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Law Notes
Law Notes
law begins and secondly the place from where the rules of business activities get legal authority.
The main sources of business law are discussed below:
a) Custom and Usage: The custom is known as particular way of life or behavior. If such
behavior is followed continuously by the people in the society, it becomes a customs or usages
which are important sources of law. This types of custom should not oppose to statutory law,
mortality and public welfare. If there is no legislation, no precedents the matter is to be decided
by the custom or usage of that particular.
b) Statutes/ Legislation: The legislatory law come from parliament or law making body of the
nation. This types of law is the outcome of demand of people and need of the time. It is made
after fulfilling a series of discussion by lawmakers. Now a days most of business activities are
regulated by the law made by parliament.
c) Judicial Decision: Judicial decision are known as precedent. Precedent is a judicial decision
which contains in itselfs a principle. In other words it is the earlier decision of supreme court
which is taken as a rule while deciding the later cases. Where there is no law to deal the
problems in such cases the court can make decision in the light of justice and equity such
decision are treated as law for that matter. It is the one of the major sources of modern business
law.
Other Sources ( this should be included in your answer the difference is that the above are the
main sources)
d) English Mercantile law: business law was developed in England. It is the pioneer of business
law in the world. Nepal is conjoind influenced by the British rule since year.
e) Professional Opinion of experts: Lawyers and critics may play significant role creating good
legal environment. The opinion and explanation made by such professional may give proper
instruction and better contribution to the development of law.
f) Business Agreement, Conventions: Conventional law refers to any rule or system of rule
agreed upon by the parties to regulate their business conduct. International business
organization are more active in national, region and world business nowdays. Examples: ( WTO,
SAFTA) . And bilateral agreement between the nations and conventions of business
communities are the main sources of national and international business law.
Legal Environment
Legal environment of business refer to the aggregate of surrounding connected with the law that
influence the business activities and business firms. It refers to the aggregate of all types of law,
regulation. Acts and precedents intended to encourage, protect, and guide the business
activities. Such law are made and enforced by the state for the prosperity of every aspect of
business.
According to Prem R Panta The legal environment refers to the framework of laws, regulation
are court decision, intended to encourage, guide and control business activities.
CHAPTER2- CONTRACT
(Define ontract)
A contract is an agreement enforceable by law. The law of contract is the basis of business.
Every business activity is determined and guided by the agreement of the concerned parties. In
fact, the law of contract is concerned with everybody and every aspect of the business to
perform any kind of act. And it is concerned with the rights and obligation of the parties entering
into it.
According to A.J Salmond: "An agreement creating and defining obligation between two or more
parties is a contract.
Supreme court of Nepal: "An agreement of two or more parties with condition is contract.
In short the contract includes the following:
- two or more parties
- an agreement on the ground of free consent
- exchange of promise by meeting the minds
- enforceable by law.
In short the right and liabilities that are created reciprocally between the concerned parties can
be called contract.
Nature of Contract:
A contract is an agreement which is enforceable by the law. The above definition have cleared
that an agreement between two or more parties concluded with their consent, creates rights and
liabilities between them. Such consent of the parties creates contract. An agreement is regarded
as a contract where there are the main characteristics of valid contract presented in it. There
should be the certain characteristics to be the contract determined by the law.
The nature of law can be discussed in the following grounds:
1) Agreement/ Promissory Nature: Contract is a private legislation, which is formed and binding
between the concerned parties on the ground of their agreement. Agreement has two element
one is there should be two parties making an agreement, one can not enter into a contract
alone. Another is.....
meeting of minds of concerning parties. An agreement is the outcomes of consenting minds of
the parties. The contracting parties must meet their minds as regards the subject matter of the
contract, in the same sense, upon the same thing and at the same time.
2) Private legislation: A contract is a private legislation binding from those parties who are
involved in it. When any one breches the contract the other party becomes victimize financially.
Therefore, the victim party may enforce by the court.
3) Legal Obligation: There must be legal obligation in an agreement to become a contract.
Usually it is presumed that the parties entering into a commercial agreement intend to create a
legal relationship between them. The agreement which do not establish a legal relationship are
not contracts.
Contract = legality + Obligation + Business Matter
4) Freedom/ Autonomy of parties: The parties of contract must be autonomous to deliver their
genuine consent at the time of concluding contracts. It is also known as a freedom of contracts.
The concerning parties of the contract should be free to choose the form of contract, its subject
and determine consideration and its extent as well as the term of condition.
5) purity of Contract: Sanctiteness is another nature of contract. The common law system
protects contract from commission of fraud, mispresentation, mistake, coercion and undue
influence and effort to control the economic exploitations of employee by the doctrine of restraint
of trade.
6) Function of Contract: Contract is a means for the achievement of purpose of the parties. The
following function are performed by nature through the contract.
- to facilitate forward planning of transaction and to make provision for future contingencies.
- to establish the respective responsibilities of the parties and performance to be expected from
them.
- To enable the economic risks involved in the transaction to be allocated in advance between
the parties.
- To provide alternative way or remedy if thing go wrong.
- Creation of legal rights to protect own interest.
Essential Elemnt of A valid Contract
(IQ) 20
Contract and agreement:
In general contract is an agreement between two or more parties. In fact such agreement are
not contract. Only those agreement which are enforceable by the law are contract. In the
agreement, the parties of it make promises about something which is to be performed, when
such promises or expectation of the parties become an agreement and when this agreement is
backed up by law it becomes a contract which creates legally binding obligation between the
parties.
The scope of an agreement is wider than of contract because a contract must fulfill some
essential elements. It has limited scope which exists within the limitation of legality. Thus all
contract are agreements but all agreement are not contract. Thus contract essentially consists
of two element first is agreement and second is its enforceability. Where certain duties or
obligation are created by agreement between the parties, contract law deals with , where as an
agreement which does not create obligation is not the subject matter of contract law.
The essential elements of a valid contract are as follows:
1) Offer and Acceptance: There must be an agreement between two parties to create a
contract. The agreement involves a valid offer by one party and valid acceptance of the offer by
other party. Therefore the journey of contract always starts with offer and acceptance.
2) Consideration: Consideration means something in return. It has motivation power to fulfill the
promise. The agreement born when contracting parties are giving and getting something in
return. It is not necessary to be cash or kind, it may be a promise to do or not to do something.
But it must be real and lawful, which may be in past, present and future.
3) Legal Relationship: At the time of entering into an agreement the parties should have the
intention to create legal relationship between them to avoid all types of conflicts. This types of
legal relationship helps victim party to have legal remedy in case of failure of either party.
Agreement without legal relation can not be enforced. For example: The relationship between a
loaner and borrower can not attract the law of contract. The father promise his son to get a cycle
if he passed the exam. Son passed the exam, The son claims for his prize. In such matter ,
father not bound to take cycle for his son, because they had no such intention to create legal
relationship while making the promises. To be fallen in contract law the agreements parties must
have the intention to establish legal relationship between them.
4) Free Consent: When the parties of contract agrees upon same thing in the same sense, their
consent must be free from oppression , under influence, mispresentation, fraud and mistake of
law. The consent must be made with knowingly and freely. If the consent is not free the parties
can avoid the contract.
5) Meeting of Minds: To be a contract, two or more than two persons must agree upon same
thing in the same sense. If 'A' want to purchase 'X' but B want to sell 'Y' than there is no contract
raised between 'A' and 'B' because there is no meeting of minds.
6) Competent ( Capable) parties: the parties who are involved in the agreement must be
competent to contract. If incompetent parties are in a contract, it is not valid. The parties not
capable to contract are minor person of unsound mind and legally disqualified person.
7) Lawful Objectives: The objectives of agreement must be lawful to be a valid contract. If the
subject matter of agreement are not lawful ( illegal, immoral and oppose to public policy) are not
contract, and the agreement having this types of objectives are not enforced by law.
8) Not declared to be void: Those agreements which are expressly declared void by the contract
and other law force are not the contract. Agreement to kill the life of other or agreement to steal
goods are illegal and void. Similarly agreement in restraint marriage, or profession are void by
NCA.
9) Certainty: The objectives of an agreement must be certain and clear and practical. The
contract which is uncertain due to lack of providing reasonable meaning is void. For example: A
agrees B that he will purchase another car if the first car becomes lucky to him. Such agreement
can not enforce against A, and B can not claim for another purchase by A. Because the term '
lucky' does not have any certain and clear meaning in practical life.
10) Possibility of performance: The objectives or the action to complete the agreement must be
possible to perform. Any act which can not be done or is non- performable does not create legal
obligation to the contracting parties.
Chapter-6
OFFER AND ACCEPTANCE
Define Offer:
To offer means to present something so that it may be accepted or rejected.
Offer is the proposal of the first party to another parties. NCA defines offer as " An offer
is a proposal presented by one person to another with the intention of obtaining his
assent for performing any work" And this types of proposal creates a legal obligation if it
is accepted by the acceptance parties. A valid offer may be expressed or implied.
i) Specific and general offer: Where an offer is made to a particular person there is a
specific offer and where it is made to the general public there is a general offer.
ii) Cross and counter offer: Where both parties make their offer to each other at the
same time, there is a cross offer. Such types of offer is not a valid offer for the contract
because to create a contract there must be an offer from one side and acceptance from
other side.
Where an offeree intends to accept the offer after alteration in any term of offer, there is
a counter offer.
Note : ( the above types of offer is just for understanding purpose that may unnecessary
for exam)
Rules Regarding the valid offer
(important question)
i) Creating a legal relationship: the offerer must have intention of creating legal
relationship. After the acceptance of the offer it must create some legal obligation.
ii) Offer should not be certain and should be made to a definite person.
iii) Offer may be conditional: An offer may be made subject to conditional and that must
be clearely conveyed to the offeree. An unreasonable treatment and ignorance of
offeree to the conditions are not valid.
iv) Offer and offree must be communicated.
v) The offer can be expressed in different for written, spoken) and implied
vi) Offer is seeking acceptance of other party
vii) offer may be specific to the person or be to general public or globally.
viii) Offer should not contain the term that non-communication or rejection would
amount to an acceptance.
ix) Invitation to offer is not an offer.
x) Advertisement is not the offer.
Chapter-7
Consideration
Define consideration and describe rules regarding consideration?
Consideration cab be defined as a price of promise, which is bought by the next parties
(promise). When a party to an agreement promises to do something he/she must get
something in return which must be valuable in the eye of law. This something is
defined as consideration which may be price, reward, payment or value for which the
promise of the other is carried.
According to Justice palterson : consideration means something, which is of some value
in the eye of law, it may be some benefit to the planting or some detriment to the
defendant.
For example: A agree to sell a house to B for Rs 2 lakh. For As promise, the
consideration is Rs. 2 lakh and for Bs promise, the consideration is the house.
Rules Regarding consideration
a) Consideration must be real and something of valuable in the eye of law.
b) Consideration must move at the desire of the promisor: The act must be done at the
desire of the promisor. Without the desire of the promisor no consideration can be
valuable. It regards that the consideration must be moved from promise only not from
other or stranger to contract.
c) Consideration may move from the promise or third persons: The act which
constitutes a consideration may be moved by the promise or any other person on his
behalf to enforce a promise. But in English law it must be from the promise not from
other.
d) Consideration may be of past, present or future.
e) Consideration must be lawful: When a party to an agreement promises to do
something the acceptors must get something in return which must be legal and have the
values in the eye of law. An illegal consideration is not supposed to be a contract. It is
void.
f) Consideration need not be adequate(satisfactory) : Consideration need not be
adequate to the promise. The contract .......
is depend upon consideration. So quantum of the consideration is decided by the parties
to the contract. The adequacy of consideration is determined by the facts, circumstances
and necessities and nature of cases.
Chapter-9
( Free Consent )
Define free consent
Consent means agree to do something. Two or more parties are said to consent when
they agree upon the same thing in the same sense. It is the meeting of mind. The
agreement without any control is free consent. Only meeting of minds are not
sufficient to be the contract whether there must be the real and free consent of the
parties. It is obtained by free and pure will of the parties from their own accord, consent
is said to be free when it is not caused by coercion, fraud, undue influence,
mispresentation and mistake. If there is no free consent then there will not be any
contract, so it is created for the sake of due and lawful consideration, not to lose
anything. Free consent provides meeting of minds, enforceability and legal remedy for
the contracting parties on their agreement.
Define Coercion
Coercion is the act of forcing or threatening someone to do something against law. It is a
threat or force used by one party against another for compelling to enter into an
agreement. In such condition the consent is not free. NCA states that " When somebody
has detained or threatened to detain property or has threatened to commit any act
forbidden by the law for causing any person to enter into contract against his will, the
person is said to have caused coercion." If A compels B to enter into an agreement by
causing harm or treating to commit harm as against the life and property of B or his
persons or third person. The contract between A and B is caused by coercion.
Chapter-12
Contingent Contract.
Define contingent contract and describes the rules regarding contingent contract.
A contingent contract can be defined as conditional contract. Such a contract depends
on a future uncertain event. A contingent contract is a contract to do or not to do
something, if some event, collateral to such contract, does or does not happen. The
example of contingent contract is Insurance contract. A contract to pay Rs. 1000000 if
Xs death. But expiry of a fixed time, can not be contingent contract, because these
events are of certain nature.
Rules Regarding Contingent Contract.
i) On the happening of a future un-certain event: A contract to do or not to do
something, if an uncertain future event happen, can not be enforced by law unless until
the event has happened. If the ground event becomes impossible that contracts
becomes void.
ii) On the non happening of future uncertain event: The contingent contract is to be
performed if a particular event does not happens, its performance can be enforced
when the happening of that event becomes impossible. For ex: A agree to pay certain
sum of money if a ship does not return to port. The ship return back. The contract
becomes void. Rather the ship sinks in the sea, now the ship could not return forever,
the contract is enforceable.
specific performance, such order is made by the court when other types of
compensation do not seem to be adequate.
v) Injuction: Injuction is a court order that restraints the breacher party from doing wrong
or continuing the wrongful act, complained. Such remedy is appropriate where there is a
kind of preventive relief to the aggrieved party.
For ex: A promise to sell his car to X for 5 lakh, rather that giving it to A, X intends to sell
the car for 6 lakh to Y. In such condition the court can order restraining X to sell his car
to C when it is claimed by A.
vi) Suit upon Quantum Meruit: Quantum meruit means payment in proportion to the
amount of work done. A injured party has the right to sue an quantum meruit arises
where a contract, partly performed by one party, has become discharged by the breach
of another party. Such type of remedy is based on the implied agreement to payment for
what has been done or competed.
Quasi Contract
Define Quasi contract.
Generally the agreement, which fulfills certain essential elements is called contract . But
certain cases create a contract without any essential elements of a valid contract, it is
called quasi contract. In such contract there is no meeting of mind, no offer and
acceptance, no free consent, no intention to create legal relation and even parties have
no intention to enter into a contract. It comes into existence when one of the parties act
activates the law. The parties of a quasi contract, sometimes are unknown to each other
however they have some right and liabilities under some circumstance. Duty is more
important and promise is less important in such contract. NCA termed it as indirect
contract. The basis of quasi contract is the doctrine of injust enrichment that is, a person
shall not allowed to enrich himself unjustly at the expense of another.
Bailment is a kind of special contract, caused by the delivery of goods. However its not
a transfer of ownership of goods rather it is the delivery of goods on a returnable basis.
NCA defines bailment as A contract relating to bailment shall be deemed to have been
concluded in case any person delivers any property to another person on a returnable
basis or for handing it over to any other person or selling it as ordered by him. For eg:
A gives his house to B on a rent for Rs. 2000 monthly, it is the bailment of building for
hire, X gives his car to repair to Z. It is the bailment of a goods for repair.
Essential factor of Bailment:
i) Delivery of goods: Delivery of goods can be defined as the change of possession of
goods from one person to another, but the ownership of the good remain same. It must
be made on the ground of free consent. The delivery of goods may be actual and
constructive. A gives his bike to B on hire for one day, B takes the bike immediately. It is
an actual delivery of goods, however constructive delivery is not a change of the physical
possession of goods. The goods remain in the same place but something is done that
causes a change of its possession to the bailee. For example delivery of key of store or
vehicles is the constructive delivery.
ii) Delivery for some special purpose: Delivery of goods must be made for some purpose
through which the Bailee is bound to return the goods when the purpose is achieved. If
goods are delivered by mistake than there is no contract of bailment.
iii) Creation of Contract: The relationship between a bailor and a bailee is the creation of
a contract. There must be a written document if delivery of good worth more than 200.
Thus the both bailee and bailor are bound to create a contract and also they should be
competent to create a contract.
iv) The good must be return.
v) No transfer of ownership
vi) Consideration is not necessary: the contract of bailment may be gratuitous or nongratuitous. If bailment is made for the benefit of a bailor or of a bailee it is gratuitous.
For ex: X lets his bike to A just for 10 minutes.
ii) Duty to bear extraordinary expenses: The bailor is responsible to bear the
extraordinary expenses of goods eg: medical treatment of sick animals, or the expenses
made for keeping the good safe.
iii) Duty to indemnify the bailee: the bailor is responsible to the bailee for any loss due
to his/ her imperfect or defective title of the goods and premature termination of the
contract.
iv) Duty to receive back the goods.
Finder of lost goods is the person who finds and keep the lost goods of another person in
his own possession, the law implies that there is a contract of bailment between the
owner and finder of the lost goods. By the law the finder is treated as the bailee who had
agreed to keep the goods of bailor(the person whose good is lost) safely and promised to
return back to the owner.
The right and duties of finder of lost good is given below:
Rights:
i) Right of possession: a finder of lost goods has the right to keep it in his possession
until the true owner is found.
ii) Right of lien : the finder has the right to keep the goods in his custody until the owner
pays the expenses ;incurred in keeping them safe, in repairing the goods and in
searching the true owner.
iii) Right to sue for reward: The finder can sue for any specific reward which the owner
has offered for the return of the goods. He/She may also retain the goods until he
received such reward.
iv) Right to sell the goods: A finder of lost good can sell those dgoods in the following
circumstance:
- If the true owner can not be found.
- If the bailor does not pay the expenses within a reasonable time.
- If the goods naturally decrease or are destroyed within specific time.
- If the lawful charges of the finder in respect of the goods found amount to 2/3 of the
value of good.
Duties:
i) To search the real owner of the goods found.
ii) Not to mix the found goods with other goods.
iii) To return the goods to the real owner after receiving the necessary expenses.
iv) To take care of good and not to make an unauthorized use of such goods.
Pledge or Pawn
Define pledge and write the right and duties of
pawaner.
Pledge is a kind of bailment where the transfer of goods or bailment of goods are made
as a security for the payment of debt, or performance of a promise. In such case, the
person who gives goods as a security is called pledger or pawnor (bailor), and the person
who receive the goods as a security is called pledgee or pawnee (bailee). The pledge is
bound to return the pledged goods on the fulfillment of his debt or pledgors promise.
Thus the contract, by which the possession of goods is transferred as a security is known
as pledge.
For ex: X borrows Rs. 50000 from Y and keep his gold as a security for the payment of
that loan.
Essentialities of pledge:
i) Delivery of goods.
ii) Delivery for security.
iii) Lawful purpose.
iv) Return of goods.
v) The goods must be long lasting.
'X' a transporter, carries Meat product of 'Y' from Nuwakot to Kathmandu. Because of
strike, 'X' sold all meat product in 'Kakani', otherwise, there was a danger of damage of
all the product. In such case 'Y' can't sue against 'X' because of want of authority. Here
'X' is treated as an agent of 'Y' by necessity.
3) By Ratification: Where an agent does an act for his principal without consent or
knowledge, and the act is accepted by the principal after wards , it is called agency by
ratification. Thus, the act of performing and the act of ratifying by the principal may
create an agency. Such types of agency occurs in two ways:
i) The person acting on behalf other has no authority and enters an agreement on
behalf of principal and if the transaction is adopted by principal.
ii) The agent when he exceeds his authority and enters an agreement on behalf of
principal, and the principal accept the transaction.
For e.g: A is a insurance agent of B. 'B' is a business man. 'A' insures the goods of B
without consent of 'B'. If 'B' ratifies the act of 'A', the policy of insurance is valid with
retrospective effect.
Note: rules regarding valid ratification is also the important question.
4. By Operation of law: In some certain circumstances an agency is created by
operation of law.
- when a company is formed as a legal person it cannot run itself. It's promoters run its
business. They are its agent or representative by operation of law. The company is
responsible for their acts.
- a partner is an agent of a business firm for the purpose of running the business. Thus
the act of the partner performed to carry out the firm's business binds the firm legally.
- a carrier of goods acting as an agent, the carrier is created as an agency by operation
of law.
Write down the rights and duties of an Agent.
# Duties:
\i)Duty to obey lawful directions of principal or customs: An agent must follow all the
lawful instruction given by the principal. In the absence of such instruction, the agent
has to act in accordance with the customs of the business.
ii) Duty to render an account : an agent is bound to render proper account of the
transaction done by him/herself on demand of principal.
iii) To carry out the work with reasonable care, skill, and diligence.
iv) Duty to act in good faith and is the interest of the principal.
v) Duty to communicate with principal.
vi) Not to make any secret profit beyond the commission.
vii) Not to delegate work or authority given by the principal.
ix) Duty to protect and pursue the interest of the principal in particular circumstances.
# Rights:
i) Right to receive remuneration.
ii) Right to retain money.
iii) Right of lien: Except otherwise agreed, an agent has a right to retain goods, papers
or other property of the principal received by him/her until the rightful/agreed amount of
commission/ payment is recovered.
iv) Right to indemnification of cost incurred in a lawful act.
v) Right to receive compensation of loss.
Negotiable Instruments
Exchange of goods and services is the basis of every business activity.
Goods are bought and sold for cash as well as on credit. All these
transactions require flow of cash either immediately or after a certain
time. In modern business, large number of transactions involving huge
sums of money take place everyday. It is quite inconvenient as well as
risky for either party to make and receive payments in cash. Therefore, it
is a common practice for businessmen to make use of certain documents
as means of making payment. Some of these documents are called
negotiable instruments. In this lesson let us learn about these documents.
17.1 Objectives
After studying this lesson, you will be able to:
explain the meaning of negotiable instruments;
identify the various features of negotiable
instruments; describe the various types of
negotiable instruments; and differentiate between
bills of exchange, promissory notes, and cheques.
17.2 Meaning of Negotiable Instruments
To understand the meaning of negotiable instruments let us take a few examples
of day-to-day business transactions.
Suppose Pitamber, a book publisher has sold books to Prashant for Rs 10,000/- on three months
credit. To be sure that Prashant will pay the money after three months, Pitamber may write an
order addressed to Prashant that he is to pay after three months, for value of goods received by
him, Rs.10,000/- to Pitamber or anyone holding the order and presenting it before him (Prashant)
for payment. This written document has to be signed by Prashant to show his acceptance of the
order. Now, Pitamber can hold the document with him for three months and on the due date can
collect the money from Prashant. He can also use it for meeting different business transactions.
For instance, after a month, if required, he can borrow money from Sunil for a period of two
months and pass on this document to Sunil. He has to write on the back of the document an
instruction to Prashant to pay money to Sunil, and sign it. Now Sunil becomes the owner of this
document and he can claim money from Prashant on the due date. Sunil, if required, can further
pass on the document to Amit after instructing and signing on the back of the document. This
passing on process may continue further till the final payment is made.
In the above example, Prashant who has bought books worth Rs. 10,000/- can also give an
undertaking stating that after three month he will pay the amount to Pitamber. Now Pitamber can
retain that document with himself till the end of three months or pass it on to others for meeting
certain business obligation (like with sunil, as discussed above) before the expiry of that three
months time period.
You must have heard about a cheque. What is it? It is a document issued to a bank that entitles
the person whose name it bears to claim the amount mentioned in the cheque. If he wants, he can
transfer it in favour of another person. For example, if Akash issues a cheque worth Rs. 5,000/ in favour of Bidhan, then Bidhan can claim Rs. 5,000/- from the bank, or he can transfer it to
Chander to meet any business obligation, like paying back a loan that he might have taken from
Chander. Once he does it, Chander gets a right to Rs. 5,000/- and he can transfer it to Dayanand,
if required. Such transfers may continue till the payment is finally made to somebody.
In the above examples, we find that there are certain documents used for payment in business
transactions and are transferred freely from one person to another. Such documents are called
Negotiable Instruments. Thus, we can say negotiable instrument is a transferable document,
where negotiable means transferable and instrument means document. To elaborate it further, an
instrument, as mentioned here, is a document used as a means for making some payment and it is
negotiable i.e., its ownership can be easily transferred.
Thus, negotiable instruments are documents meant for making payments, the ownership of which
can be transferred from one person to another many times before the final payment is made.
Definition of Negotiable Instrument
According to section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument means
promissory note, bill of exchange, or cheque, payable either to order or to bearer.
17.3 Types of Negotiable Instruments
According to the Negotiable Instruments Act, 1881 there are just three types of negotiable
instruments i.e., promissory note, bill of exchange and cheque. However many other documents
are also recognized as negotiable instruments on the basis of custom and usage, like hundis,
treasury bills, share warrants, etc., provided they possess the features of negotiability. In the
following sections, we shall study about Promissory Notes (popularly called pronotes), Bills of
Exchange (popularly called bills), Cheques and Hundis (a popular indigenous document
prevalent in India), in detail.
i. Promissory Note
Suppose you take a loan of Rupeess Five Thousand from your friend Ramesh. You can make a
document stating that you will pay the money to
Ramesh or the bearer on
Endorsement
demand. Or you can mention in the document that
you would like to pay the
means
transfer
of
amount after three months. This document, once
signed by you, duly
stamped and handed over to Ramesh, becomes a any document or negotiable instrument.
Now Ramesh can personally present it before you instrument to
for payment or give this
another
person
by
document to some other person to collect money
on his behalf. He can
signing on its
endorse it in somebody elses name who in turn
can endorse it further till
back or face or on
a slip of paper
attached to it.
the final payment is made by you to whosoever presents it before you. This type of a document is
called a Promissory Note.
Section 4 of the Negotiable Instruments Act, 1881 defines a promissory note as 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 money only to or to the order of a certain person or
to the bearer of the instrument. Specimen of a Promissory Note
Rs. 10,000/-
New Delhi
September 25, 2002
v. The parties to a promissory note, i.e. the maker and the payee must be certain.
vi. A promissory note may be payable on demand or after a certain date. For example, if it is
written three months after date I promise to pay Satinder or order a sum of rupees Five
Thousand only it is a promissory note.
vii. The sum payable mentioned must be certain or capable of being made certain. It means that
the sum payable may be in figures or may be such that it can be calculated. (See specimen
below).
ii. Bill of Exchange
Suppose Rajiv has given a loan of Rupees Ten Thousand to Sameer, which Sameer has to return.
Now, Rajiv also has to give some money to Tarun. In this case, Rajiv can make a document
directing Sameer to make payment up to Rupees Ten Thousand to Tarun on demand or after
expiry of a specified period. This document is called a Bill of Exchange, which can be
transferred to some other persons name by Tarun.
Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange as 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.
Parties to a Bill of Exchange
There are three parties involved in a bill of exchange. They arei. The Drawer The person who makes the order for making payment. In the above
specimen, Rajiv is the drawer.
ii. The Drawee The person to whom the order to pay is made.He is generally a debtor of the
drawer. It is Sameer in this case.
iii. The Payee The person to whom the payment is to be made. In this case it is Tarun.
The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the
words in the bill would be Pay to us or order. In a bill where a time period is mentioned, just like
the above specimen, is called a Time Bill. But a bill may be made payable on demand also. This
is called a Demand Bill.
Features of a bill of exchange
Let us know the various features of a bill of exchange.
i. A bill must be in writing, duly signed by its drawer, accepted by its drawee and properly
stamped as per Indian Stamp Act.
ii. It must contain an order to pay. Words like please pay Rs 5,000/- on demand and oblige
are not used.
iii. The order must be unconditional. iv. The order must be to pay money and money alone.
iv. The sum payable mentioned must be certain or capable of being made certain.
iii. Cheques
Cheque is a very common form of negotiable instrument. If you have a savings bank account or
current account in a bank, you can issue a cheque in your own name or in favour of others,
thereby directing the bank to pay the specified amount to the person named in the cheque.
Therefore, a cheque may be regarded as a bill of exchange; the only difference is that the bank is
always the drawee in case of a cheque.
The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a
specified banker and not expressed to be payable otherwise than on demand. Actually, a cheque
is an order by the account holder of the bank directing his banker to pay on demand, the
specified amount, to or to the order of the person named therein or to the bearer.
Features of a cheque
Let us look into some important features of a cheque.
i. A cheque must be in writing and duly
signed by the drawer.
ii. It contains an unconditional order. iii. It is
issued on a specified banker only.
iv. The amount specified is always certain
and must be clearly mentioned both in
figures and words.
v. The payee is always certain. vi. It
is
a) Open cheque: A cheque is called Open when it is possible to get cash over the counter at
the bank. The holder of an open cheque can do the following: i. Receive its payment over
the counter at the bank, ii. Deposit the cheque in his own account iii.Pass it to some one else
by signing on the back of a cheque.
b) Crossed cheque: Since open cheque is subject to risk of theft, it is dangerous to issue such
cheques. This risk can be avoided by issuing another types of cheque called Crossed
cheque. The payment of such cheque is not made over the counter at the bank. It is only
credited to the bank account of the payee. A cheque can be crossed by drawing two
transverse parallel lines across the cheque, with or without the writing Account payee or
Not Negotiable.
c) Bearer cheque: A cheque which is payable to any person who presents it for payment at
the bank counter is called Bearer cheque. A bearer cheque can be transferred by mere
delivery and requires no endorsement.
d) Order cheque: An order cheque is one which is payable to a particular person. In such a
cheque the word bearer may be cut out or cancelled and the word order may be written.
The payee can transfer an order cheque to someone else by signing his or her name on the
back of it.
There is another categorization of cheques which is discussed below:
Ante-dated cheques:- Cheque in which the drawer mentions the date earlier
to the date of presenting if for payment. For example, a cheque issued on 20th
May 2003 may bear a date 5th May 2003.
Stale Cheque:- A cheque which is issued today must be presented before at
bank for payment within a stipulated period. After expiry of that period, no
payment will be made and it is then called stale cheque. Find out from your
nearest bank about the validity period of a cheque.
Mutilated Cheque:- In case a cheque is torn into two or more pieces and
presented for payment , such a cheque is called a mutilated cheque. The bank
will not make payment against such a cheque without getting confirmation of
the drawer. But if a cheque is torn at the corners and no material fact is erased
or cancelled, the bank may make payment against such a cheque.
Post-dated Cheque:- Cheque on which drawer mentions a date which is
subsequent to the date on which it is presented, is called post-dated cheque. For
example, if a cheque presented on 8th May 2003 bears a date of 25th May 2003,
it is a post-dated cheque. The bank will make payment only on or after 25th
May 2003.
iv. Hundis
A Hundi is a negotiable instrument by usage. It is often in the form of a bill of exchange drawn
in any local language in accordance with the custom of the place. Some times it can also be in
the form of a promissory note. A hundi is the oldest known instrument used for the purpose of
transfer of money without its actual physical movement. The provisions of the Negotiable
Instruments Act shall apply to hundis only when there is no customary rule known to the people.
Types of Hundis
There are a variety of hundis used in our country. Let us discuss some of the most common ones.
Shah-jog Hundi: This is drawn by one merchant on another, asking the latter to pay the amount
to a Shah. Shah is a respectable and responsible person, a man of worth and known in the bazaar.
A shah-jog hundi passes from one hand to another till it reaches a Shah, who, after reasonable
enquiries, presents it to the drawee for acceptance of the payment.
Darshani Hundi: This is a hundi payable at sight. It must be presented for payment within a
reasonable time after its receipt by the holder. Thus, it is similar to a demand bill.
Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time. This is
similar to a time bill.
There are few other varieties like Nam-jog hundi, Dhani-jog hundi, Jawabee hundi, Jokhami
hundi, Firman-jog hundi, etc.
17 .4 Features of Negotiable Instruments
After discussing the various types of negotiable instruments let us sum up their features as
underi. A negotiable instrument is freely transferable. Usually, when we transfer any property to
somebody, we are required to make a transfer deed, get it registered, pay stamp duty, etc. But,
such formalities are not required while transferring a negotiable instrument. The ownership is
changed by mere delivery (when payable to the bearer) or by valid endorsement and delivery
(when payable to order). Further, while transferring it is also not required to give a notice to the
previous holder.
ii. Negotiability confers absolute and good title on the transferee. It means that a person who
receives a negotiable instrument has a clear and undisputable title to the instrument.
However, the title of the receiver will be absolute, only if he has got the instrument in good
faith and for a consideration. Also the receiver should have no knowledge of the previous
holder having any defect in his title. Such a person is known as holder in due course. For
example, suppose Rajiv issued a bearer cheque payable to Sanjay. It was stolen from Sanjay
by a person, who passed it on to Girish. If Girish received it in good faith and for value and
without knowledge of cheque having been stolen, he will be entitled to receive the amount
of the cheque. Here Girish will be regarded as holder in due course.
iii. A negotiable instrument must be in writing. This includes handwriting, typing, computer
print out and engraving, etc.
iv. In every negotiable instrument there must be an unconditional order or promise for
payment.
v. The instrument must involve payment of a certain sum of money only and nothing else. For
example, one cannot make a promissory note on assets, securities, or goods.
vi. The time of payment must be certain. It means that the instrument must be payable at a
time which is certain to arrive. If the time is mentioned as when convenient it is not a
negotiable instrument. However, if the time of payment is linked to the death of a person, it
is nevertheless a negotiable instrument as death is certain, though the time thereof is not.
vii. The payee must be a certain person. It means that the person in whose favour the instrument
is made must be named or described with reasonable certainty. The term person includes
individual, body corporate, trade unions, even secretary, director or chairman of an
institution. The payee can also be more than one person.
viii. A negotiable instrument must bear the signature of its maker. Without the signature of the
drawer or the maker, the instrument shall not be a valid one.
ix. Delivery of the instrument is essential. Any negotiable instrument like a cheque or a
promissory note is not complete till it is delivered to its payee. For example, you may issue
a cheque in your brothers name but it is not a negotiable instrument till it is given to your
brother.
x. Stamping of Bills of Exchange and Promissory Notes is mandatory. This is required as per
the Indian Stamp Act, 1899. The value of stamp depends upon the value of the pronote or
bill and the time of their payment.
17.7 Terminal Exercise
(1) Name any two types of commonly used negotiable instruments.
(2) Write two points of distinction between a promissory note and a cheque.
(3) The drawer can only draw a Time Bill. Do you agree with this statement? Give reason.
(4) A cheque need not bear a date. Do you agree? Give reason.
(5) Explain Darshani Hundi in about 20 words.
(6) State any four essential features of a bill of exchange.
(7) Write any four points of distinction between a promissory note and a bill of exchange.
(8) Explain briefly certainty of person and time of payment as features of negotiable
instruments.
(9) A bill of exchange must contain an unconditional promise to pay. Do you agree with this
statement? Justify your answer.
(10) State the three parties involved in a bill of exchange.
(11) Define Promissory note and state its any four important features.