SALE OF GOODS ACT 1930

SALE OF GOODS
The sale of goods is the most common of all
commercial contracts . A knowledge of its
main principles is the utmost importance to all
classes of the community . The law relating to
it is contained in the Sale of Goods Act 1930 .
Prior to this Act , the law of sale of goods was
contained in the Chapter 7 of The Indian
Contract Act 1872 .
 FORMATION OF
CONTRACT OF SALE
• CONTRACT OF SALE OF
GOODS
•SALE AND AGREEMENT
TO SELL
CONTRACT OF SALE OF GOODS
A Contract of sale of goods is a contract
whereby the seller transfers or agrees to
transfer the property in goods to the buyer
for a price .
SALE AND AGREEMENT TO SELL
Where under a contract of sale , the property in the goods
is transferred from the seller to the buyer , the contract is
called a “sale” , but where the transfer of the property in
the goods is to take place at a future time or subject to
some conditions thereafter to be fulfilled , the contract is
called an “agreement to sell” [Sec 4(3)].
An agreement to sell becomes a sale when the time
elapses or the conditions , subject to which the property in
the goods is to be transferred are fulfilled [Sec 4(4)].
ESSENTIALS OF A CONTRACT OF
SALE
1) Two Parties
2) Goods
3) Price
4) Transfer of General Property
5) Essential elements of a valid Contract
Distinction
BASIS SALE AGREEMENT
TO SELL
1. Definition Sale is where under a contract Agreement to sell is a
of sale , the property in the contract of sale under which
goods is transferred from the the transfer of property in
seller to the buyer ; it is called goods is to take place at a
a sale. future date or subject to
some conditions thereafter to
be fulfilled .

2. Sections under section 4(1) Under section 4(3).

3. Transfer of The property in goods passes There is no transfer of

to the buyer immediately at the property to the buyer at the
property time of making the contract. time of the contract .

4. Transfer of The property in goods passes Since the property does not
to the buyer and so as a rule ; passes to the buyer , risk also
risk the risk also passes to the does not pass to the buyer.
buyer.
BASIS SALE
5. liability A subsequent loss or
destruction of the goods is
the liability of the buyer.
AGREEMENT
TO SELL
The liability remains with
the seller where the
transaction only amounts to
an agreement to sell.

6. Executed or It is an executed contract It is an executory contract

Executory contract because nothing remains to because something remains
be done. to be done.

7.Rights of seller Seller can sue the buyer for Seller can sue the buyer for
against the buyer’s the price even though the damages even though the
breach goods are in his possession. goods are in the possession
of the buyer.

8.Rights of buyer Buyer can sue the seller for Buyer can sue the seller for
against the seller’s damages and can sue the damages only.
breach third party who bought
those goods for goods.
BASIS SALE
9. Effect of If the seller is adjudged
solvency of seller insolvent , the buyer is entitled
having possession to recover the goods from the
of goods official receiver or assignee , as
the property in the goods rests
with the buyer.
10. Effect of Seller must deliver the goods to
insolvency of the the official receiver or assignee
buyer before because the ownership of goods
paying the price has transferred to the buyer. He
can claim only ratable dividend
for the unpaid price.
AGREEMENT TO
SELL
If the buyer has already
paid the price and the seller
is adjudged insolvent, the
buyer can only claim a
ratable dividend (as a
creditor) and not the goods
because property in them
still rests with the seller.
Seller can refuse to deliver
the goods unless he is paid
full ;price of the goods
because the ownership has
not transferred to the buyer.
CLASSIFICATION OF GOODS
1. EXISTING GOODS :
a) Specific Goods
b) Ascertained Goods
c) Unascertained Goods
2. FUTURE GOODS:
d) Contingent Goods
e) Contingent and Future Goods
CONDITIONS AND WARRANTIES
Before a contract of sale is entered into , a seller
frequently makes representations or statements with
reference to the goods which influences the buyer to
clinch the bargain. Such representations or statements
differ in character and importance . Whether any
statement or representations made by the seller with
reference to the goods is a stipulation forming part of
the contract or is a mere representation (such as
expression or an opinion) forming no part of the
contract , depends on the construction of the contract.
If there is no such representations , the ordinary
rule of law “CAVEAT EMPTOR” ; i.e.; “let
the buyer beware” applies . This means the
buyer gets the goods as they come and it is no
part of the seller’s duty to point out the defects
in the goods to the buyer .
MEANING OF CONDITION
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 [Sec.12(2)] . A Condition is a stipulation which is
essential to the main purpose of the contract .It goes to the root of
the contract .Its non- fulfillment upsets the very basis of the
contract . It is defined by Fletcher Moulton L.J in Wallis v. Pratt ,
(1910) 2 K.B. 1012 as an “obligation which goes so directly to the
substance of the contract , or in other words , is so essential its
very nature , that its non performance may fairly be considered by
the other party as a substantial failure to perform the contract at
all. ’’If there is a breach of condition, the aggrieved party can
treat the contract as repudiated .
MEANING OF WARRANTY
WARRANTY [Sec.12(3)] : A Warranty is a stipulation
which is collateral to the main purpose of the contract . It
is not of such vital importance as a condition is defined in
Wallis v. Pratt as an “obligation which , though it must be
performed ,is not so vital that a failure to perform it goes
to the substance of the contract.” If there is a breach of
warranty , the aggrieved party can only claim damages
and it has no right to treat the contract as repudiated.
Whether a stipulation in a contract of sale is a
condition or a warranty depends in each case
on the construction of the contract as a whole.
The Court is not to be guided by the
terminology used by the parties to the
contract . A stipulation may be a condition
though called a warranty in the contract
[Sec.12(4)].
BASIS CONDITION
1. Meaning A “condition” is a stipulation
essential to the main purpose of
a contract , the breach of which
gives the aggrieved party a right
to repudiate the contract itself.
WARRANTY
A “warranty” is a stipulation
collateral to the main purpose
of the contract , the breach of
which gives the aggrieved
party a right to sue for damage
only , and not to avoid the
contract itself.

2. Importance Condition is essential to the Warranty is only collateral to

main purpose of the contract. the main purpose of contract
.

3. Remedy on Breach of condition entitles Breach of warranty as stated

buyer to treat the contract as
breach repudiated by the seller and
thereby reject the goods and
claim damages.
by the sec.59 , entitles the
buyer to demand only a
suitable diminution or
reduction in price and also
claims damages.

4. Treatment by The buyer has an option to The buyer has no option to

treat a condition as a warranty treat a warranty as a
buyer and determine his remedies condition.
accordingly.
WHEN CONDITION IS TO BE
TREATED AS WARRANTY (Sec.13)
1. Voluntary waiver of Condition

2. Acceptance of goods by buyer

3. Conversion of Condition
EXPRESS AND IMPLIED CONDITIONS
AND WARRANTIES
In a contract of sale of goods conditions and warranties
may be express or implied .Express conditions and
warranties are those which are expressly provided in the
contract . Implied conditions and warranties (contained in
Secs.14 to 17) are those the law implies into the contract
unless the parties stipulate to the contrary .
Sec. 16(4) further provides that an express warranty or
condition does not negative an implied warranty or
condition unless the express warranty or condition is
inconsistent with the implied warranty or condition .
IMPLIED CONDITIONS :
1.Condition as to title [Sec. 14(a)]:
a. In the case of a sale, he has a right to sell the goods ,and
b.In the case of an agreement to sell ,he will have a right to
sell the goods at the time when the property is to pass.
2 . Sale by description (Sec .15)
3 . Condition as to quality
4. Condition as to fitness [Sec.16(1)]
5. In the goods can be used for a number of purposes , the
buyer must tell the seller the particular purpose for
which he requires goods .
6. Condition as to merchantability
[Sec .16(2)]
7. Condition implied by custom [Sec.16(3)]
8. Sale by sample (Sec .17)
9. Condition as to wholesomeness .
IMPLIED WARRANTIES
1) Warranty of quiet possession [Sec. 14(b)]
2) Warranty of freedom from encumbrances
[Sec. 14(c)]
3) Warranty as to quality or fitness by usage of
trade [Sec. 16(4)]
4) Warranty to disclose dangerous nature of
goods
CAVEAT EMPTOR
This means “let the buyer beware” ,i.e., in a contract of
sale of goods the seller is under no duty to reveal the
unflattering truths about the goods sold. Therefore when a
person buys some goods , he must examine them
thoroughly . If the goods turn out to be defective or do not
suits his purpose or if he depends upon his own skill or
judgment and makes a bad selection , he cannot blame
anybody excepting himself .
EXCEPTIONS TO CAVEAT EMPTOR
1) Fitness for buyer’s purpose [Sec. 16(1)]
2) Sale under a patent or trade name [Sec.16(1)]
3) Merchantable quality [Sec .16(2)]
4) Usage of trade [Sec.16 (3)]
5) Consent by fraud
6) In case of misrepresentation by the seller
7) In case of Latent Defect
8) In case of sale by description
9) In case of sale by sample
TRANSFER OF PROPERTY
There are three stages in the performance of a
contract of sale of goods by a seller ,viz.,
1) The transfer of property in goods ;
2) The transfer of possession of goods (i.e.,
delivery); and
3) The passing of risk
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 follows ownership
2. Action against third parties
3. Insolvency of the seller or the buyer
4. Suit for price
PASSING OF PROPERTY
1. Goods must be ascertained (Sec.18).
2. Intention of the parties
a. Specific goods (Secs . 20 to 22)
i. Passing of property at the time of contract
ii. Passing of property delayed beyond the date of contract
 Goods not in a deliverable state
 When the price of goods is to be ascertained by weighing
etc.
b. Unascertained Goods (Sec. 23)
c. Goods sent on approval or “on sale or return” (Sec. 24)
PERFORMANCE OF
CONTRACT
Performance of a contract of sale means as
regards the seller , delivery of the goods to the
buyer , and as regards the buyer , acceptance
of the delivery of the goods and payment for
them , in accordance with the terms of the
contract of sale (Sec. 31)
DELIVERY OF GOODS
Delivery means voluntary transfer of possession of goods
from one person to another [Sec.2(2)] . Delivery of goods
may be made by doing anything which the parties agree
shall be treated as delivery or which has the effect of
putting the goods in the possession of the buyer or his
agent (Sec.33).
Delivery of goods may be :
1. Actual Delivery
2. Symbolic Delivery
3. Constructive Delivery
RULES AS TO DELIVERY OF GOODS
1. Mode of delivery (Sec. 33)
2. Delivery and Payment – concurrent conditions
3. Effect of part delivery
4. Buyer to apply for delivery
5. Place of delivery
6. Time of delivery
7. Goods in possession of a third party
8. Cost of delivery
9. Delivery of wrong quantity (Sec. 37)
a) Delivery of goods less than contracted for.
b) Delivery in goods in excess of the quantity contracted for .
c) Delivery of goods contracted for mixed with other goods.
10. Installment deliveries (Sec.38)
a. the quantitative ratio which the breach bears to the
contract as a whole ; and
b. the degree of probability that such a breach will be
repeated.
11. Delivery to a carrier or wharfinger (Sec .39).
RIGHTS AND DUTIES OF THE BUYER
RIGHTS OF THE BUYER :
1. Right to have delivery as per contract (Secs. 31 and 32).
2. Right to reject the goods (Sec. 37)
3. Right to repudiate [Sec.38(1)].
4. Right to notice of insurance [Sec.39(3)].
5. Right to examine (Sec.41)
6. Right against the seller for breach of contract
a. Suit for damages (Sec. 57)
b. Suit for price
c. Suit for specific performance (Sec. 58)
d. Suit for breach of warranty (Sec. 59)
e. Repudiation of contract before due
date(Sec.60)
f. Suit for interest [Sec.61(2)(b)]
DUTIES OF THE BUYER
1. Duty to accept the goods and pay for them in exchange for
possession (Sec. 31 and 32)
2. Duty to apply for delivery (Sec. 35)
3. Duty to demand delivery at a reasonable hour[Sec.36(4)]
4. Duty to accept installment delivery and pay for it [Sec.38(2)]
5. Duty to take risk of deterioration in the course of transit
(Sec.40)
6. Duty to intimate the seller where he rejects the goods (Sec.43 )
7. Duty to take delivery(Sec. 44)
8. Duty to pay price(Sec .55)
9. Duty to pay for damages (Sec. 56)
RIGHTS OF AN UNPAID SELLER
WHO IS AN UNPAID SELLER ?
A seller of goods is deemed to be an unpaid seller when:
1. the whole of the price has not been paid or
tendered;
2. A bill of exchange or other negotiable instrument
has been received as a conditional payment , and the
condition on which it was received has not been
fulfilled by reason of the dishonor of the instrument
or otherwise [Sec.45(1)].
The following conditions must be fulfilled before a
seller of goods can be deemed to be an unpaid seller:-
1. He must be unpaid and the price must be due.
2. He must have an immediate right of action
for the price.
3. A bill of exchange or other negotiable
instrument was received but the same has
been dishonored .
“Seller” here , means not only the actual seller
, but also any person who is in the position of a
seller , e.g., an agent of the seller to whom a
bill of lading has been endorsed , or a
consignee or agent who has himself paid for
the goods or is directly responsible for the
price [Sec.45(2)].
 RIGHTS OF AN UNPAID SELLER

AGAINST THE GOODS

AGAINST THE BUYER
PERSONALLY
Where the
When the
property in
property in
goods has not
goods has
passed [Sec
passed
46(2)]
Sec[46(1)]

Suit for Repudiation

Stoppage price of contract
Lien (Sec.60)
in transit Resale (Sec.55)
(Sec 47
(Secs. 50 (Sec .54)
to 49) Suit for Suit for
to 52)
damages interest
(Sec.56) (Sec. 57)
Withholding Stoppage in
delivery transit
BASIS RIGHT OF LIEN RIGHT OF
STOPPAGE IN
TRANSIT

1. Possession of goods The goods must be in actual The goods must be in the
possession of the seller. possession of a carrier or other
bailee who is acting as an
independent person.

2. Solvency The right can be exercised This right can be exercised

even when the buyer is only when the buyer has
solvent but refuses to pay the become insolvent.
price.

3. End versus This right comes to an end This right commences only
commencement on when the seller delivers the when the seller delivers the
delivery to carrier goods to a carrier. goods to the carrier.

4. Purpose The purpose of right to retain The purpose of this right is to

the possession of the goods. regain the possession of the
goods.
REMEDIES FOR BREACH OF
CONTRACT OF SALE
1. SELLER’S SUITS :
a) Suit for price (Sec.55)
b) Suit for damages for non – acceptance of
goods (Sec.56)
c) Suit for damages for repudiation of contract
by the buyer before due date (Sec.60)
d) Suit for interest [Sec.61(2)(a)].
2. BUYER’S SUITS:
a) Suit for damages for non - delivery of the
goods (Sec.57)
b) Suit for specific performance (Sec.58)
c) Suit for breach of warranty (Sec.59)
d) Suit for damages for repudiation of contract
by the seller before due date (Sec.60)
e) Suit for interest [Sec.61(2) (b)].
 NEGOTIABLE
INSTRUMENTS
NEGOTIABLE INSTRUMENTS
There are certain documents which are freely used in
the commercial transactions , and monetary dealings .
These documents , if they satisfy certain conditions ,
are known as “Negotiable Instruments.” The word
“negotiable” means “transferable from one person to
another in return for consideration” and “
instrument” , means a “written document by which a
right is created in favor of some person.”
The law relating to negotiable instruments is
contained in the Negotiable Instruments Act , 1881 ,
which deals with promissory notes , bills of exchange,
and cheques as also hundis ( a bill of exchange in a
vernacular language).
The Act extends to the whole of India . It does not
affect any local usage relating to any instrument in a
vernacular language . The local usages may however
be excluded by any words in the body of the
instrument(Sec. 1).
The Act came into force on first day of March,
1882.
The latest amendment to this act was made in 1988.
DEFINITION OF NEGOTIABLE
INSTRUMENT

A negotiable instrument is a method of

transferring a debt from one person to another .
The term “negotiable instrument” as such is not
defined in the Negotiable Instruments Act 1881.
Sec. 13 , however says that a negotiable
instrument means a promissory note , bill of
exchange or cheque payable either to order or
bearer.
CHARACTERSTICS OF A NEGOTIABLE
INSTRUMENT
1. Freely transferable
2. Title of holder free from all defects
3. Recovery
4. Presumptions :
a) Consideration
b) Date
c) Time of acceptance
d) Time of transfer
e) Order of endorsements
f) Stamp
g) Holder presumed to be a holder in due course
h) Proof of protest
TYPES OF
NEGOTIABLE INSTRUMENT
1. Negotiable by statute
• The negotiable instruments act mentions only three kinds of
negotiable instruments (Sec.13). These are :
• 1. Promissory notes
• 2. Bills of exchange
• 3. Cheques
2. Negotiable by custom or usage
NOTES , BILLS AND
CHEQUES
PROMISSORY NOTE
A Promissory Note is an instrument in writing (not being
a blank note or currency note) containing an unconditional
undertaking , signed by the maker , to pay a certain sum of
money only to , or order of a certain person , or to bearer
of the instrument (Sec .4).
The person who makes the promissory note and promises
to pay is called the maker.
ESSENTIAL ELEMENTS OF A
PROMISSORY NOTE
1. Writing
2. Promise to pay
3. Definite and unconditional
4. Signed by the maker
5. Certain parties
6. Certain sum of money
7. Promise to pay money only
8. Bank note or currency note is not a promissory note.
9. Formalities like number, date, place, consideration etc .
10. It may be payable on demand or after a definite period of time.
11. It cannot be made payable to bearer on demand.
BILLS OF EXCHANGE
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 the bearer of the instrument (Sec. 5).

PARTIES TO A BILL :
There are three parties to pay a bill of exchange , viz.,
1. The Drawer
2. The Drawee , and
3. The Payee
ESSENTIAL ELEMENTS OF BILLS OF
EXCHANGE
1. It must be in writing
2. It must contain an order to pay
3. The order must be unconditional
4. It requires three parties , i.e., the drawer , the drawee, and the payee.
5. The parties must be certain
6. It must be signed by the drawer
7. The sum payable must be certain
8. It must contain an order to pay money.
9. The formalities relating to number, date , place and consideration ,
though usually found in bills are not essential in law but a bill must
be affixed with necessary stamp.
 PROMISSORY
BASIS BILL OF EXCHANGE
NOTE
1. No. of parties There are three parties –the There are two parties- the
drawer, drawee & the payee. maker and the payee.

2. Section section (5) Section(4)

3. promise/ order A bill contains the A note contains an

unconditional order to pay. unconditional promise to
pay.

4. Nature of liability The liability of the drawer of The liability of the maker
a bill is secondary and of a note is primary and
conditional. absolute.

5. Debtor / creditor The drawer of the bill is the The maker of a note is the
creditor who directs the debtor and he himself
drawee ( his debtor) to pay. undertakes to pay.
BASIS BILL OF EXCHANGE PROMISSORY NOTE

6. Identity of payer In a bill , the drawer and the A note cannot be made
and payee; payee may be one and the payable to maker himself.
same .

7. Acceptance A bill payable after sight or A note requires no

after a certain period must be acceptance as it is signed
accepted by the drawee before by the person who is liable
it is presented for payment. to pay.

8. Payable to bearer It can be payable to bearer , it It cannot be payable to

cannot be drawn as payable to bearer.
bearer on demand.

9. Immediate Relation The drawer of the bill stands in The maker of a note stands
immediate relation with in immediate relation with
acceptor and not the payee. the payee.
BASIS BILL OF EXCHANGE PROMISSORY NOTE

10. Notice of Notice of dishonour must be Such notice is not required

Dishonour given to all the to be given to the maker.
persons(including drawer)
who are to made liable to
pay.

11. Protest for It requires the protesting for It does not require any
dishonour dishonour. protesting.
CHEQUE
A cheque is a bill of exchange drawn upon a specified
banker and payable on demand and it includes the
electronic image of a truncated cheque and a cheque in the
electronic form .
A cheque in the electronic form means “cheque which
contains the exact mirror image of a proper cheque , and is
generated , written and signed in a secure system ensuring
the minimum safety standards with the use of digital
signature and asymmetric crypto system.
A truncated cheque means a cheque which is
truncated during the course of clearing cycle ,
either by the clearing house or by the bank ,
whether by paying or receiving payment ,
immediately on generation of an electronic
image for transmission , substituting the
further physical movement of the cheque in
writing .
All cheques are bills of exchange , but all bills of exchange are
not cheques . A cheque must have all the essential requisites of a
bill of exchange , it must be signed by the drawer . It must
contain an unconditional order on a specified banker to pay a
certain sum of money to or to the order of a specified person or
the bearer of the cheque . But it does not require acceptance as it
is intended for immediate payment .

Cheque

Bill of
exchange
 BILLS OF
BASIS CHEQUE
EXCHANGE
1. Drawer It is always drawn on a It is usually drawn on
bank some person or firm.

2. Payable on It is always payable on It may be payable on

Demand demand. demand or on the expiry
of a fixed period.
3. Acceptance It does not requires any It requires an acceptance
acceptance. of the drawee.

4. Stamp It does not requires a It must be properly

stamp. stamped.

5. Grace Period It is payable immediately In case of a time bill of

on demand without any exchange , three days of
days of grace. grace are allowed from
the due date, within which
, the payment can be
made.
BASIS CHEQUE BILL OF EXCHANGE

6. Payable to A cheque drawn “payable A bill payable on demand

Bearer on to bearer” on demand shall can never be drawn payable
be valid. to bearer.
Demand
7. Crossing It can be crossed. It cannot be crossed.

8. Notice of Notice of dishonour is not It is usually required.

Dishonour required.

9. The payment of cheque The payment of a bill

Countermanded may be countermanded by cannot be countermanded .
the drawer.

10 . Section Section (6) Section (5)

BASIS CHEQUE PROMISSORY
NOTE
1. Drawer It is always drawn on a It is usually drawn on
bank. some person or firm.

2. Payable on demand It is always payable on It may be payable on

demand. demand or on the expiry
of a fixed period.
3. Section Section 6 Section 4

4. Stamp It does not requires any It ,must be properly

stamp. stamped.

5. Payable to bearer on A cheque drawn “payable A bill payable on demand

demand to bearer” on demand can never be drawn
shall be valid. payable to bearer.
BASIS CHEQUE PROMISSORY
NOTE

6. Crossing It can be crossed. It cannot be crossed.

7. Countermanded The payment of cheque The payment of a bill

may be countermanded cannot be
by the drawer. countermanded.

8. Acceptance It does not requires It must be accepted by th

acceptance. drawee.
CROSSING OF CHEQUES
There are two types of cheques , open cheques and
crossed cheques . A cheque which is payable in cash
counter of a bank is called an open cheque.
A crossed cheque is one on which two parallel
transverse lines with or without the words ‘& Co.’ are
drawn . The payment of such a cheque can be obtained
only through a banker. Thus crossing is a direction to the
drawee banker to pay the amount of money on a crossed
cheque generally to a banker or a particular banker so that
the party who obtains the payment of the cheque can
easily be traced.
TYPES OF CROSSING

TYPES OF CROSSING

1. GENERAL 2. SPECIAL
CROSSING CROSSING
1. General Crossing
A cheque is said to be crossed generally where it bears
across its face an addition of-
i. The words ‘and company’ or any abbreviation thereof ,
between two parallel transverse lines ,either with or
without the words ‘not negotiable’; or
ii. Two parallel transverse lines simply , either with or
without the words ‘not negotiable’ (Sec. 123)
2. SPECIAL CROSSING
Where a cheque bears across its face an addition of the
name of a banker , either with or without the words ‘not
negotiable’ , the cheque is deemed to be crossed specially
(Sec. 124). Transverse lines are not necessary in case of a
special crossing . The payment of a specially crossed
cheque can be obtained only through the particular banker
whose name appears across the face of the cheque or
between the transverse lines, if any.
3. RESTRICTIVE CROSSING
In addition to the two statutory types of
crossing discussed before , there is another
type which has been adopted by commercial
and banking usage . In this type of crossing the
words ‘A\c payee’ are added to the general or
special crossing .
HOLDER AND HOLDER IN
DUE COURSE
HOLDER (Sec. 8)
The “HOLDER” of a promissory note , bill of exchange
or cheque means any person entitled in his own name;
i. To the possession thereof , and
ii. To receive or recover the amount due thereon from the
parties thereto.
Where the note , bill or cheque is lost or destroyed , its
holder is the person so entitled at the time of such loss
or destruction .
HOLDER IN DUE COURSE(Sec. 9)
Any person is a ‘holder in due course’ if he fulfils the
following conditions :
1) That, for consideration , he became;
i. The possessor of the negotiable instrument if payable to
bearer, or
ii. The payee or endorsee thereof, if payable to order.
2) That he became the holder of the instrument before its
maturity,
3). That he became the holder of the instrument in good
faith.
Privileges of a holder in due course
a) Inchoate stamped instrument
b) Liability of prior parties
c) Fictitious payee
d) Negotiable instrument without consideration
e) Conditional delivery
f) Instrument cleansed of all defects
g) Instrument obtained by unlawful means or for unlawful
consideration.
h) Every holder is a holder in due course
i) Estoppel against denying original validity of instrument
j) Estoppel against denying capacity of payee to endorse
k) Endorser not permitted to deny the capacity of prior parties.
Distinction between Holder and Holder in
Due course
BASIS HOLDER HOLDER IN DUE
COURSE
1. Consideration He may become the possessor or He acquires possession for
payee of an instrument even consideration.
without consideration.
2.Before maturity He need not become the He must become the
possessor before the maturity of possessor before the maturity
the instrument. of the instrument.
3.Good Faith He need not become the He must become the
possessor in good faith. possessor in good faith i.e.,
without having sufficient
cause to believe that any
defects existed in the
transferor’s title.
4. Right to have He cannot have a better title than He can have a better title
better title than that that of the transferor. than that of transferor.
of Transferor
Distinction between Holder and Holder
in Due course
BASIS HOLDER HOLDER IN DUE
COURSE
5. Right To Enforce He cannot enforce rights He can enforce his rights
Rights Against all against all the prior parties . against all the Prior Parties.
Prior Parties He can recover the amount
from a person who has signed
it and also from the transferor
from whom he obtained.
6. Privileges He does not enjoy all the He enjoys some privileges
privileges available to holder under the Act e.g., under
in due course . Sections
20,36,42,43,46,58,120,121.
NEGOTIATION
One of the essential characteristics of a
negotiable instrument is that it is freely
transferable from one person to another , This
transfer may take place either;
A. By negotiation , or
B. By assignment.
Transfer by negotiation;
When a promissory note , bill of exchange or cheque is
transferred by one party to another , so as to constitute the
transferee the holder thereof , the instrument is said to be
negotiated(Sec. 14). Thus if A hands over a cheque to B
asking B to keep it in safe custody, the cheque is not
negotiated to B , because the delivery of the cheque to B,
as a bailee ,does not make him its holder.
There are two methods of transfer by negotiation, namely:
1. Negotiation by delivery
2. Negotiation by endorsement and delivery.
1. DELIVERY
A negotiable instrument payable to bearer is negotiable by
delivery thereof . Thus a bearer instrument may be negotiated
by delivery only. It does not require the signature of the
transferor (i.e., endorsement) and the transferee becomes the
holder thereof by mere possession . The transferor of a bearer
instrument is not liable on its dishonour because by not signing
as endorser he has not added his credit to the instrument .
FOR EXAMPLE:
A delivers a cheque to B for safe custody . This will not
amount to negotiation because there is no intention to transfer
the ownership of the instrument to B .
2. ENDORSEMENT [section.15]
Negotiation by endorsement is written order on the
instrument by its rightful holder to make the payment to
another person . According to Sec. 15 , when the maker or
the holder of a negotiable instrument signs the same ,
otherwise than as such maker , for the purpose of negotiation
or on the back or face thereof or on a slip of paper annexed
thereto or so signs for the same purpose a stamped paper
intended to be completed as negotiable instrument , he is
said to endorse the same and is called Endorser. Thus
endorsement is signing a negotiable instrument for the
purpose of negotiation. The person making the endorsement
is called an “ENDORSER” and the person to whom the
instrument is endorse is called an “ENDORSEE”.
ESSENTIALS OF A VALID
ENDORSEMENT
The essential requirements of a valid endorsement are
as follows :
1) It must be on the back or face of instrument or on a
slip of paper (called allonge) annexed thereto .
2) It must be signed by the endorser.
3) It must be completed by the delivery of the
instrument .
4) It must be made by the holder of the instrument .
TYPES OF ENDORSEMENT
1 .Blank or General Endorsement

2.Full or Special Endorsement

3. Partial Endorsement

4 .Restrictive Endorsement

5 .Conditional Endorsement
 PRESENTMENT
Presentment means showing an instrument to the drawee ,
acceptor , or maker for acceptance , sight for payment .
There are therefore , three kinds of presentment :
1) Presentment of bills of exchange for acceptance
2) Presentment of promissory notes for sight
3) Presentment of negotiable instruments for payment.
1.Presentation of bills of exchange for
Acceptance
Where presentation for acceptance is not necessary.

Where presentation for acceptance is necessary

Presentation : -to whom

Time for presentation

Place of presentation

Proof of presentation

Drawee’s time for Deliberation

When presentation is excused

Effects of Non – Presentation

Who can accept

Acceptance by several Drawees

Acceptance through Agent

2. Presentation of promissory note for
sight
Presentation for sight is only in the case of a Promissory Note
which is made payable at a certain period after sight that the
maturity of the note may be ascertained .
A promissory note does not require acceptance since the
payment is to be made by the maker himself . According to
Sec.62 ,a promissory note payable at a certain period “after
sight” must be presented to the maker for sight . The
presentation is to be made by a person entitled to demand
payment who is usually the holder. Again the note must be
presented within a reasonable time after it is made and in
business hours on a business day . In default of such presentation
, the maker is not liable to pay anything to the holder.
3. Presentation of instrument for payment
All negotiable instruments must be presented for payment
to the maker, acceptor , or drawee . The object is to give
concerned party an opportunity to pay back the money.
“Provided that the truncated cheque so demanded by the
drawee bank shall be retained by it , if the payment is
made accordingly”
1) By whom and to whom Presentation is to be made.
2) Time of Presentation for payment
3) Place of presentation for payment
4. presentation of promissory note payable by installment
5.Presentation of cheque to drawer
6. distinction between drawer of bills and drawer of
cheques
7. presentation of cheques to charge any other person,
8. presentation of instruments to agents.
NOTING AND PROTESTING
NOTING
When a promissory note or bill of exchange is dishonored
, the holder can , after giving due notice of dishonor , sue
any or all prior parties liable thereon. But before he does
that he may get the fact of dishonour authenticated by
‘noting’ by a Notary Public
In such a case the notary makes a formal demand upon
the maker or drawee or acceptor for acceptance or
payment as the case may be.
On refusal by the maker or drawee or acceptor , he
records the noting on the instrument.
“Noting” means the recording of facts of dishonour by a
Notary public upon the instrument , or upon a paper
attached thereto or partly upon each , within a reasonable
time after dishonour (Sec.99)
Noting must contain the following particulars:
i. The fact of dishonour;
ii. The date of dishonour;
iii. The reasons, if any , assigned for such dishonour;
iv. If the instrument has not been expressly dishonoured the
reason why the holder treats it as dishonoured ; and
v. The Notary charges (Sec. 99)
Noting is not compulsory in case of an inland bill or note.
PROTEST
When a promissory note or bill of exchange has been
dishonoured by non-acceptance or non-payment , the
holder may , within a reasonable time , cause such
dishonour to be noted and certified by a Notary Public.
Such certificate is called a ‘protest’ (Sec. 100, Para 1) .
The protest is the formal notarial certificate attesting the
dishonour of a bill or note . It is based upon noting.
Contents of Protest
A protest must contain all the following particulars;
1) The instrument or a literal transcript of the instrument.
2) The name of the person for whom and against whom the
instrument has been protested.
3) The fact of , and reason for , dishonour.
4) The place and time of dishonour.
5) The signature of the notary public.
6) In case of an acceptance for honour or payment for honour ,
the name of the person accepting or paying and the name of
the person for whose honour it is accepted or paid.
DISCHARGE OF NEGOTIABLE
INSTRUMENTS
INTRODUCTION
The term “DISCHARGE” in relation to negotiable
instruments has two connotations:, viz.:
A. Discharge of the instrument
B. Discharge of one or more parties from liability on the
instrument.
1. Discharge of an Instrument:
the various modes of discharge of an instrument are as follows;

1.By payment in due course

2.By cancellation

3.By party primarily liable becoming holder

4.By express waiver

5.By discharge as a simple contract

2. Discharge from Liability
[Section 82-90]
A party is discharged from his liability when his
liability on the instrument comes to an end .
Section82-90 of the negotiable instrument act 1881,
deals with the discharge from liability.
A party is said to be discharged only when a party or
parties (other than a party ultimately liable on
instrument) to a negotiable instrument is or are
discharged and the instrument continues to be
negotiable with the liabilities of undischarged parties
attaching thereto.
Modes of Discharge from Liability
1. By payment

2. By cancellation

3. By release

4. By allowing Drawee more than 48 hours to Accept

5. By taking qualified Acceptance

6. By not giving notice of dishonour

7. By Non- presentation for Acceptance of bill

8. By delay in presenting a cheque

9. Draft drawn by One branch on another

10. By material alteration

Dishonour of Negotiable Instrument
A negotiable instrument may be dishonoured by :
1. Non-Acceptance , or
2. Non –Payment
As presentment for acceptance is required only in
the case of bills of exchange, it is only the bills of
exchange , which may be dishonoured by non-
acceptance . Of course any type of negotiable
instrument – promissory note , bills of exchange , or
cheque – may be dishonoured by non – payment.
Dishonour of a bill of exchange by
non-acceptance (Section 91)
A bill of exchange is dishonoured by non-acceptance in any 0ne of the
following ways:
1) If the drawee does not accepts the bill within forty-eight hours from
the time of presentment though it is duly presented for acceptance,
2) If there are several Drawees (who are not partners) and all of them
do not accept.
3) When presentment for acceptance is excused , the bill is not
accepted.
4) When the drawee is incompetent to contract,
5) When drawee gives a qualified acceptance,
6) When the drawee is a fictitious person or after reasonable search
cannot be found.
Dishonour by Non-Payment [Section 92]
A negotiable instrument is dishonoured by non payment
in the following cases:
1. The maker of the promissory note , acceptor of the bill
of exchange , or the drawee of the cheque makes default
in the payment upon being duly required to pay the
same.
2. When the bill remains unpaid at or after maturity in
those cases where it is not required to be presented for
payment.
Notice of Dishonour
Notice of dishonour means formal communication of
the fact of dishonour. It is given to the party sought to
be made liable and therefore , it serves as a warning to
the person to whom the notice is given that he could
now be made liable.
When a negotiable instrument is dishonoured , the
holder must give a notice of dishonour to all the
parties whom he wants to make liable on the
instrument.
If he fails to do so , except in cases when notice of dishonour
may be excused , all the prior parties liable thereon are
discharged of their liability.
NOTICE BY WHOM : Notice of dishonour may be given by
the holder or by any of the parties on the instrument to the prior
parties.
NOTICE TO WHOM : Notice of dishonour must be given to
all prior parties whom the holder seeks to ,make liable .
FORM OF NOTICE [ Section 94]: The notice of dishonour
may be oral or written and may be sent by post . It may be in
any form but it must be given within a reasonable time at the
place of business or residence of the party for whom it is
intended.
 DISCHARGE OF DISCHARGE OF A
BASIS
AN INSTRUMENT PARTY

1. When Takes Place When the party who is When any party or
ultimately liable , is parties to an instrument is
discharged from the \ are discharged.
liability.

2. Negotiability The instrument ceases to The instrument continues

be negotiable. to be negotiable.

3. Extinguishment All rights of action under All rights of action under

of all rights of action the instrument are the instrument are not
completely extinguished. completely extinguished.

4. Discharge of all Discharge of an instrument Discharge of a party

parties means discharge of all does not mean discharge
parties. of all parties.