIGNMENT Bills, notes and cheques
represent debts and as such have been held to be assignable without endorsement.
Transfer by assignment takes place when the holder of a negotiable instrument sells his
right to another person without endorsing it. The assignee is entitled to get 22 possession
and can recover the amount due on the instrument from the parties thereto. Of the two
methods of transfer of negotiable instruments discussed, transfer by negotiation is
recognised by the Negotiable Instrument Act. 1.8.1 Negotiation and Assignment
Distinguished The various points of distinction between negotiation and assignment are
as below: 1. Negotiation requires delivery only to constitute a transfer, whereas
assignment requires a written document signed by the transferor. 2. Consideration is
always presumed in the case of transfer by negotiation. In the case of assignment
consideration must be proved. 3. In case of negotiation, notice of transfer is not
necessary, whereas in the case of assignment notice of the transfer must be given by the
assignee to the debtor. 4. The assignee takes the instrument subject to all the defects in
the title of the transferor. If the title of the assignor was defective the title of the assignee
is also defective. However, in case of negotiation the transferee takes the instrument free
from all the defects in the title of the transferor. A holder in due course is not affected by
any defect in the title of the transferor. He may therefore have a better title than the
transferor. 5. In case of negotiation a transferee can sue the third party in his own name.
But an assignee cannot do so. 23 1.8.2 Importance of delivery in negotiation Delivery is a
voluntary transfer of possession from one person to another. Delivery is essential to
complete any contract on a negotiable instrument whether it be contract of making
endorsement or acceptance. The property in the instrument does not pass unless the
delivery is fully completed. Section 46 of the Act provides that a negotiable instrument is
not made or accepted or endorsed unless it is delivered to a proper person. For instance, if
a person signs a promissory note and keeps it with himself, he cannot be said to have
made a promissory note; only when it is delivered to the payee that the promissory note is
made. Delivery may be actual or constructive. Delivery is actual when it is accompanied
by actual change of possession of the instrument. Constructive delivery is effected
without any change of actual possession. 1.9 ENDORSEMENT The word ‗endorsement‘
in its literal sense means, writing on the back of an instrument. But under the Negotiable
Instruments Act it means, the writing of one‘s name on the back of the instrument or any
paper attached to it with the intention of transferring the rights therein. Thus,
endorsement is signing a negotiable instrument for the purpose of negotiation. The person
who effects an endorsement is called an ‗endorser‘, and the person to whom negotiable
instrument is transferred by endorsement is called the ‗endorsee‘. Essentials of a valid
endorsement The following are the essentials of a valid endorsement: 1. It must be on the
instrument. The endorsement may be on the back or face of the instrument and if no
space is left on 24 the instrument, it may be made on a separate paper attached to it called
allonage. It should usually be in ink. 2. It must be made by the maker or holder of the
instrument. A stranger cannot endorse it. 3. It must be signed by the endorser. Full name
is not essential. Initials may suffice. Thumb-impression should be attested. Signature may
be made on any part of the instrument. A rubber stamp is not accepted but the designation
of the holder can be done by a rubber stamp. 4. It may be made either by the endorser
merely signing his name on the instrument (it is a blank endorsement) or by any words
showing an intention to endorse or transfer the instrument to a specified person (it is an
endorsement in full). No specific form of words is prescribed for an endorsement. But
intention to transfer must be present. When in a bill or note payable to order the
endorsee‘s name is wrongly spelt, he should when he endorses it, sign the name as spelt
in the instrument and write the correct spelling within brackets after his endorsement. 5.
It must be completed by delivery of the instrument. The delivery must be made by the
endorser himself or by somebody on his behalf with the intention of passing property
therein. Thus, where a person endorses an instrument to another and keeps it in his papers
where it is found after his death and then delivered to the endorsee, the latter gets no right
on the instrument. 6. It must be an endorsement of the entire bill. A partial endorsement
i.e. which purports to transfer to the endorse a part only of the amount payable does not
operate as a valid endorsement. 25 If delivery is conditional, endorsement is not complete
until the condition is fulfilled. Who may endorse? The payee of an instrument is the
rightful person to make the first endorsement. Thereafter the instrument may be endorsed
by any person who has become the holder of the instrument. The maker or the drawer
cannot endorse the instrument but if any of them has become the holder thereof he may
endorse the instrument. (Sec. 51). The maker or drawer cannot endorse or negotiate an
instrument unless he is in lawful possession of instrument or is the holder there of. A
payee or indorsee cannot endorse or negotiate unless he is the holder there of. Classes of
endorsement An endorsement may be: (1) Blank or general. (2) Speical or full. (3)
Partial. (4) Restrictive. (5) Conditional. (a) Blank or general endorsement (Sections 16
and 54). It is an endorsement when the endorser merely signs on the instrument without
mentioning the name of the person in whose favour the endorsement is made.
Endorsement in blank specifies no endorsee. It simply consists of the signature of the
endorser on the endorsement. A negotiable instrument even though payable to order
becomes a bearer instrument if endorsed in blank. Then it is transferable by mere
delivery. An endorsement in blank may be followed by an endorsement in full. 26
Example: A bill is payable to X. X endorses the bill by simply affixing his signature. This
is an endorsement in blank by X. In this case the bill becomes payable to bearer. There is
no difference between a bill or note indorsed in blank and one payable to bearer. They
can both be negotiated by delivery. (b) Special or full endorsement (Section 16) When
the endorsement contains not only the signature of the endorser but also the name of the
person in whose favour the endorsement is made, then it is an endorsement in full. Thus,
when endorsement is made by writing the words ―Pay to A or A‘s order,‖ followed by the
signature of the endorser, it is an endorsement in full. In such an endorsement, it is only
the endorsee who can transfer the instrument. Conversion of endorsement in blank into
endorsement in full: When a person receives a negotiable instrument in blank, he may
without signing his own name, convert the blank endorsement into an endorsement in full
by writing above the endorser‘s signature a direction to pay to or to the order of himself
or some other person. In such a case the person is not liable as the endorser on the bill. In
other words, the person transferring such an instrument does not incur all the liabilities of
an endorser. (Section 49). Example: A is the holder of a bill endorsed by B in blank. A
writes over B‘s signature the words ―Pay to C or order.‖ A is not liable as endorser but
the writing operates as an endorsement in full from B to C. Where a bill is endorsed in
blank, or is payable to bearer and is afterwards endorsed by another in full, the bill
remains transferable by delivery with regard to all parties prior to such endorser in full.
But such 27 endorser in full cannot be sued by any one except the person in whose favour
the endorsement in full is made. (Section 55). Example: C the payee of a bill endorses it
in blank and delivers it to D, who specially endorses it to E or order. E without
endorsement transfers the bill to F. F as the bearer is entitled to receive payment or to sue
the drawer, the acceptor, or C who endorsed the bill in blank but he cannot sue D or E. (c)
Partial endorsement (Section 56) A partial endorsement is one which purports to transfer
to the endorsee a part only of the amount payable on the instrument. Such an
endorsement does not operate as a negotiation of the instrument. Example: A is the
holder of a bill for Rs.1000. He endorses it ―pay to B or order Rs.500.‖ This is a partial
endorsement and invalid for the purpose of negotiation. (d) Restrictive endorsement
(Section 50) The endorsement of an instrument may contain terms making it restrictive.
Restrictive endorsement is one which either by express words restricts or prohibits the
further negotiation of a bill or which expresses that it is not a complete and unconditional
transfer of the instrument but is a mere authority to the endorsee to deal with bill as
directed by such endorsement. ―Pay C,‖ ―Pay C for my use,‖ ―Pay C for the account of
B‖ are instances of restrictive endorsement. The endorsee under a restrictive endorsement
acquires all the rights of the endoser except the right of negotiation. Conditional or
qualified endorsement 28 It is open to the endorser to annex some condition to his owner
liability on the endorsement. An endorsement where the endorsee limits or negatives his
liability by putting some condition in the instrument is called a conditional endorsement.
A condition imposed by the endorser may be a condition precedent or a condition
subsequent. An endorsement which says that the amount will become payable if the
endorsee attains majority embodies a condition precedent. A conditional endorsement
unlike the restrictive endorsement does not affect the negotiability of the instrument. It is
also some times called qualified endorsement. An endorsement may be made conditional
or qualified in any of the following forms: (i) ‗Sans recourse‘ endorsement: An endorser
may be express word exclude his own liability thereon to the endorser or any subsequent
holder in case of dishonour of the instrument. Such an endorsement is called an
endorsement sans recourse (without recourse). Thus ‗Pay to A or order sans recourse,
‗pay to A or order without recourse to me,‘ are instances of this type of endorsement.
Here if the instrument is dishonoured, the subsequent holder or the indorsee cannot look
to the indorser for payment of the same. An agent signing a negotiable instrument may
exclude his personal liability by using words to indicate that he is signing as agent only.
The same rule applies to directors of a company signing instruments on behalf of a
company. The intention to exclude personal liability must be clear. Where an endorser so
excludes his liability and afterwards becomes the holder of the instrument, all
intermediate endorsers are liable to him. Example: A is the holder of a negotiable
instrument. Excluding personal liability by an endorsement without recourse, he transfers
the instrument to B, and B endorses it 29 to C, who endorses it to A. A can recover the
amount of the bill from B and C. (ii) Facultative endorsement: An endorsement where the
endorser extends his liability or abandons some right under a negotiable instrument, is
called a facultative endorsement. ―Pay A or order, Notice of dishonour waived‖ is an
example of facultative endorsement. (iii) ‗Sans frais‘ endorsement: Where the endorser
does not want the endorsee or any subsequent holder, to incur any expense on his account
on the instrument, the endorsement is ‗sans frais‘. (iv) Liability dependent upon a
contingency: Where an endorser makes his liability depend upon the happening of a
contingent event, or makes the rights of the endorsee to receive the amount depend upon
any contingent event, in such a case the liability of the endorser will arise only on the
happening of that contingent event. Thus, an endorser may write ‗Pay A or order on his
marriage with B‘. In such a case, the endorser will not be liable until the marriage takes
place and if the marriage becomes impossible, the liability of the endorser comes to an
end. Effects of endorsement The legal effect of negotiation by endorsement and delivery
is: (i) to transfer property in the instrument from the endorser to the endorsee. (ii) to vest
in the latter the right of further negotiation, and (iii) a right to sue on the instrument in his
own name against all the other parties (Section 50). Cancellation of endorsement 30
When the holder of a negotiable instrument, without the consent of the endorser destroys
or impairs the endorser‘s remedy against prior party, the endorser is discharged from
liability to the holder to the same extent as if the instrument had been paid at maturity
(Section 40). Negotiation back ‗Negotiation back‘ is a process under which an endorsee
comes again into possession of the instrument in his own right. Where a bill is re-
endorsed to a previous endorser, he has no remedy against the intermediate parties to
whom he was previously liable though he may further negotiate the bill. 1.10
INSTRUMENTS WITHOUT CONSIDERATION A person cannot pass a better title
than he himself possesses. A person who is a mere finder of a lost goods or a thief or one
who obtains any article by fraud or for an unlawful consideration does not get any title to
the thing so acquired. The true owner can recover it not only from him but from any
person to whom he may have sold it. But there is a difference between the transfer of
ordinary goods and negotiation of negotiable instruments. The Negotiable Instruments
Act provides protection to those persons who acquire the instruments in good faith and
for valuable consideration. A holder in due course who has no means to discover the
defect of title in an instrument of any previous holder when the instrument may have
passed through several hands must be protected if he obtains the instrument for value and
in good faith. Section 58 of the Act provides that no person in possession of an
instrument with a defect of title can claim the amount of the instrument unless he is a
holder in due course. The moment an instrument comes 31 into the hands of a holder in
due course, not only does he get a title which is free from all defects, but having passed
through his hands the instrument is cleaned of all defects. Lost instruments Where the
holder of a bill or note loses it, the finder gets no title to it. The finder cannot lawfully
transfer it. The man who lost it can recover it from the finder. But if the instrument is
transferable by mere delivery and there is nothing on its face to show that it does not
belong to the finder, a holder obtaining it from the finder in good faith and for valuable
consideration and before maturity is entitled to the instrument and can recover payment
from all the parties thereof. If the instrument is transferable by endorsement, the finder
cannot negotiate it except by forging the endorsement. The holder of the instrument when
it is lost must give a notice of loss to all the parties liable on it and also a public notice by
advertisement. The holder of a lost bill remains owner in law and as such on maturity can
demand payment from the acceptor, and if is dishonoured he must give notice of
dishonour to prior parties. The owner of the lost bill has a right to obtain the duplicate
from the drawer and on refusal he can sue the drawer for the same. Stolen instrument The
position of thief of an instrument is exactly the same as that of a finder of lost
instruments. A thief acquires no title to an instrument if he receives payment on it the
owner can sue him for the recovery of the amount. But if an instrument payable to bearer
is stolen and if transferred to a holder in due course, the owner must suffer. Instruments
obtained by fraud 32 It is of the essence of all contracts including those on negotiable
instruments, that they must have been brought about by free consent of the parties
compenent to contract. Any contract to which consent has been obtained by fraud is
voidable at the option of the person whose consent was so obtained. A person who
obtains an instrument by fraud gets a defective title. But if such an instrument passes into
the hands of a holder in due course, the plea of fraud will not be available against him. If
however, it could be shown that a person without negligence on his part was induced to
sign an instrument it being represented to him to be a document of a different kind he
would not be liable even to a holder in due course. Instrument obtained for an unlawful
consideration The general rules as to the legality of object or consideration of a contract
apply to contracts on negotiable instruments also. An instrument given for an illegal
consideration is void and does not covey a valid title to the holder. He cannot enforce
payment against any party thereto. Thus, a bill of exchange given in consideration of
future illicit cohabitation is void. But if such an instrument passes into the hands of a
holder in due course, he obtains a good and complete title to it. Forged instrument
Forgery confers no title and a holder acquires no title to a forged instrument. A forged
instrument is treated as anullity. Forgery with the intention of obtaining title to an
instrument would include: (1) fraudulently writing the name of an existing person, (2)
signing the name of a fictitious person with the intention that it may pass that of a real
person, or 33 (3) signing one‘s own name with the intention that the signature may pass
as the signature of some other person of the same name. Example: A bill is payable to
Ram Sunder or order. At maturity it wrongfully comes into the possession of another
Ram Sunder who knows that he has no claim on the bill. He puts his own signature and
the acceptor pays him. The bill is not discharged and the acceptor remains liable to Ram
Sunder who is the owner of the bill. A forged instrument has no existence in the eyes of
law. A title which never came into existence cannot be improved even if it passes into the
hands of a holder in due course. A forges B‘s signature on a promissory note and
transfers the same to C who takes it in good faith for value. C gets no title of the note
even though he is a holder in due course. Examples: (a) On a note for Rs.1000, A forges
B‘s signature to it as maker. C, a holder who takes it bonafide and for value acquires no
title to the note. (b) On a bill for Rs.1000 A‘s acceptance to the bill is forged. The bill
comes into hands of B, a bonafide holder for value, B acquires no title to the bill. Forged
endorsement The case of a forged endorsement is slightly different. If an instrument is
endorsed in full, it cannot be negotiated except by an endorsement signed by the person
to whom or to whose order the instrument is payable, for the endorsee obtains title only
through his endorsement. If an endorsement is forged, the endorsee acquires no title to
the instrument even if he is a bonafide purchaser. On the other hand, if the instrument is a
bearer instrument or has been endorsed in blank, 34 and there is a forged endorsement the
holder gets a good title because holder in such a case derives title by delivery and not by
endorsement. Bankers are specially protected against forged endorsement under section
85 of the Act. Examples: (a) A bill is endorsed, ―Pay X or order.‖ X must endorse the bill
and if his signature is forged, the bill is worthless. (b) A bill is payable to ―X or order.‖ It
is stolen from X and the thief forges X‘s endorsement and endorses it to Y who takes it in
good faith and for value. Y acquires no title to the bill. (c) A bill payable to ―A or order‖
is endorsed in blank by A. It comes into the hands of B. B by simple delivery passes it to
C. C forges B‘s endorsement and transfers it to D. As D does not derive his title through
the forged endorsement of B, but through the genuine endorsement of A, he obtains a
good title to the instrument in spite of the intervening forged endorsement. Instrument
without consideration Sections 43 to 45 of the Negotiable Instrument Act deal with the
consequences of failure or absence of consideration in negotiable instruments. In the case
of negotiable instruments consideration is presumed to exist between the parties unless
the contrary is proved. As between immediate parties, if an instrument is made, drawn or
endorsed without consideration, or for a consideration which subsequently fails, it is
void. As between immediate parties, failure of consideration has the same effect as the
absence of consideration. For instance if a promissory note is delivered by the maker to
the payee as a gift, it cannot be enforced against such maker. 35 Examples: (a) C the
holder of a bill endorses it in blank to D receiving no value. D for value transfers it by
delivery to E. E is a holder of value. (b) A is the holder of a bill for consideration. A
endorses it to B, without consideration. The property in the bill passes to B. The bill is
dishonoured at maturity. B cannot sue A on the bill. As between remote parties, the
defence of absence or failure of consideration is not available at all. The holder in due
course who has paid consideration can recover it from all prior parties immaterial of the
fact whether any of them has received consideration or not. Where there is a partial
absence or failure of consideration, as between immediate parties, only that part can be
recovered which was actually paid. However, a holder in due course is not affected by
this rule. But even between immediate parties, where the part of the consideration which
is absent or cannot be ascertained without collateral inquiry, the whole of the amount is
recoverable. Examples: (a) A owes B Rs. 500. B draws a bill on A for Rs. 1000. A to
accommodate B and at his request accepts it. If B sues A on the bill he can only recover
Rs. 500. (b) A draws a bill on B for Rs. 500 payable to the order A. B accepts the bill but
subsequently dishonours it by non-payment. A sues B on the bill. B proves that it was
accepted for value as to Rs. 400 and as an accommodation to A (the plaintiff) for Rs. 100.
A can only recover Rs. 400. But if this bill gets into the hands of a holder in due course,
he can recover the full amount of Rs. 500. 1.11 HOLDER IN DUE COURSE 36 Section
9 of the Act defines ‗holder in due course‘ as any person who (i) for valuable
consideration, (ii) becomes the possessor of a negotiable instrument payable to bearer or
the indorsee or payee thereof, (iii) before the amount mentioned in the document
becomes payable, and (iv) without having sufficient cause to believe that any defect
existed in the title of the person from whom he derives his title. (English law does not
regard payee as a holder in due course). The essential qualification of a holder in due
course may, therefore, be summed up as follows: 1. He must be a holder for valuable
consideration. Consideration must not be void or illegal, e.g. a debt due on a wagering
agreement. It may, however, be inadequate. A donee, who acquired title to the instrument
by way of gift, is not a holder in due course, since there is no consideration to the
contract. He cannot maintain any action against the debtor on the instrument. Similarly,
money due on a promissory note executed in consideration of the balance of the security
deposit for the lease of a house taken for immoral purposes cannot be recovered by a suit.
2. He must have become a holder (passessor) before the date of maturity of the negotiable
instrument. Therefore, a person who takes a bill or promissory note on the day on which
it becomes payable cannot claim rights of a holder in due course because he takes it after
it becomes payable, as the bill or note can be discharged at any time on that day. 3. He
must have become holder of the negotiable instrument in good faith. Good faith implies
that he should not have accepted the negotiable instrument after knowing about any
defect in the title to the instrument. But, notice of defect in the title received subsequent
to the acquisition of the title will not affect the rights of a holder in due course. Besides
good faith, the Indian Law also requires reasonable care on the 37 part of the holder
before he acquires title of the negotiable instrument. He should take the instrument
without any negligence on his part. Reasonable care and due caution will be the proper
test of his bona fides. It will not be enough to show that the holder acquired the
instrument honestly, if in fact, he was negligent or careless. Under conditions of
sufficient indications showing the existence of a defect in the title of the transferor, the
holder will not become a holder in due course even though he might have taken the
instrument without any suspicion or knowledge. 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. A bill should not be
taken without enquiry if suspicion has been aroused. (ii) A post-dated cheque is not
irregular. It will not preclude a bonafide purchase instrument from claiming the rights of
a holder in due course. It is to be noted that it is the notice of the defect in the title of his
immediate transferor which deprives a person from claiming the right of a holder in due
course. Notice of defect in the title of any prior party does not affect the title of the
holder. 4. A holder in due course must take the negotiable instrument complete and
regular on the face of it. 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 38 holders. A
holder in due course can recover the amount of the instrument from all previous parties
although, as a matter of fact, no consideration was paid by some of the previous parties to
instrument or there was a defect of title in the party from whom he took it. Once an
instrument passes through the hands of a holder in due course, it is purged of all defects.
It is like a current coin. Who-so-ever takes it can recover the amount from all parties
previous to such holder (Sec. 53). It is to be noted that a holder in due course can purify a
defective title but cannot create any title unless the instrument happens to be a bearer one.
Examples: (i) 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. (ii) A bill is payable to ―A or order‖. It
is stolen from A and the thief forges A‘s signatures and indorses it to B who takes it as a
holder in due course. B cannot recover the money. It is not a case of defective title but a
case where title is absolutely absent. The thief does not get any title therefore, cannot
transfer any title to it. (iii) A bill of exchange payable to bearer is stolen. The thief
delivers it to B, a holder in due course. B can recover the money of the bill. 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) 39 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 40 ―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. 1.12 DISHONOUR
OF A NEGOTIABLE INSTRUMENT When a negotiable instrument is dishonoured, the
holder must give a notice of dishonour to all the previous parties in order to make them
liable. A negotiable instrument can be dishonoured either by nonacceptance or by non-
payment. A cheque and a promissory note can only be dishonoured by non-payment but a
bill of exchange can be dishohoured either by non-acceptance or by non-payment.
Dishonour by non-acceptance (Section 91) A bill of exchange can be dishonoured by
non-acceptance in the following ways: 41 1. If a bill is presented to the drawee for
acceptance and he does not accept it within 48 hours from the time of presentment for
acceptance. When there are several drawees even if one of them makes a default in
acceptance, the bill is deemed to be dishonoured unless these several drawees are
partners. Ordinarily when there are a number of drawees all of them must accept the
same, but when the drawees are partners acceptance by one of them means acceptance by
all. 2. When the drawee is a fictitious person or if he cannot be traced after reasonable
search. 3. When the drawee is incompetent to contract, the bill is treated as dishonoured.
4. When a bill is accepted with a qualified acceptance, the holder may treat the bill of
exchange having been dishonoured. 5. When the drawee has either become insolvent or is
dead. 6. When presentment for acceptance is excused and the bill is not accepted. Where
a drawee in case of need is named in a bill or in any indorsement thereon, the bill is not
dishonoured until it has been dishonoured by such drawee. Dishonour by non-payment
(Section 92) A bill after being accepted has got to be presented for payment on the date
of its maturity. If the acceptor fails to make payment when it is due, the bill is
dishonoured by non-payment. In the case of a promissory note if the maker fails to make
payment on the due date the note is dishonoured by non-payment. A cheque is
dishonoured by non-payment as soon as a banker refuses to pay. 42 An instrument is also
dishonoured by non-payment when presentment for payment is excused and the
instrument when overdue remains unpaid (Sec 76). Effect of dishonour: When a
negotiable instrument is dishonoured either by non acceptance or by non-payment, the
other parties thereto can be charged with liability. For example if the acceptor of a bill
dishonours the bill, the holder may bring an action against the drawer and the indorsers.
There is a duty cast upon the holder towards those whom he wants to make liable to give
notice of dishonour to them. Notice of dishonour: Notice of dishonour means the actual
notification of the dishonour of the instrument by non-acceptance or by non-payment.
When a negotiable instrument is refused acceptance or payment notice of such refusal
must immediately be given to parties to whom the holder wishes to make liable. Failure
to give notice of the dishonour by the holder would discharge all parties other than the
maker or the acceptor (Sec. 93). Notice by whom: Where a negotiable instrument is
dishonoured either by non- acceptance or by non-payment, the holder of the instrument or
some party to it who is liable thereon must give a notice of dishonour to all the prior
parties whom he wants to make liable on the instrument (Section 93). The agent of any
such party may also be given notice of dishonour. A notice given by a stranger is not
valid. Each party receiving notice of dishonour must, in order to render any prior party
liable give notice of dishonour to such party within a reasonable time after he has
received it. (Sec. 95) When an instrument is deposited with an agent for presentment and
is dishonoured, he may either himself give notice to the parties liable on the instrument or
he may give notice to his principal. If he gives 43 notice to his principal, he must do so
within the same time as if he were the holder. The principal, too, in his turn has the same
time for giving notice as if the agent is an independent holder. (Sec. 96) Notice to
whom?: Notice of dishonour must be given to all parties to whom the holder seeks to
make liable. No notice need be given to a maker, acceptor or drawee, who are the
principal debtors (Section 93). Notice of dishonour may be given to an endorser. Notice
 of dishonour may be given to a duly authorised agent of the person to whom it is required
to be given. In case of the death of such a person, it may be given to his legal
representative. Where he has been declared insolvent the notice may be given to him or to
his official assignee (Section 94). Where a party entitled to a notice of dishonour is dead,
and notice is given to him in ignorance of his death, it is sufficient (Section 97). Mode of
notice: The notice of dishonour may be oral or written or partly oral and partly written. It
may be sent by post. It may be in any form but it must inform the party to whom it is
given either in express terms or by reasonable intendment that the instrument has been
dishonoured and in what way it has been dishonoured and that the person served with the
notice will be held liable thereon. What is reasonable time?: It is not possible to lay down
any hard and fast rule for determining what is reasonable time. In determining what is
reasonable time, regard shall be had to the nature of the instrument, the usual course the
dealings with respect to similar instrument, the distance between the parties and the
nature of communication between them. In calculating reasonable time, public holidays
shall be excluded (Section 105). 44 Section 106 lays down two different rules for
determining reasonable time in connection with the notice of disnonour (a) when the
holder and the party to whom notice is due carry on business or live in different places,
(b) when the parties live or carry on business in the same place. In the first case the notice
of dishonour must be dispatched by the next post or on the day next after the day of
dishonour. In the second case the notice of dishonour should reach its destination on the
day next after dishonour. Place of notice: The place of business or (in case such party has
no place of business) at the residence of the party for whom it is intended, is the place
where the notice is to given. If the person who is to give the notice does not know the
address of the person to whom the notice is to be given, he must make reasonable efforts
to find the latter‘s address. But if the party entitled to the notice cannot after due search
be found, notice of dishonour is dispensed with. Duties of the holder upon dishonour (1)
Notice of dishonour. When a promissory note, bill of exchange or cheque is dishonoured
by non-acceptance or non-payment the holder must give notice of dishonour to all the
parties to the instrument whom he seeks to make liable thereon. (Sec. 93) (2) Noting and
protesting. When a promissory note or bill of exchange has been dishonoured by non-
acceptance or non-payment, the holder may cause such dishonour to be noted by a notary
public upon the instrument or upon a paper attached thereto or partly upon each (Sec. 99).
The holder may also within a reasonable time of the dishonour of the note or bill, get the
instrument protested by notary public (Sec. 100). 45 (3) Suit for money. After the
formality of noting and protesting is gone through, the holder may bring a suit against the
parties liable for the recovery of the amount due on the instrument. Instrument acquired
after dishonour: The holder for value of a negotiable instrument as a rule, is not affected
by the defect of title in his transferor. But this rule is subject to two important exceptions

(i) when the holder acquires it after maturity and

(ii) when he acquires it with notice of dishonour.

The holder of a negotiable instrument who acquired it after dishonour, whether by non-acceptance or
non-payment, with notice thereof, or after maturity, has only, as against the other parties, the rights
thereon of his transfer. (Sec. 59).

NOTING AND PROTESTING

When a negotiable instrument is dishonoured the holder may sue his prior parties i.e the drawer and
the indorsers after he has given a notice of dishonour to them. The holder may need an authentic
evidence of the fact that a negotiable instrument has been dishonoured. When a cheque is dishonoured
general1y the bank who refuses payment returns back the cheque giving reasons in writing for the
dishonour of the cheque. Sections 99 and l00 provide convenient methods of authenticating the fact of
dishonour of a bill of exchange and a promissory note by means of ‘noting’ and ‘protest’. Noting As soon
as a bill of exchange or a promissory note is dishonoured, the holder can after giving the parties due
notice of dishonour, sue the parties liable thereon. Section 99 provides a mode of authenticating the
fact of the bill having been dishonoured. Such mode is by noting the 46 instrument. Noting is a minute
recorded by a notary public on the dishonoured instrument or on a paper attached to such instrument.
When a bill is to be noted, the bill is taken to a notary public who represents it for acceptance or
payment as the case may be and if the drawee or acceptor still refuses to accept or pay the bill, the bill is
noted as stated above. Noting should specify in the instrument,

(a) the fact of dishonour,

(b) the date of dishonour,

(c) the reason for such dishonour, if any

(d) the notary’s charges,

(e) a reference to the notary’s register and

(f) the notary’s initials.

Noting should be made by the notary within a reasonable time after dishonour. Noting and protesting is
not compulsory but foreign bills must be protested for dishonour when such protest is required by the
law of the place where they are drawn. Cheques do not require noting and protesting. Noting by itself
has no legal effect. Still it has some advantages. If noting is done within a reasonable time protest may
be drawn later on. Noting without protest is sufficient to allow a bill to be accepted for honour. Protest
Protest is a formal certificate of the notary public attesting the dishonour of the bill by non-acceptance
or by non-payment. After noting, the next step for notary is to draw a certificate of protest, which is a
formal declaration on the bill or a copy thereof. The chief advantage of protest is that the court on proof
of the protest shall presume the fact of dishonour. Besides the protest for non-acceptance and for non-
payment the holder may protest the bill for better security. When the acceptor of a bill becomes
insolvent or suspends payment before the date of maturity, or 47 when he absconds the holder may
protest it in order to obtain better security for the amount due. For this purpose the holder may employ
a notary public to make the demand on the acceptor and if refused, protest may be made. Notice of
protest may be given to prior parties. When promissory notes and bills of exchange are required to be
protested, notice of protest must be given instead of notice of dishonour. (Sec. 102) Inland bills may or
may not be protested. But foreign bills must be protested for dishonour when such protest is required
by the law of the place where they are drawn (Sec. 104).

Where a bill is required to be protested under the Act within a specified time, it is
sufficient if it is ‗noted for protest‘ within such time. The formal protest may be given at
anytime after the noting (Sec. 104A) Contents of protest Section 101 of the Act lays
down the contents of a regular and perfect protest which are as follows:

1. The instrument itself or a literal transcript of the instrument; and of everything written
or printed thereupon.

2. The name of the person for whom and against whom the instrument has been
protested.

3. The fact of and reasons for dishonour i.e. a statement that payment or acceptance or
better security, as the case may be, has been demanded of such person by the notary
public from the person concerned and he refused to give it or did not answer or that he
could not be found.

4. The time and place of demand and dishonour.

5. The signature of the notary public.

6. In the case of acceptance for honour or payment for honour the person by whom or for
whom such acceptance or payment was offered and effected.