UNIT - I

MERCANTILE AND COMMERCIAL

LAW

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What is a contract?

Contract: An agreement enforceable

by law (sec 2 (b))
 Agreement: Every promise and every
set of promises forming consideration
for each other (sec 2 (e))
 Promise: When the person to whom
the proposal is made signifies his
ascent thereto, the proposal is said to
be accepted. A proposal when accepted
becomes a promise.

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 Example: A agrees to sell his car to
B for Rs. 50,000. The agreement
gives rise to a legal obligation on
the part of A to deliver the car to B.
On the part of B to pay Rs. 50,000
to A. The agreement is a contract.

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Essential elements of a valid
contract

1. Agreement-[Offer and Acceptance]

2. Intention to create Legal
Relationship: An agreement of a purely
social or domestic nature is not a
contract.
3. Free and genuine consent: The
consent of the parties should not be
obtained by misrepresentation, fraud,
undue influence, Coercion or mistake. If
the consent is obtained by any of these
flaws, then contract is not valid.

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4. Parties competent to contract:- Every
person is competent to contract if he is
(i) of the age of majority (ii) is of sound
mind and (iii) is not disqualified from
contracting by any law to which he is
subject.
5. Lawful consideration: - Each party of
an agreement must give or promise
something and receive something or a
promise in return.

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6. Lawful object: The object of the
agreement must be lawful and not one
which the law disapproves.
7. Agreement not declared illegal or
void: There are certain agreements which
have been expressly declared illegal or
void by the law. In such cases, even if the
agreement possesses all the elements of
a valid agreement, the agreement will not
be enforceable by law.

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8. Certainty of meaning: - The meaning
of the agreement must be certain or must
be capable of being made certain.
9. Possibility of performance: - The
terms of the agreement should be capable
of performance.
10. Necessary Legal formalities: - A
contract may be in oral or in writing.

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Classification of contracts

[Link] According to
Validity or Enforceability
To constitute a valid contract it
should have all the essential
elements discussed earlier. If one or
more of these elements is / are
missing the contract is voidable,
void, illegal or unenforceable.

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[Link] According to Mode
of Formation
 Express-The terms of a contract may
be stated in words (written or spoken)
 Implied-Terms of a contract may be
inferred from the conduct of parties or
from the circumstances of the case –
Taking a seat in a Public Transport Bus.

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[Link] According to
Performance
 Executed – Wholly performed.
 Executory – Wholly unperformed or partly
performed.
 Unilateral: - At the time when the contract is
concluded, if there is an obligation to be
performed only by one party then it is called as
unilateral.
 Bilateral: - There is an obligation on the part
of both to do or to refrain from doing a
particular thing. Similar to executory contracts

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Formation of A Contract

 Offer and Acceptance(sec2-9)

 Consideration(sec2(d),23-25,185)
 Competency to contract (sec.10-12)
 Free consent (sec.15-18)
 Lawful object(sec.23-24)

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Offer and Acceptance
Offer:
“when one person signifies to another
his willingness to do abstain from doing
anything with a view to obtaining the
assent of that to such act ,he is said to
make a proposal”
Offer may be: Express Offer or Implied
Offer
Type of offer: Specific offer and General
offer
Essentials and legal rules for a Valid
offer

1. The offer must be communicated to the

other party
2. The Terms of the offer must be Definite
and clear
3. The offer must be capable of crating
legal relationship
4. The offer must be made with view to
obtain Acceptance
5. An offer may be Positive or negative
Acceptance:
“When one person to whom the
proposal is made signifies his assent
thereto, the proposal is said to be
acccepted. A proposal, when
accepted become a promise”
Essentials and legal rules for a Vaild
Acceptance

1. Acceptance must be absolute and

unqualified
2. Acceptance must be communicated
to the offeror
3. The acceptance must be in the
Prescribed manner
4. The Acceptance must be by the
offer
Consideration

Section 2(d) defines

consideration as:”When at the
desire of the promisor, the promise
or any other person has done or
abstained from doing, or promise to
do or to abstain from doing,
something, such act or abstinence
or promise is called a consideration
for the promise”.

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Competency to Contract

Every person is competent to

contract who is of the age of
majority according to the law to
which he is subject, and who is of
sound mind, and is not disqualified
from contracting by any law to
which he is subject.

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Free Consent
Consent- the subject matter and object
of negotiation should be the same.
Free consent- A concent is said to be
free when it is not caused by:
 Fraud
 Undue influence
 Misrepresentation
 Mistake

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Discharge of contract
A contract may be discharged:
1. by performance
2. by mutual agreement or
consent.
3. by impossibility.
4. by lapse of time.
5. by operation of law.
6. by breach of contract.

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Remedies for Breach of Contract

The following remedies according to

the law:
 1. Rescission of the contract
 2. Suit for damages
 ordinary damages
 special damages
 exemplary damages
 Nominal damages
 Damages for loss of reputation

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 3. Suit upon quantum meruit “as
much as earned”.
 4. Suit for specific performance of the
contract
 5. Suit for injunction

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Quasi Contract
Sometimes obligations are
created by law whereby an
obligation is imposed on a party and
an action is allowed to be brought
by another party. These obligations
are known as Quasi-contracts.
Eg:A supplied B, a minor and / or
the wife and children of B with necessaries
suitable to his / their condition of life. A is
entitled to be reimbursed from B’s property

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Kinds of Quasi Contract

1. Supply of necessaries
2. Payment by an interested
person
3. Obligation to pay for non-
gratuitous acts
4. Responsibility of Finder of Lost
goods
5. Mistake

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Agency
Person employed to do any act for
another or to represent another in dealings
with third person.
Example.
A approves B a broker to sell his car on
his behalf then
 A = Principal B = Agent

 Relationship between A and B is Agency

 Act of an agent is the act of the principal

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Nature of agency
Who can employ an Agent?
 A major

 Partnership firms

 Any person of a sound mind

 Company, an Artificial person

 Who may be an Agent?

 Person who is capable of contracting

 (If the agent happens to be a person incapable of

contracting, then the principal cannot hold the
agent liable, in case he misconducts or has been
negligent in performance of his duties)

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 Agent & Servant: - Agent is not a
servant – servant may be an agent
– Agent may work for several
principals at the same time.

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Classification of Agent:
Agents are classified as:
1. Commercial Agent (or) Mercantile Agent
2. Non-Commercial Agent (or) Non-Mercantile Agent
[Link] or Commercial Agent
1. Broke
2. Factor
3. Commission Agent
4. Auctioneer
5. Banker
[Link] Commercial Agent:-
[Link]

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Subagent and substituted Agent
General rule is that an agent cannot appoint an agent.
However an agent may appoint an agent in the following
circumstances.
(1) Where expressly permitted by the principal
(2) Where the ordinary custom of trade permits delegation
Sub Agent-: Person employed by and acting under the
control of the original agent in the business of the
agency.
substituted Agent: Where an agent appoints or names
other person for being appointed as an agent in his
person, such person is called a substituted agent.

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How the agency is created?
Agency can be created in the following ways as
mentioned below:
Creation of an Agency
1) By an express agreement
2) By Implication
3) By ratification.
Consideration is not essential to create an agency
1-Express Agency
The authority of an agent may be expressed by the
following forms:
1. Word of Mouth (Oral)
2. By writing-usual form of written of agency – Power of Attorney on
stamped paper.

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2-Implied Agency
Implied agency is possible by the below
said method:
From conduct, situation or relationship
of parties.
  a) Agency by Estoppels.
b) Agency by holding out
c) Agency of Necessity

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3. Agency by ratification-
When an agent does an act for
his principal but without knowledge or
authority or while he exceeds the given
authority, the principal is not held bound by
the transaction. The Principal if he so
desires can ratify the act of the agent.
Agency in such a case comes into existence
from the moment the agent first acted.

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Requisites of valid ratification
1. Agent must contract as agent
2. Principal must have been in existence at
the time the agent originally acted
3. Ratification must be done within a
reasonable time
4. The act to be ratified must be a lawful one
5. Principal should have full knowledge of
facts

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Rights and duties of principal,
agents and third party
A-Rights of an agent
1. Right to receive reasonable remuneration
2. Right to retain moneys of the principal towards advances made
3. Right of lien to retain properties of the principal for the amount
due to himself.
B. Principal’s duties to agent
1. To indemnify the agent against the consequences of all lawful acts
done by such agent .
2. The principal is not liable for acts which are criminal in nature
though done by the agent at the instance of the principal.
4. The principal must make compensation to his agent in respect of
injury caused to such agent by the principal’s neglect

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C-Duties of agent
1. To conduct the business of agency to the principle’s
directions and not to deviate even for the benefit of
the principal
2. To conduct the business with the diligence and skill
generally possessed by persons engaged in similar
business
3. To render proper accounts
4. In case of difficulty to communicate with the principal
5. Not to make any secret profits
6. Not to deal on his own account
7. Not entitled to remuneration for business misconduct

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A-Liability of principal to third persons
1. Liable for the acts of the agents falling within actual
authority, afferent or ostensible authority.
2. Principal will be liable even for misrepresentatives
made or frauds constituted, by an agent for his
benefits.
B-Personal liability of an agent
1. Where acting for a foreign principal
2. Where acting for a principal whose name he does not
disclose
3. Where the principal cannot be sued e.g. minor
4. Where he acts without authority or exceeds authority

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Termination of agency

Termination of agency may be in any of

the following ways,

I. By the act of the parties,

II. By the operation of law.

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I. Termination of agency by the act
of parties.

1. Agreement

2. Revocation by the Principal

3. Renunciation by the Agent

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II. Termination of Agency by
Operation of Law

1. Completion of agency business,

2. Expiry of time

3. Death of either party

4. Insanity of either party

5. Insolvency of the principal

6. Destruction of the subject- matter

7. Principal or agent become alien enemy

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The Sale of Goods Act 1930

A contract of 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.

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Sale:
A contract of sale of goods is a contract
whereby the seller transfer or agrees to transfer
the property in goods to the buyer for a price.
[Link] must be at least 2 parties
2. Transfer or agreement to transfer the
ownership of goods should take place
3. Subject matter: Goods
4. Consideration: Price
5. May be absolute or conditional
6. All other essentials of a valid contract must
be present

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Transfer of title and risk of loss
A document of title to goods is one,
which enables its possessor to deal with the
goods described in it as if he were the owner;
it is used in the ordinary course of business as
proof of the possession or control of goods.
Conditions to be fulfilled by a document of
title of goods:
It must be used in the ordinary course of
business
The undertaking to deliver the goods to the
possessor of the document must be
unconditional.

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Document of title of Goods
The goods can be called as
goods based on the below said form
of titles:
 1. Bill of lading
 2. Dock warrant.
 3. Warehouse keeper’s
certificate/Harbinger’s certificate
 5. Railway or lorry receipt
 6. Warrant/Order for the delivery of
goods

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Transfer of property
Transfer of property in goods from the
seller to the buyer is the main object of a contract
of sale. The term property in goods must be
distinguished from possession of goods. Property
in goods means the ownership of goods, whereas
possession of goods refers to the custody or
control of goods.
i) Risk follows ownership
ii) Action against third parties
iii) Insolvency of the seller or the
buyer
iv) Suit for price

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Passing of Property
The primary rules for ascertaining, when the
property in goods passes to the buyer is as
follows;
i) Goods must be ascertained- When there is
a contract for the sale of unascertained goods, no
property in the goods is transferred to the buyer
unless and until the goods are ascertained.
ii) Intention of the parties- Where there is a
contract for the sale of specific or ascertained
goods, the property in them passes to the buyer
at the time when the parties intend it to pass.

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Transfer of property based on the
classification of goods

1. Existing – a) Specific and

ascertained –The rules relating to
transfer of property in specific
goods are as follows:
i) Passing of property at the time
of contract-
ii) Passing of property delayed
beyond the date of the contract-

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 2. Generic and unascertained-
When there is a contract for the
sale of unascertained goods, the
property in the goods does not
pass to the buyer until the goods
are ascertained. Until goods are
ascertained there is merely an
agreement to sell.
 Future Goods
 Contingent Goods

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Conditions and Warranties in
sales contract

Condition: A condition is a
stipulation which is essential to the
main purpose of the contract. It goes
to the root of the contract.
Warranty: A warranty is a
stipulation which is collateral to the
main purpose of the contract. It is
not of such vital importance as a
condition.

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 Difference between a condition
and warranty

SL.
CONDITION WARRANTY
NO.
1 A breach of condition gives the A breach of warranty gives only the
aggrieved party a right to sue for right to sue for damages. The
damages as well as the right to contract cannot be repudiated
repudiate the contract

2 A breach of condition may be treated A breach of warranty cannot be

as a breach of warranty in certain treated as a breach of condition
circumstances

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Express and implied conditions
and warranties

Express condition: If the terms

of contract expressly provide for
them.
Implied conditions
 1. Condition as to title-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 price paid.

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2. Sale by description –A ship was contracted to be
sold as a “copper fastened vessel” to be taken with all
faults, without any allowance for any defects
whatsoever. The ship turned out to be “partially
copper-fastened”.
Held: The buyer was entitled to reject
[Link] as to fitness or quality
4. Goods to be of merchantable quality
5. Condition implied by custom or trade
6. In case of sale by sample

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Implied warranties
The implied warranties in a
contract of sale are as follows:
 1. Warranty of quiet possession-
 2. Warranty of freedom from

encumbrances-

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Performance of sales
contracts
Performance of a contract of
sale means as regards the seller,
deliver the goods to the buyer, and
as regards the buyer, acceptance of
the delivery of the goods and
payment for them, in accordance
with the terms of the contracts of
sale.

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Mode of Delivery
Delivery means voluntary transfer of
possession of goods from one
person to another.
Delivery of the goods may be
[Link] Delivery,
[Link] Delivery,
[Link] Delivery.

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2 Rules as to delivery of goods
a) Mode of delivery
b) Delivery and payment
c) Effect of part delivery
d) Buyer to apply for delivery
e) Place of delivery
f) Time of delivery
g) Goods in possession of a third
party

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3 Acceptance of delivery
Receipt of goods by the buyer
does not necessarily result in
acceptance of goods by him under
and in performance of the contract
of sale.

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Rights and duties of the Buyer
Rights of the buyer- are as follows-
 a) Right to have delivery as per contract

 b) Right to reject the goods

 c) Right to repudiate

 e) Right to examine

Duties of the buyer

 a) Duty to accept the goods and pay for them in
exchange for possession
 b) Duty to apply for delivery

 c) Duty to demand delivery at a reasonable time

 d) Duty to accept installment delivery and pay for it

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Rights and duties of a Seller
Rights of a seller - are as follows-
 a) Right to claim compensation

 b) Right to sue for price

 c) Right to sue for damages

 e) Right to interest by way of damages

Duties of the buyer

 a) Duty to deliver the goods

 b) Duty to deliver the goods at the agreed place

 c) Duty to send the goods within specified time

 d) Duty to sent the goods at reasonable hour

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Unpaid seller

A seller of goods is deemed to be

an unpaid seller when:
 1. The whole of the price has not been
paid or tendered
 2. A bill of exchange or other
negotiable instrument

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Rights of an unpaid seller

Against goods
1. Right to lien
2. Right of stoppage in transit
3. Right of resale
Against the buyer personally
[Link] for price
2. Suit for damages
3. Repudiation of contract
4. suit for interest

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Remedies for breach of contract
of sale

1. Buyer suits:
 a) Suit for damages for non-delivery of
the goods
 b) Suit for breach of warranty
 c) Suit for damages for repudiation of
contract by the seller before due date
 d) Suit for specific performance
 e) Suit for interest

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2. Seller’s suits
 a) Suit for price
 b) Suit for damages for non-acceptance
of the goods
 c) Suit for damages for repudiation of
contract by the buyer before due date
 d) Suit for interest

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Doctrine of ‘caveat emptor’

Let the Buyer Beware

It is not part of the seller’s duty
to point out defects of his own
goods.
The buyer must inspect the
goods to find out if they will suit his
purpose.

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Negotiable Instruments Act 1881

A “Negotiable instrument” means

a promissory note, bill of exchange
or cheque payable either to order to
bearer (Section 13)

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Features of Negotiable
instruments

(1) Freely transferable

(2) Holder’s title free from defect
(3) The holder can sue in his own
name
(4) Can be transferred any number of
times (Infinity) till its maturity.
(5) It is subject to certain
presumptions

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Presumptions / Requisites :-
(section 118 & 119)
 1. As to consideration
 2. As to date
 3. As to acceptance
 4. As to transfer.
 5. As to the order of endorsement
 6. As to lost instruments

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Kinds of Negotiable instruments

[Link] Note
[Link] of exchange
[Link]
[Link] draft

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Promissory note

An instrument in writing (not

being a bank note of a currency note)
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.
 Example (a) I promise to pay “B” or
order Rs. 500

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Essential Characteristics of a
Promissory Note

(1) Should be in writing

(2) Promise to pay
(3) Unconditional
(4) Signed by the maker
(5) Certain parties
(6) Certain sum of money only
(7) Promise to pay money only
(8) Number, place, date etc

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Bill of Exchange

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.

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Essential Characteristics of a
bill of exchange

It must be in writing
It must contain an order to pay
The order must be unconditional
The sum payable must be certain

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Cheque

A cheque is a bill of exchange dawn

on a specified banker and expressed
to be payable on demand.
Crossing of cheques
Payment cannot be claimed across
the counter in a crossed cheque. It
can only be credited to an account
with a bank

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Type of crossing
(1) General (2) Special.
General Crossing
a) Not Negotiable crossing -It is not non-transferable-
The cheque having the special feature as these can be
no holder – in due course.
b) A/c Payee Crossing: Drawer intends the payment to
be credited to payee’s account and none else.
Special crossing
a) Not Negotiable,
b) A/c Payee Crossing
Who can cross cheque? Drawer ,Holder ,Banker

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Transfer of negotiable instruments
and liability of parties

One of the essential

characteristics of a negotiable
instrument is that it is freely
transferable from one person to
another person. This transfer may
take place either:
 1. by negotiation
 2. by presentment

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 1. Transfer by negotiation- When a
promissory note, bill of exchange or cheque is
transferred by one party to another, so as to
constitute the transferee the holder thereof,
the instrument is said to be negotiated.
There are two methods of transfer by
negotiation.
 a) Negotiation by delivery
 b) Negotiation by endorsement and delivery
 2. Transfer by presentment

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Liability of parties
a) Liability of drawer
b) Liability of drawee of cheque
c) Liability of maker of note and acceptor of
bill
d) Liability of indorser
e) Liability of prior parties to a holder in due
course

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Holder in due course

Holder:- The holder of a

promissory note, bill of exchange or
cheque means any person entitled
in his own name

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 Holder in due course:-Who for
consideration locate the possessor or the
payee or the endorsee thereof, if payable to
order, before the amount mentioned in it,
becomes payable and without having
sufficient cause to believe that any defect
existed in the title of the person from whom
he derived his title. Holder in due course
acquires a better title than that of its
transferor.

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Privileges of a holder in due
course
 Liability of prior parties-
 Fictitious payee-
 Negotiable instrument without
consideration-
 Conditional delivery-

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Discharge of negotiable
instruments
1. Discharge of an Instrument
The different modes of discharge of an
instrument are as follows:
a) By payment in due course
b) By party primarily liable becoming holder
c) By cancellation
e) By discharge as a simple contract

79
2. Discharge of party or parties
A party or parties to a negotiable
instrument is/are discharged in any one of the
following ways:
a) By payment
b) By cancellation
c) By release
f) Cheque payable to order
g) Draft drawn by one branch on another

80
3. By operation of law-
This includes discharge-
1. By an order of insolvency court, discharging
the insolvent
2. By merger-
3. By lapse of time
4. By material alteration

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