Year: 2020

Management Notes

Price, Conditions and Warranties

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Price:

Another essential element of a contract of sale is that there must be some price for the goods. That means, the goods must be sold for some price. According to Sec. 2(10) of the Sale of Goods Act, the term price means “the money consideration for a sale of goods“.

Thus the price is the consideration for contract of sale which should be in terms of money. If the ownership of the goods is transferred for any consideration other than the money, that will not be a sale but an exchange. However, consideration can be paid partly in money and partly in goods.

For e.g., A delivered to B 10 cows valued at Rs.2,000 per cow. B delivered to A 20 bags of rice at Rs.750 per bag and paid the balance of Rs.5,000 in cash in exchange of the cows. This is a valid contract of sale.

Conditions:

In the context of the Sale of Goods Act, 1930, a condition refers to a fundamental stipulation that forms the essence of a contract of sale. It is a term that is so essential to the contract that its breach entitles the aggrieved party to repudiate the contract and refuse to accept the goods.

According to Section 12(2) of the Act, “A condition is a stipulation essential to the main purpose of the contract, the breach of which gives the aggrieved party a right to repudiate the contract.”

For example, if a buyer purchases a new diesel generator and it is delivered as a petrol generator instead, the buyer can reject the goods and cancel the contract since the term breached is a condition related to the core purpose of the transaction.

Conditions may be express (explicitly agreed upon by both parties) or implied by law. Common implied conditions include:

  • Condition as to title (seller has the right to sell),

  • Condition as to description,

  • Condition as to quality or fitness for purpose,

  • Condition as to sample.

A breach of condition allows the buyer to reject the goods, terminate the contract, and/or claim damages. However, under some circumstances, the buyer may choose to treat the breach of condition as a breach of warranty and claim damages without repudiating the contract.

Types of Conditions:

  • Express Conditions

Express conditions are those explicitly mentioned in the contract of sale, either orally or in writing. These are agreed upon by both parties and are binding. For example, if a buyer specifies that goods must be delivered by a certain date or must be of a particular brand, failure to comply constitutes a breach of condition. Such conditions form the basis of the agreement and must be fulfilled for the contract to remain valid. Breach of an express condition entitles the buyer to reject the goods and repudiate the contract entirely.

  • Implied Condition as to Title

Section 14(a) of the Sale of Goods Act, 1930 implies a condition that the seller has the right to sell the goods. This means that the seller must possess ownership or authority to transfer the title. If a seller sells stolen goods unknowingly, the buyer can reject the goods and recover the price paid. The buyer is not obligated to retain goods if the seller’s title is defective. This condition protects the buyer’s legal ownership and ensures that no third party can rightfully claim the goods sold.

  • Implied Condition as to Description

When goods are sold by description, it is an implied condition that they must match the description provided. This condition ensures that the buyer gets what was promised. For example, if a seller describes a phone as a “Brand New iPhone 14 Pro,” and a different or used model is delivered, it constitutes a breach. The buyer is entitled to reject the goods. This type of condition is especially crucial in cases where the buyer has not seen the goods physically and relies solely on the seller’s representation.

  • Implied Condition as to Quality or Fitness

If a buyer informs the seller about the specific purpose for which goods are required, it is an implied condition that the goods should be suitable for that purpose. This applies when the buyer relies on the seller’s skill and judgment. For instance, if a buyer asks for paint suitable for outdoor use, and it peels off within days, the buyer can claim breach of condition. However, this does not apply when the buyer does not rely on the seller’s expertise or buys goods based on their own judgment.

  • Implied Condition as to Merchantable Quality

When goods are bought by description from a seller who deals in such goods, there is an implied condition that they must be of merchantable quality. This means the goods must be fit for general use and free from latent defects. For example, if a person buys a washing machine and it breaks down within a day, it would not be considered of merchantable quality. The buyer has the right to reject such goods. This protects consumers from defective or substandard products.

Warranty:

A warranty is a stipulation collateral to the main purpose of the contract, that is to say, it is a subsidiary promise. Its breach does not entitle the aggrieved party to repudiate the contract. He can only claim damages. Where there is a breach of warranty on the part of the seller, the buyer must accept the goods and claim damages. Where A purchases 100 bags of wheat from B. Wheat must be fit for human consumption. This is an essential stipulation. Hence it is called as condition. Other stipulations like packing, etc., is a minor one, hence called as warranty. Conditions and warranties may be express or implied. An express condition or warranty is one stated definitely in so many words as the basis of the contract. Implied conditions or warranties are those which attach to the contract by operation of law. The law incorporated them into the contract unless the parties agree to the contrary. A sold to B timber to be properly seasoned before shipment. It was agreed between the parties, that in case of dispute the buyer would not reject the goods but accept or pay for them against documents. It was held that the provision as to seasoning was not a condition but only a warranty. If the timber was not properly seasoned B had to accept it and claim damages for the breach of warranty.

The points of distinction between a condition and warranty can be summed up as under:

(1) A condition is a stipulation essential to the main purpose of a contract while a warranty is astipulation collateral to the main purpose of contract.

(2) Breach of condition gives the right to treat the contract as repudiated while the breach of warranty gives the right to claim for damages alone. The contract cannot be repudiated because the breach of warranty does not defeat the purpose of contract.

(3) A breach of condition may be treated as breach of warranty but a breach of warranty cannot be treated as breach of condition. Let us take an example to make these two terms clear. So where a man buys a particular horse which is warranted quiet to ride. The horse, turns out to be a vicious one. Buyers remedy is to claim damages unless he has expressly reserved the right to return the horse. Suppose instead of buying a particular horse, he specifically asks for a quiet  horse-that stipulations is a condition. Now the buyer can either return the horse or retain the horse and claim damages. (Hartley v. Hymans)

Types of warranties:

  • Express Warranty

An express warranty is a specific assurance or promise made by the seller regarding the quality, performance, or condition of the goods. It can be stated in writing or spoken at the time of sale. These warranties are clearly agreed upon by both parties and form part of the contract. For instance, a seller may claim a refrigerator will function properly for five years. If the goods fail to meet these conditions, the buyer is entitled to claim compensation or replacement. However, breach of a warranty does not void the contract; it only allows for damages.

  • Implied Warranty of Quiet Possession

This warranty implies that the buyer will enjoy undisturbed use and possession of the goods. Under Section 14(b) of the Sale of Goods Act, the seller guarantees that no third party will interfere with the buyer’s possession or claim ownership. For example, if a person buys a car and later someone claims legal ownership, the buyer can sue the seller for breach of this implied warranty. The aim is to protect the buyer’s right to use the goods peacefully without facing legal challenges or possession issues from others.

  • Implied Warranty of Freedom from Encumbrances

According to Section 14(c) of the Sale of Goods Act, there is an implied warranty that the goods are free from any undisclosed charges or encumbrances. This means the buyer should receive goods that are not subject to any third-party claim, lien, or mortgage. If the buyer discovers an undisclosed lien on the goods, they are entitled to damages. For example, if a person buys a second-hand laptop that is still under EMI liability, the buyer can sue the seller for breach of warranty if not informed prior.

  • Implied Warranty as to Quality or Fitness (in Specific Cases)

Though generally treated as a condition, in some cases, fitness for a particular purpose may be treated as a warranty, especially when the buyer has not fully relied on the seller’s skill or when goods are purchased under one’s own judgment. If the buyer does not expressly communicate the intended use or does not depend on the seller’s expertise, the fitness becomes a mere warranty. This protects sellers from extensive liability while still giving buyers the right to claim damages if the goods turn out defective under usual use.

  • Warranty Arising from Usage of Trade

In certain trades or industries, regular practices establish standard warranties. These are known as warranties arising from usage of trade. Even if not explicitly mentioned, such warranties are enforceable due to consistent industry practices. For example, in the textile industry, it might be a trade practice that dyed fabrics must not bleed color on first wash. If this expectation is not met, the buyer may claim damages under this warranty. It emphasizes how commercial customs and business traditions influence obligations between buyers and sellers.

  • Voluntary or Collateral Warranty

A collateral warranty is an additional assurance provided voluntarily by the seller without being a formal part of the sale contract. It may relate to future performance, durability, or after-sales service. These warranties are usually given to enhance customer confidence and are often supported with service commitments or return policies. For instance, a seller might offer a “30-day free replacement guarantee” as a collateral warranty. Though not legally mandatory, once stated, it becomes enforceable and a buyer can seek remedies if the seller fails to honor it.

When condition to be treated as Warranty

Section 13 of the Sales of Goods Act mentions 3 cases in which a condition sinks or descends to the level of a warranty. A condition descends to the level of a warranty in the following cases:

(1)   Where the buyer waives the condition;

(2)   Where the buyer treats the breach of condition as breach of warranty;

(3)   Where the contract is indivisible and the buyer has accepted the goods or part of the goods.

In all the above three cases the breach of a condition is deemed to be a breach of a warranty and buyer can only claim damages or compensation for the breach of the condition. He cannot repudiate the contract or refuse to take delivery of the goods. In the first two cases, a condition is treated a warranty. at the will of the buyer; but in the third case the breach of condition can be treated only as breach of warranty; for once the buyer has accepted the goods he cannot reject them on any ground. If on subsequent inspection a breach of condition is disclosed, he can treat that as breach of warranty and sue for damages.

Example: Suppose A promises to deliver 100 bales of cotton to B on 1st August, 80. A delivers the bales of cotton on 10th of August. Now in this contract, time is the essence of contract. B can refuse to accept the delivery. But he can also waive this right. He may treat this breach of condition as breach of warranty by accepting the goods and claim damages instead.

Warranties from the Seller

Buyers often overlook the warranties being made by the seller. There is no such thing as “standard warranties.” Warranties vary across industries and from company to company, so be sure to closely review the seller’s promises. Are the goods being sold “as-is”? Is the seller disclaiming the warranties of merchantability or fitness for a particular purpose? If so, this might undo any verbal promises about the goods made by the seller.

Management Notes

Rights and Remedies of Unpaid Seller

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An unpaid seller is a seller who has not received the full price of the goods sold or has received a conditional payment (like a cheque or bill of exchange) which has been dishonoured. As per the Sale of Goods Act, 1930 (Section 45), the seller is considered unpaid if the full consideration is not received, regardless of delivery. An unpaid seller enjoys several rights such as lien, stoppage in transit, resale, and suit for price or damages. These rights ensure that the seller is legally protected until payment is completed. The concept protects sellers from buyer default and strengthens trust in commercial transactions.

Rights of Unpaid Seller:

1. Right of Lien (Section 47)

An unpaid seller has the right of lien which allows them to retain possession of the goods until full payment is received. This right applies when the seller is in possession of the goods and the payment is due. It can be exercised even if the seller has a part-delivery. The lien is lost if the goods are delivered to a carrier without reserving rights.

2. Right of Stoppage in Transit (Section 50)

If the goods are in transit and the buyer becomes insolvent, the unpaid seller has the right to stop the goods mid-transit and regain possession. This ensures that goods are not delivered to a buyer who cannot pay. This right ends when the buyer or their agent takes actual delivery, thereby terminating the transit.

3. Right of Resale (Section 54)

The unpaid seller has the right to resell the goods if:

  • The goods are perishable,

  • There is an express reservation of resale in the contract,

  • Or after giving notice to the buyer, the buyer still fails to pay.

If proper notice is given, any loss is borne by the buyer, and any profit belongs to the seller. Without notice, the seller must return any surplus.

🔹 Rights Against the Buyer Personally

4. Right to Sue for Price (Section 55)

If the buyer refuses to pay the agreed price, the unpaid seller can file a suit for price, especially when the ownership of goods has already passed to the buyer. This right allows the seller to claim the contract price regardless of delivery, provided the conditions of the contract have been met.

5. Right to Sue for Damages (Section 56)

When the buyer wrongfully refuses to accept or pay for the goods, the unpaid seller can sue for damages caused by the breach of contract. The amount of damages is usually the difference between the contract price and the market price on the date of breach. This compensates the seller for the financial loss.

6. Right to Sue for Interest (Section 61)

The unpaid seller has the right to claim interest on the amount due from the date of default or from the date agreed upon in the contract. This right exists when the contract or usage of trade allows it. Courts may award interest as part of the compensation for delayed payment.

Remedies of Unpaid Seller:

I. Remedies Against the Goods

1. Right of Lien (Section 47–49)

The seller can retain possession of goods until full payment is made. This lien is available when:

  • The goods are sold without credit.

  • The credit period has expired.

  • The buyer becomes insolvent.

This right is lost if goods are delivered to a carrier without reserving disposal rights.

2. Right of Stoppage in Transit (Section 50–52)

If goods are in transit and the buyer becomes insolvent, the unpaid seller can stop the delivery and regain possession. This remedy protects the seller from delivering goods to a buyer who cannot pay. Transit ends when the buyer or their agent takes delivery.

3. Right of Resale (Section 54)

The unpaid seller may resell the goods:

  • Without notice, if goods are perishable.

  • With notice, if the buyer defaults despite warning.

If resale is without proper notice, the seller cannot claim loss from the buyer but must give any profit back.

II. Remedies Against the Buyer Personally

4. Suit for Price (Section 55)

The seller can file a suit to recover the contract price if:

  • Ownership has passed to the buyer, or

  • Price is payable on a fixed date irrespective of delivery.

This remedy gives the seller a direct right to demand payment legally.

5. Suit for Damages for Non-Acceptance (Section 56)

If the buyer wrongfully refuses to accept and pay for the goods, the seller can sue for damages. The amount is calculated based on the loss incurred, usually the difference between contract price and market price on the breach date.

6. Suit for Interest (Section 61)

The seller can claim interest on the unpaid amount from the due date or a date agreed in the contract. This compensates for the delay in payment. The court may decide the interest rate and duration based on fairness.

Management Notes

Sale by Auction

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An auction sale is a public sale. The goods are sold to all members of the public at large who are assembled in one place for the auction. Such interested buyers are the bidders.

The price they are offering for the goods is the bid. And the goods will be sold to the bidder with the highest bid.

The person carrying out the auction sale is the auctioneer. He is the agent of the seller. So all the rules of the Law of Agency apply to him.

But if an auctioneer wishes to sell his own property as the principal he can do so. And he need not disclose this fact, it is not a requirement under the law.

Rules of an Auction Sale

As we saw previously, the rules regarding an auction sale are found in the Sale of Goods Act. Section 64 of the Act specifically deals with the rules governing an auction sale. Let us take a brief look.

1) Goods Sold in Lots

In an auction sale, there can be many goods up for sale of many kinds. If some particular goods are put up for sale in a lot, then each such lot will be considered a separate subject of a separate contract of sale. So each lot ill prima facie be the subject of its own contract of sale.

2) Completion of Sale

The sale is complete when the auctioneer says it is complete. This can be done by actions also – like the falling of the hammer, or any such customary action. Till the auctioneer does not announce the completion of the sale the prospective buyers can keep bidding.

3) Seller may Reserve Right to Bid

The seller may reserve his right to bid. To do so he must expressly reserve such right to bid. In this case, the seller on any person on his behalf can bid at the auction.

4) Sale Not Notified

If the seller has not notified of his right to bid he may not do so under any circumstances. Then neither the seller nor any person on his behalf can bid at the auction. If done then it will be unlawful.

The auctioneer also cannot accept such bids from the seller or any other person on his behalf. And any sale that contravenes this rule is to be treated as fraudulent by the buyer.

5) Reserve Price

An auction sale may be subject to a reserve price or an upset price. This means the auctioneer will not sell the goods for any price below the said reserve price.

6) Pretend Bidding

But if the seller or any other person appointed by him employs pretend bidding to raise the price of the goods, the sale is voidable at the option of the buyer. That means the buyer can choose to honor the contract or he can choose to void it.

7) No Credit

The auctioneer cannot sell the goods on credit as per his wishes. He cannot accept a bill of exchange either unless the seller is expressly fine with it.

Management Notes

Goods and their classification

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Classification of Goods

 

Exiting Goods: Which are owned or possessed by the seller at the time of making of contract. For example Manikchand, the Gutka maker have 1 Ton of Vimal Pan Masala in his godown.

Future Goods: Goods which are going to exists in future. For example, there is new phone launched named as “Ache Din”, which will be available in future. This good will be future goods.

Contingent Goods: These goods are not certain. For example if Business man Adani says he will sell Gold to Bappi Lehri if he finds a gold in mine. After digging if Gold is found, then fine, if not then also fine. Such goods are contingent goods.

We can classify existing goods further in specific, ascertained and unascertained goods.

Specific Goods: These are goods which are identified by buyer at the time of contract of sale. For example you go to showroom and identify a particular bike or car. Important thing is these goods must be identified at the time of contract and not subsequently.

Unascertained goods: Unascertained goods are the goods which are not identified or ascertained at the time of making of the contract. They are indicated or de fined only by description or sample.

For example, If A agrees to sell to B one packet of salt out of the lot of one hundred packets lying in his shop, it is a sale of unascertained goods because it is not known which packet is to be delivered. As soon as a particular packet is separated from the lot, it becomes ascertained or specific goods.

Ascertained Goods: Ascertained Goods are those goods which are identified in accordance with  the agreement after the contract of sale is made. This term is not de ned in the Act but has been judicially interpreted. In actual practice the term ‘ascertained goods’ is used in the same sense as ‘specific goods.’ When from a lot or out of large quantity of unascertained goods, the number or quantity contracted for is identified, such identified goods are called ascertained goods.  

Management Notes

Crossing of Cheque, Types of Crossing, Material Alterations

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A cheque is a negotiable instrument that can be categorized as either open or crossed. An open cheque, also known as a bearer cheque, is payable directly over the counter when presented by the payee to the paying banker. In contrast, a crossed cheque cannot be encashed over the counter and must be processed through a bank. The payment for a crossed cheque is credited directly to the payee’s bank account. Cheque crossings can be classified into three types: General Crossing, Special Crossing, and Restrictive Crossing.

Crossing Cheque

Crossed cheque is a type of cheque marked with two parallel lines, with or without additional words, across its face. This crossing ensures that the cheque cannot be encashed directly over the counter and must be deposited into a bank account. The purpose of crossing is to enhance security by directing the payment only to a bank account, reducing the risk of misuse if the cheque is lost or stolen. Crossings are of three types: General Crossing (with two parallel lines), Special Crossing (naming a specific bank), and Restrictive Crossing (adding further instructions like “A/C Payee Only”).

Types of Cheque Crossing (Sections 123-131 A):

The concept of cheque crossing is governed by Sections 123 to 131A of the Negotiable Instruments Act, 1881, aimed at ensuring secure payments. Cheque crossing mandates that the amount mentioned is credited to the payee’s bank account, providing an additional layer of safety. The primary types of cheque crossings are:

1. General Crossing (Section 123)

General crossing is when two parallel transverse lines are drawn across the face of the cheque, with or without the words “and company” or “not negotiable.”

  • Effect: The cheque cannot be encashed over the counter but must be collected through a bank.
  • Purpose: Enhances security by ensuring the payment is made to the payee’s bank account.

2. Special Crossing (Section 124)

Special crossing occurs when, in addition to two parallel lines, the name of a specific bank is mentioned within the lines.

  • Effect: The cheque can only be collected through the specified bank, further narrowing the scope of encashment.
  • Purpose: Provides an additional layer of security by directing the payment exclusively through the mentioned bank.

3. Restrictive Crossing

Restrictive crossing includes specific instructions such as “A/C Payee Only” or “Not Negotiable” written between the lines.

  • Effect: The cheque can only be deposited into the account of the specified payee, restricting its transferability.
  • Purpose: Prevents misuse and ensures the payment is credited to the intended recipient.

4. Not Negotiable Crossing (Section 130)

When the words “Not Negotiable” are added to the crossing, the cheque loses its negotiability, meaning it cannot be further endorsed.

  • Effect: Even if transferred, the transferee cannot have better rights than the transferor.
  • Purpose: Minimizes risks associated with stolen or improperly endorsed cheques.

5. Account Payee Crossing (Section 131A)

An “Account Payee” crossing directs the cheque payment to be made strictly to the bank account of the payee mentioned on the cheque.

  • Effect: Prohibits transferability and ensures payment reaches the intended account holder only.
  • Purpose: Provides the highest level of safety in cheque transactions.

General Cheque Crossing

General cheque crossing is a form of crossing where two parallel transverse lines are drawn across the face of the cheque, often accompanied by words like “& Co.” or “Not Negotiable.” This crossing directs that the cheque cannot be encashed directly over the counter and must be deposited into a bank account. The payment is routed through the banking system, enhancing the security of the transaction by ensuring that the funds are credited to the rightful account holder. General crossing serves as a preventive measure against fraud and misuse, as it mandates the cheque’s processing through a bank rather than direct encashment.

Special Cheque Crossing

Special cheque crossing is a type of cheque crossing where, in addition to two parallel lines across the cheque’s face, the name of a specific bank is mentioned within the lines. This ensures that the cheque can only be collected through the bank named in the crossing, adding an additional layer of security to the transaction.

The primary purpose of special crossing is to restrict encashment to the designated bank, minimizing the risk of fraud or misuse. For instance, if a cheque bears the crossing “State Bank of India,” only the specified bank is authorized to process the cheque.

Special crossing is particularly useful in situations where the drawer wishes to ensure the cheque’s payment is handled securely through a trusted or preferred banking channel. It is governed by Section 124 of the Negotiable Instruments Act, 1881, which protects both the drawer and payee from unauthorized access to funds.

Restrictive Cheque Crossing or Account Payee’s Crossing

Restrictive cheque crossing, also known as account payee’s crossing, is a form of cheque crossing where the words “Account Payee” or “A/C Payee Only” are written between two parallel lines on the face of the cheque. This type of crossing is used to ensure that the cheque is credited only to the bank account of the payee whose name is specified on the cheque. It prohibits further endorsement or transfer to another party, thus providing an additional layer of security.

The restrictive crossing is particularly helpful in preventing unauthorized or fraudulent transactions, as it limits the cheque’s encashment or credit to the intended recipient’s account. For instance, if a cheque is crossed as “A/C Payee Only” and made payable to a specific individual or entity, it cannot be encashed by anyone else, even if the cheque is lost or stolen.

Governed by Section 131A of the Negotiable Instruments Act, 1881, restrictive crossing is widely used in business transactions and situations requiring secure fund transfers. It provides both the drawer and payee with enhanced protection, ensuring that the payment reaches the rightful beneficiary without the risk of being misused or misappropriated during the clearing process.

Not Negotiable Cheque Crossing

Not negotiable cheque crossing is a specific type of crossing where the words “Not Negotiable” are added within two parallel transverse lines on the face of the cheque. This crossing ensures that while the cheque can be transferred, the transferee (the person to whom the cheque is endorsed) does not acquire better title than the transferor (the person endorsing it). Essentially, this crossing restricts the negotiability of the cheque while maintaining its transferability.

For example, if a cheque crossed with “Not Negotiable” is transferred to a third party, and it is later discovered that the transferor had no legal right to the cheque, the transferee cannot claim better rights to the amount than the transferor. This helps protect the drawer from potential fraud or unauthorized transfers.

The primary purpose of a “Not Negotiable” crossing is to minimize risks associated with stolen or lost cheques. Even if such a cheque falls into the wrong hands, the restrictive nature of the crossing prevents its misuse. This type of crossing is commonly used in commercial transactions to ensure added security.

Governed by Section 130 of the Negotiable Instruments Act, 1881, “Not Negotiable” crossings act as a safeguard for drawers by controlling the risks of improper transfer, ensuring funds are handled securely and lawfully.

Material Alterations:

A material alteration occurs when any change is made to a cheque after it has been issued that affects its legal validity or the rights of the parties involved. Examples include changing the amount, date, payee name, or signature without the drawer’s consent. Such alterations can make a cheque void or dishonoured, unless approved by the drawer. Banks are required to carefully examine cheques for material alterations before payment. In India, material alterations are governed by the Negotiable Instruments Act, 1881, and unauthorized changes can lead to legal consequences for fraud or forgery.

Types of Material Alterations:

  • Alteration in Amount

Changing the amount on a cheque, either in words or figures, is a common form of material alteration. For example, modifying ₹5,000 to ₹50,000 without the drawer’s consent is unauthorized. Such alterations can lead to the cheque being dishonoured by the bank. Only the drawer can approve changes, and the alteration must be authenticated with initials or signature. Unauthorized changes may constitute fraud or forgery under the Negotiable Instruments Act, 1881. Banks are legally responsible for detecting such alterations before processing payment, ensuring the safety and integrity of financial transactions.

  • Alteration in Date

Changing the date on a cheque after issuance is another type of material alteration. Altering the date can affect the cheque’s validity, making it post-dated or stale-dated unintentionally. For instance, modifying the date to a past or future date without the drawer’s consent may mislead the bank or payee. Banks examine dates carefully to avoid dishonour or legal complications. Unauthorized date changes can lead to legal liability for forgery. Any change must be approved by the drawer and authenticated with initials, ensuring that the cheque remains a legally valid negotiable instrument.

  • Alteration in Payee Name

Altering the payee’s name on a cheque is a serious material alteration. For example, changing the payee from “Rahul Kumar” to “Rohit Sharma” without the drawer’s authorization is illegal. This type of alteration can result in dishonour or rejection of the cheque by the bank. Only the drawer can approve and authenticate such a change with initials. Unauthorized modifications can lead to criminal charges for forgery or fraud under the Negotiable Instruments Act. Banks are required to scrutinize the payee details carefully to prevent misuse and maintain the integrity of cheque transactions.

  • Alteration in Signature

Changing or forging the drawer’s signature on a cheque is a material alteration that invalidates the instrument. If the signature is altered, the bank may refuse payment as it cannot verify the authenticity. Unauthorized signature alteration constitutes fraud or forgery, which is punishable under the Negotiable Instruments Act, 1881. Even minor modifications can make the cheque legally ineffective. Banks rely on signature verification to prevent such alterations. Any correction in signature must be done with the drawer’s consent and properly authenticated. Signature alterations are critical to maintaining trust and security in the Indian banking system.

Management Notes

Dishonours of cheques

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Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for [a term which may be extended to two years], or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless:

(a) The cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b) The payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, [within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation: For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.

Dishonour is of 2 kinds:

  1. Dishonour of bill of exchange by non-acceptance
  2. Dishonour of promissory note, bill of exchange or cheque by non-payment

When presentment for payment is made and the maker, acceptor or drawee, as the case may be, makes default in making the payment, there is dishonour of the instrument. And also, if there are certain circumstances when presentment for payment is excused and the instrument is deemed to be dishonoured even without presentment. Thus, when the maker, acceptor or drawee intentionally prevents the presentment of the instrument is deemed to be dishonoured even without presentment.

Notice of dishonour

Notice of dishonour means information about the fact that the instrument has been dishonoured.

Notice of dishonour is given to the party sought to be made liable and, therefore it serves as a warning to the person to whom the notice is given that he could now be made liable.

Enormous delay in giving notice of dishonour may put an end to the plaintiff’s right in respect of the dishonoured instrument.

Notice of dishonour is to be given by a person who wants to make some prior party of his liable on the instrument. Therefore, such a notice may be given:

  1. Either by the holder
  2. A party to the instrument who remain liable for it

Dishonour of cheque

A person suffers a lot if a cheque issued in his favour is dishonoured due to the insufficiency of funds in the account of the drawer of the cheque. To discourage such dishonour, it has been made an offence by an amendment of the Negotiable Instrument Act by the Banking, Public Financial Institution and Negotiable Instrument Laws (Amendment) Act, 1988.

A new Chapter VII consisting of Sections 138 to 142 has been inserted in the Negotiable Instrument Act.

Section 138 makes the dishonour of cheque an offence. The payee or holder in due course can have recourse against the drawer, who may be held liable for the offence.

Management Notes

Holder & Holder in due course

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Various differences between holder and holder-in-due-course can be explained on the basis of the following

  • Entitlement
  • Maturity
  • Right to recover amount
  • Privileges
  • Consideration
  • Title
  • Notice of defect in the Title
  1. Entitlement: Holder is a person who is entitled for the possession of a negotiable instrument in his own name. Hence he shall receive or recover the amount due thereon. Whereas a Holder-in-due-course is a person who has obtained the instrument for consideration and in good faith and before maturity.
  2. Consideration: Consideration is not necessary to become a holder. The instrument may also be given by way of a donation or gift and thus, the donee of an instrument can also become a holder of it. However, consideration is a must to become a holder-in-due-course and thereby the donee of a negotiable instrument can be a holder but not holder-in-due-course.
  3. Maturity: A holder may acquire the instrument even after its maturity. But a holder-in-due-course must acquire the instrument before its maturity failing which he will not enjoy the rights of a holder-in-due-course.
  4. Title: A holder does not acquire a better title than that of transferor. In simple words, if the title of any of the prior party is defective, his title will not be defect free. Whereas, a holder-in-due-course derives a good title freed from all defects. His title is better than that of the transferor.
  5. Right to recover amount: A holder has a right to recover the amount due on the instrument from the transferor (i.e., just preceding party) only from whom he has obtained the instrument. Holder-in-due-course, on the other hand, can recover the amount due on the instrument from any of the prior parties till the instrument is duly discharged. Thus, all prior parties shall remain liable towards the holder-in-due-course, jointly as well as severally, till the instrument is duly discharged.
  6. Notice of defect in the Title: A holder-in-due-course is not only supposed to have acquired the instrument without any notice of the defect of the title of the person from whom he obtained it, but also there should be no cause on his part to believe that any defect sustains in the transferor’s title. But a holder is exempt from this condition. He may have notice of defect in the title but he shall not be liable for it unless he is a party to that defect, fraud, or forgery.
  7. Privileges: A holder-in-due-course enjoys certain privileges under the Negotiable instruments Act (as discussed earlier), which are not available to a holder.

Comparison Chart

Holder

Holder in due course (HDC)
Meaning

A holder is a person who legally obtains the negotiable instrument, with his name entitled on it, to receive the payment from the parties liable.

A holder in due course (HDC) is a person who acquires the negotiable instrument bonafide for some consideration, whose payment is still due.
Consideration Not necessary Necessary
Right to sue A holder cannot sue all prior parties. A holder in due course can sue all prior parties.
Good faith The instrument may or may not be obtained in good faith. The instrument must be obtained in good faith.
Privileges Comparatively less More
Maturity A person can become holder, before or after the maturity of the negotiable instrument.

A person can become holder in due course, only before the maturity of negotiable instrument.

Management Notes

Negotiable instruments Act 1881 and it’s Features

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The law relating to “negotiable instruments” is contained in the Negotiable Instruments Act, 1881. The Act extends to the whole of India. The Negotiable Instruments Act, 1881, has been amended for more than a dozen times so far.

The latest in the series are: (i) the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (effective from 1st April, 1989), and (ii) the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 (effective from 6th February, 2003). The provisions of all the Amendment Acts have been incorporated at relevant places in Part IV of this book.

The Negotiable Instruments Act, 1881, as amended up-to-date, deals with three kinds of negotiable instruments, i.e., Promissory Notes, Bills of Exchange and Cheques.

Definition:

The word negotiable means ‘transferable by delivery,’ and the word instrument means ‘a written document by which a right is created in favour of some person.’

Thus, the term “negotiable instrument” literally means ‘a written document transferable by delivery.’

According to Section 13 of the Negotiable Instruments Act, “a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.” “A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees” [Section 13(2)].

The Act, thus, mentions three kinds of negotiable instruments, namely notes, bills and cheques and declares that to be negotiable they must be made payable in any of the following forms:

(a) Payable to order:

A note, bill or cheque is payable to order which is expressed to be ‘payable to a particular person or his order.’ For example, (i) Pay A, (ii) Pay A or order, (iii) Pay to the order of A, (iv) Pay A and B, and (v) Pay A or Bare various forms in which an instrument may be made payable to order.

But it should not contain any words prohibiting transfer, e.g., ‘Pay to A only’ or ‘Pay to A and none else’ is not treated as ‘payable to order’ and therefore such a document shall not be treated as negotiable instrument because its negotiability has been restricted.

It may be noted that documents containing express words prohibiting negotiability remain valid as a document (i.e., as an agreement) but they are not negotiable instruments as they cannot be negotiated further.

(b) Payable to bearer:

‘Payable to bearer’ means ‘payable to any person whosoever bears it.’ A note, bill or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank.

Thus, a note, bill or cheque in the form “Pay to A or bearer,” or “Pay A, B or bearer,” or “Pay bearer” is payable to bearer. Also, where an instrument is originally ‘payable to order,’ it may become ‘payable to bearer’ if endorsed in blank by the payee.

For example, a cheque is payable to A. A endorses it merely by putting his signature on the back and delivers to B with the intention of negotiating it (without making it payable to B or S’s order). In the hands of B the cheque is a bearer instrument.

Section 31 of the Reserve Bank of India Act:

It is important to note that the above definition is subject to the provisions of Section 31 of the Reserve Bank of India Act, 1934, which as amended by the Amendment Act of 1946, provides as under:

  1. No person in India other than the Reserve Bank or the Central Government can make or issue a promissory note ‘payable to bearer.’
  2. No person in India other than the Reserve Bank or, the Central Government can draw or accept a bill of exchange ‘payable to bearer on demand’.
  3. A cheque ‘payable to bearer on demand’ can be drawn on a person’s account with a banker.

The effect of the above provisions is that:

(i) A promissory note cannot be originally made ‘payable to bearer,’ no matter whether it is payable on demand or after a certain time. It must be made ‘payable to order’ initially. However, on being endorsed in blank it can become ‘payable to bearer’ or ‘payable to bearer on demand’ subsequently and it shall be valid in that case.

(ii) A bill of exchange may be originally made ‘payable to bearer’ but it must be payable otherwise than on demand (say, payable three months after date) in that case. If it is ‘payable on demand’ then it must be made ‘payable to order.’ However, on being endorsed in blank subsequently, it can become ‘payable to bearer on demand.’

(iii) A cheque drawn on a bank can be originally made ‘payable to bearer on demand’ and it shall be valid. In fact cheques are always payable on demand.

The object of the above provisions of the Reserve Bank of India Act is to prevent private persons from infringing the monopoly of ‘Note Issue’ of the Reserve Bank and the Government of India.

For, if individuals are allowed to issue instruments ‘payable to bearer on demand,’ then there may be someone so rich and well known person whose bills of exchange and promissory notes may be taken as currency notes.

A currency note bears the words’ I promise to pay the bearer the sum of Rupees 10, 50 or 100,’ as the case may be. The general public is, therefore, prohibited to issue such notes or bills.

Section 32 of the Reserve Bank of India Act, 1934, makes the issue of such bills or notes a criminal offence and declares them illegal and unenforceable at law. Accordingly, ‘a promise to pay A or bearer’ or ‘a promise to pay the bearer’ is not enforceable at law and the document containing such a promise is illegal and void.

The definition given in Section 13 of the Negotiable Instruments Act does not set out the essential characteristics of a negotiable instrument. Possibly the most expressive and all-encompassing definition of negotiable instrument had been suggested by Thomas who is as follows:

“A negotiable instrument is one which is, by a legally recognised custom of trade or by law, transferable by delivery or by endorsement and delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes, free from equities, to a bona fide transferee for value, notwithstanding any defect in the title of the transferor.”

Essential Features of Negotiable Instruments are given below:

1. Writing and Signature:

Negotiable Instruments must be written and signed by the parties according to the rules relating to Promissory Notes, Bills of Exchange and Cheques. Demand Drafts are also construel as Negotiable Instruments in the limiting case as they have the same property as N.I. Instrumes.

2. Money:

Negotiable instruments are payable by legal tender money of India. The liabilities of the parties of Negotiable Instruments are fixed and determined in terms of legal tender money.

3. Negotiability:

Negotiable Instruments can be transferred from one person to another by a simple process. In the case of bearer instruments, delivery to the transferee is sufficient. In the case of order instruments two things are required for a valid transfer: endorsement (i.e., signature of the holder) and delivery. Any instrument may be made non-transferable by using suitable words, e.g., “pay to X only.”

4. Title:

The transferee of a negotiable instrument, when he fulfils certain conditions, is called the holder in due course. The holder in due course gets a good title to the instrument even in cases where the title of the transferrer is defective.

5. Notice:

It is not necessary to give notice of transfer of a negotiable instrument to the party liable to pay. The transferee can sue in his own name.

6. Presumptions:

Certain presumptions apply to all negotiable instruments. Example: It is presumed that there is consideration. It is not necessary to write in a promissory note the words “for value received” or similar expressions because the payment of consideration is presumed. The words are usually included to create additional evidence of consideration.

7. Special Procedure:

A special procedure is provided for suits on promissory notes and bills of exchange (The procedure is prescribed in the Civil Procedure Code). A decree can be obtained much more quickly than it can be in ordinary suits.

8. Popularity:

Negotiable instruments are popular in commercial transactions because of their easy negotiability and quick remedies.

9. Evidence:

A document which fails to qualify as a negotiable instrument may nevertheless be used as evidence of the fact of indebtedness.

Management Notes

Promissory Notes, Bill of exchange and Cheque

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Negotiable Instruments are written contracts whose benefit could be passed on from its original holder to a new holder. In other words, negotiable instruments are documents which promise payment to the assignee (the person whom it is assigned to/given to) or a specified person. These instruments are transferable signed documents which promises to pay the bearer/holder the sum of money when demanded or at any time in the future.

As mentioned above, these instruments are transferable. The final holder takes the funds and can use them as per his requirements. That means, once an instrument is transferred, holder of such instrument obtains a full legal title to such instrument.

Promissory Notes

A promissory note refers to a written promise to its holder by an entity or an individual to pay a certain sum of money by a pre-decided date. In other words, Promissory notes show the amount which someone owes to you or you owe to someone together with the interest rate and also the date of payment.

For example, A purchases from B INR 10,000 worth of goods. In case A is not able to pay for the purchases in cash, or doesn’t want to do so, he could give B a promissory note. It is A’s promise to pay B either on a specified date or on demand. In another possibility, A might have a promissory note which is issued by C. He could endorse this note and give it to B and clear of his dues this way.

However, the seller isn’t bound to accept the promissory note. The reputation of a buyer is of great importance to a seller in deciding whether to accept the promissory note or not

Bill of exchange

Bills of exchange refer to a legally binding, written document which instructs a party to pay a predetermined sum of money to the second(another) party. Some of the bills might state that money is due on a specified date in the future, or they might state that the payment is due on demand.

A bill of exchange is used in transactions pertaining to goods as well as services. It is signed by a party who owes money (called the payer) and given to a party entitled to receive money (called the payee or seller), and thus, this could be used for fulfilling the contract for payment. However, a seller could also endorse a bill of exchange and give it to someone else, thus passing such payment to some other party.

It is to be noted that when the bill of exchange is issued by the financial institutions, it’s usually referred to as a bank draft. And if it is issued by an individual, it is usually referred to as a trade draft.

A bill of exchange primarily acts as a promissory note in the international trade; the exporter or seller, in the transaction addresses a bill of exchange to an importer or buyer. A third party, usually the banks, is a party to several bills of exchange acting as a guarantee for these payments. It helps in reducing any risk which is part and parcel of any transaction.

Cheques

A cheque refers to an instrument in writing which contains an unconditional order, addressed to a banker and is signed by a person who has deposited his money with the banker. This order, requires the banker to pay a certain sum of money on demand only to to the bearer of cheque (person holding the cheque) or to any other person who is specifically to be paid as per instructions given.

Cheques could be a good way of paying different kinds of bills. Although the usage of cheques is declining over the years due to online banking, individuals still use cheques for paying for loans, college fees, car EMIs, etc.  Cheques are also a good way of keeping track of all the transactions on paper. On the other side, cheques are comparatively a slow method of payment and might take some time to be processed.

The Negotiable Instruments (Amendment) Bill, 2017

The Negotiable Instruments (Amendment) Bill, 2017 has been introduced in the Lok Sabha earlier this year on Jan 2nd, 2018.  The bill seeks for amending the existing Act. The bill defines the promissory note, bill of exchange, and cheques. The bill also specifies the penalties for dishonor of cheques and various other violations related to negotiable instruments.

As per a recent circular, up to INR 10,000 along with interest at the rate of 6%-9% would have to be paid by an individual for cheques being dishonored.

The Bill also inserts a provision for allowing the court to order for an interim compensation to people whose cheques have bounced due to a dishonouring party (individuals/entities at fault). Such interim compensation won’t exceed 20 percent of the total cheque value.

Management Notes

Appointment and Removal of Directors

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Director is an individual appointed to manage and oversee a company’s operations, ensuring it meets its goals and complies with legal requirements. Directors are responsible for making strategic decisions, protecting shareholder interests, and guiding the company’s long-term growth. They act as fiduciaries, managing the company’s assets and resources responsibly. Directors can be executive (involved in daily operations) or non-executive (focused on oversight), depending on their role within the company. Their duties are governed by laws such as the Companies Act, 2013.

Appointment of Director:

Companies Act, 2013 provides a comprehensive framework for the appointment of directors in Indian companies. Directors are crucial in managing and overseeing a company’s activities, ensuring compliance with the law, and protecting the interests of shareholders. The appointment process is governed by specific rules under the Act to ensure transparency and accountability.

  1. Minimum and Maximum Number of Directors

Every company must have a minimum number of directors:

  • Private Company: At least two directors.
  • Public Company: At least three directors.
  • One Person Company (OPC): At least one director.

The maximum number of directors a company can appoint is 15, but this can be increased by passing a special resolution in a general meeting.

  1. Eligibility for Appointment

To be appointed as a director, an individual must:

  • Be at least 18 years old.
  • Not be disqualified under any of the provisions of the Companies Act, such as being of unsound mind, an undischarged insolvent, or convicted of an offense involving moral turpitude.
  • Obtain a Director Identification Number (DIN) before being appointed.

  1. Ordinary and Special Resolutions

Directors can be appointed through the following methods:

  • Ordinary Resolution: Appointment of directors is generally done through an ordinary resolution passed in the company’s general meeting.
  • Special Resolution: If the number of directors exceeds the statutory limit of 15, a special resolution must be passed.

  1. Appointment by the Board

In some cases, the board of directors can appoint:

  • Additional Directors under Section 161(1) if authorized by the Articles of Association. Their tenure ends at the next AGM.
  • Alternate Directors to act temporarily in place of a director who is absent for more than three months from India.

  1. Appointment by Shareholders

At the company’s Annual General Meeting (AGM), directors are appointed or re-appointed by the shareholders. The rotation policy requires at least one-third of the board to retire by rotation every year.

  1. Appointment of Independent Directors

Under Section 149, public companies with a paid-up share capital of ₹10 crore or more, turnover of ₹100 crore or more, or outstanding loans/debentures/deposits of ₹50 crore or more must appoint independent directors. Independent directors should not have any material relationship with the company that could affect their judgment.

  1. Appointment of Woman Directors

Under Section 149(1), certain categories of companies are required to appoint at least one woman director. This applies to:

  • Listed companies.
  • Public companies with a paid-up share capital of ₹100 crore or more or turnover of ₹300 crore or more.

  1. Director Identification Number (DIN) Requirement

Before being appointed as a director, every individual must obtain a DIN, which is a unique identification number issued by the Ministry of Corporate Affairs (MCA). Without a valid DIN, a person cannot be legally appointed as a director.

  1. Consent to Act as Director

Under Section 152(5) of the Companies Act, every person appointed as a director must give their written consent to act as a director in Form DIR-2 before their appointment. The consent must be filed with the Registrar of Companies (ROC) in Form DIR-12 within 30 days of the appointment.

Removal of Director:

  1. Grounds for Removal

Directors can be removed on various grounds:

  • Non-performance: Failure to fulfill their duties and responsibilities.
  • Misconduct: Engaging in fraudulent or unethical behavior.
  • Breach of fiduciary duty: Acting in a manner that is not in the best interests of the company or its shareholders.
  • Incapacity: Being of unsound mind or undischarged insolvent.

  1. Removal by the Central Government

Under certain circumstances, the Central Government can also remove a director. This usually occurs when the director is found guilty of fraud, misfeasance, or other violations of law.

  1. Effect of Removal

Once a director is removed, they cease to be a director of the company immediately upon the passing of the resolution. However, the removal does not affect any contractual rights or liabilities the director may have with the company.

  1. Filing with the Registrar

After the removal of a director, the company must file a notice with the Registrar of Companies (ROC) in Form DIR-12 within 30 days of the removal.

  1. Consequences of Removal

Director who is removed may seek legal recourse if the removal is deemed unlawful or if the procedures outlined in the Companies Act were not followed.

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