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UNIT I – COMMERCIAL LAW AND RELEVANT CASES

INTRODUCTION

Why to study law? Business has two types of risks, known risk and unknown risk, Legal risk is
one of the known risk. Knowledge on legal bye laws helps to avoid potential problems. Thus
studying law is important.

Law: Law is the body of principles recognised and applied by the state in administration of
justice. Code of conduct and body of rule to secure order. (2 marks)

Object of Law: To provide guidelines that governs the rules and regulations of relationship
between one individual with another or state. To determine circumstances, rights and duties are
honoured. To provide legal remedies to aggrieved party. To establish socio economic justice and
remove imbalance in society. (2 marks)

Sources of Law: English Mercantile Law, Indian Statute Law, Judicial Law and Custom &
Usage. (2 marks)

Interpretation of Statute: Court Interprets and apply legislation. (2 marks)

Commercial Law or Business Law: Commerce, Trade, Sales and Merchandising. (2 marks)

Lex Mercatoria: It is a body of international commercial law or merchant law prevailed in

Europe during medieval period to regulate trade. It acted as international law of commerce. (2
marks)

DR K S USMAN MOHIDEEN, B.Com, M.B.A, M.H.R.M, M.Com, M.Sc (Psychology), M.A (Economics) Ph.D
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THE INDIAN CONTRACT ACT 1872

Contract: Agreement + Legal enforceability. Section 2 (h) (2 marks)

Jus in Rem: Right against a thing.

Jus in Personam: Right against a person.

Agreement: Every set of promises with consideration. Agreement = Offer + Acceptance.

Section 2(e)

Consensus-ad-idem: Meeting of Minds. Same subject matter in same sense at same time. (2
marks) when two people agree to buy and sell a car for a certain price, they have reached a consensus ad idem. Both parties
have the same understanding of the terms of the agreement, and they have agreed to the same thing.

Essential Elements of Valid Contract: (13 marks)

1. Offer and Acceptance:

Offer: Signifies willingness to do or abstain from doing, Section 2(a)

Legal Rules: 2 parties, capable of rising legal relationship, must be definite, unambiguous and
certain, communicated, Mere statement of price is not an offer.

Types of offer: (2 marks, need not write for Part B) a) Express: Oral words or written, b)
Implied: Conduct of party/circumstances/situation, c) General: Whole world, d) Specific: definite
person, e) Counter: modifies offer, f) Cross: same subject matter simultaneously.

Acceptance: Willingness to be bound by the terms of offer. Section 2(b)

Acceptance types: Express and Implied.

Legal Rules: Absolute & unqualified, communicated, according to prescribed or reasonable

mode or time, cant precede offer, from party to whom the offer is made, before time lapses or
offer withdrawn, can‟t be implied from silence.

2. Intention to create legal relationship: No domestic or social agreement gives rise to

contract.
3. Lawful Consideration:

Consideration: Something in return. Latin term QUID-PRO-QUO. (2 marks) Section 2(d)

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Legal Rules: Past, present or future, Act or abstinence, Cash or kind, Real not illegal immoral or
opposed to public policy or imaginary, Need not be adequate, not already bound to do

4. Capacity of Parties: Incompetent parties are a) Minors, b) Unsound mind and c) Other
person. Section 11
a) Minors: not completed 18 years of age, not completed 21 years of age (under guardian
or when property vested with court). Based on the basic principle to protect minor against
their own inexperience and improper design of more experienced. Section 3 of The
Indian Majority Act, 1875

Legal Rules relating to minor: Void ab initio, can be beneficiary, can‟t ratify after attaining
majority, always plead majority, can‟t enter into partnership, can‟t be adjusted as insolvent, can
be an agent, liable for necessaries: (Necessaries: Bread clothes, bicycle/watch, education,
training for trade medical advice and loan for obtaining necessaries (2 marks)).

b) Person of Unsound mind: Agreement with person of unsound mind are void. Lunatic
(mentally deranged), Idiot (can‟t understand even ordinary matters) and Drunken or
intoxicated. Section 12
c) Other persons: Alien enemy, foreign diplomats, insolvents, convicts.
5. Free & Genuine Consent: Consent means assenting to offer. Free Consent means
when two or more person said to consent when they agree upon same subject matter in
same sense at same time without a) Coercion, b) Undue influence, c) Misrepresentation,
d) Fraud and e) Mistake. When any one or more above element is present it is called
missing free consent or error in consensus. Section 13 & 14
a) Coercion: committing or threatening to commit any act forbidden by law, includes:
physical compulsion, threat to goods, unlawful of detention, threatening to commit
suicide. DURESS: equivalent term for coercion in English Law. Duress is more of threat
or actual violence over person. (2 marks) Section 15
b) Undue influence: Special kind of relationship, one party dominates another, Unfair
advantage, Authority is real or apparent. Undue influence is also called as Moral
Coercion. Relationship with undue influence are parent & child, doctor & patient,

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Trustee & beneficiary, teacher & student, religious leader & disciple, lawyer & client.
Section 16
c) Misrepresentation: unintentional false statement of fact made by one party to induce
another party to enter into a contract. Person making the statement believes it to be true.
No intention to deceive another person. Section 18
d) Fraud: Intentional false statement made by one party to another. Doesn‟t believes to be
true, aggrieved party can avoid contract. Section 17
e) Mistake: i) Mistake of Law - Section 21: Mistake of the country (ignorance is not an
excuse) and Mistake of foreign country (Mistake of fact).
ii) Mistake of fact: Section 20
a) Mistake of only one party: i) mistake as to person contracted with and ii) mistake as
to nature of contract.
b) Mistake of both parties: i) Mistake as to subject matter: Existence, Identity, Quality,
Quantity, Title, Price, ii) Mistake as to possibility of performance: Physical
impossibility and Legal impossibility.
6. Lawful Object: Object must not be illegal, immoral and opposed to public policy.

Illegal and immoral: forbidden by law, defeats provision of law, fraudulent, injury to property
or person, sexual immorality. Section 23

Agreement opposed to public policy: trading with enemy, committing crime, interference in
administration of justice, trafficking of public titles, restraint of parental duties, restraint of
marriage or marital duties, defrauding creditors, restraint of trade (except sale of goodwill or
partner‟s agreement)

7. Agreement not declared void: incompetent parties, mutual mistake of fact,

consideration wholly or partly unlawful, without consideration, restraint of marriage,
restraint of trade, restraint of legal proceeding. Section 24 to 30 and 56.
8. Certainty and possibility of performance: It should be physically and legally possible
with certainty and without ambiguity. Section 29
9. Legal Formalities: In some case it must be written, some case stamped or seal affixed in
some case registered. Statutory requirements must be fulfilled. Section 10

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CLASSIFICATION OF CONTRACT: (13 marks)

A) ACCORDING TO VALIDITY:

a) Valid contract: satisfies all 9 elements of valid contract, b) Voidable contract: missing free
consent (Section 2 (i)), c) Void contract: war broke out (Section 2 (g)), d) Unenforceable
contract: can‟t enforce in court of law due to some technical defects, e) Void agreement: Minor
(Section 2 (g)), f) Unlawful agreement: parties contrary to provision of law, g) Illegal agreement:
object is illegal.

B) ACCORDING TO FORMATION:

a) Express contract: Either words spoken or written (Section 9), b) Implied contract: inferred
from act or conduct or situation or circumstances or course of dealing (Section 9), c) E-
commerce contract: via internet, d) Quasi Contract or Constructive contract (4 or 8 marks): NO
PERSON IS ALLOWED TO ENRICH THEMSELVES AT THE EXPENSE OF ANOTHER.
Works based on ground of equity, Law of Quasi contract or Law of restitution. Actually there is
no contract but parties are put into the place as if they have contract between them. (Section 68
to 72)

Kinds of Quasi contract: a) Supply of necessaries (reimburse of minor‟s property) (Section 68),
b) payment of interested person (Section 69), c) obligation to pay for non-gratuitous act (Section
70), d) mistake or coercion - (Section 72)and e) Finder of goods - (Section 71): (4 marks) finder
bound to take care of goods as man of ordinary prudence, necessary measure to trace owner, no
guilt of wrongful conversion of property, till owner is found he has every right to retain property
against the whole world. When finder can sell goods (2 marks): a) danger of perishing, b)
owner can‟t be find even after reasonable effort, c) owner found but he refuses to pay lawful
charges, d) when lawful charges amounts to 2/3rd of value of property.

C) ACCORDING TO PERFORMANCE:
a) Executed contract: both performed their obligations, b) Executory contract: both yet to
perform their obligation, c) Unilateral contract or one sided or partly executed/partly
executory contract: One party done with obligation and other party yet to perform.

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FORMATION OF CONTRACT (8 marks)

Offer, Acceptance, Intention to create legal relationship, Consideration, Consensus-ad-idem,

Obligation (legal tie imposes on parties to a contract), Privity of Contract (relation between the
parties in a contract which entitles them to sue each other but prevents a third party from doing
so), Express contract, Implied contract, E-commerce contract and Quasi contract.

PERFORMANCE OF CONTRACT (4 marks)

Fulfill their obligations within the time and in the manner prescribed.

Attempted Performance or Tender: promisor offers to perform his obligation but promise
doesn‟t accept the performance. (Section 38)

By whom contracts be performed: a) Promisor himself - Section 40, b) Agent - Section 40, c)
Legal representatives - Section 37, d) Third person - Section 41 and e) Joint promisor.

Who can demand performance? Only promise, Third party (Trust), Legal representatives.

Contract which need not be performed: a) Becomes Impossible – Section 56, b) Party agrees
to substitute a new contract – Section 62, c) When promise extends time – Section 63, d) When
the person whose option it is voidable rescinds (Section 64), e) When the promise neglects or
refuse to afford the promisor reasonable facilities.

Time & Place of performance: a) When no application and no time is specified – Reasonable -
Section 46, b) Where time is specified – usual hours of business Section 47, c) Where time is
certain day & place – at proper time & within usual hours of business. - Section 48, d) Manner
prescribed – in prescribed manner. Section 50

DISCHARGE OF CONTRACT: Termination of contractual relationship between the parties.

It is said to be discharged, when rights and obligations created comes to an end.

Modes of Discharge: (13 marks)

A) By Performance: i) Actual and ii) Attempted Performance or tender.

B) By Agreement or consent: i) Express: and ii) By Implied: a) Novation: new contract is

substituted for existing or with one new party, before expiry of time of performance, Section 62
DR K S USMAN MOHIDEEN, B.Com, M.B.A, M.H.R.M, M.Com, M.Sc (Psychology), M.A (Economics) Ph.D
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b) Rescission: all or some terms of contract are cancelled Section 62, c) Alteration: one or more
time is/are altered Section 62, d) Remission: acceptance of lesser fulfilment Section 63, e)
Waiver: mutual abandonment, no longer bound by the contract, f) Merger: inferior rights to
superior rights.

C) Discharge by impossibility of performance – Section 56: a) Impossibility arising at the

time of agreement or Pre-contractual or Initial Impossibility, i) Known to party – Void ab Initio,
ii) Unknown to party – mutual mistake and c) Supervening Impossibility or Impossibility arises
subsequent to formation to contract or Post contractual Impossibility. – a) An Excuse: i)
Destruction of subject matter of contract, ii) Non-existence or non-occurrence of particular state,
iii) Death or incapacity, iv) change of law and v) Outbreak of war, b) Impossibility of
performance: not an excuse i) Difficulty of performance, ii) Commercial Impossibility, iii)
Impossibility due to failure of 3rd person, iv) Strikes, lockouts and civil disturbances and v)
failure of one of the objects, where several object is involved.
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D) Discharge by Lapse of time: The Limitation Act, 1963.

E) Discharge of Operation of Law: a) By death, b) By Merger, c) By Insolvency, d) By

Unauthorised alteration, e) Circuity of action – Rights & Liabilities becoming vested with same
person.

F) Discharge by breach of contract: Breach means breaking of the obligation. Violation or

contravention with regard to fulfilment of terms & conditions incorporated in an agreement.
Parties to the agreement fail to discharge their respective obligation or when parties act contrary
in contravention to terms of conditions in contact.

a) Actual breach of contract: i) At the time when performance is due: ii) During the
performance of contract: a) Express repudiation and b) Implied repudiation.

b) Anticipatory breach of contract: Party to executory contract declares his intention of not
performing the contract before the performance is due. i) By expressly renouncing his obligation
under the contract, ii) doing some act that performance becomes impossible.

REMEDIES FOR BREACH OF CONTRACT:

When contract is broken, the injured party has following one or more following remedies:

A) Rescission – When one party cancel or broken the contract the other party may sue.
Court may grant: when contract is voidable or contract is unlawful.
Court may not rescind contract: when party ratified the contract, owing to change in
circumstances, when 3rd parties have acquired rights in good faith, where part of contract
is not severable (incomplete painting).
B) Suit for damages: Put injured party in same position as damages would have not
occurred. This is called Doctrine of Restitution. It is compensation from loss due to
breach.

Legal Rules relating to damages: a) Ordinary damages: damages from usual course of
business, Amount of damage = Contract price – Market price, if market price not available
nearest price, b) Special damages: damage could have been avoided if look at thoughtfully. c)
Vindictive or exemplary damages: not punitive in nature, eg: wrongfully dishonour of cheque, d)

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Nominal damages: merely acknowledges and proved his case has won, e) damages for loss of
reputation: generally not recoverable, eg: banker refuses to honour a customer‟s cheque. f)
Damages for inconvenience & discomfort – damages can be recovered on the ground of fairness,
g) Mitigation of damages: injured party takes all reasonable steps to mitigate the loss caused by
the breach. h) difficulty of assessment: although incapable of assessment eg: beauty pageant, i)
Cost of decree: cost of suit, j) damages agreed upon in advance: sum agreed in advance in case
of case - a) Liquidated damages: sum fixed and pre-estimate of probable loss and b) Penalty -
disproportionate to damage.

C) Suit upon quantum meruit: ―As much as merited” or “as much as earned”, some event
happens that makes further performance of contract is impossible. Party can claim
remuneration for the work has done.

Claim for QM: Agreement is discovered to be void, no gratuitous act, no express or implied
contract but no agreement for remuneration, contract prevented by act of another party, contract
is divisible, contract in divisible but badly performed.

D) Suit for specific performance of contract: Specific performance enforced in

following: a) money not an adequate relief, b) no standard ascertaining damage, c)
money can‟t be got for non-performance.

Specific performance not enforced: a) damages are an adequate remedy, b) contract is not
certain, c) revocable contract, d) contract by trustee in breach of their trust, e) personal nature (to
marry), f) contract by company in excess of its power given in MoA, g) court can‟t supervise
contract being carrying out.

E) Suit for Injunction: Party breach negative term of contract, doing something which he
promised not to do, court may restrain from doing. Such order is called as Injunction.

DR K S USMAN MOHIDEEN, B.Com, M.B.A, M.H.R.M, M.Com, M.Sc (Psychology), M.A (Economics) Ph.D
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THE SALE OF GOODS ACT 1930

Contract of Sale of goods: Seller transfers or agrees to transfer the property in goods to the
buyer for a price. Contract of sale may be absolute or conditional. (2 marks)

Essentials: a) Two parties: Distinct parties, Buyer & Seller, b) Goods: Movable, c) Price:
Consideration must be money, d) Transfer of general property: distinguished from special
property (pledges), e) Essential elements of valid contract. (8 marks)

Classification of Goods (2 marks): a) Existing goods: Owned or possessed by the seller at the
time of sale i) Unascertained goods; not identified, ii) Ascertained goods: identified, iii) Specific
goods: identified and agreed upon. b) Future goods: Seller don‟t possess at the time of
formation of contract but manufacture or acquired after that. c) Contingent goods: Seller
depends on may or may not happen of another event, eg: receiving goods depends on arrival
time.

Sale vs Agreement to Sell and Sale vs HP: (2 marks)

Sale Agreement to Sell

Immediate transfer Future subject to certain conditions

Executed contract Executory

Existing goods i,e specific goods Future & Contingent goods

Risk of loss falls on buyer Seller

Breach of buyer – Seller can sue for price Sue for damages

Seller has no right to re-sell Seller can re-sell

Jus in Rem Jus in Personam

Sale Hire Purchase

Immediate transfer After agreed instalments are paid

Buyer is Owner Bailer and called as Hire Purchaser

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Amount paid is called as Price Hire charges

Cant terminate contract Hire purchaser has option to terminate at

any stage

DOCUMENT TO TITLE OF GOODS

Document of title of goods is used in ordinary course of business as a proof of possession or

control of goods. It authorises possessor or endorser to receive goods. Goods will be delivered to
the holder of the instrument. Common title to goods are:

a) Bill of lading: It is a document which acknowledge the receipt of goods on ship.

b) Dock Warrant: It is the document given by owner of the dock giving details of the
goods and authorises the person to receive possession of goods.
c) Wharfinger‘s Certificate: It is a document issued by a warehouse keeper stating that the
goods specified in the document are in his warehouse.
d) Railway Receipt: It is a document containing an order by the owner of the goods to the
holder of the goods on his behalf and asking him to deliver the goods to the person
mentioned in the document.

RISK OF LOSS

a) Goods perishing before making of contract: Seller - Rule is based on mutual mistake or
impossibility of performance.
b) Goods perishing after agreement to sell but before sale is effected: Without fault of seller
or buyer – Seller

Stages in sale of goods: 3 stages – i) Transfer of Property (Ownership), ii) Transfer of

Possession (Custody), iii) Transfer of Risk.

Guarantees and warranties:

Guarantee Warranty

Guarantees are usually free of cost and offered by Warranties are usually given at extra cost and
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manufacturer. offered by shop keepers.

It is an agreement from manufacturer confirming Similar to insurance policy that covers the product
that they will repair or replace or refund if beyond the guarantee period.
something goes wrong within certain time.

It automatically comes with product It is optional

Guarantee is a Promise. Warranty is an assurance

Guarantee covers repair/replace/refund Warranty deals with repair alone.

Guarantee can be in both oral or written Warranty only in written format.

PERFORMANCE OF SALES CONTRACT (13 marks)

Definition: Performance means: Seller – delivery of goods and for Buyer – Acceptance of
delivery. (2 marks)

Delivery of goods (2 marks): a) Actual Delivery, b) Symbolic Delivery – Bulky in nature, c)

Constructive Delivery or Delivery by Attornment – Eg; picking up parcel on behalf of friend and
holding it.

Rules relating to Delivery of goods: a) Mode of delivery: Actual or Symbolic or Attornment, b)

Delivery by payment: according to terms of contract, c) Effect of part delivery: Part =Whole, d)
Buyer to apply for delivery, e) Place of delivery, f) Time of delivery, g) Cost of delivery: making
delivery – seller and obtaining delivery – buyer, h) Instalment of delivery, j) Goods in possession
of third party – Eg: Railway receipt, h) Delivery of wrong quantity: i) Less than contract: reject
or accept part, ii) More than contracted: reject or accept all or contracted, iii) Mixed with other
goods: reject or accept part.

CONDITIONS AND WARRANTIES

Condition Warranties

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Main purpose Collateral

Breach: Repudiate contract Claim damages

Breach of condition is treated as breach of Breach of warranty doesn‟t leads to breach

warranty condition

Expressed Conditions and Expressed Warranties - given expressly in the contract.

Implied Conditions: a) Condition as to title: circumstances of contract show different

intention, eg: R bought car from D, not a true owner. Right to sell is wider than right to property,
b) Sale by Description: If you contract to sell peas, you can‟t oblige a party to take beans, i)
when packaging is part of description, ii) buyer not seen the goods but relies on description by
seller, iii) sale by description as well as sample. c) Condition as to quality or fitness: where
buyer expressly or impliedly makes known the particular use of product, sale under patent or
trademark, goods used for number of purpose, suffers abnormality. d) Condition as to
Merchantability: Good fit the purpose for which goods are commonly bought. e) Condition
implied by custom: Eg: acute skin disease, f) Sale by Sample: Bulk correspond sample, can be
compared and free from defect. g) Condition as to wholesome: Eg: milk with typhoid germs.

Implied Warranties: a) Warranty of quiet possession: can‟t disturb possession, b) Warranty of

freedom from encumbrances, c) Warranty as to quality or fitness by usage of trade, d) Warranty
to disclose dangerous nature of goods: share information.

CAVEAT EMPTOR: Let the Buyer Beware (2 marks)

In contract of sale seller is under no duty to reveal unflattering truth about the goods, buyer must
examine them thoroughly, buyer depends upon his own skills or judgement select the goods he
can‟t blame anybody except himself. Exception: Fitness for buyer purpose, Sale under patent or
trademark, merchantable quality, Usage of trade, Consent by fraud.

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CONDITIONAL SALES or Conditional Sales Agreement or Conditional Sales Contract

It is a financing agreement where the buyer takes possession of goods but title and repossession
remains with seller until the full price is paid.

RIGHTS OF AN UNPAID SELLER

Definition of Unpaid seller: Unpaid seller, when

a) Whole of price has not been paid.

b) Bill of exchange or other negotiable has been received as conditional payment, the
condition on which it was received has not been fulfilled.
Condition:

1. He must be unpaid & price must be due.

2. He must have immediate right of action for price.
3. Bill of exchange or other negotiable instrument received but dishonoured.
Rights of an Unpaid Seller:

A) Rights against the goods: a) Goods has passed: lien, stoppage in transit, resale, b) Goods
has not passed: i) With holding delivery, ii) Stoppage in transit
B) Rights against the buyer: a) Suit for price, b) Suit for damages, c) Suit for interest, d)
Repudiation of contract
A) Right against the goods
a) Goods has passed:
i) Right of lien – Right to retain possession of goods until payment of price.
Goods have been sold without any stipulation as to credit, Goods have been sold on credit, but
term of credit has expired, buyer becomes insolvent.
Rules: i) If he loses possession, he loses right of lien, Lien depends on actual possession & not
on title, Not expressly excludes right of lien, Lien can exercised only for price on the remainder,

ii) Rights of stoppage on transit: Right of stopping the goods in transit after the unpaid seller
has parted with the possession of goods. It is available to unpaid seller: When buyer becomes
insolvent, when goods are in transit.

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iii) Right of re-sale: Can re-sell, where goods are of perishable nature - once the seller gives
notice of re-sale, then the buyer within reasonable time pay.

b) Goods has not passed:

i) Right of withholding delivery: In addition to other remedies, right of withholding co
extensive with rights of lien & stoppage in transit.

ii) Rights of stoppage on transit: Right of stopping the goods in transit after the unpaid seller
has parted with the possession of goods. It is available to unpaid seller: When buyer becomes
insolvent, when goods are in transit.

B) Rights against the buyer:

Rights of an unpaid seller against the buyer personally: a) Suit for damages - Amount of
damages=Contract price – market price, b) Suit for price - This situation arise “when there is
non-delivery”, c) Repudiation or Cancellation of contract before due date, d)Suit for interest –
Damages occurred for that interest is sued.

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THE NEGOTIABLE INSTRUMENTS ACT 1881

Meaning: A written document which is transferable from one person to another in return for
consideration for which right is created in favour of some person.
Definition: (2 marks)
According to Negotiable Instruments Act, “A negotiable instrument means a promissory note,
bill of exchange or cheque payable either to order or to bearer”. Section 13
Cheque: An order to a bank to pay a stated sum of money by banker form drawer‟s account,
written in a specifically printed form. Section 6
Promissory Note: One party makes unconditional promise in writing, to pay a sum of money.
Bill of exchange: A written order by drawer to the drawee to pay money to the other party.
Section 5
Definition of Promissory Note: “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 certain
person or to the bearer of the instrument”. Section 4
Definition of Bill of Exchange: “It is an instrument in writing and unconditional order signed by
the 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”.
Characteristics of Negotiable Instrument: Freely transferable, Title free from all defects,
Recovery – Sue for recovery of amount, Consideration, Date, Time of Acceptance, Stamped,
Proof of protest – when dishonoured, Holder presumed to be holder in due course.
Types of Negotiable Instrument: (2 marks)
 Negotiable by statute – promissory note, bill of exchange, cheque. Section 13
 Negotiable by custom (or) usage – Railway Receipt, Bill of Lading, Demand Draft,
Share Warrant
DRAFT: A demand draft is a NI similar to a bill of exchange. A bank issues a DD to client
(drawer), directing another banker (drawee), to pay certain sum of money to specified party
(payee). It has more similarity with Cheque. However it is difficult to countermand (cancel).
CHEQUE: A cheque is a bill of exchange drawn upon a specified banker and payable on
demand and it includes the electronic images of truncated cheque and cheque in electronic form.

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Requisites: To be drawn on a banker, To be payable on demand, To be presented by the buyer

before maturity, No acceptance needed for encashment, No notice of dishonor is required, No
stamp is needed, No days of grace payments, There are 3 parties involved – drawer, banker and
holder.
Types of Crossing:
a) General Crossing: A cheque which bears across its face, the words “And Co” or any
abbreviations between parallel lines either with or without the words “Not Negotiable” or
“Two Transverse parallel lines without any word”.
b) Special Crossing: It contains parallel lines mentioning name of a banker either with or
without the term “Not Negotiable”.
c) Restrictive Crossing: The word account “A/C Payee” is added to general or special
crossing.
d) Double Crossing: If the banker to whom a cheque is specially crossed does not have a
branch at eh place of paying, the cheque may be crossed specially to another banker who
acts as his agent for the purpose of collection.
Who can Cross a cheque? Drawer, Holder and Banker
When a banker can refuse payment? (4 marks) When a drawer countermands payment, Death
of a drawer, Insolvency of drawer, Insanity of either party, Notice of assignment of credit
balance, Garnishee order (court restricting payment), Breach of trust (hindrance in operating
account), Post-dated cheque, If cheque has apparent material alteration, Signature forged or does
not tally with specimen, Insufficient fund.
Escrow: Making a negotiable instrument, authenticating it and getting loan, keeping it as a
collateral or custody security. “Negotiable instrument are delivered for some purpose, so as to
enable person in whose favour it is drawn may lodge as collateral security or safe custody”.
Hundis: The word HUND refers “To Collect”, It is governed by local usage and custom, It is a
part of informal system, It is a financial instrument evolved by indigenous bankers, to use in
trade and credit transactions. It is used to transfer funds from one place to another, to borrow
money, for trade transactions. “It is an unconditional order in writing made by a person directing
another to pay a certain sum of money to a person named in the order”.
Noting: It is a convenient mode of authenticating the fact that a bill is dishonoured.

DR K S USMAN MOHIDEEN, B.Com, M.B.A, M.H.R.M, M.Com, M.Sc (Psychology), M.A (Economics) Ph.D
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Protesting: When an instrument is dishonoured the holder not only noted the fact, but also to be
certified by a notary public that the bill has been dishonoured. Such certificate is referred to as
protest.
HOLDER AND HOLDER IN DUE COURSE
Holder: “Holder of a negotiable instrument means any person entitled in his own name to the
possession thereof and to receive or recover the amount due thereon from the parties thereto.
Holder in due course: “It means any person who, for consideration, become the possessor of the
negotiable instrument, if payable to the bearer or the payee or endorsee thereof if payable to the
order, before the amount mentioned in it became payable and without having sufficient cause of
believe that defect exist in the title of the person from whom he derived his title”.
Conditions for Holder in due course:
Endorsee name must appear in instrument, It must be regular and complete, It must be obtained
for valuable consideration, It must have been obtained before the period of maturity, Must obtain
the instrument without having sufficient cause to believe that any defect exist in title.
Rights of holder in due course:
He must possess title free from all defects, Liability of prior parties, Inchoate instrument,
subsequent transfer makes them complete, Fictitious bills must prove that document bears the
endorsement with signature of drawer, An instrument which is obtained by unlawful means or
for unlawful consideration, Estoppel against denying original validity of the instrument, Estoppel
against denying signature.
LIABILITY OF PARTIES:
A) Liability of drawer
Must compensate the holder, Must receive notice of dishonor, Notice can be oral or written,
Criminal Liability: Instrument given for discharge of debt, Should be presented within 6 months,
Sufficient funds should be maintained, Stop payment instruction can be given, Complaint can be
filed only by the holder in due course.
B) Liability of drawee: (Banker)
Drawee incurs no liability unless and until he accepts the bill, His liability not affected by death
or bankruptcy, In case of 2 or more promisor, they are jointly liable, Shall be liable to
compensate any loss or damage sustained.

DR K S USMAN MOHIDEEN, B.Com, M.B.A, M.H.R.M, M.Com, M.Sc (Psychology), M.A (Economics) Ph.D
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C) Liability of endorser: Same as drawer

D) Liability of the maker: Same as drawee
E) Liability of prior party: Every party is liable to every subsequent party
F) Liability inter se: Indorsed ABCDE
G) Liability of acceptor of forged instrument: When acceptor is fully aware, he can‟t later
deny his liability, the consequences will be liable to make payment twice.
H) Liability of acceptor of fictitious bill: No party is relieved from his liability in the ground
on anonymous name.
DISCHARGE OF NEGOTIABLE INSTRUMENT
An instrument is said to be discharged when al rights under it completely extinguished or ceases
to be negotiable.
A) Discharge of instrument
1) By payment Section 81
2) Party primarily liable to become holder Section 90
3) Renunciation
4) Cancellation
5) Payment of money
B) Discharge of party
1) By payment Section 82 (c)
2) By cancellation Section 82 (a)
3) By release
4) Non-presentment of cheque Section 84
5) By material alteration Section 87
6) Operation of law
 Insolvency
 Merger
 Lapse of time
7) Cheque drawn by another branch Section 85 (a)

DR K S USMAN MOHIDEEN, B.Com, M.B.A, M.H.R.M, M.Com, M.Sc (Psychology), M.A (Economics) Ph.D
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CONTRACT OF AGENCY

Nature of agency: An agent is a person employed to do any act for another or to represent
another in dealing with third person. [A], Person on whose behalf such act is done called
principal [P], Person for whom the act is performed is called third party [T].

Primary function of agent: The function of agent is to bring his principal into contractual
relationship with the third party.

Essentials of agency act: Agreement between principal and agent and Intention of an agent to
act on behalf of the principal.

Rules of agency: Whatever a person can do, he can do through an agent. He who does an act,
through agent does it by himself.

Who can appoint an agent?

A person who is age of majority and who is of sound mind.

Who may be an agent? Anyone can be an agent. If minor is appointed as an agent the principal
is liable to the third party.

Test of agency: Has agent has capacity to bind the principal and make him answerable to third
party, by bringing principal into legal relation with the third party, thus establish a privity a
contract between agent and principal ? If yes, he is an agent. Else not. (2 marks)

Agent vs Servant (2 marks)

Agent Servant

 Creates legal relationship  Does not

 No direct control or supervision  Acts under direct control and
required. supervision.
 Principal is liable for wrongs of agent  Master is liable, if wrong committed in
done within scope of his authority. course of employment.
 Agent can work under many principal.  Servant can work under only one
master.

DR K S USMAN MOHIDEEN, B.Com, M.B.A, M.H.R.M, M.Com, M.Sc (Psychology), M.A (Economics) Ph.D
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Modes of creation of agencies: (13 marks)

A) Agency by express agreement: Either by word of mouth of written. Eg: power of

attorney. Section 187
B) Agency by implied agreement: Arises from the situation or from the conduct of the
party, it can be inferred from circumstances. Section 187
i) Agency by estoppels: leads wilfully another person to believe that certain state of
affairs exist and induce to act. Section 237
ii) Agency by holding out: prior positive affirmative action
iii) Agency by necessity: no opportunity to being communicated.
a) Agent exceeding his authority in an emergency: perishable goods
b) A person entrusted with another property: Eg: Captain of ship
c) Husband and Wife: bound to maintain except: expressly forbidden wife to pledge
credit, goods not necessaries, allowed sufficient fund, tradesman expressly told
not to give credit.
C) Agency by Ratification: Person may act on behalf without knowledge or consent. Reject
or accept. It is called as ratification. If ratified same as P & A relationship.

Effect of ratification: Bind as if they had been performed with appropriate authority. It relates
back to the date of act not from date of ratification.

Requisites of Valid ratification: Agent must claim act and identifiable, P must be existence at
time of contract, P must have contractual capacity at both time, Must be done with full
knowledge of facts, Must be within reasonable time, Must be lawful, Only whole can be ratified,
Must be communicated, Not Ultra-vire, Should not put third party to damage, Relates back to
date of act.

D) Agency by operation of law:

Relationship between company and promoter & Relationship between partner and firm.

DR K S USMAN MOHIDEEN, B.Com, M.B.A, M.H.R.M, M.Com, M.Sc (Psychology), M.A (Economics) Ph.D
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CLASSIFICATION OF AGENTS (8 marks)

A) Extent of their authority: a) Special agent: particular act or transaction, b) General

agent: particular trade, c) Universal agent: Unlimited authority.
B) Nature of work performed : a) Mercantile agent: or Commercial agent – in customary
course of business involves in either buy or sell
i) Factor: sell on his own, can sell on credit also.
ii) Auctioneer: reward in form of commission, before sale agent of seller and
after sale agent of buyer
iii) Broker: employ to buy or sell, no possession
iv) Commission agent:
v) Delcredre agent: occupies position of guarantor and an also agent.
vi) Banker: while transacting draft or cheque.

b)Non mercantile agent: no involved in buying and selling. Eg: solicitors, insurance agents,
clearing and forwarding agents, wife and power attorneys.

AUTHORITY OF AGENTS: a) Actual or Real authority: i) Express, ii) Implied and b)

Ostensible authority: authority that actually appears to others where it actually doesn‟t exist.
Apparently true not necessarily true.

LIABILITY OF PARTIES

Liability of principal:

 Within the scope of authority

 In the course of employment

Liable for such acts to maintain proper accounts, Liable for necessary act by the agent, He can
repudiate the whole contract, if can‟t be separated, Principal is bound to give notice, He is liable
for misrepresentation, P is liable for agents unauthorised act were authorised.

Rights of principal:

To recover damages, To obtain a account of secret profit, To resist claim of indemnify the agent.

DR K S USMAN MOHIDEEN, B.Com, M.B.A, M.H.R.M, M.Com, M.Sc (Psychology), M.A (Economics) Ph.D
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Duties of the principal:

To indemnify the agent against the consequences of acts done in good faith, To indemnify agent
for injury cost, To pay the agent.

Duties, rights and liabilities of agent:

Duties: To carry out work effectively, To render proper account, To communicate principal in
case of difficulty, Not to make secret profit, Not to delegate authority, Pay sums received.,
Protect and preserve interest of P, Not to use information obtained in course of agency.

Rights:

Right to retain, Right to receive remuneration, Right of indemnification, Right of stoppage in

transit, Right to get compensated.

Liabilities:

Agent is personally liable in following cases:

When the contract expressly provides, When he acts for foreign principals, When he acts for
minors, When he signs contract in his own name, When he acts for undisclosed principal, When
breach of warranty of authority, When he receive or pay money by mistake or fraud, When
authority is coupled with interest, When trade usage and custom makes agent personally liable.

TERMINATION OF AGENCY: (13 marks)

a) Termination of agency by act of parties: i) Agreement, ii) Revocation by principal and

iii) Revocation by Agent.
b) Termination of agency by operation of law: i) Performance of Contract, ii) Expiry of
time, iii) Death and insanity, iv) Insolvency, v) Destruction of subject matter, vi)
Principal becoming an alien enemy, vii) Dissolution of company, viii) Termination of
subagent authority.

DR K S USMAN MOHIDEEN, B.Com, M.B.A, M.H.R.M, M.Com, M.Sc (Psychology), M.A (Economics) Ph.D