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Negotiable instruments

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Negotiable instruments.

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Negotiable instruments

  1. 1. NEGOTIABLE INSTRUMENTS • They are credit instruments • Used as substitute of money • They are ‘Chose’(thing) in action • “Negotiable” means transferable by delivery • Instruments means written documents creating rights in favour of some person. • Negotiable instruments thus means documents transferable by delivery.
  2. 2. DEFINITION OF NEGOTIABLE INSTRUMENT • Negotiable instruments are governed by the Negotiable Instruments Act 1881, which came in to force on 1st march 1882. • The Act is based on the English Common law relating to promissory notes, bills of exchange and cheques. Definition.S.13(1) of the Act “A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer” According to Justice Willis “A negotiable instrument is one ,the property in which is acquired by any one who takes it bonafide, and for value notwithstanding any defect in the title of person from whom he took it”
  3. 3. CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS • Freely transferable • Better title to the transferee • Right to sue in his own name • Presumptions to NI • Credit of the party • It is exception to the rule of privity of contract • It is also an exception to the maxim Nemo dat quod non habet(No one can give what he has not)
  4. 4. Presumptions to Negotiable Instruments S.118-119 • Consideration-every NI has been made or drawn for consideration. • Date-The date bearing up on it is the date of drawing. • Time of acceptance-it was accepted with in a reasonable time and before maturity • Time of transfer-every transfer was made before maturity • Order of endorsement-as it appears on the instrument • Stamp-when it is lost it is presumed that it was properly stamped • Holder in due course has got it for consideration, innocently and before maturity.
  5. 5. BILL OF EXCHANGE Definition • “A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.” (S.5) Five certainties for a valid bill. 1.Drawer must be certain, 2.Drawee must be certain 3.Order must be certain 4.Sum payable must be certain 5.Payee must be certain
  6. 6. Essentials of a Bill of Exchange • Instrument in writing • Unconditional order to pay to a certain person • The drawer,drawee and payee must be certain • It should be signed by the drawer • The sum payable must be certain • It is an order to pay money only • It should be properly stamped • It should contain date, consideration and other formalities.
  7. 7. Promissory Note • “A promissory note is an instrument in writing(not being bank note or currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument”
  8. 8. Essentials of Promissory Note • It must be in writing • It must contain a promise to pay • The promise to pay must be unconditional • It must be signed by the maker • The sum payable must be certain • Promise to pay money only • The payee must be certain • Other formalities like stamp, date, consideration etc.
  9. 9. Difference Between P/N and B/E Particulars Promissory Note Bill of Exchange No. of parties Two parties-maker and payee Three parties- Drawer,drawee and payee Payee Maker cannot be the payee Drawer and payee may be the same Nature of payment Unconditional promise Unconditional order Acceptance No acceptance required Required for certain bills Liability The liability of the maker is primary and absolute The liability of the drawer becomes secondary on acceptance Payment Cannot be drawn payable to bearer Can be drawn as ‘payable to bearer on demand’ Notice of dishonour No notice is necessary to the maker Notice must be given by the holder for all parties liable to pay Sets Cannot be drawn in sets Foreign bills drawn in sets
  10. 10. CHEQUE • Definition (Section-6)“A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form” Two distinctive features of cheque;- 1.Cheque is always drawn on a specified bank 2.It is always payable on demand
  11. 11. Difference Between Cheque & B/E Cheque • Drawee is always a banker • Acceptance is not required • Always payable on demand • It requires no stamp • It can be crossed for safety • No Noting and protesting • No days of grace • Can be countermanded • Can draw payable to bearer on demand Bill of Exchange • Any one including a banker can be the drawee • Acceptance required in some bills • Payable on demand or after a specified time • Must be properly stamped • No crossing in B/E • B/E is noted and protested • Days of grace for three days • No countermanding allowed • It is illegal
  12. 12. Types of Negotiable Instruments • Bearer Vs. Order instruments • Fictitious Vs. Escrow bills • Accommodation bills • Clean Vs. Documentary bills • Ambiguous instruments • Inchoate instruments • Demand and time instruments • Inland Vs. Foreign bills
  13. 13. Difference between Negotiability& Transferability Assignment/Transferability • Governed by Transfer of Property Act • Transfer Deed is required • Consideration to be proved • Same title to transferee • Notice of transfer required Negotiability • Governed by Negotiable Instruments Act. • Mere delivery & Endorsement and delivery • Consideration is presumed • Better title to the transferee • No notice of transfer required.
  14. 14. Endorsement( S.15) • Endorsement consists of signature of the holder usually made on the back of the instrument for the purpose of negotiation. • The person making the endorsement is called the endorser • To whom it is endorsed is called the endorsee If there is no space for endorsement on the back of the instrument a separate paper is attached It is called allonge
  15. 15. Kinds of Endorsement • Blank or general endorsement • Full or special endorsement • Restrictive endorsement • Conditional or qualified endorsement a) Sans Recourse endorsement b) Sans frais endorsement c) Facultative endorsement
  16. 16. Crossing of cheques 1. Crossing is made to ensure safety of cheques 2. When a cheque is crossed it cannot be paid at the counter. Payment can be made only through a bank account. Types of crossing 1.General crossing 2. Special crossing 3. Not negotiable crossing 4.A/c payee crossing or restrictive crossing.
  17. 17. Dishonour and Discharge of NI A Negotiable Instrument may be dishonoured in either of the following ways:- • Dishonour due to non-acceptance • Dishonour due to non- payment The dishonour due to non-acceptance is applicable only to Bills of Exchange
  18. 18. Dishonour By Non-acceptance S.91 • Where the drawee refuses to accept it within 48 hours of presentment for acceptance • When presentation of acceptance is excused and it remains unaccepted • Drawee is incompetent to contract • Drawee could not be found after a reasonable search. • When the acceptance is qualified • One or more of the drawees refuses to accept • Drawee is a fictitious person
  19. 19. Dishonour by Non-payment(S.92) • When the instrument is duly presented for payment and the payment is refused • When presentment for payment is excused and the instrument remains unpaid at maturity. • When the instrument is overdue, remains unpaid.
  20. 20. Consequences of Dishonour When a NI is dishonoured, the holder takes the following steps;- 1.File a suit for recovery of the amount from the parties liable to pay 2.Give notice of dishonour to parties against whom he intends to proceed. 3.To get the instrument noted and protested before a Notary Public.
  21. 21. Notice of Dishonour (S.93) • Notice of dishonour is the formal communication of the fact of dishonour. • It is given by the holder or any of the parties liable on the instrument to the prior parties. • It may be oral or in writing or even by post. • It must be given within a reasonable time • It is given at the place of business or residence. Notice to whom? 1.To all persons whom the holder wants to make liable 2.To the duly authorised agent of the person to whom it is required to be given. 3.To the legal representative of deceased party. 4.To the assignee of the insolvent
  22. 22. Compensation to Holder on Dishonour S.117 • 1.Amount due up on the instrument • Interest on principal @18% from the date of maturity till the date of payment • Expenses connected with dishonor • Current rate of exchange if foreign currency is involved. • An endorser who has paid the amount of the instrument he has all the above rights of compensation.
  23. 23. Discharge of the Instrument A negotiable instrument may be discharged:- • By payment • By acceptor becoming holder • By renunciation(holder gives up his right against all the parties liable) • By cancellation by the holder any of the party • Discharge as a simple contract for payment of money like novation,rescission etc. • By release. If the holder releases any party by any method other than cancellation of names,ie, by separate agreement of waiver,novation etc.all other subsequent parties are discharged • If the holder allows more than 48 hours for acceptance to the drawee,all previous parties not consenting to it will be discharged • If the holder takes a qualified acceptance with out the consent of previous parties,they are discharged • If holder fails to give notice of dishonour • When the cheque is not presented for payment with in a reasonable time • By operation of law,death,insolvency,lapse of time etc. • By material alteration
  24. 24. CONTRACT OF SALE OF GOODS • The law relating to sale of goods or movables in India is contained in the Sale of Goods Act. • The Act came in to force from 1st July 1930 • Previously the provisions relating to sale of goods were included in Sections 76 to 123 of the Indian contract Act . • The Indian Sale of Goods Act is based on the English Sale of Goods Act of 1893. • The provisions of Contract Act relating to capacity of parties, free consent etc. are applicable. • The Act deals with passing of ownership of goods from the seller to buyer, duties of seller and buyer etc.
  25. 25. Essentials of Contract of Sale • S.4(1) of the Act defines a contract of sale of goods as “a contract where by the seller transfers or agrees to transfer the property in goods to the buyer for price” • To constitute a valid contract of sale consideration for transfer must be money paid or promised • Where there is no money consideration the transaction is not a contract of sale.(eg.barter.) • If transaction involves consideration partly in money and partly of goods it becomes a sale.
  26. 26. Essentials of contract of sale..cntd. 1.Two parties in a contract of sale-buyer and seller. 2.Transfer of general property-property means ownership and general property means full ownership.-To constitute sale, transfer of general property is required. If goods are given for hire, lease or pledge general property is not transferred and hence it is not a sale. 3.Goods form the subject matter of the contract and must be movable property other than actionable claims and money and includes stock and shares, growing crops .Transfer of immovable property is not regulated by the sale of goods act. 4.Price-the consideration of the contract of sale expressed in money 5.All essentials of valid contract like agreement, free consent, consideration etc.
  27. 27. Goods Existing Future Contingent Specific- Ascertained and Unascertained
  28. 28. Goods • 1.Existing goods are those owned and possessed by the seller at the time of making the contract of sale. It is further classified as;- • A).Specific goods-those which are identified and agreed up on at the time of making the contract of sale • B)Ascertained goods- are ascertained subsequent to the formation of the contract of sale • C)Unascertained Goods-are not separately identified or ascertained at the time of making the contract. It means generic goods ie,goods defined by description or by sample. 2. Future goods-S.2(6)-goods which the seller does not possess at the time of contract. It is to be manufactured or produced or acquired by the seller after making the contract. Future goods are neither in possession nor in existence. But unascertained goods are in possession and existence. 3.Contingent goods-are future goods. A contract for sale of contingent goods can be enforceable only if the event on the happening of which its performance depended on takes place.
  29. 29. Sale & Agreement to Sell • Sale is an executed contract • Performance of sale is absolute and unconditional • Property of the goods passes from the seller to the buyer immediately • If the goods are lost or destroyed, the loss falls on the buyer even if the goods are in possession of the seller. • If there is breach of contract the seller can sue for the price, even if the goods are in his possession • As the property is with the buyer, the seller cannot resell the goods. • If the buyer becomes insolvent the seller will have to deliver the goods to the official receiver and claim only rateable dividend. • On insolvency of the seller the buyer is entitled to receive the goods from the official receiver as he has ownership in it. Agreement to Sell • Agreement to sell is an executory contract • Performance is conditional and made in future • Transfer of property takes place in future or subject to fulfillment of condition • If the goods are lost or destroyed the loss falls on the seller, even if they are in the possession of the buyer • If the buyer fails to accept the goods the seller can sue for damages and not the price, even though the goods are with seller. • The property remains with the seller and he can dispose of it as he likes • If the buyer becomes insolvent the seller may refuse to deliver the goods to the receiver unless paid for it. • On insolvency of the seller the buyer who has paid the price can only claim rateable dividend and not the goods as the ownership is with the seller. Sale
  30. 30. Conditions and Warranties • The statement of the seller at the time of forming the contract of sale are known as representations • A representation which form part of the contract of sale and affects the contract is called stipulations. • A stipulation which is most important for the formation of the contract is known as condition. • Stipulation which is of lesser importance for the contract is called warranty.
  31. 31. Condition • S.12(2) “A condition is a stipulation essential to the main purpose of the contract ,the breach of which give rise to a right to treat the contract as repudiated” • Warranty –S.12(3) “a warranty is a stipulation collateral to the main purpose of the contract, the breach which give rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated”
  32. 32. Condition & Warranty distinguished condition • It is a stipulation which is essential to the main purpose of the contract • A contract of sale cannot be fulfilled unless the condition is fulfilled. • Breach of condition give the aggrieved party the right to repudiate the contract and to claim damages. • A breach of condition may be treated as a breach of warranty. warranty • It is a stipulation which is only subsidiary or collateral to the main purpose of the contract • It is not of vital importance. The main contract can be fulfilled even if the warranty is not fulfilled. • The breach of warranty gives the aggrieved party a right to claim damages only • A breach of warranty cannot be treated as a breach of condition
  33. 33. When condition to be treated as warranty?S.13(1) • Voluntary waiver of condition by the buyer It may be of two cases:- a)buyer waives off the condition . b)Treat its breach as breach of warranty. • Acceptance of goods by the buyer, and subsequent knowledge of breach of condition he can only claim damages and not repudiate . • By impossibility or excused by law
  34. 34. Doctrine of caveat emptor • Caveat Emptor means “let the buyer beware” • It is the duty of the buyer to be careful while purchasing the goods. • In the absence of enquiry from the buyer the seller is not bound to disclose the defects of the goods. • It is the buyer who must examine the goods and if the goods are defective he cannot sue the seller as there is no implied undertaking by the seller that he shall supply goods to suit the buyer’s choice. • Exceptions to caveat emptor 1.When the seller makes representation of facts innocently or fraudulently 2.When the seller actively conceals a defect of the goods which could not be revealed by ordinary examination 3.Sale under a patent or trade name 4.When the goods supplied as per description are not merchantable quality. 5.Custom or usage of trade 6.Sale by sample, if the bulk does not correspond with sample. 7.Misrepresentation of goods by the seller 8.Implied condition as to title of goods 9. Implied warranty as quiet possession apply 10.Implied warranty as to freedom from any charge or encumbrance
  35. 35. Remedies to the buyer on breach of condition • Repudiate the contract and reject the goods. • Treat the breach of condition as breach of warranty and claim damages • No remedy when fulfillment of condition is excused by the law. Consequences of breach of warranty 1.Breach of warranty give rights to claim for damages but no right to reject the goods and repudiate the contract 2.The buyer may sue the seller for damages 3.No remedy is available if the fulfillment of warranty becomes impossible due to operation of law.
  36. 36. Express and Implied Conditions and Warranties (S.14 to 17) • In a contract of sale conditions and warranties may be expressed or implied. • When the will of the parties are entered in a contract of sale in clear words it is express condition or warranty. • Conditions and warranties are said to be implied when the law presumes their existence in the contract automatically, though they are not written in express words.
  37. 37. Implied Conditions and Warranties Implied Conditions 1.Condition as to title 2.Condition as to description 3.Condition as to sample 4.Condition as to quality and fitness 5.Condition as to merchantability 6.Condition implied by customs 7.Condition as to wholesomeness Implied warranties 1.Warranty of quiet possession 2.Warranty of freedom from encumbrances 3.Warranty as to usage of trade 4.Warranty to disclose dangerous nature of goods.

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