Negotiable instruments.

1. NEGOTIABLE INSTRUMENTS
• They are credit instruments
• Used as substitute of money
• They are ‘Chose’(thing) in action
• “Negotiable” means transferable by delivery
• Instruments means written documents
creating rights in favour of some person.
• Negotiable instruments thus means
documents transferable by delivery.

2. DEFINITION OF NEGOTIABLE
INSTRUMENT
• Negotiable instruments are governed by the Negotiable
Instruments Act 1881, which came in to force on 1st march
1882.
• The Act is based on the English Common law relating to
promissory notes, bills of exchange and cheques.
Definition.S.13(1) of the Act “A negotiable instrument means
a promissory note, bill of exchange or cheque payable
either to order or to bearer”
According to Justice Willis “A negotiable instrument is
one ,the property in which is acquired by any one who
takes it bonafide, and for value notwithstanding any
defect in the title of person from whom he took it”

3. CHARACTERISTICS OF NEGOTIABLE
INSTRUMENTS
• Freely transferable
• Better title to the transferee
• Right to sue in his own name
• Presumptions to NI
• Credit of the party
• It is exception to the rule of privity of contract
• It is also an exception to the maxim Nemo dat
quod non habet(No one can give what he has not)

4. Presumptions to Negotiable
Instruments S.118-119
• Consideration-every NI has been made or drawn for
consideration.
• Date-The date bearing up on it is the date of drawing.
• Time of acceptance-it was accepted with in a reasonable
time and before maturity
• Time of transfer-every transfer was made before maturity
• Order of endorsement-as it appears on the instrument
• Stamp-when it is lost it is presumed that it was properly
stamped
• Holder in due course has got it for consideration, innocently
and before maturity.

5. BILL OF EXCHANGE
Definition
• “A bill of exchange is an instrument in writing containing an
unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to or to
the order of a certain person or to the bearer of the
instrument.” (S.5)
Five certainties for a valid bill.
1.Drawer must be certain,
2.Drawee must be certain
3.Order must be certain
4.Sum payable must be certain
5.Payee must be certain

6. Essentials of a Bill of Exchange
• Instrument in writing
• Unconditional order to pay to a certain person
• The drawer,drawee and payee must be certain
• It should be signed by the drawer
• The sum payable must be certain
• It is an order to pay money only
• It should be properly stamped
• It should contain date, consideration and other
formalities.

7. Promissory Note
• “A promissory note is an instrument in
writing(not being bank note or 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”

8. Essentials of Promissory Note
• It must be in writing
• It must contain a promise to pay
• The promise to pay must be unconditional
• It must be signed by the maker
• The sum payable must be certain
• Promise to pay money only
• The payee must be certain
• Other formalities like stamp, date,
consideration etc.

9. Difference Between P/N and B/E
Particulars Promissory Note Bill of Exchange
No. of parties Two parties-maker and payee Three parties-
Drawer,drawee and payee
Payee Maker cannot be the payee Drawer and payee may be
the same
Nature of payment Unconditional promise Unconditional order
Acceptance No acceptance required Required for certain bills
Liability The liability of the maker is primary
and absolute
The liability of the drawer
becomes secondary on
acceptance
Payment Cannot be drawn payable to bearer Can be drawn as ‘payable
to bearer on demand’
Notice of
dishonour
No notice is necessary to the
maker
Notice must be given by
the holder for all parties
liable to pay
Sets Cannot be drawn in sets Foreign bills drawn in sets

10. CHEQUE
• Definition (Section-6)“A cheque is a bill of
exchange drawn on a specified banker and
not expressed to be payable otherwise than
on demand and it includes the electronic
image of a truncated cheque and a cheque in
the electronic form”
Two distinctive features of cheque;-
1.Cheque is always drawn on a specified bank
2.It is always payable on demand

11. Difference Between Cheque & B/E
Cheque
• Drawee is always a banker
• Acceptance is not required
• Always payable on demand
• It requires no stamp
• It can be crossed for safety
• No Noting and protesting
• No days of grace
• Can be countermanded
• Can draw payable to bearer on demand
Bill of Exchange
• Any one including a banker can be the drawee
• Acceptance required in some bills
• Payable on demand or after a specified time
• Must be properly stamped
• No crossing in B/E
• B/E is noted and protested
• Days of grace for three days
• No countermanding allowed
• It is illegal

12. Types of Negotiable Instruments
• Bearer Vs. Order instruments
• Fictitious Vs. Escrow bills
• Accommodation bills
• Clean Vs. Documentary bills
• Ambiguous instruments
• Inchoate instruments
• Demand and time instruments
• Inland Vs. Foreign bills

13. Difference between Negotiability&
Transferability
Assignment/Transferability
• Governed by Transfer of
Property Act
• Transfer Deed is required
• Consideration to be proved
• Same title to transferee
• Notice of transfer required
Negotiability
• Governed by Negotiable
Instruments Act.
• Mere delivery &
Endorsement and delivery
• Consideration is presumed
• Better title to the transferee
• No notice of transfer
required.

14. Endorsement( S.15)
• Endorsement consists of signature of the
holder usually made on the back of the
instrument for the purpose of negotiation.
• The person making the endorsement is called
the endorser
• To whom it is endorsed is called the endorsee
If there is no space for endorsement on the back
of the instrument a separate paper is attached
It is called allonge

15. Kinds of Endorsement
• Blank or general endorsement
• Full or special endorsement
• Restrictive endorsement
• Conditional or qualified endorsement
a) Sans Recourse endorsement
b) Sans frais endorsement
c) Facultative endorsement

16. Crossing of cheques
1. Crossing is made to ensure safety of cheques
2. When a cheque is crossed it cannot be paid at
the counter. Payment can be made only through
a bank account.
Types of crossing
1.General crossing
2. Special crossing
3. Not negotiable crossing
4.A/c payee crossing or restrictive crossing.

17. Dishonour and Discharge of NI
A Negotiable Instrument may be dishonoured in
either of the following ways:-
• Dishonour due to non-acceptance
• Dishonour due to non- payment
The dishonour due to non-acceptance is
applicable only to Bills of Exchange

18. Dishonour By Non-acceptance
S.91
• Where the drawee refuses to accept it within 48
hours of presentment for acceptance
• When presentation of acceptance is excused and
it remains unaccepted
• Drawee is incompetent to contract
• Drawee could not be found after a reasonable
search.
• When the acceptance is qualified
• One or more of the drawees refuses to accept
• Drawee is a fictitious person

19. Dishonour by Non-payment(S.92)
• When the instrument is duly presented for
payment and the payment is refused
• When presentment for payment is excused
and the instrument remains unpaid at
maturity.
• When the instrument is overdue, remains
unpaid.

20. Consequences of Dishonour
When a NI is dishonoured, the holder takes the
following steps;-
1.File a suit for recovery of the amount from the
parties liable to pay
2.Give notice of dishonour to parties against
whom he intends to proceed.
3.To get the instrument noted and protested
before a Notary Public.

21. Notice of Dishonour (S.93)
• Notice of dishonour is the formal communication of the fact of
dishonour.
• It is given by the holder or any of the parties liable on the
instrument to the prior parties.
• It may be oral or in writing or even by post.
• It must be given within a reasonable time
• It is given at the place of business or residence.
Notice to whom?
1.To all persons whom the holder wants to make liable
2.To the duly authorised agent of the person to whom it is required to
be given.
3.To the legal representative of deceased party.
4.To the assignee of the insolvent

22. Compensation to Holder on Dishonour
S.117
• 1.Amount due up on the instrument
• Interest on principal @18% from the date of
maturity till the date of payment
• Expenses connected with dishonor
• Current rate of exchange if foreign currency is
involved.
• An endorser who has paid the amount of the
instrument he has all the above rights of
compensation.

23. Discharge of the Instrument
A negotiable instrument may be discharged:-
• By payment
• By acceptor becoming holder
• By renunciation(holder gives up his right against all the parties liable)
• By cancellation by the holder any of the party
• Discharge as a simple contract for payment of money like novation,rescission etc.
• By release. If the holder releases any party by any method other than cancellation of names,ie, by
separate agreement of waiver,novation etc.all other subsequent parties are discharged
• If the holder allows more than 48 hours for acceptance to the drawee,all previous parties not consenting
to it will be discharged
• If the holder takes a qualified acceptance with out the consent of previous parties,they are discharged
• If holder fails to give notice of dishonour
• When the cheque is not presented for payment with in a reasonable time
• By operation of law,death,insolvency,lapse of time etc.
• By material alteration

24. CONTRACT OF SALE OF GOODS
• The law relating to sale of goods or movables in India
is contained in the Sale of Goods Act.
• The Act came in to force from 1st July 1930
• Previously the provisions relating to sale of goods
were included in Sections 76 to 123 of the Indian
contract Act .
• The Indian Sale of Goods Act is based on the English
Sale of Goods Act of 1893.
• The provisions of Contract Act relating to capacity of
parties, free consent etc. are applicable.
• The Act deals with passing of ownership of goods from
the seller to buyer, duties of seller and buyer etc.

25. Essentials of Contract of Sale
• S.4(1) of the Act defines a contract of sale of
goods as “a contract where by the seller
transfers or agrees to transfer the property in
goods to the buyer for price”
• To constitute a valid contract of sale
consideration for transfer must be money paid or
promised
• Where there is no money consideration the
transaction is not a contract of sale.(eg.barter.)
• If transaction involves consideration partly in
money and partly of goods it becomes a sale.

26. Essentials of contract of sale..cntd.
1.Two parties in a contract of sale-buyer and seller.
2.Transfer of general property-property means ownership and general
property means full ownership.-To constitute sale, transfer of
general property is required. If goods are given for hire, lease or
pledge general property is not transferred and hence it is not a sale.
3.Goods form the subject matter of the contract and must be movable
property other than actionable claims and money and includes
stock and shares, growing crops .Transfer of immovable property is
not regulated by the sale of goods act.
4.Price-the consideration of the contract of sale expressed in money
5.All essentials of valid contract like agreement, free consent,
consideration etc.

27. Goods
Existing Future Contingent
Specific-
Ascertained and
Unascertained

28. Goods
• 1.Existing goods are those owned and possessed by the seller at the time
of making the contract of sale. It is further classified as;-
• A).Specific goods-those which are identified and agreed up on at the time
of making the contract of sale
• B)Ascertained goods- are ascertained subsequent to the formation of the
contract of sale
• C)Unascertained Goods-are not separately identified or ascertained at the
time of making the contract. It means generic goods ie,goods defined by
description or by sample.
2. Future goods-S.2(6)-goods which the seller does not possess at the time of
contract. It is to be manufactured or produced or acquired by the seller
after making the contract. Future goods are neither in possession nor in
existence. But unascertained goods are in possession and existence.
3.Contingent goods-are future goods. A contract for sale of contingent goods
can be enforceable only if the event on the happening of which its
performance depended on takes place.

29. Sale & Agreement to Sell
• Sale is an executed contract
• Performance of sale is absolute and
unconditional
• Property of the goods passes from the seller
to the buyer immediately
• If the goods are lost or destroyed, the loss
falls on the buyer even if the goods are in
possession of the seller.
• If there is breach of contract the seller can
sue for the price, even if the goods are in his
possession
• As the property is with the buyer, the seller
cannot resell the goods.
• If the buyer becomes insolvent the seller will
have to deliver the goods to the official
receiver and claim only rateable dividend.
• On insolvency of the seller the buyer is
entitled to receive the goods from the official
receiver as he has ownership in it.
Agreement to Sell
• Agreement to sell is an executory contract
• Performance is conditional and made in future
• Transfer of property takes place in future or
subject to fulfillment of condition
• If the goods are lost or destroyed the loss falls
on the seller, even if they are in the possession
of the buyer
• If the buyer fails to accept the goods the seller
can sue for damages and not the price, even
though the goods are with seller.
• The property remains with the seller and he can
dispose of it as he likes
• If the buyer becomes insolvent the seller may
refuse to deliver the goods to the receiver
unless paid for it.
• On insolvency of the seller the buyer who has
paid the price can only claim rateable dividend
and not the goods as the ownership is with the
seller.
Sale

30. Conditions and Warranties
• The statement of the seller at the time of
forming the contract of sale are known as
representations
• A representation which form part of the contract
of sale and affects the contract is called
stipulations.
• A stipulation which is most important for the
formation of the contract is known as condition.
• Stipulation which is of lesser importance for the
contract is called warranty.

31. Condition
• S.12(2) “A condition is a stipulation essential
to the main purpose of the contract ,the
breach of which give rise to a right to treat the
contract as repudiated”
• Warranty –S.12(3) “a warranty is a stipulation
collateral to the main purpose of the contract,
the breach which give rise to a claim for
damages but not a right to reject the goods
and treat the contract as repudiated”

32. Condition & Warranty distinguished
condition
• It is a stipulation which is
essential to the main purpose
of the contract
• A contract of sale cannot be
fulfilled unless the condition is
fulfilled.
• Breach of condition give the
aggrieved party the right to
repudiate the contract and to
claim damages.
• A breach of condition may be
treated as a breach of
warranty.
warranty
• It is a stipulation which is only
subsidiary or collateral to the
main purpose of the contract
• It is not of vital importance.
The main contract can be
fulfilled even if the warranty is
not fulfilled.
• The breach of warranty gives
the aggrieved party a right to
claim damages only
• A breach of warranty cannot
be treated as a breach of
condition

33. When condition to be treated as
warranty?S.13(1)
• Voluntary waiver of condition by the buyer
It may be of two cases:-
a)buyer waives off the condition . b)Treat its
breach as breach of warranty.
• Acceptance of goods by the buyer, and
subsequent knowledge of breach of condition
he can only claim damages and not repudiate
.
• By impossibility or excused by law

34. Doctrine of caveat emptor
• Caveat Emptor means “let the buyer beware”
• It is the duty of the buyer to be careful while purchasing the goods.
• In the absence of enquiry from the buyer the seller is not bound to disclose the defects of the
goods.
• It is the buyer who must examine the goods and if the goods are defective he cannot sue the
seller as there is no implied undertaking by the seller that he shall supply goods to suit the
buyer’s choice.
• Exceptions to caveat emptor
1.When the seller makes representation of facts innocently or fraudulently
2.When the seller actively conceals a defect of the goods which could not be revealed by ordinary
examination
3.Sale under a patent or trade name
4.When the goods supplied as per description are not merchantable quality.
5.Custom or usage of trade
6.Sale by sample, if the bulk does not correspond with sample.
7.Misrepresentation of goods by the seller
8.Implied condition as to title of goods
9. Implied warranty as quiet possession apply
10.Implied warranty as to freedom from any charge or encumbrance

35. Remedies to the buyer on breach of
condition
• Repudiate the contract and reject the goods.
• Treat the breach of condition as breach of warranty and
claim damages
• No remedy when fulfillment of condition is excused by the
law.
Consequences of breach of warranty
1.Breach of warranty give rights to claim for damages but no
right to reject the goods and repudiate the contract
2.The buyer may sue the seller for damages
3.No remedy is available if the fulfillment of warranty
becomes impossible due to operation of law.

36. Express and Implied Conditions and
Warranties (S.14 to 17)
• In a contract of sale conditions and warranties
may be expressed or implied.
• When the will of the parties are entered in a
contract of sale in clear words it is express
condition or warranty.
• Conditions and warranties are said to be
implied when the law presumes their
existence in the contract automatically,
though they are not written in express words.

37. Implied Conditions and Warranties
Implied Conditions
1.Condition as to title
2.Condition as to description
3.Condition as to sample
4.Condition as to quality and
fitness
5.Condition as to merchantability
6.Condition implied by customs
7.Condition as to wholesomeness
Implied warranties
1.Warranty of quiet possession
2.Warranty of freedom from
encumbrances
3.Warranty as to usage of
trade
4.Warranty to disclose
dangerous nature of goods.