UNIT 2

SALE OF GOODS ACT

1930.
¨ The law relating to sale of goods is contained in
sale of goods act 1930

¨ There are sixty six sections.

¨ A contract of sale of goods happens by an offer

from one party and acceptance by other, it is
consensual transaction.

¨ The parties agree to any terms they like relating

to delivery and payment of price etc.
¨ A contract whereby the seller transfers or
agrees to transfer the property in goods to the
buyer for a price.
[Link] Parties – Buyer and seller exception
Undivided joint owners, case of part owners.,
In case of execution of a decree (auction).
[Link] of property : Means ownership, actual
transfer of interest.
3. Goods : Any kind of movable property. Trade
mark copy rights, brands etc.
4. Price : Money should be exchanged , other wise
it is barter and governed by transfer of
property and not sales goods act.
5. Includes both sale and Agreement to sale:
¨ Sale : Under contract of sale the property in the goods is
immediately transferred at the time of making the contract from
the seller to buyer.
- It is referred to as true sale
- It is an executed contract
- there is immediate conveyance of ownership
¨ An Agreement to sell becomes a sale after time lapses or the
conditions are full filled subject to which property in goods is
transferred.

6. No Formalities Observed: Does not prescribe any particular form to

constitute a valid contract of [Link] can be made by mere offer and
acceptance, written or oral. Either party can make the offer.
Example
1. Transfer of property (Ownership)
- Immediate in case of sale
- No transfer at the time of contract, the conveyance of property takes place later
so that the seller continues to be owner until the agreement becomes a sale or by
the expiry of time or the fulfilment of some condition
- An agreement to sale creates a jus in personam- that is it gives right to buyer
and seller against each other for any default in full filling his part of agreement.

2. Risk Of loss The risk prima facie passes with property ,if goods were lost even
before it reached the buyer loss falls on buyer.
- In case of agreement of sale ownership is yet to pass such loss has to be borne
by the seller

3. Consequence of breach In sale: if buyer wrongfully neglects to pay the seller can
sue for the price. Even though the goods are in his possession.
- In case of agreement the seller can only sue for damages and not for price even
though the goods are in possession of buyer
¨ Right Of resale The property is with the buyer and as such the seller (in
possession of goods) after sale cannot re [Link] he does the subsequent buyer
having knowledge of the previous sale cannot aquire title to [Link] original
buyer can sue and get the goods.

- In agreement to sale the seller can dispose off the goods if he likes, but orginal
buyer can sue and get damages.

¨ Insolvency of buyer before he pays for the goods : In a sale if the buyer is
adjudged insolvent before he pays then the seller in absence of right of lien
must hand over the goods to official receiver or assignee, the seller is entitled to
only a rateable dividend for price of goods.
- In agreement to sell the seller may refuse to deliver goods.

¨ Insolvency of seller if the buyer has already paid the price : If seller is adjudged
insolvent then the bueyer is entitled to recover goods from the official assignee.

- In agreement to sale if the buyer has already paid , then the buyer can only claim a ratable
dividend and not goods because property in them still rests with the seller
¨ Both the contracts resemble very much.

¨ However legal incidents are quite different

¨ Under hire purchase goods are delivered to the hire

purchaser for use, but owner agrees to transfer the
property only when certain instalments are paid.
¨ Till such time hirer remains the bailee and instalments
are regarded as hire charges.

¨ Hire purchase agreement is no agreement to buy but

there is only bailment of goods coupled with option to
purchase them which may be exercised.
¨ Goods is transferred to buyer immediately
¨ Position of buyer is owner here it is bailee
¨ In sale buyer cannot terminate contract, hire
purchase he can terminate the contract.
¨ In sale the seller takes risk of loss resulting
from insolvency of buyer, the owner takes no
risk, he gets right to take back goods
¨ The buyer can pass a bonafide title to goods,
the hire purchaser cannot
1. Existing Goods : Goods that are in existence and which are in sellers ownership
and or possession at the time of entering the contract of sale are called existing
goods. When the seller is the owner he has general property in them. Existing
goods may again be either specific or unascertained.

a) Specific Goods : Goods identified and agreed upon at the time of making
contract of sale are called specific goods.

b) Unascertained Goods: The goods which are not separately identified or

ascertained at the time of the making of the contract are known as unascertained
goods.

2. Future Goods: Goods to be manufactured, produced or acquired by the seller

after making of the contract of sale are called future goods. They may not be in
existence but not yet aquired by the seller. There can be no present sale of future
goods.

3. Contingent Goods : Goods the acquisition of which by the seller depends upon
an uncertain contingency are called contingent goods. They are a type of
contingent goods and a contract for the sale of contingent goods also operates as
an agreement to sell and not a sale. The property to goods does not pass to buyer
at the time of making the contract.

- Contract of sale of contingent goods is enforceable only if the event on the

happening of which performance of the contract is dependent happens
 Perishing not only means physical destruction but also
damage to goods that have ceased to exist, loss of
goods by theft, where goods have been requisitioned
lawfully by govt.

1. Perishing goods at or before making of the contract:

a) In case of perishing of the whole of goods
b) In case of perishing of only part of the goods: depends
on whether contract is whole or divisible.

2. Perishing of goods before sale but after agreement to sell

¨ The money consideration for sale is known as price. The price is
an essential element in every contract of sale of goods, that is no
valid sale can take place without a price. The price should be paid
or promised to be paid in legal tender money, unless other wise
agreed.

¨ Modes of fixing price:

1. It may be expressly fixed by the contract itself.
[Link] may be fixed in an agreed manner provided by the contract.
3. It may be decided by the course of dealings between parties
4. If price cannot be decided by any of the method above the buyer
is bound to give a reasonable price
¨ Money deposited with the seller by the buyer as
security for due fulfillment of the contract .

¨ Where contract is carried through earnest money is

taken as part of payment

¨ If contract goes off the seller is entitled to forefeit the

amount.

¨ If contract goes off due to the seller’s default the buyer

can recover the money in addition to damages.
¨ Stipulation relating to time of delivery of goods- The time fixed
for delivery of goods is the essence of contract.

-If there is a delay in delivery the contract becomes voidable at the

option of the buyer, the buyer may refuse to accept and put an end
to contract.

¨ Stipulation relating to time of payment of the price – As regards

the time fixed for payment of price, time is not deemed to be the
essence of the contract. Thus even if the price is not paid as agreed
the seller cannot avoid the contract on that account.

- He has to deliver if the buyer tenders the price within reasonable

time before the re-sale
¨ Any document which is used in an ordinary
course of business as proof of possession or
control of goods, authorising or purporting to
authorise either by endorsement or delivery,
the possessor of document to transfer or
receive goods thereby is a document of title of
goods

¨ Example BL,Railway receipt etc, the right of the

transferee (even if bonafide ) will not be
superior to that of the transferor.
§ Condition and Warranties

- A contract of sale of goods contains various stipulations

regarding quality of goods, the price, mode of
payment, the delivery of goods, its time and place.

- All the terms are not equally important .

- Some of these terms may be major and go to roots of

the contract.

- Their breach may frustrate the very purpose of the

contract.
- Other terms may be minor ones which are
not vital that their breach may lead to breach of
the whole contract as such.

- The major terms are the condition

- The minor terms are the warranties

- Mere statements of commendations or praise
or expressions by the seller do not constitute
condition and warranties

- They do not from a part of contract and

hence give no right to action

- Example
¨ It is a stipulation essential to the main purpose
of a contract.

¨ The breach of this gives the aggrieved party the

right to repudiate the contract

¨ An action for damages or losses can also be

claimed.
¨ It is a stipulation collateral to the main purpose
of the contract

¨ The breach of this gives the aggrieved party the

right to sue for damages

¨ The party cannot avoid the contract

¨ Meaning and legal effects of condition and warranty is very clear ,
condition is fundamental to contract and warranty is of only
secondary importance.

¨ There are no hard and fast rule as to which is condition and which
is warranty.

¨ Whether a stipulation is a condition or a warranty in a contract of

is determined by the construction of the contract.

¨ The court is not guided by terminology but looks at intention of

parties by referring to terms, its construction and surrounding
circumstances to judge whether a stipulation is a condition or
warranty

¨ Example A man purchases a horse

¨ As to value – condition is essential to contract,
warranty is collateral to main purpose of
contract

¨ As to breach – Breach of condition give

aggrieved party the right to repudiate, the
breach of warranty give right to claim
damages.

¨ As to treatment – A breach of condition may be

treated as breach of warranty, a breach of
warranty cannot be treated as breach of
condition
¨ Voluntary waiver by buyer: Example

¨ Acceptance of goods by buyer

¨ Acceptance of only part of goods : If the
contract is indivisible acceptance of part means
acceptance of whole.i.e breach of condition will
be treated as breach of warranty.

¨ If the contract is divisible he can repudiate as

regards, the remaining goods
- When he intimates to the buyer that he has
accepted
- When he does any act in relation to goods
which is inconsistent with the ownership of the
seller – i.e consumes, uses, pledges etc.
- when after the lapse of reasonable time he
retains the goods without intimating him that
he has rejected.
¨ Condition and warranties may be expressed or implied

¨ They are said to expressed when with the will of

parties they are included in the contract.

¨ They are implied when law presumes their existence in

contract.

¨ Implied condition and warranties may be negatived or

varied by express agreement or by course of dealing
between the parties.
¨ Conditions to title: In every contract the
implied condition is that the seller ahs right to
sell.
- He has the right if owner or agent
- If the title turns out to be defective then he can
reject and recover his price.
- In some case if there is a claimant he may have
to return to original owner, treat the the breach
as breach of warrenty and claim damages
- Example
¨ Condition in sale by description :Where there is a
contract of sale of goods theris a implied condition that
goods correspond with the [Link]

¨ Condition in a sale by sample : When under contract of

sale goods are to be supplied according to a sample
agreed upon the implied conditions are:

- The bulk shall correspond with sample in quality

- The buyer shall have reasonable opportunity of
comparing the bulk with sample
- Goods shall be free from defect.
Example
¨ Condition in a sale by description: Implied condition
that the bulk of goods shall correspond with the
sample.
¨ Example
¨ Condition as to fitness for quality : No implied
condition or warranty as to quality. This is governed by
Caveat Emptor “ Buyer shall be aware” But an implied
condition appllies that the seller shall give goods which
are reasonably fit for and this applies when:
- Buyer expressly makes known to seller his requirement
- The buyer relies on sellers skill or judgement
- The goods sold must be of description which the
seller deals in ordinary course of business
example
¨ Condition to Merchantability : This is implied only
when in sale by description, not only this following
condition also needs to be satisfied:
- The seller should be dealer in goods of that
description
- The buyer must not have an opportunity to examine
or some latent flaws that was not visible.
example
¨ Condition to Wholesomeness: Implied only in eatables
and provision, must be according to description and
merchantable but also wholesome, free from defect.
¨ example
¨ Warranty of Quiet Possession
- Buyer should have quiet posession of goods
- Should not be disturbed by someone with
superior rights
- This is an extension of implied condition
Example
¨ Warranty of freedom from encumberance
- Goods shall be free from any encumberance
- If goods are found to be subject to a charge , the
buyer can claim warranty
example
¨ Warranty to disclose dangerous nature of
goods to the ignorant buyer
- The seller would warn if goods are
dangerous in nature
- If there is breach of warranty the buyer is
entitled to claim damages
Example
¨ Let buyer beware.

¨ It is duty of buyer to be careful and in absence

of an enquiry by the buyer the seller is not
bound to disclose every defect in the goods.

¨ The buyer may examine the goods and check

for its suitability

¨ The buyer should depend on his own ability

¨ Seller makes mis- representation
¨ Seller makes false representation
¨ Goods purchased on description do not correspond to
description
¨ Goods purchased are not merchantable quality
¨ Goods brought by sample caveat emptor does not
apply
¨ Brought by sample and description and bulk goods do
not correspond
¨ When buyer tells the purpose for which goods are
purchased
¨ Trade usage attaches an implied condition
¨ In a sale transfer of goods takes place from
buyer to seller

¨ It means transfer of ownership.

¨ “property in goods” in goods is different from

possession of goods.

¨ Thus property in goods may pass from buyer

to seller but the possession may remain with
the seller.
¨ Risk Prima facie passes with property: as a rule the
risk of loss of goods is to be borne by the person in whose name
property is.
¨ Action against third party: The party in whose name
property is can only take a action against the third party.
¨ Suit for price: seller can sue for the price if property in goods
has been passed to buyer.
¨ Insolvency of the seller or buyer:In case the property
in goods is in name of the person who has become insolvent than
official receiver or assignee can take no control on the goods
¨ Transfer of property in specific or ascertained
goods

¨ Transfer of property in unascertained goods or

Future Goods
¨ When there is a contract for the sale of specific
or ascertained products then transfer of
property occurs when the parties to contract
intend it to happen.

¨ The parties can pass the property

- At once at time of contract
- When goods are delivered
- When goods are paid for
¨ It is only when the intention of parties is not very clear
that the following rules have to be referrred to:

¨ When goods are in deliverable state – Property in

goods pass on as soon as sale is made and payment of
price is immaterial.
For eg: A buys a bicycle for Rs.2000 on a months credit
and ask the shopkeeper to sent to it [Link]
shopkeeper agrees to do so .the bicycle immidatly
becomes the property of A.
¨ When goods have to be put into a deliverable
state – When seller has to do something to
goods, the property does not pass as long as
such thing has been done. Merely doing
something does not result in transfer of
property the buyer should be duly notified
about it.
Case: Rugg Vs Minett
¨ When goods have to be measured etc to
ascertain price – When the seller has to weigh ,
measure or test or do something the property passes as
soon this is done by the seller.
- If the seller has already done all what is required to do
under the contract and nothing remains to be done by
him, the property passes to the buyer even if buyer has
to do something for his own satisfaction.
- For eg: A sold to B 289 bales of goat skins, each bale
containing five dozen and price was certain for per
dozen. It was the duty of A to count the goat skin in
each bales. Before A could do the same, the bales were
destroyed by [Link],the property in goods has not
passed to the buyer as something still remained to be
done by the seller for ascertaining the price, and as
such the loss caused by fire had to be borne by the
seller.(i.e. A)
¨ When goods are delivered on approval – In a
case where goods are delivered on sale or
return basis, the property passes to buyer
when:
- He signifies his acceptance
- He returns the goods within the stipulated time
frame.
- Example: A Delivered a horse to B on the terms of “
sale or return” ,within 8 [Link] horse died on the
third day without any fault on the part of B .Held
A,was to bear the loss as the horse was still his
property when it perished.
¨ When goods that are to be sold are not ascertained or when they
are future goods the property in goods does not pass as long as
they are ascertained or unconditionally appropriated and brought
to the deliverable state either by the seller with the ascent of buyer
or the buyer with the ascent of the seller, such an ascent may be
expressed or implied.

¨ Essentials of valid appropriation:

- The appropriation must be of goods matching the requirement in

the contract
- The appropriation must be intentional
- Appropriation must be made either by seller or buyer
- The appropriation must be unconditional (The seller should not
reserve himself the right of disposal of goods )
¨ An unauthorized sale by a mercantile agent :
A mercantile agent has authority to sell or raise money
using the goods as security and hence he has an
authority to sell, goods convey a good title. The
following condition must be satisfied.

- He should be in possession of goods or relevant

documents of title to the goods
- He should sell while acting in normal course of
business
- The buyer should act in good faith without having any
knowledge that agent has no authority to sell
¨ Transfer of property by estoppel:
When a person by his conduct or words leads others to
believe that certain state of affairs existed would be
estopped from denying later on that such a state of
affairs did not exist. Estoppel may arise when:

- The owner is standing when sale takes place

- Assists the sale
- Permits the goods to go into possession of other
- Made representations so as to induce buyer

Example
¨ Sale by person in possession under voidable contract
When seller has obtained possession of goods under a voidable
contract before contract has rescinded, the buyer if he was
unaware of the defect to title acquires a good title to goods.
For eg: A,by misrepresentation induces B to sell and deliver to him a
cow .A sells the cow to c before B has rescinded the contract.C
purchases the cow in good faith and without notice of the seller’s
defective title.
¨ Sale by joint owner
If one of several joint owners has sole possession by permission of
joint owners then the property in the goods is transferred to any
person who buys from joint owner in good faith, without
knowledge of the fact that seller has no authority to sell. The
buyer would have obtained the title of co owner
Thus establishing no one can give what he has not got.
For eg: A,B and C are three brothers. They own a cow in common .B
and C entrust the work of looking after the cowin A ‘s
possession .A sells the cow to D .D purchases bonafide for
value .D gets a good title.
¨ Sale by seller in possession after sale
- A seller in possession after sale again sells
conveys a good title provided the buyer acts in
good faith without being aware of the defect in
the title.
¨ Sale by buyer in possession after agreement to
buy
-A buyer in possession from an agreement to
buy contract pledges or resells the buyers gets
a good title provided he received the goods in
good faith without being aware of any lien or
rights of the original seller.
¨ Resale by an unpaid seller
When an unpaid seller who has exercised his right of
lien or stoppage in transit resells the goods , the
subsequent buyer get a good title, even though resale
may not be justified in the circumstances that original
buyer was not notified.

¨ Exceptions under other acts

Examples of such situation are finder of lost goods,

pawnee , official receiver or assignee.
¨ It is the duty of the seller to deliver the goods and the
buyer to accept the good and pay for them according to
the terms of the contract of sale.

¨ Thus performance simply implies:

- Delivery of goods by seller
- Acceptance of goods by buyer
- Payment of price by the buyer
- The parties are free to choose terms of contract like
place of delivery, mode of payment, manner of delivery
etc.
¨ Delivery means voluntary transfer of
possession of goods from one person to
another, if it is under coercion then it is not
delivery
¨ Actual Delivery
Physical possession of goods is given to buyer.
Example
¨ Symbolic Delivery
Goods remain where they are but means of
obtaining them are given Example : Key of
godown etc.
¨ Constructive delivery or deliver by attornment

Such deliver occurs when person in possession

of goods of the seller acknowledges in
accordance with the seller’s order , that he
holds the goods on behalf of the buyer and the
buyer has assented to it.
¨ Delivery may be actual, symbolic or v
constructive
¨ Delivery and payment are concurrent condition
¨ Effect of part delivery, when property in goods
is to pass on delivery
¨ Buyer to apply for delivery
¨ Time of delivery
¨ Place of Delivery
¨ Delivery of goods when they are in possession
of third party
¨ Expense of Delivery
¨ Delivery of wrong quantity or different quality
¨ Instalment deliveries
¨ Delivery to carrier or wharfinger
¨ Liability of buyer for neglecting or refusing to
take delivery of goods
¨ When he intimates the seller that he has
accepted

¨ When he does any act in relation to goods

which is inconsistent with ownership of the
seller example consumes, pledges, resells etc.
ú Rights of an Unpaid Seller

ú Buyers right against Seller

¨ Unpaid seller
The seller of goods is deemed to be unpaid
under two circumstances when:
A) When whole price is not paid
B) Where a bill of exchange or other negotiable
exchange has been received as condition of
payment and dishonoured
¨ Seller includes any person ho is in the position
of a seller, an agent in whose name B/L IS
endorsed or consignee or agent is also a seller

¨ The definition emphasises following

characteristics of the seller

- He must sell goods on cash terms, must be

unpaid
- He must be unpaid either wholly or partially
- He must not refuse payment when tendered
¨ Right of unpaid seller against goods

¨ Rights of unpaid seller against the buyer

personally
¨ An unpaid seller has following rights against
the goods

¨ Right of Lein

¨ Right of stoppage of goods in transit

¨ Right of resale
¨ Lein is the right to retain of possession of goods
and refuse to deliver until the price in due
respect of them is paid or tendered.

¨ An unpaid seller in possession of good is

entitled to exercise his lein in following cases
¡ When the goods have been sold without any
stipulation to credit
¡ When goods have been sold on credit but the term of
credit has expired
¡ When buyer becomes insolvent even though period
of credit may not have yet expired
¨ The unpaid sellers lein is a possessionary lein i.e it can be
exercised as long as seller remains in possession of the goods.

¨ He may exercise his right of lein notwithstanding that he is in

possession of the goods as agent or bailee for the buyer.

¨ Transfer of goods or transfer of document of title to the goods does

not affect his right to exercise his right if possession of goods is
with the seller

¨ Sellers lein when property has not passed is called a rigght of

withholding delivery
¨ When is lein lost:

¡ When he delivers the goods to a carrier or bailee

¡ When buyer or his agent gains possession lawfully
¡ When the seller expressly or impliedly waives his
right of lein, when fresh term of credit is given ,
accepts a b/e at a future date etc.
¨ Right of stopping further movement of goods when they are with
the carrier for the purpose of transmission to the buyer and
retaining possession until payment is received.

¨ When can one exercise this?

- When buyer becomes insolvent
- When the property has not passed to the buyer
- When the goods are in course of transit- when goods are with
transit agent.

¨ The right of stoppage can be exercised only as long as goods are in

transit, once this ends then the right to stoppage cannot be
exercised
¨ Duration of Transit: The transit is deemed to end in
following cases:
- When The buyer or his agent takes delivery
- When buyer or his agent take delivery before it
arrives at appointed destination
- When goods have arrived at destination and carrier
acknowledges to buyer of its arrival
- When goods have arrived and buyer requests the c
carrier to keep it for some more time
- When carrier wrongfully refuses to deliver to deliver
the goods to buyer
- When part delivery of goods have been made with
intention to deliver the rest
¨ How to exercise stoppage of goods:
¨ - By taking actual possession
¨ By giving notice of his claim to the carrier or
other bailee

¨ Lein and stoppage in transit distinguished

Lein Stoppage in transit

Lein attaches when buyer is Only when buyer is insolvent

at default, solvent or
insolvent
When goods are in actual When goods are in custody
possession of independent agent
Comes to end once seller Commences after seller has
hands over to carrier delivered to carrier
Consists retaining Regaining possession
possession
¨ This is a very valuable right, without this the
right the unpaid sellers other rights like right of
lein and stoppage in transit has no meaning.
¨ The lae gives right to an unpaid seller to resell
in case :
- goods are perishable in nature
- when such right ispressedly mentioned in
contract
- when seller has given a notice to buyer of his
intention
¨ Suit for price: Where property in goods has passed to the buyer or
where a sale price is to be payable on a certain date,althought the
property in goods has not passed, and the buyer wrongfully
neglect or refuse to pay the price acc to terms of the contract, the
seller is entitled to sue the buyer for the price irrespective of
delivery of goods.
¨ Suit for damages for non acceptance: Where buyer wrongfully
neglects or refuse to accept the pay for the goods,the seller may
sue him for damage for non acceptance .The damage would be
decided under section 73.
¨ Suit for special damages and interest: seller can sue the buyer for
special damage ,means the loss which is known to the parties at
the time contract ,which is likely to result in case of breach of [Link]
also get interest at a reasonable rate on the total unpaid price of
the goods sold, from the time it was due until it is actually paid.
¨ Suit for damages for non delivery

¨ Suit for specific performance

¨ Suit for damages of breach of warranty

¨ Suit for rescission of contract for damages for

breach of condition

¨ Suit for recovery of price together with interest

GAURI DHINGRA
¨ Means a written document which can be
transferred to another party as a form of
payment.
¨ A negotiable instrument is a document
guaranteeing the payment of a specific amount
of money, either on demand, or at a set time.
¨ According to the Negotiable Instruments Act,
1881 in India there are just three types of
negotiable instruments i.e., promissory note,
bill of exchange and cheque.
¨ Sec. 23. When Instrument Payable To Order:
payable to the order of a specified person or to him or his
order.

Instruments to order, customarily read "Pay to the order

of John Brown" or "Pay to John Brown, or order."

"It may be drawn payable to the order of:

¨ A payee who is not maker
¨ The drawer or maker; or
¨ The drawee; or
¨ Two or more payees, jointly; or
¨ One or some of several payees; or
¨ The holder of an office for the time being.
¨ The instrument is payable to bearer:
1. When it is expressed to be so payable; or
2. When it is payable to a person named therein or
bearer; or
[Link] the only or last endorsement is an
endorsement In blank.
For Eg.: a cheque is payable to A.A endorse it
merely by putting his signature on the back
and delivers to B with the intention of
negotiating it .In the hand of B cheque is A
Bearer instrument.
v Easy negotiability : It must be transferable.
v Transferee can sue in his own name without
giving notice to the debtor:
v Better title to a bona fide transferee for value:
v Presumptions
a} Every instrument was made for some consideration
b} Was made on such date
c} Was accepted within reasonable time after its date
and before its maturity
d} Transfer was made before maturity
e} Endorsement were made in order in which they
appear
F}The negotiable instrument is duly stamped
G} The holder of instrument is holder in due course.
¨ It is an instrument in writing containing an
unconditional undertaking signed by the
maker to pay a certain sum of money only to or
to the order of a certain person, or to the bearer
of the instrument.
¨ In case of promissory note negotiability is
restricted.
¨ It must be in writing:
Ø An oral promise to pay does not become
promissory note.
Ø It must state a clear undertaking to pay ,not
necessity of word promise.
Ø Eg: A signs the instrument in following manner:
Ø “ I promise to pay B”
Ø “ I acknowledge myself to be indebted to B in Rs.
1000 to be paid on demand for value received.”
¨ It must contain a promise or undertaking to
pay,
¨ a mere acknowledgement of indebtedness is
not a promissory note until it states a promise
to pay.
Illustration: I am liable to pay to B rs.500.
¨ To be a valid promissory note:

Illustration: I acknowledge myself to be indebted

to B for Rs 500 ,to be paid on demand, for value
received”
¨ Promise to pay must be unconditional:
Ø The promise to pay depend upon the
happening of uncertain event is invalid:
Eg: I promise to pay B rs.500 seven days after my
marriage with C.
Ø If happening of an event is certain but time is
not certain than it’s a valid promissory note.
Eg: I promise to pay B rs.500 seven days after C’s
death.
¨ It must be signed by maker:
Ø signature may be at any part of the instrument
may not be necessarily at the bottom.
Ø If a maker is illiterate-thumb mark is sufficient.
¨ The maker must be certain person:
Ø It must indicate with certainty the person who
is the maker:
Eg; I,Alok Kumar promise to pay.
Ø In case a person signs in a assumed name, he is
liable as a maker because a maker is taken as
certain identity,
Eg: Satish chandra is a good note against Alok
Kumar only.
¨ The payee must be certain
¨ Payee must be certain on the face of the
instrument.
¨ A note is valid even if the payee is misnamed
or indicated by his official designation
provided he can be ascertained by evidence.
¨ The sum payable must be certain
Ø The amount payable capable of contingent
additional or subtraction is invalid promisory
note.
Eg: I promise to pay B rs.500 and all other sums
which shall be due to him.
Ø to be valid the amount to be paid must be
certain.
¨ The amount payable must be in legal tender
money of India
Ø A document containing a promise to pay a
certain amount of foreign money or to deliver a
certain quantity of goods is not a promissory
note.
Eg: A say “ I promise to pay B rs.500 and to
deliver him my black horse on next 1st jan” is
not a valid promissory note.
¨ Other formalities
Ø must be properly stamped as required by the
Indian stamp act.
Ø An unstamped or inadequately stamped
promissory note is invalid.
¨ A bill of exchange is an instrument in writing
containing an unconditional order, signed by
maker, directing a certain person to pay a certain
sum of money only to or to the order of, certain
person or to the bearer of the instrument

v The three parties in Bills of exchange are

v Drawer The person who makes it

v Drawee The person who is directed to pay
v Payee The person to whom the payment is made
v Must be in writing
v Must contain an order to pay
v Must be unconditional
v Must be signed by drawer
v The drawer,drawee,payee must be certain
v Sum payable must be certain
v Must contain an order to pay money only
v Must comply with formalities
Bases Promissory Note Bills of Exchange

No of parties 2 parties-maker 3 parties-drawer,

and the payee drawee and the
payee.
The maker of a The maker cannot The drawer and
note cannot be the be the payee payee may be
payee because promisor same person
and promisee where a bill is
cannot be same drawn “Pay to
person. Me”
Promise and order There is a promise There is a order to
to make the make the payment.
payment
Bases Promissory Note Bills of Exchange
Acceptance It requires no It must be accepted
acceptance as it is be accepted by
signed by the drawee before it is
person who is presented for the
liable to pay. payment.
Nature of liability The liability of the The liability of
maker is primary. drawer arises only
when acceptor or
drawee does not
honor the bill.
Bases Promissory Note Bills of Exchange
Makers position There is There is
immediate relation immediate relation
between drawer between drawer
and payee. and drawee but
not between
drawer and payee.
¨ A cheque is a document/instrument (usually a
piece of paper ) that orders a payment of
money.
¨ Drawer, the person or entity who makes the
cheque .
¨ Payee, the recipient of the money .
¨ Drawee, the bank or other financial institution
where the cheque can be presented for
payment
¨ Wherever Reserve Bank of India has its office
the clearing house is managed by it.
¨ Reserve Bank of India manages 14 clearing
houses at Ahmedabad, Bangalore,
Bhubaneshwar, Mumbai, Calcutta, Chennai,
Guwahati, Hyderabad, Jaipur, Kanpur, Nagpur,
New Delhi, Patna and Thiruvananthapuram.
¨ In the absence of an office of the Reserve Bank,
the clearing house is managed by the State
Bank of India, its associate banks and in a few
cases by public sector banks.
¨ MICR- Magnetic Ink character recognition
¨ 9 digit no.

¨ First 3 digits no. – City code of bank

¨ Next 3 digit no.- Bank code

¨ Next 3 digits – branch code .

Next 6 digits – Account no. maintained by RBI

Last 2 digits- Current or saving account.
IFSC code-INDIAN FINANCIAL SYSTEM CODE
11 digits- first 4 characters bank remaining
branch.
Drawn on banker Drawn on any other person
Payable on demand On demand or after expiry of
certain period
Payable to bearer on demand Payable to bearer on demand
valid absolutely void
Not require acceptance by the Requires acceptance by the
drawee before payment is drawee
demanded.
No need to be stamped Must be stamped
No grace period allowed as it Three days of grace period
is payable on demand allowed while calculating
maturity date in case of time
bills
Cheques Bills of Exchange

Drawer not discharged Drawer is discharged

by the delay of the from liability if not duly
holder in presenting for presented for payment
payment
¨ CROSSING OF CHEQUES Cheques can be of
two types:-
¨ 1. Open or an uncrossed cheque
¨ 2. Crossed cheque
¨ Open Cheque
An open cheque is a cheque which is payable at
the counter of the drawee bank on presentation
of the cheque.
¨ A crossed cheque is a cheque which is payable
only through a collecting banker and not
directly at the counter of the bank.
¨ Crossing ensures security to the holder of the
cheque as only the collecting banker credits the
proceeds to the account of the payee of the
cheque.
¨ When two parallel transverse lines, with or
without any words, are drawn generally, on the
left hand top corner of the cheque.
Types of Crossing
¨ General Crossing

¨ Special Crossing

¨ Account Payee or Restrictive Crossing

¨ ‘ Not Negotiable ‘ Crossing

¨ Where a cheque bears across its face an addition of the
words “and company” or any abbreviation thereof,
between two parallel transverse lines, or of two parallel
transverse lines simply, either with or without the
words “not negotiable”, that addition shall be deemed
a crossing, and the cheque shall be deemed to be
crossed generally.

¨ In general crossing ,the banker on whom it is drawn

shall not pay it otherwise than to a banker.

¨ The holder may get it collected through some

bank .collecting bank can be of his choice.
¨ Where a cheque bears across its face an addition of
the name of a banker, either with or without the
words “not negotiable”, that addition shall be
deemed a crossing, and the cheque shall be deemed
to be crossed specially, and to be crossed to that
banker. [section 124]
¨ Where a cheque is specially crossed ,the bank on
whom it is drawn is supposed to honor only when it
is presented by the banker mentioned on it or agent
of such bank.
¨ This crossing can be made in both general and
special crossing by adding the words Account
Payee.
¨ in this type of crossing the collecting banker is
supposed to credit the amount of the cheque to
the account of the payee only.
¨ The words 'Not Negotiable' can be added to General as
well as Special crossing and a crossing with these
words is known as Not Negotiable crossing.

¨ The effect of such a crossing is that it removes the most

important characteristic of a negotiable instrument i.e.
the transferee of such a crossed cheque cannot get a
better title than that of the transferor ( cannot become a
holder in due course ) and cannot covey a better title to
his own transferee, though the instrument remains
transferable.
¨ A cheque is said to be dishonoured when
drawee makes a default in payment.
¨ The provisions for dishonour of a cheque is
contained under section 138 to 147.:
¨ a drawer of a dishonoured cheque shall be
deemed to have commited offence
v Holder : Any person entitled to the possession
of the instrument in his own name and to
receive or recover the amount due thereon
from the parties liable thereto. Thus in order to
be called holder a person must satisfy the
following condition:

v 1. He must be entitled to the posession of the

instrument in his own name
v 2. He must be entitled to receive or recover the
amount due thereon from the parties liable
thereto.
¨ Principal whose name appear on an instrument.
¨ where a instrument is a bearer
instrument ,whosoever holding it is a holder.
¨ where a instrument is in name of a partner of a
firm, it becomes a holder as it is not a separate
entity from partner.
¨ If a holder of negotiable instrument is dead,the
heir of deceased holder becomes holder.
¨ A person on whose behalf a instrument is
endorsed in blank ,he is the holder of an
instrument though his name does not appear on
the instrument.
v Any person who for consideration becomes the
possessor of instrument if payable to bearer or the
payee or indorsee thereof if payable to order before the
amount mentioned in it beacame payble.

v He must be holder in due course.

v He must be a holder for valuable consideration.
v He must become a holder of the instrument before the
date of maturity.
v He became owner without being aware that any defect
existed in the title of the person from whom he
received it.
¨ He gets a better title than that of a transferor.
¨ Privileges in case of inchoate stamped
instrument.
¨ Privileges in case of fictitious bills.
¨ Privileges when an instrument delivered
conditionally is negotiated.
¨
¨ Negotiating by mere delivery
¨ Negotiating by endorsement and delivery
¨ Blank endorsement
¨ Endorsement in full or specific endorsement
¨ Partial endorsement
¨ Restrictive endorsement
¨ Conditional endorsement
¨ Sans recourse endorsement
¨ facultative endorsement