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1. Papers - Business Law
Paper 1
Question1:Define promissorynote andbill of exchange ?Highlightthe essentialsof eachone anddraw
comparisonbetweenthese twonegotiable instrument.( 2+2+2+2+2=10)
Question2:What are the essentialsof contractof sales,defineunpaidseller,highlightshisrightsand
lien?(4+2+2+2=10)
Question3:What do you understandbyfree consentinacontract ? Elaborate itseach aspect.
SolutionPaper1
Answer1:
1. A promissorynote isaninstrument inwriting( notbeingacurrencynote or banknote) containingan
unconditional undertaking,signedbythe maker,topaya certain sumof moneyonlyto or to the order
of,a certain person,orto the bearerof the instrument.Section4
2. A bill of exchangeisan instrumentin writing containing an unconditionalorder,signed by themaker,
directing a certain person to pay a certain sumof money only to,or to the orderof a certain person or to
the bearerof theinstrument. A bill of exchange,therefore,isawrittenacknowledgementof the debt,
writtenbythe creditor and acceptedbythe debtor.There are usuallythree partiestoabill of exchange
drawer,acceptoror drawee and payee.Drawerhimself maybe the payee.
3. EssentialsOf PromissoryNote
a. It mustbe inwriting:
A mere verbal promise topayisnot a promissorynote.The methodof writing( eitherinkorpencil or
printing,etc.) isunimportant,butitmustbe inany formthat cannot be alteredeasily.
b.It must certainlyan express promiseor clear understandingtopay:
There mustbe an expressundertakingtopay.A mere acknowledgementisnotenough.
c. Promise to pay must be unconditional:
A conditional undertakingdestroysthe negotiable characterof anotherwise negotiable instrument.
Therefore,the promisetopaymust notdependuponthe happeningof some outside contingencyor
event.Itmustbe payable absolutely.

2. d. It shouldbe singedby the maker
The personwhopromise topay mustsignthe instrumenteventhoughitmight have beenwritten
by the promisorhimself.
e.The maker must be certain:
The note self mustshowclearlywhoisthe personagreeingtoundertake the liabilitytopaythe
amount
f.The payee mustbe certain:
The instrumentmustpointoutwithcertaintythe persontowhomthe promise hasbeenmade.
g. The promise shouldbe topay moneyandmoneyonly:
Moneymeansthe legal tendermoneyandnotoldand rare coins
h. The amountshouldbe certain:
One of the mostimportantcharacteristicsof a promissorynote iscertainly-notonly regardingthe
personto whomor bywhompaymentisto be made butalsoregardingthe amount.
There isa promise topaycertainamountwithinterestata specifiedrate.
The amountisto be paidat an indicatedrate of exchange
j. OtherFormalities:
The other formalitiesregardingnumber,place,date,considerationetc.thoughusuallyfoundgiven
inthe promissorynotesbutare notessential inlaw
4. Essentialsof Bill of Exchange
a. It mustbe inwriting.
b. It mustbe signed bythe drawer.
c. The drawer,drwaee &payee mustbe certain.
d. The sum payable mustalsobe certain.
e. It shouldbe properlystamped.
f. It must containan expressordertopaymoneyand moneyonly.
g. Number,date , place are not essential.

3. 5. ComparisonBetweenPromissory NoteandBill of Exchange
Basis of
difference
Promissory note Bill of exchange
Numberof
parties
There are two
parties-
The
maker(debtor),&
thepayee( creditor).
There are three parties-
Drawer, drawee & payee:
Although anytwoout of
thethree may be filled by
one and thesame person.
Payment to
the maker
A promissorynote
cannot be made
payable themaker
himself.
Bill of exchange tothe
drawerand payee or
drawee and payee maybe
thesame person.
Conditional
instrument
it cannot be made
conditionally.
A bill also cannot be
drawn conditionally.
Nature of
liability
Theliability of
maker is primary &
absolute.
Theliability of a maker of
a bill of exchange is
secondaryand
conditional.

4. Maker Themaker of a
promissory note is
in a position of a
debtorwho
promises topay the
sumspecified in it.
Themaker of a bill of
exchange is in a position
of a creditorwhoorders to
paythesum specified in it.
Answer2
1.Contract of Sale. It isa contract bywhichthe ownershipof movable goodsistransferredfrom
the sellertothe buyer.The term‘contract of sale’isdefinedinSection4(1) of the Sale of Goods
Act as-
“Acontract of sale of goodsis a contract wherebythe sellertransfersor agreesto transfer the
property in goodsto the buyer for a price”
Contract of sale may be absolute or conditional
Property in goods transferredit is calledSALE
Transfer to take place in future called AGREEMENT TO SELL
Agreementto Sell becomesSale whenproperty in goods is transferred.
2. EssentialsOfContract Of Sale : Must be a transfer of propertyor an agreementto transfer it
from sellerto buyer
Transfer must take place in considerationofa moneypayment made by the buyer. This money
payment iscalled price.
Property to be transferredmust be saleable
Sellerand buyermust be differentperson
3.Unpaid Seller: THE SELLER OF GOODS IS DEEMED TO BE AN UNPAID SELLER WHENTHE WHOLE
PRICE HAS NOT BEEN PAID OR TENDERED
WHEN A BILL OF EXCHANGEOR OTHER NEGOTIABLE INSTRUMENT HAS BEEN RECEIVED AS
CONDITIONAL PAYMENTAND THE CONDITION NOT FULFILLED BY REASON OF DISHONOUR OR
OTHERWISE.

5. 4.RIGHTS OF UNPAIDSELLER:
 A Lien on the goods for the price while he isin possessionofthem
 In case of the insolvencyofthe buyera right of stoppingthe goodsin transit after he
has parted with possessionwiththem
 A right of resale as limitedbythe salesof good act
 Where the property in goods has not passedto the buyer , in additionto hisother
remedies,a right of withholdingdeliverysimilartoand coextensive withhisrights of
lienand stoppage intransit where the property has passedto the buyer
5. UNPAIDSELLER’S LIEN:
 While he isin possessionofgoods he entitledtoretain the possessionofthemuntil
payment or tenderof the price in the followingcases
1. Where the goods have beensoldwithout any stipulationas to credit
2. Where the goods have beensoldto the credit but the terms of ccredit
has expired
3. Where the buyer become insolvent
 The unpaid sellermayexcise hisright of liennot withstandingthat he isin possession
of the goodsas agent or bailee or the buyer
Answer3 :
1.Consent: Two or more personsare said to consent whenthey agree upon the same thing in the
same sense
2.Consentof both parties must be free.
3.Consentis said to be free whenit is not caused by
(a) coercion,as definedinsection15
(b) undue influence,asdefinedinsection16
(c) fraud, as definedinsection17
(d) misrepresentation,asdefinedinsection18
(e) mistake,subjectto the provisionsof sections20, 21 and 22.
4.Coercion: In simple words,coercionisthreatorforce usedbyone party againstanotherfor
compellinghimtoenterintoan agreement.
Section15 of IndianContractAct definescoercionasthe committingorthreateningtocommitany
act forbiddenbythe IndianPenal Code oran unlawful detainingorthreateningtodetain,any
propertyto the prejudice of anypersonwiththe intentionof inducinganypersontoenterintoan
agreement.

6. Consentobtainedatthe pointof pistol orintimidation,threatof imprisonmentandthreatto
commitsuicide withthe intentionof causingapersontoenterintoan agreementisanact of
coercion.
In simple words,coercionisthreatorforce usedbyone party againstanotherfor compellinghimto
enterintoan agreement.
Section15 of IndianContractAct definescoercionasthe committing orthreateningtocommitany
act forbiddenbythe IndianPenal Code oran unlawful detainingorthreateningtodetain,any
propertyto the prejudice of anypersonwiththe intentionof inducinganypersontoenterintoan
agreement.
Consentobtainedatthe pointof pistol orintimidation,threatof imprisonmentandthreatto
commitsuicide withthe intentionof causingapersontoenterintoan agreementisanact of
coercion
5.Undue Influence: acontract issaidto be inducedbyundue influencewhere the relations
subsistingbetweenthe partiesare suchthatone of the partiesisina positiontodominate the will
of the otherand usesthe positiontoobtainanunfairadvantage overthe other
A personisin positiontodominate the will of otherwhen: Where he holdsa real or apparent
authorityoverthe othere.g.relationshipbetweenmasterandservant,publicofficerandaccused,
income tax officerinrelationanassessee.
Where he standsin a fiduciaryrelationshiptothe other.Fiduciaryrelationmeansarelationof
mutual trustand confidence.like fatherandson,guardianandward, solicitorandclient,doctorand
patient,trustee andbeneficiary.
Where he makesa contract witha personwhose mental capacityistemporarilyorpermanently
affected byreasonof age,illnessormental orbodilydistress.
Whenconsentto an agreementiscausedbyundue influence,the agreementisacontract voidable
at the optionof the party whose consentwassocaused.Suchcontract may be set aside either
absolutelyorsubjecttorestitutionof the benefitthere underoruponsuch conditionasthe court
may deemjust.(section19 (A)).
Pardanashin Ladies-A paranashinwomenisone wholivesinseclusionhavingnocommunication
exceptfrombehindthe pardahwithany male personexceptafew privilegedrelations.
Law providesspecial protectiontothemonthe groundof theirbeingignorantsofar as the worldly
knowledge goes.A contractwiththemispresumedtohave beeninducedbyundue influence unless
the otherparty showthat it washer intelligentandvoluntaryact.

7. 6.Fraud : "Fraud" meansandincludesanyof the followingactscommittedbya party to a
contract, or withhisconnivance,orbyhisagent,withintenttodeceive anotherpartytheretoof
hisagent,or to induce himto enterintothe contract:-
the suggestion,asa fact,of that whichisnot true,byone who doesnotbelieveittobe true ;
the active concealmentof afact by one havingknowledgeorbelief of the fact ;
a promise made withoutany intentionof performingit
any otheract fittedtodeceive ;
any suchact or omissionasthe law speciallydeclarestobe fraudulent.
Mere silence astofacts likelytoaffectthe willingnessof apersontoenterintoa contract isnot
fraud,unlessthe circumstancesof the case are suchthat, regardbeinghadto them, it isthe
dutyof the personkeepingsilence tospeak,orunlesshissilence is,initself,equivalentto
speech.
1.The suggestion,asafact, of that whichisnot true,by one whodoes notbelieve ittobe true.
The leadingcase:PeekV.Gurney.
The prospectusof a companydidnotreferto the existence of adocumentdisclosingliabilities.
Thiscreatedan impressionthatthe companywasprosperous.Itwasheldthatthere was
suppression of truthandsuggestionof false statementamountingtofraud.
2. The active concealmentof afact by one havingknowledge orbelief of the fact-If aperson
concealsa fat whichismaterial tothe contract will be a case of fraud.Mere nondisclosure is
not fraud,where there isnodutyto disclose.”CaveatEmptor”or“BuyerBeware”isthe rule,but
incontracts of absolute faithmere silence aboutmaterial factswill be takenasfraud.
E.g. A,horse dealersolda mare to B.A knew that the mare hada crackedhoof,whichhe filled
up insuch a way as to defydetection.The defectwassubsequentlydiscoveredbyB.Itwas held
that the agreementcouldbe avoidedbyBas hisconsentwasobtainedbyfraud.
A promise made withoutanyintentionof performingitis fraud.
Anyotheract fittedtodeceive.E.g.Where aparty,whoby false impersonationinducesanother
to enterintoa contract withhimunderthe belief thathe issomebodyelse,commitsfraud.
Anysuch act or omissionasthe law speciallydeclarestobe fraudulent.
A party to the contract isunderno obligationtodisclose the whole truthtothe otherparty.
CaveatEmptor i.e.letthe buyerbeware isthe rule applicable tocontracts.There isno dutyto
speakinsuch casesand silence doesnotamountto fraud.
Silence istreatedasFraudin:

8. Fiduciaryrelationship
Contract of insurance
Contract of marriage
Contract of Familysettlement
Share allotmentcontracts.
Whenthe consentto an agreementiscausedbyfraud,the agreementisavoidable contractat
the optionof the partywhose consentwasso caused.
A party whose consenttoanagreementissoobtainedhastworemedies,namely:
He mayrescindthe contract or
He mayinsistthat the contract shall be performedandthathe shall be put inthe position in
whichhe wouldhave been,if the representationmade hadbeentrue.
7.Misrepresentation: The term “Misrepresentationmeansafalse representationof factmade
innocentlyornon-disclosure of amaterial factwithoutanyintentiontodeceive the other party.
Accordingto Section18 the term misrepresentationmeans:
The positive assertion,inamannernot warrantedbythe informationof the personmakingit,of
that whichisnot true,thoughhe believesittobe true.
E.g. A onthe strengthof hearsay informationpositivelyassertedtoBthat certainthirdparty is
goingto be the Director of the co. to be incorporated, boughtthe sharesonfaithof such a
statement.Thisiscase of misrepresentationbyA.(Mohanlal V Shri GangaJi CottonMillsco.)
2.Anybreach of duty,which,withoutanintentiontodeceive gainsanadvantage tothe person
committingitor anyone claiming underhim, bymisleadinganothertohisprejudiceorto the
prejudice of anyone claimingunderhim.Thisisknownas‘Constructive fraud".
3.It alsocoversthose caseswhere a statementwhenmade wastrue butsubsequentlybefore it
was actedupon,itbecame false tothe knowledge of the personmakingit.Insucha case , the
personmakingthe statementcomesunderanobligationtoinformthe otherpartyof the true
facts.
There shouldbe a representationorassertion.
Such representationmustrelate toamatterof fact whichhasbecome untrue ; and Itwas made
before the finalizationof transactionwithaview toinduce the otherpartyto enterintoa
contract.
It mustactuallyhave beenacteduponby the party.

9. It musthave beenmade eitherbythe party himself orby hisdulyauthorizedagent.
Consequencesof Misrepresentation- The aggrievedpartymayavoidthe contract,or May affirm
the contract and insistonthe misrepresentationbeingmade good.
Whenconsentisinducedbymisrepresentation&aggrievedpartyhasthe meansof discovering
the truth withordinarydiligence,the contractcannotbe setaside.
8.Mistake : Mistake may be definedasanerroneousbeliefconcerningsomething.Itmeans
that partiesintendingtodoone thinghave by intentionalerrordone somethingelse.
Mistake of IndianLaw: The contract isbindingbecause everybodyissupposedtoknow the law
of the country.”A contract isnot voidable because itwascausedbya mistake asto any lawin
force in India”(section21).
Mistake of ForeignLaw and Mistake of Private rightsof Partiesare treatedas mistake of facts.
Mistake as to subjectmatter. It fallsintosix headsnamely
1.Existence 2.Identity3.Title 4. Price 5. Quantity6.Quality
Whenboththe parties toan agreementare undera mistake asto a matter of fact, whichare
essential tothe agreement,andthis agreementshall be Void.
Thus thismistake shall be termedasbilateral mistake of facts.
It shouldbe committedbyboththe parties
It shouldbe relatedtoa matterof fact whichare essential tothe agreement.
Section22 providesthatif one party alone isundermistake of fact. Unilateral mistakesdonot
affectthe validityof contractunlesstheyconcernsome fundamental factandthe otherparty is
aware of the mistake.
1.Mistake as to identityof the personorparty: Mistake asto the identityof apersonmayalso
avoida contract. Where A intendstocontract onlywithB,but entersintoa contract withC
believinghimtobe B,the contract isvitiated.
2.Mistake as to the nature of transaction:A blindmansigninga document,readovertohim
wrongly,will notbindhim.
Case ; FosterV. Mackinnon.
A an illiterate oldman,wasmade toputhis signature ona documentwhichwasa pronote .A
thoughtthe documenttobe a will where hissignature wasrequiredasawitness.Underthis
presumptionhrsignedthe documentwhichwasinfact a pronote.SubsequentlyBendorsedthe

10. pronote to C whopaidvalue forit ingoodfaith.C suedA onthe pronote.Itwasheldthat A was
not boundbyit.