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Unit–I: The Contract Act

Meaning of Contract
A contract is an agreement between two or more parties to
perform a service, provide a product or commit to an act and
is enforceable by law. There are several types of contracts,
and each have specific terms and conditions.

Formation of a Contract
Contract is a branch of the law of obligations in jurisdictions
of the civil law tradition. A contract arises when the parties
agree that there is an agreement. Formation of a contract
generally requires an offer, acceptance, consideration, and a
mutual intent to be bound.

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Essentials of a Contract
1.Offer & acceptance.
2.Intention to create legal relationship.
3.Consensus - ad - idem.
4.Consideration.
5.Capacity to contract.
6.Free consent.
7.Legality of object.
8.Possibility of performance.
9.Writing & registration.

Definition of Contract
An agreement enforceable by Law is a contract.
Therefore, there must be an agreement and it should be
enforceable by law.
Agreement + Enforceability = Contract

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Types of Contracts
VALID CONTRACTS
Contingent contract - In a contract to do or not to do
something, if an event is collateral, does or doesn't happen.
Express contract - When contracts are either in writing or in
oral.
Implied contract - When contracts are neither in writing nor in
oral.
Absolute contract - A contract which is not dependent on
fulfillment of any condition.

INVALID CONTRACTS
 Void contract
Is void(Void - ab - initio) - An agreement which is not valid
from the beginning.

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Becomes void - An agreement which is valid in the
beginning but due to some supervening impossibility the
contract becomes void
 Voidable contract - A contract which is valid unless until
avoided by either the party.
 Illegal contract - An agreement forbidden by law
 Unenforceable contract - It is valid but due to some
technical defect the contract becomes void. In case
defects are removed the contract is enforceable.(lack of
registration, lack of signature etc.,)
OTHER TYPES OF CONTRACTS
• Executed contract - In a contract where both the parties
have performed their obligation, there is remaining
nothing to perform.
• Executory contract - In a contract where both the parties
are yet to perform their obligation.
• Unilateral contract - In a contract one party has performed
his obligation and other person is yet to perform his
obligation.
• Bilateral contract - In a contract where both the parties
have performed their obligation. Bilateral & Executory are
same and inter - changeable.

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Offer
Definition

According to Sec.2(a), when a person made a proposal, when he


signifies to another his willingness to do or to abstain from
doing something.
TYPES OF OFFER

Express offer - When offer is given to another person either in


writing or in oral.

Implied offer - When offer is given to another person neither in


writing nor in oral.

Specific offer - When offer is given to a specific person.

General offer - When offer is given to entire world at a


large.(Carlill Vs. Carbolic smoke ball Co.,)

Cross offer - When both the persons are making identical offers
to each other in ignorance of other’s offer.

Counter offer - When both the persons are making offers to


each other which are not identical in ignorance of other’s offer.

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Standing offer - An offer which remains continuously
enforceable for a certain period of time.

Acceptance
Definition
According to sec.2(b), when a person made a proposal to
another to whom proposal is made, if proposal is assented
there to, it is called acceptance.
LEGAL RULES FOR ACCEPTANCE
• Acceptance must be given as per the mode prescribed by
the offeror.
• Acceptance must be given before the lapse of time or
within reasonable time.
• Acceptance must be unconditional.
• Acceptance may be given by any person in case of general
offer.
• Acceptance may be given by any specific person in case of
specific offer.
• Acceptance must be communicated. (Bordgon Vs.
Metropolitan Rly. Co.)

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• Mental acceptance is no acceptance or acceptance must
not be derived from silence.
• Acceptance must not be precedent to offer.

Consideration
Definition
According to sec 2(d) consideration is defined as “when at
the desire of the promisor , or promisee or any other
person has done or abstained from doing or does or
abstains from doing ,or promises to do or to abstain from
doing , something , such an act or abstinence or promise is
called a consideration for the promise .
LEGAL RULES AS TO CONSIDERATION
1)It must move at the desire of the promisor.
[Durga Prasad v. Baldeo ]
2)It may move by the promisee .
[Chinnaya v. Ramayya ]
3)It must be past ,present or future .
4)It need not be adequate .

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5)It must be real .
6)It must not be illegal , immoral or opposed to public
policy .

Capacity to Contract
The parties to an agreement must have the capacity at law to
enter into a valid contract. Section 11 states that every person
is competent to contract if-
a) he is of the age of majority,
b) he is of sound mind and
c) he is not disqualified from entering into a contract by any
law, to which he is subject.

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Unsound person

• According to sec(12) a person generally sound ,


occasionally unsound can enter into a contract when
he of sound mind

• A person generally unsound occasionally sound can


enter onto contract when he is sound mind .

Free Consent
According to Sec 10 of the Indian Contract Act one of the
essentials of a valid contract is “Free Consent”
Sec 13 defines “consent” as “Two or more persons are
said to consent when they agree upon the same thing in the
same sense.” According to Sec 14, consent is said to be free
when it is not caused by:
1.Coercion
2.Undue influence
3.Fraud
4.Misrepresentation
5.Mistake

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COERCION
According to Sec 15 coercion means “Committing or
threaten to commit any act forbidden by Indian Penal Code
1860 or unlawful detaining or threating to detaining any other
persons property with a view to enter into an agreement. It is
immaterial whether the IPC is or is not in force where the
coercion is employed”
The threat amounting to coercion need not necessarily be
from a party to contract , it may also proceed from a stranger
to the contract.
UNDUE INFLUENCE

Sometimes a party is compelled to enter into a contract against


his will as a result of unfair persuasion by the other party.
Section 16 defines undue influence as follows
A contract is said to be induced by “undue influence”where the
relations subsisting between the parties are such that one of
the parties is in a position to dominate the will of the other and
uses that position to obtain an unfair advantage over the other

Essentials of undue influence

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1. There are two persons
2. The relations are satisfying between them
3. One must dominate the other
4. There must be unfair advantage
5. It involves the moral pressure
Examples of Undue Influence
-Principal and agent
-Superior and and subordinate
-Doctor and patient
-Father and son
-Teacher and student
-Promoter and company
-Master servant
-Spiritual advisor and devotee

FRAUD
According to Sec 17 fraud means and includes any of those
acts committed by a party to contract or with his connivance or
by his agent with an intent to deceive or induce a person to
enter a contract:
1. The suggestion that a fact is true when it is not true and the
person making it does not believe in itto be true

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2. The active concealment of a fact by a person having
knowledge or belief of the fact
3. A promise made without any intention of performing it
4. Any other act fitted to deceive
5. Any such act or omission as the law specially declares to be
fraudulent
Essentials of fraud
1. There must be a representation or assertion and it must be
false
2.The representation must relate to a fact
3.The representation must have been made with the intention
of inducing the other party to act upon it
4.the representation must have been made with a knowledge
of its falsity
5.the other party must have subsequently suffered some loss
MISREPRESENTATION
According to Sec 18 there is misrepresentation:
1. When a person positively asserts a fact is true when his
information does not warrant it to be so, though he
believes it to be true
2. When there is any Breach of duty by a person which brings
an advantage to the person committing it by misleading
another to his prejudice
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3. When a party causes however innocently the other party
to the agreement to make a mistake as to the substance of
the thing which s the subject of the agreement

Performance of Contract
ACTUAL PERFORMANCE
When both parties perform their promises & there is nothing
remaining to perform.
ATTEMPTED PERFORMANCE
When the promisor offers to perform his obligation ,but
promisee refuses to accept the performance. It is also known
as tender.

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Discharge of Contract
DISCHARGE BY PERFORMANCE
DISCHARGE BY AGREEMENT OR CONSENT
DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE
DISCHARGE BY LAPSE OF TIME
DISCHARGE BY OPERATION OF LAW
DISHARGE BY BREACH OF CONTRACT

Discharge by Operation of Law


 DEATH
 MERGER
 INSOLVENCY
 UNAUTHORISED ALTERATION OF THE TERMS OF A
WRITTEN AGREEMENT
 RIGHTS & LIABILITIES VESTING IN THE SAME PERSON

Discharge by Breach of Contract


 ACTUAL BREACH :
 At the time of performance
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 During the performance
 ANTICIPATORY BREACH
 By the act of promisor
(implied repudiation)
 By renunciation of obligation
(express repudiation)

Remedies for Breach (Injured Party)


• A remedy is a means given by law for the enforcement of a
right
• Following are the remedies
• [1] Rescission of damages.
• [2] Suit upon quantum meruit.
• [3] Suit for specific performance.
• [4] Suit for injunction.

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Unit–II: The Sale of Goods Act, 1930

Definition of Contract of Sale


• Section 4 defines a contract of sale as “a contract whereby
a seller transfers or agrees to transfer the property in
goods to the buyer for a price”

Goods
• ‘Goods’ means every kind of movable property, other than
actionable claims and money; and includes stocks and
shares, growing crops, grass and things attached to or
forming part of the land which are agreed to be severed
before sale or under the contract of sale
• Trademarks, patents, copyright, goodwill, water, gas,
electricity are all goods
• In general, it is only the movables that form goods
• The term goods excludes money
• Money means legal tender and not the rare coins which
can be sold and purchased as goods
• Money itself cannot be subject of a sale

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• The actionable claims are things which a person cannot
make use of, but which can be claimed by him by means of
a legal action

Kinds of Goods
• Goods may be classified as:
1. Existing
2. Future
3. Contingent
Existing goods are those which are owned or possessed by the
seller at the time of the contract
Instances of goods possessed but not owned by the seller are
sales by agents and pledgees
• Existing goods may be either:
a) Specific or ascertained
b) Generic and unascertained
Specific goods means goods identified and agreed upon at the
time a contract of sale is made
Ascertained goods, though normally used as synonym for
specific goods may be intended to include goods which have

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become ascertained subsequently to the formation of the
contract
Generic or unascertained goods are goods indicated by
description and not specifically identified

Future goods means goods to be manufactured or produced or


acquired by the seller after making the contract of sale
Contingent goods are the goods the acquisition of which by the
seller depends upon a contingency which may or may not
happen. Contingent goods is a part of future goods

SALE :
 It is a contract where the ownership in the goods is
transferred by seller to the buyer immediately at the
conclusion contract
EXAMPLE: A sells his house to B for Rs. 10,00,000. It is a sale
since the ownership of the house has been transferred from A
to B.

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AGREEMENT TO SELL :
 It is a contract of sale where the transfer of property in
goods is to take place at a future date or subject to some
condition thereafter to be fulfilled.
EXAMPLE: A agreed to buy from B a certain quantity of nitrate
of soda. The ship carrying the nitrate of soda was yet to arrive.
This is `an agreement to sell`. In this case, the ownership of
nitrate of soda is to be to transferred to A on the arrival of the
ship containing the specified goods (i.e. nitrate of soda)
[Johnson V McDonald (1842) 9 M & W 600, 60 RR 838]

ESSENTIALS OF CONTRACT OF SALE


 Two parties: There must be two parties- a buyer and a
seller to constitute a contract of sale.
 Goods: Contract of sale relates to goods i.e., movable
property . Transaction involving purchase and sale of
immovable property are out of the purview of the Sale of
Goods Act.
 Transfer of general property: The object of the contract
must be the transfer of general property as distinguished
from the special property in the goods by one person to
another. The term ‘general property’ refers to ownership
of goods.

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 Price: The consideration for the contract of sale called
price must be money.
 Essential elements of a valid contract: All the essential
elements of a valid contract must be present in the
contract of sale.

The Price
Sec.2(10) defines price “as money consideration for a sale of
goods”.
 It forms an essential part of the contract.
 It must be expressed in terms of money.
 It is not essential that the price should be fixed at the time
of sale. It must, however, be payable, though it may not
have been fixed.
Ascertainment of price
 Price in a contract of sale may be
 fixed by the contract itself, or
 left to be fixed in an agreed manner, or
 determined by the course of dealing between the
parties[Sec. 9(1)]

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 In the absence of this, the buyer must pay to seller a
reasonable price. What is the reasonable price is a
question of fact dependent on the circumstances of
each particular case[Sec. 9(2)]
IMPORTANCE OF TRANSFER OF OWNERSHIP
It is important to know the precise moment of
time at which the property in goods passes from
the seller to the buyer for the following reasons:-
1. Risk prima facie passes with ownership: In case of
destruction of or damage to the goods, it is the owner who
has to bear the loss because the general rule is ‘res perit
domino’ risk follows ownership or whosoever is the owner must
bear the loss. The payment of the price or possession of goods
is immaterial.
2. Action against third parties: In case the goods have damaged
by a third party, it is the only the owner who can take action
against him.
3. Insolvency of the seller or the buyer: In the
event of insolvency of either the seller or the buyer, the
question whether the Official Receiver or Assignee can take
over the goods or not depends on whether the property in the
goods has passed from the seller to the buyer.

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Conditions and Warranties
MEANING OF CONDITION AND WARRANTY
 A stipulation in a contract of sale with reference to goods
which are the subject thereof may be a condition or a
warranty[Sec. 12(1)].
 Condition:
A condition is a stipulation essential to the main purpose of
the contract, the breach of which gives rise to a right to treat
the contract as repudiated. [Sec 12(2)]
 Warranty:
A warranty is a stipulation collateral to the main purpose of
the contract, breach of which gives rise to a claim for damages,
but not a right to reject the goods and treat the contract as
repudiated. [Sec 12(3)]

Transfer of Title
 For Specific goods(Sec. 20 to 22)

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 Passing of property at the time of contract(Sec.20)
Where there is an unconditional contract for the sale of
specific goods in a deliverable state, the property in the goods
passes to the buyer when the contract is made.
 Passing of property delayed beyond the date of the
contract
Goods not in a deliverable state(Sec.21)
Where there is a contract for sale of specific goods not
in a deliverable state, i.e., the seller has to do something
to the goods to put them into the deliverable state, the
property does not pass until such thing is done and the
buyer has notice of it.
When the price of goods is to be ascertained by weighing
Where there is a contract for sale of specific goods in a
deliverable state, but the seller is bound to weigh,
measure, test or do some other act or thing with
 For unascertained/ ‘future’ goods Sec.23
In the case of a contract for a sale of unascertained or future
goods by description , property will pass from the seller to the
buyer when the goods of the same description, in a deliverable
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state, are unconditionally appropriated to the contract by one
party with the consent of the other.
 Goods sent on approval or ‘sale or return’ Sec.24
When the goods are delivered to the buyer on ‘approval’ or
on ‘sale or return’ basis, the property in the goods will pass
from seller to the buyer, when any of the following conditions
are satisfied.
 The buyer accepts the goods, or
 The buyer does something which is similar to his
act of accepting the goods, e.g., pledges the
goods or sells away the goods, or
 The buyer retains the goods without giving
notice of rejection beyond the period fixed or
reasonable period if no time is fixed.

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Definition of Unpaid Seller

Seller :- A person who sells the goods or agrees to sell the


goods is called seller.

Unpaid :- It means payment is not made or without


payment. In simple words, "Unpaid seller" means a person
who has sold the goods for a price but price has not been paid
to him.

Unpaid Seller Is A Person :-

i. To whom the whole price has not been paid or tendered.

ii. And where a bill of exchange or other negotiable


instruments has been accepted by him as a condition on
which it was received has not been fulfilled by reason of
dishonor of the instrument or otherwise.

EXAMPLE: Party A sells a car on cash basis to party B and the


price has not been received yet.

Rights of an Unpaid Seller


 Right against the goods
A. When the property in the goods has been transferred

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1.RIGHT OF LIEN[Sec 46(1)(a) and 47 to 49]
The right of lien means lawfully right to retain the goods
possession until the full priceis received. An unpaid seller can
exercise his right of lien in following cases
Where the goods have been sold on the cash basis.
I. Where the goods have been sold on credit basis and the
term of credit has expired.
II. Where the buyer has become insolvent even if the period
of credit has not been expired.
2.RIGHT OF STOPPAGE IN TRANSIT
It means stoppage of goods while they are in transit to take
possession until the price is paid (sec.50-52)
 Unpaid seller can stop the goods in transit in the following
cases.
1. While the buyer becomes insolvent.
2. While the goods are out of actual possession of seller,
but have not reached buyer’s possession i.e. goods
are in transit with career.
3. The unpaid seller can stop the goods in transit only
for payment of the price of the goods and not for any
other charges.

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3.RIGHT TO RE-SALE
If a buyer fails to pay or offer the price within a reasonable
time, the unpaid seller has the right to resell the goods in
the following circumstances.
1. Where the goods are of perishable nature.
2. Where the unpaid seller has exercised his right of lien
or stoppage in transit and gives a notice to buyer of
his intension of resell the goods.
3. Where the unpaid seller has expressly reserved his
right of resale.
4. Where seller gives notice to the buyer of his intension
to resell and the buyer does not pay within a
reasonable time, he can-
a. Recover loss on resale of the goods, if any
b. Retain any surplus on resale of goods, if any

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Unit–III: The Negotiable Instruments Act,
1881

Negotiable Instruments: Definition


A negotiable instrument is a document guaranteeing the
payment of a specific amount of money, either on demand, or
at a set time, with the payer named on the document.

Characteristics of Negotiable Instruments


1. Property

The possessor of the negotiable instrument is presumed to be


the owner of the property contained therein. A negotiable
instrument does not merely give possession of the instrument
but right to property also. The property in a negotiable
instrument can be transferred without any formality. In the
case of a bearer instrument, the property passed by mere
delivery to the transferee. In the case of an order instrument,
endorsement and delivery are required for the transfer of
property.
2. Title

The transferee of a negotiable instrument is known as holder in


due course.’ A bonafide transferee for value is not affected by
any defect of title on the part of the transferor or of any of the

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previous holders of the instrument. This is the main distinction
between a negotiable instrument and other subjects of
ordinary transfer. The general rule of nemo dat quod non habet
does not apply to negotiable instruments.
3. Rights

The transferee of the negotiable instrument can sue in his own


name, in case of dishonor.
A negotiable instrument can be transferred any number of
times till it is at maturity. The holder of the instrument need
not give notice of transfer to the party liable on the instrument
to pay.
4. Presumptions

Certain presumptions apply to all negotiable instruments e.g. a


presumption that consideration has been paid under it.
5. Prompt Payment

A negotiable instrument enables the holder to expect prompt


payment because a dishonor means the ruin of the credit of all
persons who are parties to the instrument.

Definition of a Promissory Note


A promissory note is an instrument in writing (not being a bank
note or a currency note) containing an unconditional
undertaking, signed by the maker, to pay a certain sum of
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money only to, or to the order of, a certain person. This
definition given by law means that when a person gives a
promise in writing to pay a certain sum of money
unconditionally to another person (named) or according to his
instructions, the document is a promissory note.

Essentials of a Promissory Note


The essentials are:
(1) It must be in writing.

(2) It must contain a clear promise to pay. Mere


acknowledgment of debt is not a promise.

(3) The promise to pay must be unconditional. “I promise to pay


Rs. 5,000 as soon as I can” is not an unconditional promise.

(4) The promisor or maker must sign the promissory note.

(5) The maker must be a certain person.

(6) The payee (the person to whom payment is promised) must


also be certain.

(7) The sum payable must be certain and must not be capable
of contingent additions or subtractions.

“I promise to pay Rs. 5,000 plus all fines” is not certain.

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(8) Payment must be in legal tender money only. “I promise to
pay B Rs. 3,000 and one quintal of paddy,” is not a promissory
note.

(9) It should not be made payable to bearer, Under the Reserve


Bank of India Act, a promissory note payable to bearer is illegal.

(10) It should be properly stamped.

Bill of Exchange – Definition


The legal definition is “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.” It means that if an order is made in writing by one
person on another directing him to pay a certain sum of money
unconditionally to a certain person or according to his
instructions or to the bearer, and if that order is accepted by
the person on whom the order was made, the document is a
bill of exchange.

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Essentials of a Bill of Exchange
1. It must be in writing-The Bill of Exchange must be in
writing.
2. Order to pay-There must be an order to pay. It is the
essence of the bill that the drawer orders the drawee to
pay money to the payee. The term order means any
request or direction, which show an intention of the
drawer to pay.
3. Unconditional order-This order must be unconditional.
The bill is payable at all events. The order of the payment
of the bill must not dependent on a contingent event. A
conditional bill of exchange is invalid.
4. Signature of the drawer-The drawer must sign the
instrument. The instrument without the proper signature
will be unclear and ineffective. It is permissible to add the
signature at any time after the issue of the bill.
5. Parties -There must be three parties in a bill of exchange
and the parties must be certain. The drawer, drawee and
the payee are the parties in a bill of exchange.
6. Certainty of amount-The order must be to pay a certain
sum of money.
7. Payment medium-The instrument must contain an order
to pay money and money only. The distinctive order to pay
anything is invalid.
8. Stamping-A Bill of Exchange is valid when it is duly
stamped as per the Stamp Act.
9. Cannot be made payable to bearer on demand-A Bill of
Exchange as originally drawn cannot be made payable to
the bearer on demand.
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Cheque– Definition
Section 6 of the Act defines “A cheque is a bill of exchange
drawn on a specified banker, and not expressed to be payable
otherwise than on demand”. A cheque is bill of exchange with
two more qualifications, namely, (i) it is always drawn on a
specified banker, and (ii) it is always payable on demand.
Consequently, all cheque are bill of exchange, but all bills are
not cheque. A cheque must satisfy all the requirements of a bill
of exchange; that is, it must be signed by the drawer, and must
contain an 17 unconditional order on a specified banker to pay
a certain sum of money to or to the order of a certain person or
to the bearer of the cheque. It does not require acceptance.

Distinction between a Cheque and a Bill of Exchange


Distinction Between Bills of Exchange and Cheque
1. A bill of exchange is usually drawn on some person or firm,
while a cheque is always drawn on a bank.
2. It is essential that a bill of exchange must be accepted before
its payment can be claimed A cheque does not require any such
acceptance.
3. A cheque can only be drawn payable on demand, a bill may
be also drawn payable on demand, or on the expiry of a certain
period after date or sight.

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4. A grace of three days is allowed in the case of time bills while
no grace is given in the case of a cheque.
5. The drawer of the bill is discharged from his liability, if it is
not presented for payment, but the drawer of a cheque is
discharged only if he suffers any damage by delay in presenting
the cheque for payment.
6. Notice of dishonour of a bill is necessary, but no such notice
is necessary in the case of cheque.
7. A cheque may be crossed, but not needed in the case of bill.
8. A bill of exchange must be properly stamped, while a cheque
does not require any stamp.
9. A cheque drawn to bearer payable on demand shall be valid
but a bill payable on demand can never be drawn to bearer.
10. Unlike cheques, the payment of a bill cannot be
countermanded by the drawer.

Bank Draft
It is a bill of exchange in which a bank orders its branch or
another bank, as the case may be, to pay a specified amount to
a specified person or to the order of the specified person.

Parties to Negotiable Instruments


Parties to Bill of Exchange
1. Drawer: The maker of a bill of exchange is called the
‘drawer’.
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2. Drawee: The person directed to pay the money by the
drawer is called the ‘drawee’
3. Acceptor: After a drawee of a bill has signed his assent upon
the bill, or if there are more parts than one, upon one of such
pares and delivered the same, or given notice of such signing to
the holder or to some person on his behalf, he is called the ‘
acceptor’.
4. Payee: The person named in the instrument, to whom or to
whose order the money is directed to be paid by the
instrument is called the ‘payee’. He is the real beneficiary under
the instrument. Where he signs his name and makes the
instrument payable to some other person, that other person
does not become the payee.
5. Endorser: When the holder transfers or indorses the
instrument to anyone else, the holder becomes the ‘Endorser’.
6. Endorsee: The person to whom the bill is indorsed is called
an ‘Endorsee’.
7. Holder: A person who is legally entitled to the possession of
the negotiable instrument in his own name and to receive the
amount thereof, is called a ‘holder’. He is either the original
payee, or the Endorsee. In case the bill is payable to the bearer,
the person in possession of the negotiable instrument is called
the ‘holder’.

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8. Drawee in case of need: When in the bill or in any
endorsement, the name of any person is given, in addition to
the drawee, to be resorted to in case of need, such a person is
called ‘drawee in case of need’. In such a case it is obligatory on
the part of the holder to present the bill to such a drawee in
case the original drawee refuses to accept the bill. The bill is
taken to be dishonored by non-acceptance or for nonpayment,
only when such a drawee refuses to accept or pay the bill.
9. Acceptor for honor: In case the original drawee refuses to
accept the bill or to furnish better security when demanded by
the notary, any person who is not liable on the bill, may accept
it with the consent of the holder, for the honor of any party
liable on the bill. Such an acceptor is called ‘acceptor for honor’.
Parties to a Promissory Note
1. Maker. He is the person who promises to pay the amount
stated in the note. He is the debtor.
2. Payee. He is the person to whom the amount is payable i.e.
the creditor.
3. Holder. He is the payee or the person to whom the note
might have been indorsed.
4. The indorser and indorsee (the same as in the case of a bill).

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Parties to a Cheque
1. Drawer. He is the person who draws the cheque, i.e., the
depositor of money in the bank.
2. Drawee. It is the drawer’s banker on whom the cheque has
been drawn.
3. Payee. He is the person who is entitled to receive the
payment of the cheque.
4. The holder, Endorser and Endorsee (the same as in the case
of a bill or note).

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Unit–IV: Laws pertaining to Business
Organizations:

Types of Business Organizations


Private Ltd Company
A private company has the following features:

1. Restricts the right of the shareholders to transfer their shares.


2. Has a minimum of 2 and maximum of 50 members.
3. does not invite public to subscribe to its share capital
4. Must have a minimum paid up capital of Rs. 1 lakh or such a
higher amount which may be prescribed from time to time.
Public Ltd Company :
A public Ltd company has the following characteristics:

1. It allows the shareholders to transfer their shares.


2. Has a minimum of 7 members, and for maximum there is no
limit.
3. it invites the general public to subscribe to its shares
4. Must have a minimum paid up capital of Rs 5 lakh or such a
higher amount as may be prescribed from time to time.
Unlimited Company
Unlimited Company is a form of business organization under
which the liability of all its members is unlimited. The personal
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assets of the members can be used to settle the debts. It can at
any time re-register as a limited company under section 32 of
the Companies Act.

Sole proprietorship
Sole proprietorship is a form of business entity where a single
individual handles the entire business organization. He is the
sole recipient of all profits and bearer of all loses. There is no
separate law that governs sole proprietorship.

Joint Hindu Family


Joint Hindu Family is a form of business organization wherein
the members of a family can only own and manage the
business. It is governed by Hindu Law.

Partnership
Partnership is “the relation between persons who have agreed
to share the profits of the business carried on by all or any one
of them acting for all”. It is governed by the Indian Partnership
Act 1932.

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Co-operatives
Co-operatives is a form of voluntary organization, wherein the
members work together for the promotion of the interests of
its members. There is no restriction to the entry or exit of any
member. It is governed by Cooperative Societies Act 1912.

Limited Liability Partnership


Under LLP (Limited Liability Partnership) the liability of at least
one member is unlimited whereas rest all the other members
have limited liability, limited to the extent of their contribution
in the LLP. Unlike general partnership this kind of partnership
does not get terminated by the death or insolvency of the
limited partners. It is governed by Limited Liability Partnership
Act of 2008.

Liaison Office
Liaison Office is a kind of representative office which is set up
to understand the business and investment environment. It is
barred from taking up any commercial/industrial/trading
activity and its role is limited to aggregation of information and
promotion of exports/imports. It has to maintain itself out of
inward remittances received from the parent company.
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Branch Office
Foreign companies which are into manufacturing and trading
activities abroad are permitted to set up branch offices in India
for various purposes like rendering of professional and
consultancy services, export/import of goods etc. Branch
offices are not permitted to carry out manufacturing activities
on their own. RBI is the statutory body that grants permission
to foreign companies for setting up branch offices in India.

Project Office
Foreign companies can set up temporary project offices in India
for carrying out activities related to that specific project. - See
more at: http://business.mapsofindia.com/doing-business-in-
india/types-of-business-entities-in-
india.html#sthash.iVYV2LQ1.dpuf

Types of Companies according to the Mode of Incorporation


 Chartered Companies
 Statutory Companies
 Registered Companies

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Types of Registered Companies
 Private Limited Company
 Partnership
 Limited Liability Partnership
 Proprietorship
 One Person Company

1. Private Limited Company


It is one of the most sophisticated forms of business entities in
India. Here, business assets are separated from personal assets.
Every shareholder is just responsible for his share of the total
capital. Pvt Ltd Companies need to maintain records of financial
transactions, board meetings, and annual reports and so on.
A Pvt Ltd company consists of a group of shareholders and the
total capital of the entity is made up of shares. These shares
can be sold/transferred to another individual who then also
becomes one of the owners of the company.
Private Limited Company can be of three types:
i) Company limited by shares – A company having the liability of
its members limited by the memorandum to the amount, if any,
unpaid on the shares respectively held by them.
ii) Company limited by guarantee – A company having the
liability of its members limited by the memorandum to such
amount as the members may respectively undertake to
contribute to the assets of the company in the event of its
being wound-up.
iii) Unlimited company – A company not having any limit on the
liability of its members.

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2. Partnership
Partnership business entities are quite similar to sole
proprietorship. The basic difference between partnership and
sole proprietorship is that more than one individual is involved
in a partnership. The roles, responsibilities and the share of
each partner are specifically defined in a legal partnership
agreement.
Any profit earned by the business is shared between partners
according to the legal partnership agreement. In case there are
losses, each of the partners is personally responsible. Personal
assets of partners may be used to compensate the losses
incurred, if any.

3. Limited Liability Partnership


With the concept introduced in 2009, a LLP functions as a
structured business model. It is a separate legal entity from the
partnership entity and business assets are separate from the
personal assets of the partners. In case the business incurs
losses, the personal assets of partners are not put at risk as the
maximum liability of every partner is defined by his share
capital in the entity.
Compared to Partnership and Sole Proprietorship, Limited
Liability Companies always have better credibility among
investors. The main reasons include proper maintenance of
financial records, incorporation records and tax records.

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4. Proprietorship
A business registered in the name of an individual is called Sole
Proprietorship. A single person is completely responsible for
the entire business with the business and the owner not being
separate from each other. The owner funds the business, takes
any profits and bears any losses.
It does not involve any complex rules or accounting. Personal
assets and business assets are not separated from each other.
Any profits from the business are just added to the business
owner’s income for taxation purposes.
Similarly, any losses become the personal losses of a business
owner. In case the business starts incurring losses and
additional money is needed to compensate those losses, the
personal assets of the owner itself are put at risk.

5. One Person Company


OPC is a newly introduced type of company and was introduced
in the Companies Act, 2013 to support entrepreneurs who on
their own are capable of starting a venture by allowing them to
create a single person economic entity. One of the biggest
advantages of a OPC is that there can be only one member in a
OPC, while a minimum of two members are required for
incorporating and maintaining a Private Limited Company or a
Limited Liability Partnership.
Similar to a Company, an OPC is a separate legal entity from its
members, offers limited liability protection to its shareholders,
has continuity of business and is easy to incorporate.

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Partnership Firms – Formation
Section.4 of the Indian Partnership Act, 1932 defines
Partnership in the following terms:
“ Partnership is the relation between persons who have agreed
to share the profits of a business carried on by all or any of
them acting for all.”

Essentials of Partnership
a.) There must be a contract.
b.) Between two or more persons.
c.) Who agree to carry on business.
d.) With the object of sharing profits.
e.) The business must be carried on by all or any of them
acting for all.

Registration of Partnership Firms


Under the partnership Act, it is not compulsory for every
partnership firm to get itself registered. But an unregistered
firm suffers from a number of disabilities.

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An application in the prescribed format along with the
prescribed fees has to be submitted to the Registrar of firms of
the State in which the place of business of the firm is situated.
The application must be signed by all the partners and must
contain the following particulars:
a.) The name of the firm.
b.) The place of business of the firm.
c.) The names of any other places where the business of the
firm is carried on.
d.) The date when each partner joined the firm.
e.) The names in full and permanent addresses of the partners.

Duties of Partners
1. To be Sincere and faithful :-
Every partner should be fair and faithful in dealing to other
partners.

2. Maintenance of True account :-


Every partner should prepare the true account of the firm
for the other partners.

3. Common Advantage :-
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Every partner should performs his duties for the common
advantage of all the partners.

4. To keep the Secrecy :-


It is the duty of the partner that he should maintain the
secrecy of the business from outside.

5. Use of Firm Property :-


It is the duty of the partner that he may not use the
property of the firm for his personal interest.

6. Provide All Information's :-


It is the duty of the partner that he must provide all the
necessary information's about the business to other
partners.

7. To Carry on Other Business :-


It is the duty of the partner that he should not carry on any
other business except the partnership.

8. Profit should be Paid to the Firm :-


If a partner earn profit from any sources of the firm, it
should be paid to the management of the firm.

9. Compensation for Loss :-

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If a partner commits a fraud his co-partner he must
compensate the loss.

10. Distribution of Loss :-


In the absence of agreement, each partner will pay
equally.

11. Use of Powers Within Limits :-


It is the duty of the partner that he should use his powers
within the limits delegated by the firm.

12. To Abide the Decision :-


A partner should abide by the decisions taken by the
majority of the partners.

Liabilities of Partners
1. Loss Liability :-
In case of loss each partner will equally contribute the loss. If
there is no agreement.

2. Liability of All Actions :-


All the partners of the firm are jointly responsible for all the
actions done by the firm.

3. Liability of New Partner :-

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A new partner is liable for all the acts of the firm done after he
becomes a partner.

4. Liability of Insolvent Partner :-


The property of insolvent partner is not liable for any
obligations of the firm after the date on which the order of
insolvent is issued by the Court.

5. Liability of Deceased Partner :-


If a partner dies and the firm suffers losses the property of the
deceased can not be held liable for any payment.

6. Liability of Retired Partner :-


A retired partner will not be responsible for any act of the firm
after the date of retirement.

7. Liability of Fraud :-
If any partner commits fraud the other partners will also be
equally liable.

Dissolution of a Partnership Firm


Section. 39 provides that the dissolution of partnership
between all the partners of a firm is called ‘dissolution of the
firm.’
Modes of dissolution
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A firm may be dissolved in any one of the following ways:
1. By Agreement:
2. By Notice
3. On the happening of certain contingencies
4. Compulsory Dissolution
5. Dissolution by the Court
1. By Agreement: A firm may be dissolved with the
consent of all the partners or in accordance with a
contract between the partners. Partnership is created
by a contract, it can also be terminated by a contract.
2. By notice: Where the partnership is at will, the firm may
be dissolved by any partner giving the notice in writing
to all the other partners of his intention to dissolve the
firm. A notice of dissolution once given cannot be
withdrawn without the consent of all the other
partners.
3. On the happening of certain contingencies: Subject to a
contract between the partners, a firm may be dissolved
if:
a.) if constituted for a fixed term, by the expiry of
that term.

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b.) If constituted to carry out one or more
adventures or undertakings, by the completion thereof.
c.) By the death of the partner.
d.) By the adjudication of partner as an insolvent.
4. Compulsory Dissolution: A firm may be compulsorily
dissolved if:

a.) When all the partners, or all the partners but one,
are adjudged insolvent.
b.) When some event has happened which makes it
unlawful for the business of the firm to be carried on.
5. Dissolution by the Court: Dissolution by the court is
necessitated when there is a difference of opinion
between the partners regarding the matter of dissolution
in cases of:

a) Insanity
b) Permanent Incapacity
c) Misconduct
d) Persistent breach of agreement
e) Transfer of interest
f) Just and Equitable

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Distinction between a Firm and a Company
BASIS FOR PARTNERSHIP COMPANY
COMPARISON
FIRM

Meaning. When two or more A company is an


persons agree to association of
carry on a business persons who
and share the invests money
profits & losses towards a
mutually, it is common stock, for
known as a carrying on a
Partnership firm business and
shares the profits
& losses of the
business.

Governing Act Indian Partnership Indian Companies


Act, 1932 Act, 1956
How it is created? Partnership firm is The company is
created by mutual created by
agreement incorporation
between the under the
partners. Companies Act.

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Registration Voluntary Obligatory

Minimum number Two Two in case of


of persons private company
and Seven in case
of public
company.
Maximum number 20 in trading 50 in case of a
of persons business and 10 in private company
banking business. and a public
company can have
unlimited number
of members.
Management of the concern Partners itself. Directors

Liability Unlimited Limited

Contractual capacity A partnership firm A company can


cannot enter into sue and be sued in
contracts in its own its own name.
name
Minimum capital No such 1 lakh in case of
requirement requirement private company
and 5 lakhs in case
of public
company.
Use of word limited No such Must use the
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requirement. word 'limited' or
'private limited' as
the case may be.
Legal formalities in No Yes
dissolution /
winding up
Separate legal entity Yes No Yes

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